First Community Bank v. Maureen Gaughan

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE LARRY MILLER, No. 14-16854
Debtor,
D.C. No.
FIRST COMMUNITY BANK, 2:13-cv-02050-NVW
Plaintiff-Appellant,
v. OPINION
MAUREEN GAUGHAN, Chapter 7
Trustee,
Defendant-Appellee.
Appeal from the United States District Court
for the District of Arizona
Neil V. Wake, District Judge, Presiding
Argued and Submitted October 18, 2016
San Francisco, California
Filed March 31, 2017
Before: A. Wallace Tashima and Milan D. Smith, Jr.,
Circuit Judges, and Edward R. Korman,* District Judge.
Opinion by Judge Korman
*
The Honorable Edward R. Korman, Senior District Judge for the
U.S. District Court for the Eastern District of New York, sitting by
designation.
2 IN RE MILLER
SUMMARY**
Bankruptcy
The panel reversed the district court’s reversal of the
bankruptcy court’s summary judgment in favor of a creditor
that brought an adversary proceeding against a chapter 7
trustee, seeking a declaration that the creditor had an
enforceable judgment lien on real property, thereby granting
it priority over the proceeds of the trustee’s sale of the
property.
The judgment on which the lien was based arose from a
guaranty signed by the debtor but not by his wife. The couple
were Arizona domiciles. The panel held that while the real
property, a San Francisco co-op apartment owned by both
spouses, was not community property under California law,
it was a tenancy-in-common. Under California law, the
interests of a co-tenant-in-common are subject to the
enforcement of a judgment lien. Applying California’s
choice-of-law rules, the panel held that California law, rather
than Arizona law, governed. Therefore, the debtor’s interest
in the co-op was subject to enforcement of the judgment lien.
The panel rejected the argument that the creditor’s
registration of the judgment in the Northern District of
California was sufficient, by itself, to create an enforceable
lien against the co-op.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN RE MILLER 3
COUNSEL
Joseph E. Cotterman (argued), Andante Law Group PLLC,
Scottsdale, Arizona, for Plaintiff-Appellant.
Steven J. Brown (argued), Steven J. Brown & Associates
LLC, Phoenix, Arizona, for Defendant-Appellee.
OPINION
KORMAN, District Judge:
Larry and Kari Miller, both Arizona domiciliaries, owned
a cooperative apartment located at 2170 Jackson Street in San
Francisco, California. The co-op was held in each of their
names, as husband and wife. First Community Bank, a
judgment creditor of Larry Miller, obtained a lien against the
Millers’ co-op.
Under Arizona law, the co-op would be treated as
community property. See A.R.S. § 25-211. If Arizona law
applies, FCB’s judgment lien could not be enforced against
the co-op, because the judgment upon which the lien was
based arose from a guaranty signed by Larry Miller and not
Kari Miller, and a guaranty that is signed by only one of two
spouses is not binding on the couple’s community property
under Arizona law.
Under California law, the co-op would not constitute
community property because it was not acquired by the
Millers while they were domiciled in California. See CAL.
FAM. CODE § 760. Instead, it would constitute a tenancy-in-
common. See CAL. CIV. CODE § 685. The application of
4 IN RE MILLER
California law would permit the judgment lien to be enforced
against Larry Miller’s sole and separate interest in the co-op,
because “[t]enants in common may each unilaterally alienate
their shares through sale or gift or place encumbrances upon
these shares.” United States v. Craft, 535 U.S. 274, 280
(2002) (emphasis supplied). Thus, if California law applies,
a judgment against Larry Miller would be enforceable only
against his interest in the apartment, but not Kari Miller’s
separate interest.
FACTUAL BACKGROUND
Against this backdrop for the choice-of-law issue
presented by this case, we turn to a more detailed discussion
of the underlying facts. Larry Miller was the President of
Miller Holding Investments, Inc., which in turn was the
General Partner of both El Paseo Partners, L.P. and El
Rancho Partners, LP, both limited partnerships organized
under California law. First Community Bank (“FCB”) is a
California corporation, doing business in the State of
California, with its principal place of business in Sonoma
County, California.
In December 2006, FCB extended credit to Paseo and
Rancho in exchange for a Business Loan Agreement, a
Promissory Note in the original principal amount of
$5,744,000, and a Commercial Guaranty from Miller that
personally secured repayment of all obligations owed to FCB
under the Note and the Loan Agreement. All three of these
contracts selected California’s local law as the governing law.
The Business Loan Agreement and the Promissory Note both
stated on their face that they were accepted by FCB in
California. Indeed, the guaranty given by Miller not only
selected California as the governing law, it also provided that
IN RE MILLER 5
“[a]ny married person who signs this Guaranty hereby
expressly agrees that recourse under this Guaranty may be
had against both his or her separate property and community
property.” Unfortunately, Paseo and Rancho could not live
up to their obligations on the loans, and Miller defaulted on
the guaranty.
PROCEDURAL HISTORY
On October 24, 2008, FCB sued Larry and Kari Miller in
the United States District Court for the District of Arizona.
FCB moved for summary judgment as to liability and
damages on Larry Miller’s breach of the Commercial
Guaranty, and also requested a “[r]uling that Kari Miller has
received notice and due process in connection with this legal
action, to the extent that any of the property subject or
potentially subject to enforcement and execution upon the
judgment, whether located in the State of Arizona, the State
of California or elsewhere, is asserted to belong in whole or
in part to her marital community.” Complaint at 7, First
Community Bank v. Larry L. Miller and Kari Miller, No.
2:08-cv-01952-NVW (D. Ariz. 2009), ECF No. 1. While the
answer filed to the complaint alleged that neither the
“Miller[s’] marital community property, nor Kari Miller’s
sole and separate property, is subject to the claims in [First
Community] Bank’s complaint,” Answer at ¶ 4, id., ECF No.
11, the Millers’ “only legal opposition” to FCB’s motion for
summary judgment was that “California law requires [FCB]
first to execute on collateral securing the loan,” before
making their motion. Order Granting Motion for Summary
Judgment as to Liability at 2–3, id., ECF No. 23.
The district court rejected this argument, and entered
judgment against Larry Miller for the principal amount of
6 IN RE MILLER
$5.744 million plus accrued interest and ancillary damages,
for a total judgment of $6.373 million (the “Arizona
judgment”). Judgment, id, ECF No. 36. The judgment made
no reference to the Millers’ community property, although the
order granting the motion observed, in dictum and without
undertaking a choice-of-law analysis, that “any [liability of
the marital community] appears to be precluded by A.R.S.
§ 25-214(C)(2).” Order Granting Motion for Summary
Judgment as to Liability at 3, id., ECF No. 23. FCB
registered this judgment in the United States District Court
for the Northern District of California pursuant to 28 U.S.C.
§ 1963. See Certification of a Judgment to be Registered in
Another District, First Community Bank v. Miller, No. 09-
mc-80131-PJH (N.D. Cal. 2009), ECF No. 1.
As of the time that FCB registered its judgment in
California, Larry and Kari Miller held an ownership interest,
to which reference was made earlier, in real property located
at 2170 Jackson Street, San Francisco, California, which
consisted of their ownership share in Twenty-One Seventy
Jackson Street Corporation and a leasehold in an apartment
owned by the co-op.1 On June 23, 2009, consistent with the
manner in which a judgment lien is obtained, FCB recorded
the California judgment in the Official Records of the San
Francisco County Recorder’s Office.
1
California law treats corporations formed “primarily for the purpose
of holding title to . . . improved real property, and [in which] all or
substantially all of the shareholders of the corporation receive a right of
exclusive occupancy in a portion of the real property,” as real property.
CAL. CIV. CODE § 6566. “[T]he correlative interest in the stock
cooperative corporation” is also treated as an interest in real property. See
CAL. CIV. CODE § 783.1.
IN RE MILLER 7
Several years later, Larry Miller filed a petition for
reorganization under Chapter 11 of the Bankruptcy Code in
the District of Arizona. Miller’s proceeding was later
converted to a Chapter 7 liquidation. In the course of
administering the Miller estate, the Chapter 7 Trustee,
Maureen Gaughan, sold the Millers’ co-op. FCB filed an
adversary proceeding seeking a declaration that it held an
enforceable judgment lien on the co-op, thereby granting it
priority over the proceeds of the sale.
The bankruptcy court held that, “[b]ecause the Miller
Judgment was registered in California, California law governs
the enforceability of the Miller Judgment against Debtors’
community property located in California, and under
California law, Debtors’ community property located in
California is liable for satisfaction of the Miller Judgment.”
Judgment in Favor of First Community Bank at 4, First
Community Bank v. Miller, No. 2:13-ap-00436-EPB (Bankr.
D. Ariz. 2013), ECF No. 25. The Millers appealed to the
district court.
THE DISTRICT COURT’S DECISION
The district court framed the issue presented as “whether
an Arizona judgment against a husband on his sole and
separate debt may be executed against the Arizona couple’s
community property in California.” In re Miller, 517 B.R.
145, 147 (D. Ariz. 2014). Answering this question in the
negative, the district court held that “the Arizona federal
judgment against the husband alone, later registered in a
California federal court and recorded in California, does not
lien their community real property in California.” Id.
Moreover, it continued that “[t]his is the rule by Arizona
statute, and California choice of law principles yield to the
8 IN RE MILLER
Arizona rule concerning Arizona domiciliaries.” Id.
Presumably drawing upon those principles, the district court
concluded that “California has no interest in ousting Arizona
marital law concerning obligations between husband and wife
and of persons contracting with one spouse, and the
California community property statute by its terms does not
purport to do so.” Id.
We reverse the judgment of the district court. While we
agree that the co-op apartment does not come within the
definition of community property, as that term is defined in
Section 760 of the California Family Code, it does come
within the definition of a tenancy-in-common. See CAL. CIV.
CODE § 685. The interests of a co-tenant in such tenancies,
which are presumed to be held in equal shares, see Caito v.
United California Bank, 20 Cal. 3d 694, 705 (1978), are
subject to the enforcement of a judgment lien. The issue,
then, is whether California should yield to Arizona’s
community property law, and treat the Millers’ co-op as
community property not subject to the enforcement of a
judgment. Applying California’s choice-of-law rules, we
hold that California law governs, and that the co-op would be
treated as a tenancy-in-common, as defined in Section 685 of
the California Civil Code, making Larry Miller’s interest in
the co-op subject to enforcement of the judgment lien.2
2
The district court and the trustee relied on Grappo v. Coventry
Financial Corp., 235 Cal. App. 3d 496 (1991), for the proposition “that
the property rights of a husband and wife are governed by the law of the
couple’s matrimonial domicile at the time of the acquisition of the
property regardless of [where] the property is located.” Grappo, however,
involved a dispute between a husband and wife regarding their respective
rights under family law in a piece of real property held in the wife’s name,
although claimed by the husband to be community property. After
conducting a choice-of-law analysis, id. at 505–06, the California Court
IN RE MILLER 9
DISCUSSION
I. 28 U.S.C. § 1963 Does Not Obviate the Need for a
Choice-of-Law Analysis
FCB’s principal argument on appeal is that the
registration of the judgment against Larry Miller, pursuant to
28 U.S.C. § 1963, in the Northern District of California, was
sufficient, by itself, to create an enforceable lien against the
co-op. While FCB is correct that § 1963 requires the use of
California’s lien creation rules, it does not do away with the
task of conducting a choice-of-law analysis in the event that
another state has an interest in application of its law.
A party may register and enforce a federal judgment in
another district, and “[a] judgment so registered shall have
the same effect as a judgment of the district court of the
district where registered and may be enforced in like
manner.” 28 U.S.C. § 1963. “This system of enforcing
federal judgments parallels the California and Arizona
systems for enforcing sister state judgments.” In re Miller,
517 B.R. at 154. Moreover, “[e]nforcement measures do not
travel with the sister state judgment as preclusive effects do;
such measures remain subject to the even-handed control of
forum law.” Baker v. Gen. Motors Corp., 522 U.S. 222, 235
(1998).
of Appeal rejected the husband’s claim, based on its conclusion “that
California, and not Nevada [where the property was located], is the state
which has the most significant relationship to the parties and issues in this
case.” Id. at 506. The dispute in the present case involves a claim by a
California-based third-party creditor, on property located in California,
giving California an interest in the application of its law.
10 IN RE MILLER
Thus, under California’s enforcement procedures, when
FCB registered the judgment rendered by the federal district
court in Arizona in the Northern District of California, and
formally recorded such judgment with the San Francisco
County Recorder’s Office, it acquired a judgment lien on the
Millers’ co-op. See CAL. CIV. PROC. CODE § 697.310(a).
Nevertheless, perfection of a lien alone does not ensure that
such a lien can be enforced against a particular piece of
property—the property must be “subject to enforcement of
the money judgment.” See Lezine v. Sec. Pac. Fin., 14 Cal.
4th 56, 65 (1996). Under California law, “[e]xcept as
otherwise provided by law, all property of the judgment
debtor is subject to enforcement of a money judgment.” CAL.
CIV. PROC. CODE § 695.010(a) (emphasis supplied).
While we are not aware of any California case that
construes the term “except as otherwise provided by law” in
a comparable context, the most reasonable construction
suggests that it refers not just to the local law of California,
but also to the laws of other states that may apply as a result
of the application of California’s choice-of-law rules. Our
construction of the term is informed by a comparison with a
similar term, which appears in the same Article of the
California Code of Civil Procedure (“Enforcement of Money
Judgments”) as does § 695.010. California Code of Civil
Procedure § 697.310(a), which provides the rule on the
creation of judgment liens, contains an exception for
circumstances “as otherwise provided by statute,” rather than
“as otherwise provided by law.” CAL. CIV. PROC. CODE
§ 697.310(a) (emphasis supplied). This difference suggests
to us that while the California Legislature intended to limit
the exception in § 697.310(a) to certain express statutory
carve-outs, it intended to make the exception contained in
§ 695.010(a) encompass California’s whole law, including its
IN RE MILLER 11
choice-of-law rules. Cf. RESTATEMENT (SECOND) OF
CONFLICT OF LAWS (1971) (“Restatement”) § 4(2) (“As used
in the Restatement of this Subject, the ‘law’ of a state is that
state’s local law, together with its rule of Conflict of Laws.”).
Our discussion would end here if this case were being
litigated in California. Some additional discussion, however,
is required. While California’s choice-of-law rules apply
here, they do so as a result of a somewhat indirect path, which
we now trace. “In federal question cases with exclusive
jurisdiction in federal court, such as bankruptcy,” including
this case, we apply federal choice-of-law rules. See In re
Lindsay, 59 F.3d 942, 948 (9th Cir. 1995). Federal choice-of-
law rules are based on the Restatement (Second) of Conflict
of Laws. See In re Vortex Fishing Sys., Inc., 277 F.3d 1057,
1069 (9th Cir. 2001). Restatement § 230 provides that,
“[w]hether a lien creates an interest in land and the nature of
the interest created are determined by the law that would be
applied by the courts of the situs.” Moreover, if the court of
the situs “would have decided the particular question by
reference to the local law of some other state, the forum will
do likewise.” Restatement § 230, cmt. b. As noted
previously, California is the situs of the real property at issue,
so we apply its choice-of-law rules to resolve the conflict in
this case.
II. Choice-of-Law Analysis
California applies the governmental interests mode of
analysis to resolve choice-of-law problems. See McCann v.
Foster Wheeler LLC, 48 Cal. 4th 68, 87 (2010). Under this
approach, we analyze three related questions: (1) does
relevant law vary between the potentially affected
jurisdictions?; (2) If there is a difference in law, does a true
12 IN RE MILLER
conflict exist such that “each of the states involved has a
legitimate but conflicting interest in applying its own law[?]”;
(3) If there is a true conflict, “which state’s interest would be
more impaired if its policy were subordinated to the policy of
the other state[?]” See Kearney v. Salomon Smith Barney,
Inc., 39 Cal. 4th 95, 111–12 (2006) (citations omitted).
We begin our analysis with Arizona law, and more
specifically its community property law, and then proceed to
discuss California law.
Community property rests on a notion that
husband and wife are a marital partnership
(a ‘community’) and should share
accordingly. . . . Because it can exist only
between husband and wife and cannot be
converted into separate property without the
consent of both spouses, community property
can be conveyed to a third person only as an
undivided whole. . . . Prior to the 1960s, the
husband was deemed to be manager of the
community, but beginning in the late 1960s,
all . . . community property states enacted
statutes giving the husband and wife equal
management powers. These statutes,
however, differ in many details.
JESSE DUKEMINIER, PROPERTY 354–55 (2d ed. 1988).
Although Arizona and California both have community
property laws, there is one difference between the two that
gives rise to the necessity of a choice-of-law analysis. In
Arizona, “[a]ny transaction of guaranty, indemnity or
suretyship” requires the “joinder of both spouses”—a
IN RE MILLER 13
requirement that has been construed to mean the signature of
both spouses on the guaranty contract. Ariz. Rev. Stat.
(“A.R.S.”) § 25-214(C)(2). Thus, the statute “bars collection
of the guaranteed debt from the community’s property,”
unless both spouses sign the guaranty. See Rackmaster Sys.,
Inc. v. Maderia, 219 Ariz. 60, 64 (Ct. App. 2008).
California has no such dual-signature requirement with
respect to either community property, joint property, or a
tenancy-in-common. Cf. CAL. FAM. CODE § 1102(a); CAL.
CIV. PROC. CODE § 695.010. Thus, all such property is
subject to the enforcement of a money judgment, even where
a guaranty underlying the judgment is signed by only one of
two spouses. The difference between Arizona and California
law, however, does not compel the conclusion that there is a
“true conflict,” as that term is understood in the choice-of-law
context. The existence of such a conflict turns on whether the
circumstances of the case implicate the policies underlying
the ostensibly conflicting laws.
Hamada v. Valley National Bank, 27 Ariz. App. 433
(1976), contains a helpful discussion of the history and
purpose of Arizona’s dual-signature requirement. In
Hamada, the Arizona Court of Appeals explained that “[t]he
husband, as a member of the community, has no power under
the law without the knowledge and consent of his wife, to use
community assets to guarantee the payment of a debt of a
stranger to the community, it deriving no benefit therefrom.”
Id. at 436 (emphasis supplied). It continued, “[t]his law has
now been codified in A.R.S. Sec. 25-214(C)(2) which
requires both spouses to join in any transaction of guaranty,
indemnity or suretyship.” Id. Thus, Hamada makes clear
that the policy underlying Arizona’s dual-signature
requirement is to ensure that a spouse who lacks knowledge
14 IN RE MILLER
of, and does not acquiesce to, a guaranty is not bound. See
also Vance-Koepnick v. Koepnick, 197 Ariz. 162, 163 (Ct.
App. 1999) (“The purpose of such statutes is to protect one
spouse against obligations undertaken by the other spouse
without the first spouse’s knowledge and consent.”).
The absence of the signature of one spouse, however,
does not necessarily indicate that the non-signing spouse did
not know of, or consent to, the execution of the guaranty.
The signature requirement is simply the mechanism for
avoiding a dispute as to this issue. See All-Way Leasing, Inc.
v. Kelly, 182 Ariz. 213, 216 (Ct. App. 1984). A guaranty
without both required signatures is “not per se void, only
voidable by the nonsigning spouse.” Geronimo Hotel &
Lodge v. Putzi, 151 Ariz. 477, 479 (1986). Thus, the Arizona
Court of Appeals has recognized that “there may be
circumstances where a spouse may be estopped from
disaffirming a contract.” Consol. Roofing & Supply Co., Inc.
v. Grimm, 140 Ariz. 452, 458 (Ct. App. 1984).3
The complaint filed by FCB in Arizona, which ended with
the judgment against Larry Miller that underlies the lien at
issue, put the Millers on notice that FCB planned to go after
their community property. Nevertheless, the Millers did not
3
Other community property jurisdictions with statutes similar to
A.R.S. § 25-214 also recognize that estoppel principles may apply. See,
e.g., Miller v. Johnston, 270 Cal. App. 2d 289, 300 n.6 (1969) (holding
that a spouse was bound by a conveyance of community property to which
she was not a party, because of her “knowledge and acquiescence” to the
conveyance); Colo. Nat’l Bank of Denver v. Merlino, 35 Wash. App. 610,
616 (1983) (“A community is estopped to deny liability due to the failure
of one spouse to join a transaction when one spouse permits the other to
conduct the transaction, both have a general knowledge of the transaction,
and both are ready to accept the benefits which may come from it.”).
IN RE MILLER 15
defend on the ground that Kari Miller lacked“knowledge and
acquiescence” sufficient to enable the Millers to rely on the
absence of her signature on the guaranty. Indeed, as we
explained earlier, rather than invoking A.R.S. § 25-214 in
response to FCB’s motion for summary judgment in the
proceeding on the guaranty, their only legal opposition was
based on FCB’s alleged failure to comply with a California
procedural rule. See Order Granting Motion for Summary
Judgment as to Liability at 2–3, First Community Bank v.
Larry L. Miller and Kari Miller, No. 2:08-cv-01952-NVW
(D. Ariz. 2009), ECF No. 23. Moreover, although Larry
Miller warranted in the guaranty that he had the “full power,
right, and authority to enter into this guaranty,” the trustee
failed to come forward with any evidence in the bankruptcy
court to suggest that Kari Miller did not either know of, or
acquiesce to, the guaranty.4
While we do not invoke the doctrines of estoppel or
waiver here, our discussion of it is intended to underscore the
fact that a guaranty, signed by only one of two spouses, does
not necessarily implicate the underlying policy of protecting
a spouse who lacks knowledge of a guaranty. Indeed, here,
because of the manner in which the Millers chose to litigate
the complaint that gave rise to the underlying judgment, we
do not know the extent that the underlying policy interest
4
“[T]he ordinary rule, based on considerations of fairness, does not
place the burden upon a litigant of establishing facts peculiarly within the
knowledge of his adversary.” Campbell v. United States, 365 U.S. 85, 96
(1961); see also Nealey v. Transportacion Maritima Mexicana, S.A.,
662 F.2d 1275, 1280–81 (9th Cir. 1980). Thus, if Kari Miller had
challenged the validity of the lien prior to bankruptcy on the ground that
she did not know of or acquiesce to the guaranty, the burden of proof
would have been on her. Because the trustee is essentially relying on her
asserted interest, the burden in bankruptcy should logically fall to her.
16 IN RE MILLER
would be impaired by the enforcement of the judgment
against the couple’s community property.
On the other hand, under the circumstances here,
California does have a significant interest in effectuating its
policy regarding enforcement of judgments in favor of
California creditors against real property located there,
whether the property constitutes community property or a
tenancy-in-common. “California, as does every state, has a
substantial interest in the economic health of corporations
which do business within its borders. It derives substantial
sales and income taxes, as well as other revenues, directly and
indirectly from a corporation’s activities within the state.” In
re Air Crash Disaster Near Chi., Ill. on May 25, 1979,
644 F.2d 594, 614 (7th Cir. 1981). Moreover, California also
has an interest in fostering the growth of commercial
activities that require ready access to credit—a policy that
would be undermined by limiting the ability of California
creditors to enforce obligations for activities undertaken in
California and made subject to the operation of California law
by consent of the parties. Indeed, when Larry Miller sought
credit in California to finance his business venture, he took
advantage of the credit environment fostered by what the
district court described as California’s “general policy
favoring creditors.” In re Miller, 517 B.R. at 149 n.1.
These considerations “reflect[] the principle articulated by
the California Supreme Court that the policy of protecting the
creditors of a spouse outweighs the policy of protecting
family income.” Ordlock v. Comm’r, 533 F.3d 1136, 1139
(9th Cir. 2008) (internal ellipses and alterations omitted). So
too does the fact that California renders the entire community
property of a married couple subject to enforcement of a
guaranty—even if the guaranty was made solely for the
IN RE MILLER 17
benefit of a single spouse. See Lezine v. Sec. Pac. Fin. Servs.,
Inc., 14 Cal. 4th 56, 64 (1996). While the co-op owned by
the Millers did not come within the definition of community
property in California, we refer to the manner in which
community property is treated there simply to illustrate the
strength of California’s interest in the enforcement of the
judgment lien against the co-op apartment located in San
Francisco.
The policy interests discussed above are especially strong
where, as here, the law chosen by the parties in their various
agreements (including the guaranty) includes California’s
creditor-friendly interest described above. Indeed, the
Supreme Court of California has adopted § 187 of the
Restatement, see Nedlloyd Lines B.V. v. Superior Court,
3 Cal. 4th 459, 464–65 (1992), which upholds “[t]he law of
the state chosen by the parties to govern their contractual
rights and duties . . . , even if the particular issue is one which
the parties could not have resolved by an explicit provision in
their agreement directed to that issue.” Restatement § 187(2).
Section 187 is a policy “providing for incorporation by
reference” that enables parties “to determine the terms of
their contractual engagements,” not a choice-of-law rule as
such. Id. § 187, cmt. c.
The purposes underlying this section “are to protect the
justified expectations of the parties and to make it possible
for them to foretell with accuracy what will be their rights
and liabilities under the contract.” Id. § 187, cmt. e.
Moreover, the Restatement recognizes that, in multi-state
transactions such as the one at issue, “letting the parties
choose the law to govern the validity of the contract and the
rights created thereby” is the better route to ensure “certainty
and predictability of result.” Id. Indeed, an even more
18 IN RE MILLER
specific provision, Restatement § 194, provides that “[t]he
validity of a contract of suretyship and the rights created
thereby are determined, in the absence of an effective choice-
of-law by the parties, by the law governing the principal
obligation which the contract of suretyship was intended to
secure,” subject to exceptions similar to those applicable to
§ 187.5 Again, there was an effective choice-of-law made by
the parties. Moreover, “the principal obligation that the
contract of suretyship was intended to secure”—the
Promissory Note —was governed by “the laws of the State of
California without regard to its conflicts of law provisions.”
Those laws would make the lien enforceable against Larry
Miller’s ownership interest as a co-tenant of the co-op
apartment.
Neither of the exceptions to the incorporation by
reference rule of § 187, which also apply to the rule of § 194,
is present here. Specifically, this is not a case in which “the
chosen state has no substantial relationship to the parties or
the transaction,” Restatement § 187(2)(a), nor would the
chosen law “be contrary to a fundamental policy of a state
which has a materially greater interest than the chosen state
in the determination of the particular issue.” Id. § 187(2)(b).
While Arizona may have an interest in the determination of
this issue, we cannot say that its interest is “materially greater
. . . than [that of] the chosen state,” particularly where the
record does not adequately show whether or not Kari Miller
had knowledge of, or consented to, the guaranty. Nor, to use
the test applied in cases of a true conflict, is Arizona’s
interest more substantially impaired than that of California.
5
“‘Suretyship,’ as here used, includes ‘guaranty,’ for . . . there has
never been general agreement as to what distinction, if any, should be
drawn between the two terms.” Restatement § 194, cmt. a.
IN RE MILLER 19
We recognize that Larry Miller’s agreement to the
application of California law does not bind Kari Miller.
Nevertheless, the agreement should bind Larry Miller, and
permit the enforcement of that agreement against him as a
tenant-in-common. Moreover, the enforcement of the
agreement in that way protects Kari Miller’s one-half interest
in the property as a co-tenant. Thus, the underlying purpose
of A.R.S. § 25-214(C)(2), which is “to protect one spouse
against obligations undertaken by the other spouse without
the first spouse’s knowledge and consent,” see Vance-
Koepnick, 197 Ariz. at 163, is accommodated to a significant
degree, rather than substantially impaired, by application of
California law.
California’s interest is similarly accommodated, because
FCB, the California creditor that was the beneficiary of the
guaranty, is able to recover the share of proceeds from the
sale of the co-op attributable to Larry Miller’s interest.
Application of Arizona law would defeat that interest
entirely. Under these circumstances, even if there were a true
conflict, we would apply California law because its “interest
would be more impaired if its policy were subordinated to the
policy of the other state.” See Kearney, 39 Cal. 4th at 112.
In sum, we agree with FCB “that California [has] a
compelling interest in applying its law,” under the
circumstances presented here.
CONCLUSION
The judgment of the district court is REVERSED AND
REMANDED for proceedings consistent with this opinion.