Which State’s Law Governs? Domesticating Out-of-State Judgments in California
I ran into an interesting legal question regarding the collection of out-of-state judgments: when an out-of-state judgement is domesticated in California, which state’s law controls? Let’s say a creditor secured a judgment against one spouse outside of California in another community property state, but that state’s community property laws prevented the married couple’s community property from being encumbered by the judgment. The rub is that the couple also own property in California. Can the creditor secure a lien against the California property by domesticating the judgment in California?
California Sister State Money Judgments Act and Domesticating Judgments
The California Sister State Money Judgments Act, Code Civ Proc section 1710 deals with sister state judgments and domesticating judgments in California, which states: “Except as otherwise provided in this chapter, a judgment entered pursuant to this chapter shall have the same effect as an original money judgment of the court and may be enforced or satisfied in like manner.” Code Civ Proc § 1710.35. Courts have taken the plain language of section 1710.35 and determined that the legislative intent of the “[a]ct was not intended to alter any substantive rights or defenses which would otherwise be available to a judgment debtor or a judgment creditor in this state.” Washoe Dev. Co. v. Irving Sav. Ass’n, 47 Cal.App.4th 1518, 1524 (1996); see also Kahn v. Berman,198 Cal. App. 3d 1499, 1505-1507 (1988).
In Washoe, a judgment was entered in Nevada and then renewed by court order, which revealed that Respondents had money due from Appellants remaining. 47 Cal.App.4th at 1521. Respondents obtained a judgment in California (domesticated judgment) to recover the remaining amount through the sister-state judgment process under Code Civ Proc section 1710. Id. There was an issue raised regarding whether the California judgment was unenforceable in light of conflicting Nevada law. Id. at 1523. However, the court in Washoe determined that defenses against sister-state judgment enforcement cannot be asserted because “the court rendering the judgment had fundamental jurisdiction”, which in this case, was California. Id. at 1524.
In light of Washoe and section 1710 of the California Sister State Money Judgments Act, the answer seems relatively straightforward. However, not all community property states are created equal, and will sometimes conflict with one another in terms of whether the community property can be encumbered by a judgment lien. For instance, Ariz. Rev. Stat. (“A.R.S.”) section 25-214 states that binding community property for “[a]ny transaction of guaranty, indemnity or suretyship” requires a joinder of both spouses. Ariz Rev. Stat. § 25-214. This effectively prevents the creditor in the situation supra from securing a lien on any of the couple’s community property. However, California has no such rule. In fact, California’s Code of Civil Procedure states that “[a]ll property of the judgment debtor is subject to enforcement of a money judgment.” Code Civ. Proc., § 695.010. This begs the question: if the creditor decides to domesticate the Arizona judgment in California, will the creditor be able to secure a lien on the community property located in California?
True Conflict Test
In Gaughan v. First Cmty. Bank (In re Miller), 517 B.R. 145, 152 (D.Ariz. 2014), a judgment was entered against the husband Larry Miller and not his wife, Kari Miller, in Arizona. 517 B.R. at 147. The judgment was later domesticated in California, and the Arizona District Court determined that Arizona laws should apply under the principles of full faith and credit. Id. at 155. However, the Ninth Circuit reversed this decision in First Cmty. Bank v. Gaughan (In re Miller), 853 F.3d 508, 519 (9th Cir. 2017).
The Ninth Circuit drilled down on this issue of conflicting statutes due to the presence of a choice-of-law provision and applied a three-prong test based on Kearney v. Salomon Smith Barney, Inc., 39 Cal. 4th 95, 111-12 (2006). 853 F.3d at 516. In determining which state’s law applies, they analyzed three questions: (1) does relevant law vary between the potentially affected jurisdictions?; (2) If there is a difference in law, does a true 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[?]” Id.; see also Kearny, 39 Cal. 4th at 111-12.
On paper, there seems to be a “true conflict” between the Arizona and California community property laws—applying Arizona law would mean the community property is exempt or protected from encumbrance, while applying California law would mean the community property can be encumbered. This is exactly what the court in Gaughan concluded prior to the Ninth Circuit’s reversal. However, the Ninth Circuit held that the differences in the two statutes did not necessarily compel the conclusion that a true conflict existed. In re Miller, 853 F.3d at 516. Instead, the “existence of such a conflict turns on whether the circumstances of the case implicate the policies underlying the ostensibly conflicting laws.” Id. at 517.
The Ninth Circuit dove deeper in light of this finding and analyzed the true purpose of each state’s ostensibly conflicting rules to see whether a true conflict actually existed. In doing so, the Ninth Circuit relied on Hamada v. Valley National Bank, 27 Ariz. App. 433 (1976). In Hamada, the Appellees Valley National Bank secured a judgment against the Appellants Hajime and Toshiko Hamada, a married couple. Id. at 436. However, Toshiko Hamada, Hajime’s wife, did not sign the promissory note on which the judgment was based. Id. 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. Therefore, the “policy underlying Arizona’s dual-signature requirement is to ensure that a spouse who lacks knowledge of, and does not acquiesce to, a guaranty is not bound.” In re Miller, 853 F.3d at 516.
Given that the Millers in In re Miller did not defend on the ground that Kari Miller lacked knowledge or acquiescence to justify her lack of signature on the guaranty, A.R.S. § 25-214 was not invoked and therefore, there was no true conflict between California and Arizona law. Id. at 518. Further, because there was no true conflict, the Ninth Circuit determined that California had a compelling interest in applying its law, one of which is “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.” Id.
In light of the Ninth Circuit’s ruling in In re Miller, if the creditors in the hypothetical supra were to domesticate the out-of-state judgment in California and there are differences in the two states’ statutes, this might trigger the three-prong analysis to determine whether a true conflict actually exists. However, even if the analysis is triggered, it would probably be prudent to assume Washoe and California’s procedural laws would be controlling.
