Opinion ID: 507339
Heading Depth: 2
Heading Rank: 2

Heading: State Versus Federal Interests

Text: 19 Having determined that Congress did not intend section 2410 to preempt Arizona's notice requirement, we now proceed to the second stage of our analysis: Should the Arizona notice provision be adopted as the governing federal law? In the absence of an applicable act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards. Clearfield Trust Co. v. United States, 318 U.S. 363, 367, 63 S.Ct. 573, 575, 87 L.Ed. 838 (1943). 20 In deciding whether state law should be adopted as the governing federal common law, our cases have primarily focused on the issue of competing federal and state concerns. United States v. Pastos, 781 F.2d 747, 750 (9th Cir.1986). Consistent with its actions in the preemption area, the Supreme Court has encouraged the adoption of state law as the federal law applicable within that state. [State interests] should be overridden by the federal courts only where clear and substantial interests of the National Government, which cannot be served consistently with respect for such state interests, will suffer major damage if the state law is applied. United States v. Yazell, 382 U.S. 341, 352, 86 S.Ct. 500, 506, 15 L.Ed.2d 404 (1966); see United States v. MacKenzie, 510 F.2d 39, 40 (9th Cir.1975) (en banc). The federal courts will formulate a federal law that supersedes state law only when it relates to federal programs and actions where [t]he desirability of a uniform rule is plain. Clearfield, 318 U.S. at 367, 63 S.Ct. at 575; see Yazell, 382 U.S. at 354, 86 S.Ct. at 507. 21 Before we discuss the state and federal interests at stake, it is necessary to describe how the Arizona statutes at issue apply in this case.
22 The Arizona law of redemption relevant to this appeal is quoted in the margin. The SBA is a subsequent lienholder under Arizona law because its lien is junior, or subsequent, to Home Federal's. See Ariz.Rev.Stat.Ann. Sec. 12-1281 (1982). Section 12-1284 requires a subsequent lienholder to file a notice of intent to redeem within the applicable period of redemption as provided in Sec. 12-1282. 5 When the property has not been abandoned, and thus section 12-1282(A) does not apply, the applicable period of redemption referred to in section 12-1284 is the six-month period established by section 12-1282(B). See Matcha v. Wachs, 132 Ariz. 378, 380, 646 P.2d 263, 265 (1982). 23 The Arizona Court of Appeals has explained the relationship between the notice provisions in sections 12-1282 and 12-1284 as follows: 24 Th[e] right to redeem [provided in section 12-1282] is not established until the lienholder files the Notice Of Intention To Redeem required by Section 12-1284. If this is not done, the lienholder loses his right to redeem and the rights of any subsequent lienholder, who has given notice, become senior to his. This is the meaning of the term senior creditor in Sec. 12-1282. The senior creditor refers to the creditor whose lien is highest in the order of those who have complied with section 12-1284. 25 S & M Trust Co. v. Valley Lumber Co., 5 Ariz.App. 373, 375-76, 427 P.2d 354, 356-57 (1967). 26 The judgment and decree of foreclosure identified the SBA as the second lienholder, junior only to Home Federal. Arizona law would permit the SBA to redeem only if it filed the notice and supporting documents required by sections 12-1284 and 12-1287. This requirement could have been met by filing the necessary notice any time within six months after the foreclosure sale. If the SBA were not protected by section 2410, it would have been able to redeem the property only for a five-day period after March 5, 1986. Section 2410 clearly alters the five-day redemption period. This is not disputed. If none of the creditors filed a notice of intent to redeem under section 12-1284, according to Arizona law the sheriff should have executed and delivered a deed to the property to Centuras on March 6, 1986. See Ariz.Rev.Stat.Ann. Sec. 12-1286; 6 S & M Trust Co., 5 Ariz.App. at 376, 427 P.2d at 357.
27 Arizona's requirement that a redemptioner file a timely notice of his intent to redeem establishes a mechanism to clear title to property sold at foreclosure in a reasonably prompt manner and provides an orderly procedure that protects the interests of lien creditors. See S & M Trust Co., 5 Ariz.App. at 376, 427 P.2d at 357. The person who receives a sheriff's deed at a foreclosure sale certainly would be inconvenienced by a lingering cloud on the title if the United States were not required to file a notice of intent to redeem. Id. Were we to adopt the rule advocated by the SBA we would disrupt settled Arizona redemption procedures, with unpredictable results. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 739-40, 99 S.Ct. 1448, 1464, 59 L.Ed.2d 711 (1979) (Because the ultimate consequences of altering settled commercial practices are so difficult to foresee, we hesitate to create new uncertainties, in the absence of careful legislative deliberation. (footnote omitted)). Under Arizona law, only creditors who file a proper notice of intent to redeem are included in the succession of five-day redemption periods mentioned in section 12-1282(C). See S & M Trust Co., 5 Ariz.App. at 375-76, 427 P.2d at 356-57. To calculate when their right to redeem arises, Arizona creditors considering redemption would naturally examine the public record to determine who has filed a notice of intent to redeem. Arizona's notice provision protects the redemption rights of all lien creditors. Without the notice provision, the rights of Arizona creditors would be substantially less certain.
28 The SBA argues that the federal interest to be considered is the United States' right to redeem. This position, however, assumes that the SBA is incapable of complying with the notice provision. We cannot accept that assumption. As we noted in part A above, we assume that the SBA can comply with state laws to protect its security interests; indeed, its own regulations encourage using local notice procedures. See 13 C.F.R. Sec. 101.1(d)(3) (1987). Although compliance with the Arizona provision might add a modest expense to the administration of SBA loans in that state, we have adopted state law despite added costs to loan programs when other federal interests were not jeopardized. United States v. Ellis, 714 F.2d 953, 955 (9th Cir.1983). 29 In reviewing the legislative history of section 2410, the Supreme Court has stated that Congress considered the redemption provision of Sec. 2410(c) an important and integral feature of Sec. 2410. United States v. John Hancock Mut. Life Ins. Co., 364 U.S. 301, 305, 81 S.Ct. 1, 4, 5 L.Ed.2d 1 (1960). The importance of this redemption provision relates to the government's procurement procedures. As a junior lienholder, the SBA can bid competitively at a foreclosure sale to ensure that property on which it has a lien is not sold at a discount, to the detriment of the SBA's lien interest. Such a bid, however, normally requires an allocation of funds, and this may entail an appreciable time for processing. See, e.g., id. at 306, 81 S.Ct. at 4 (appropriation from Congress may be required for bid at foreclosure sale). Thus, the one-year period of redemption was inserted to afford the United States sufficient time to secure an appropriation and protect its interests. Id. But a requirement that the SBA comply with Arizona's notice provision does not impact the SBA's ability to procure funds necessary for redemption.
30 If Arizona's notice of intent to redeem requirement is adopted as federal law, the SBA will lose its right to redeem in this case. Compliance with this notice requirement, however, will not unduly burden the SBA. The federal interest at stake here is convenience in being freed from the shackle of a state notice procedure. Our previous decisions indicate that convenience normally is not sufficient justification to create a uniform federal rule rather than to adopt state law. See Ellis, 714 F.2d at 955. 7 Moreover, we previously have adopted state procedures as federal law even though the SBA's failure to comply with those procedures can extinguish its rights. In Bumb v. United States, 276 F.2d 729 (9th Cir.1960), we adopted as federal law a state law recording requirement. The state law requirement extinguished a chattel mortgage held by the SBA. We concluded in Bumb that the SBA had failed to create a valid security interest under California law. Id. The California law in question only regulated the manner of acquisition of a valid security interest, and [it did] not purport to regulate the remedy of the [SBA] after default by the mortgagor. Id. at 737. 31 Although the SBA does not mention our Bumb decision, it argues that our refusal to adopt local rules as federal law in two of our previous opinions should be followed in this case. See United States v. Stadium Apartments, Inc., 425 F.2d 358, 360-61 (9th Cir.), cert. denied, 400 U.S. 926, 91 S.Ct. 187, 27 L.Ed.2d 185 (1970); United States v. View Crest Garden Apts., Inc., 268 F.2d 380, 383 (9th Cir.), cert. denied, 361 U.S. 884, 80 S.Ct. 156, 4 L.Ed.2d 120 (1959). We rejected this same argument in United States v. Pastos, 781 F.2d 747, 750 (9th Cir.1986), and we do so again today for the same reason: the state interests in favor of adopting state law outweigh the opposing federal interests. 32 We conclude that Bumb controls our decision and that state law should be adopted. The Supreme Court's decision in United States v. Brosnan, 363 U.S. 237, 80 S.Ct. 1108, 4 L.Ed.2d 1192 (1960), strengthens this conclusion. Indeed, Brosnan emphasized the need for judicially created federal common law to respect the complex property relationships long since settled and regulated by state law. Id. at 242, 80 S.Ct. at 1111. The Court concluded that the best way to respect the tenets of our federal system was not to inject [the courts] into the network of competing private property interests, by displacing well-established state procedures governing their enforcement, or superimposing on them a new federal rule. Id. In our case, Arizona lienholders should be able to rely on Arizona's notice of intent to redeem requirement even when redemption might be exercised by the federal government under 28 U.S.C. Sec. 2410. Asking the SBA to comply with this notice provision will create little inconvenience and is consistent with the precedents of the Supreme Court and this court. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 728-40, 99 S.Ct. 1448, 1458-65, 59 L.Ed.2d 711 (1979); United States v. Yazell, 382 U.S. 341, 348-52, 86 S.Ct. 500, 504-06, 15 L.Ed.2d 404 (1966); Brosnan, 363 U.S. at 240-42, 80 S.Ct. at 1110-11; Pastos, 781 F.2d at 751-52; United States v. Crain, 589 F.2d 996, 1000 (9th Cir.1979); United States v. MacKenzie, 510 F.2d 39, 40 (9th Cir.1975) (en banc); Bumb, 276 F.2d at 735-38. 33 The SBA contends that we should not adopt the Arizona notice requirement because doing so would undercut one of the conditions that Congress attached to the waiver of sovereign immunity contained in section 2410. In United States v. John Hancock Mut. Life Ins. Co., 364 U.S. 301, 81 S.Ct. 1, 5 L.Ed.2d 1 (1960), the Supreme Court categorized the one-year right to redeem established in section 2410 as a condition that Congress imposed on its waiver of sovereign immunity. Id. at 306, 81 S.Ct. at 4. The Court then noted that protective conditions that accompany the waiver of sovereign immunity must be strictly observed and exceptions thereto are not to be implied. Id. (quoting Soriano v. United States, 352 U.S. 270, 276, 77 S.Ct. 269, 273, 1 L.Ed.2d 306 (1957)). 34 As discussed above, the Court in John Hancock held that section 2410's redemption period preempted the redemption period available under state law. The Court reviewed a Kansas decision holding that state law barred the United States from redeeming during the first year after the foreclosure sale. Id, 364 U.S.at 304, 81 S.Ct. 3. In defense of the result reached by the Kansas courts, John Hancock argued that Congress actually intended section 2410's redemption period to apply only when state law provided no right of redemption. See id. at 306-07, 81 S.Ct. at 4-5. The Court disagreed, concluding instead that Congress wanted the government to have a one-year right to redeem no matter what the substantive provisions of state law established. 35 The circumstances in the present case are quite different from those in John Hancock. Here, the Arizona procedures provide for notice to the owner of property and to lienholders. No comparable procedures have been created by Congress. The parties' dispute in John Hancock focused on the United States' substantive right to redeem and the debtor's exclusive right to redeem under state law. The Court did not consider, nor did the dispute involve, state notice requirements to protect the rights and interests of the owner of property and lienholders. Given this significant distinction, we follow what we consider the stronger principle which is present in the case now before us: State law procedures governing property relationships should be adopted as federal law when Congress creates a property right but is silent regarding how that right should be integrated into coexisting rights arising under state law, so long as the state procedures are convenient and adequately protect federal interests. This principle is drawn from United States v. Kimbell Foods, Inc., 440 U.S. 715, 739-40, 99 S.Ct. 1448, 1464, 59 L.Ed.2d 711 (1979) and United States v. Standard Oil Co., 332 U.S. 301, 309, 67 S.Ct. 1604, 1609, 91 L.Ed. 2067 (1947). 36 The SBA also argues that even if the Arizona notice provision applies, as we have decided it does, equitable principles expressed in Arizona law should permit SBA to redeem. See Matcha v. Wachs, 132 Ariz. 378, 380-82, 646 P.2d 263, 265-67 (1982). This claim is without merit. The SBA's notice was filed more than five months late under Arizona law. Such substantial tardiness cannot be excused as only a minor deviation from Arizona's statutory scheme. See Matcha, 132 Ariz. at 380-82, 646 P.2d at 265-67. In Matcha, the Arizona Supreme Court held that a party in substantial compliance with the Arizona redemption requirements did not lose his right to redeem. The court explained that the lienholder's timely section 12-1284 notice and the filing of documents required by section 12-1287 concurrently with his tender of the money necessary for redemption constituted substantial compliance. Id. at 381-82, 646 P.2d at 266-67. Concluding that none of the parties was prejudiced by the lienholder's minor deviation from full compliance, the court accepted his tendered redemption. Id. at 382, 646 P.2d at 267. 37 The SBA's notice and tender of redemption in this case differ significantly from the facts in Matcha. The court's willingness to find substantial compliance in Matcha was based in large part on the appellant's timely filing of notice under section 12-1284. Id. at 381-82, 646 P.2d at 266-67. The deviation from section 12-1287 was only two days. Id. Here it exceeds five months. Unlike the lienholder in Matcha, the SBA also had the benefit of the Arizona Supreme Court's very clear delineation of the notice requirements. 8 The SBA's claim that noncompliance with Arizona law might be excused as inadvertent or in good faith is irrelevant. Since the SBA did not substantially comply with the statutes, the presence or absence of prejudice, which is the second step in the Matcha inquiry, need not be explored. III