Arizona Bankruptcy American Inn of Court

Arizona Supreme Court Certification Issue Statutes and Rules

January 8, 2015

Certification of Questions to the Arizona Supreme Court Applicable Statutes and Rules

Ariz. Rev. Stat. § 12-1861. Supreme Court; questions of law certified by other courts The supreme court may answer questions of law certified to it by the supreme court of the United States, a court of appeals of the United States, a United States district court or a tribal court when requested by the certifying court if there are involved in any proceedings before the certifying court questions of law of this state which may be determinative of the cause then pending in the certifying court and as to which it appears to the certifying court there is no controlling precedent in the decisions of the supreme court and the intermediate appellate courts of this state. Supreme Court Rule 27. Certification of Questions of Law from Federal and Tribal Courts (a) Filing; form; number of copies; additional record. (1) A certification proceeding may be commenced in this court by filing with the clerk of this court a certification order from a federal court or the court of last resort of a federally recognized Indian tribe within the boundaries of the State of Arizona. (2) The certification order shall be filed in this court only by the clerk of the certifying court. (3) The certification order shall set forth: (A) The questions of law to be answered; (B) A statement of all facts relevant to the questions certified; (C) A list of the counsel (or pro se parties) appearing in the matter, together with their addresses and telephone numbers; (D) The proportions in which the parties shall share the required filing fees, if such proportions are not to be equal; (E) Any other matters that the certifying court deems relevant to a determination of the questions certified. (4) An original and six copies of the certification order shall be filed. (5) Upon request of this court, the clerk of the certifying court shall transmit to the clerk of this court the original or copies of such other portions of the certifying court's record as this court deems necessary to a determination of the certified questions. (b) Acceptance of jurisdiction; notice; motion for reconsideration. (1) Upon the filing of the certification order and any additional record requested by this court, this court will determine whether it will accept jurisdiction or decline to accept jurisdiction to answer the certified questions. (2) The clerk of this court will promptly notify the certifying court and the parties of this court's decision to accept jurisdiction or to decline to accept jurisdiction. (3) No motion for reconsideration of an order declining to accept jurisdiction of a certification order shall be filed. (c) Filing fees. Upon receipt of notice that the court has accepted jurisdiction of a certification order and notice of the amount of the required filing fees, the parties shall promptly remit such amount to the clerk of this court. (d) Briefing; oral argument.

(1) Within twenty (20) days after entry of an order accepting jurisdiction of the certification order, each of the parties may file a brief addressing the questions to be answered. No further briefs may be filed without leave of court. (2) Oral argument may be had only upon order of the court. Any party may request oral argument within the time provided for filing a brief. (e) Costs and attorneys' fees. There shall be no application for costs or attorneys' fees made to this court in connection with a certification proceeding. (f) Motions; other procedures. Except as otherwise provided herein, the Arizona Rules of Civil Appellate Procedure shall apply to motions and other procedures under this rule.

ARIZONA CODE OF JUDICIAL ADMINISTRATION Part 7: Administrative Office of the Courts

Chapter 2: Certification and Licensing Programs Section 7-201: General Requirements

A. Definitions. In this section, unless otherwise specified, the following definitions apply:

“Accredited” means placement on a list of nationally recognized authorizing agencies the United States Secretary of Education determines to be reliable authorities as to the quality of education or training provided by the institutions of higher education and the higher education programs they sanction. “ACJA specific section” means the adopted section of the Arizona Code of Judicial Administration (ACJA) applicable to a specified profession or occupation governed by this section, specifically, § 7-202: Fiduciaries; § 7-203: Confidential Intermediary; § 7-205: Defensive Driving Schools and Instructors; § 7-206: Certified Reporters and § 7-208: Legal Document Preparers. “Active” means a valid and existing certificate to practice in the specified profession or occupation. “Advisory letter” means written communication from the board notifying a certificate holder the conduct, while not warranting discipline, may result in future disciplinary action if not modified or eliminated. An advisory letter is not a disciplinary action. “Censure” means a written formal discipline sanction, finding a certificate holder has violated one or more provisions of the statutes, court rules, or applicable sections of the ACJA. “Certificate holder” means any entity or individual granted and currently holding valid certification pursuant to the applicable ACJA section and Arizona law. “Certification” means a process conducted by a board to determine if a person or entity meets all requirements to practice in the profession or occupation, pursuant to statutes, court rules and the applicable ACJA section. “Community college” means an accredited educational institution providing training in the arts, sciences and humanities beyond the twelfth grade of the public or private high school course of study or vocational education, including terminal courses of a technical and vocational nature and basic adult education courses. “Consent agreement” means a written statement to resolve a certification, complaint or compliance audit matter, voluntarily signed by the applicant or certificate holder.

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“Corrective action plan” means the measures outlined and agreed upon by division staff and the certificate holder to correct all deficiencies after a compliance audit or defensive driving course monitoring is completed. “Deputy director” means the deputy director of the administrative office of the courts (AOC) or the deputy director’s designee. “Designated principal” means an active certificate holder of a business or public entity who is designated specific responsibilities pursuant to the applicable sections of the ACJA. “Director” means the administrative director of the courts or the director’s designee. “Disciplinary clerk” means the individual or the individual’s designee of the certification and licensing division designated to accept all filings relevant to denial of initial or renewal certification of applicants and discipline of certificate holders. “Division director” means the director of the certification and licensing division of the AOC or the division director’s designee. “Division staff” means all members of the certification and licensing division of the AOC, including the division director. “Disciplinary action” means either informal or formal proceedings against a certificate holder, after a finding of probable cause the certificate holder has committed acts of misconduct or violations of statutes, court rules, or the applicable sections of the ACJA. “Dismissed with prejudice” means final disposition barring future action under this section on the same issue, claim, or cause. “Dismissed without prejudice” means final disposition with the right to bring future action under this section on the same issue, claim or cause. “Expired” means the certificate has lapsed on a specified date. “Filing” or “filed” means a document has been received and date-stamped by the disciplinary clerk. “Formal statement of charges” means the document setting forth specific alleged acts of misconduct or violations by a certificate holder of statutes, court rules, or the applicable sections of the ACJA, including any amendments, authorized by the board, upon a determination of probable cause. “Formal disciplinary proceedings” means the process initiated upon a determination of probable cause, the alleged acts of misconduct or violations of the statutes, court rules, or the applicable sections of the ACJA by a certificate holder, that if true, would warrant a censure, consent agreement or other negotiated settlement, restrictions, probation, additional training,

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a cease and desist order, suspension or revocation of certification pursuant to subsection (H)(24)(a)(6). “Good cause” means a legally sufficient ground or reason based upon the circumstances of the presented case. “Hearing officer” means an individual appointed by the supreme court to preside over administrative hearings pursuant to this section. “Inactive” means a certificate holder who voluntarily decides not to practice in the specified profession or occupation for a specified period of time and who is not the subject of any pending disciplinary action. “Informal disciplinary proceedings” means the process initiated upon a determination of probable cause the alleged acts of misconduct or violations of the statutes, court rules, or applicable sections of the ACJA by a certificate holder, that if true, would warrant a letter of concern, pursuant to subsection (H)(24)(a)(6)(a). “Injury” means harm to a client, customer, the public, judicial or legal system, the profession, or occupation resulting from a certificate holder’s misconduct. “Knowledge” is the conscious awareness of the nature or attendant circumstances of the conduct but without the conscious objective or purpose to accomplish a particular result. “Letter of concern” means a written informal discipline sanction finding a certificate holder has violated one or more provisions of the statutes, court rules, or the applicable sections of the ACJA. “Minimum competencies” means having the required skills for an adequate level of performance. “Negligence” means deviation from the standard of care a reasonable certificate holder would exercise in the situation. “Probable cause” means reasonable grounds for belief in the existence of facts concerning alleged acts of misconduct or violations by a certificate holder, warranting informal or formal discipline against the certificate holder. “Probation” means a written formal discipline sanction finding a certificate holder has violated one or more provisions of the statutes, court rules, or applicable sections of the ACJA but allowing the certificate holder to practice in their profession or occupation under specified conditions for a set period of time. “Professional regulatory entity” means a government or private unit associated with and having authority over a group of qualified and practiced individuals in a profession or occupation.

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“Revoked” or “revocation” means a written formal discipline sanction, finding a certificate holder has violated one or more provisions of the statutes, court rules, or applicable sections of the ACJA and the certificate to practice in the profession or occupation is rescinded. “Sanction” means an explicit and official action resulting from an informal or formal disciplinary action finding a certificate holder has violated or failed to comply with one or more of the statutes, court rules, applicable sections of the ACJA, court orders or board orders relevant to the certificate holder’s profession or occupation. “Section” means the referenced provision of the ACJA. “Suspended” or “suspension” means a written formal discipline sanction finding a certificate holder has violated one or more provisions of the statutes, court rules, or applicable sections of the ACJA and the certificate holder is not permitted to exercise the privileges of the certificate for a set period of time as the result of a final order of disciplinary action. “Valid” means a certificate currently in effect, granted by the board and not expired, surrendered, suspended, or revoked. “Voluntary surrender” means a certificate holder decides to discontinue practice in the specified profession or occupation and returns the certificate to the board for review and acceptance pursuant to subsection (E)(7).

B. Applicability. This section is read together with the ACJA section applying to the applicant’s or certificate holder’s profession, occupation or authorized services. In the event of any conflicts between this section and the ACJA section specific to a profession, occupation or authorized services, the specific ACJA section shall govern. Reference to “these sections” refers to ACJA § 7-201: General Requirements and the applicable sections of ACJA. ACJA § 7-201 applies to certification of confidential intermediaries pursuant to A.R.S. § 8-134 and § 8-543 and ACJA § 7-203; certification of fiduciaries pursuant to A.R.S. § 14-5651 and ACJA § 7-202; certification of defensive driving schools and instructors pursuant to A.R.S. §§ 28-3395 through -3399 and ACJA § 7-205; certification of reporters pursuant to A.R.S. § 32-4001 and ACJA § 7-206; and certification of legal document preparers pursuant to Rule 31, Rules of the Supreme Court and ACJA § 7-208.

C. Purpose. This section specifies the application, certification and renewal of certification

process, the complaint and disciplinary process and hearing process for the certification programs. The primary purpose of the certification and discipline processes is protection of the public. In addition, the certification programs ensure compliance to the highest ethical standards, rehabilitation of the certificate holder and deterrence of further unprofessional conduct pursuant to subsection (H)(6)(k), in accordance with statutes, court rules and ACJA.

D. Administration.

1. Role and Responsibilities of the Supreme Court. Pursuant to A.R.S. § 8-134(I), § 8-543(A),

§ 14-5651(A), § 28-3395(B), § 32-4005(A) and Rule 31(a)(23), Rules of the Supreme Court,

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the supreme court is responsible for administering the confidential intermediary program, fiduciary program, defensive driving program, certified reporter program and legal document preparer program. The supreme court shall:

a. Adopt rules for the implementation and administration of all certification programs

including minimum qualifications, certification and disciplinary processes and a code of conduct.

b. Establish and collect fees, costs and fines necessary for the implementation and

enforcement of all certification programs.

2. Role and Responsibilities of the Director. The director as designated by the Az. Const. Art. 6 § 7: a. Shall:

(1) Develop policies and procedures in conformity with this section and the applicable sections of ACJA including §§ 7-202, -203, -205, -206 and -208;

(2) Appoint and supervise all division staff; (3) Approve or disapprove all budgetary matters; (4) Ensure implementation of the applicable laws, this section and the applicable

sections of the ACJA; (5) Develop policies and procedures regarding review of credit reports; (6) Develop policies and procedures governing any complaint initiated by the

director; and (7) Develop time frames for the processing of certification applications by division

staff. b. May:

(1) Appoint and develop administrative guidelines for ethics advisory committees to

issue nonbinding ethical advisory opinions; (2) Direct division staff to conduct an investigation into alleged acts of misconduct or

violations by a certificate holder pursuant to subsection (H)(1)(b); (3) Initiate a complaint pursuant to subsection (H)(1)(b)(4)(b); and (4) Pursuant to the applicable sections of the ACJA, administrative orders and

A.R.S. §§ 28-3399 and 41-2401(D)(8), initiate a compliance audit of a certificate holder to determine if the certificate holder is in compliance with statutes, court rules, administrative orders, court orders, local rules, the ACJA and any other legal or ethical requirement relating to the certificate holder’s profession or occupation. The following provisions apply to audits: (a) Timeframes. The director shall develop timeframes and procedures for

division staff conducting compliance audits. (b) Confidentiality.

(i) Working papers associated with the compliance audit maintained by division staff are not public records and are not subject to disclosure,

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except to court staff in connection with their official duties, the attorney general, county attorney, public regulatory entities or law enforcement agencies.

(ii) Upon completion of an audit the final report issued to the affected party is a public record subject to public inspection.

(c) Subpoena. The director may subpoena witnesses or documentary evidence, administer oaths and examine under oath any individual relative to the audit.

(d) Referral. The director may refer the audited certificate holder to an applicable agency or division staff for investigation of alleged acts of misconduct or violations of the statutes, court rules, this section or the applicable sections of the ACJA. If the director refers the audited certificate holder to division staff for investigation of allegations of acts of misconduct or violations, the division staff shall process the complaint pursuant to subsection (H).

(e) Violations or Noncompliance. Wilful violation of or wilful noncompliance with an order of the director regarding the audit, or wilful noncompliance with a corrective action plan resulting from an audit, may result in an order directing the certificate holder to comply. The director may forward a copy of the order or report to the superior court and request the superior court issue an order to require the appearance of a person or business, compliance with the director’s order, or both. The superior court may treat the failure to obey the order as contempt of court and may impose penalties as though the certificate holder had disobeyed an order issued by the superior court.

3. Role and Responsibilities of the Deputy Director. The deputy director shall:

a. Serve as the probable cause evaluator, pursuant to subsection (H)(5)(a); b. Review the investigation summary of a complaint prepared by division staff; and c. Determine if there is probable cause to believe a certificate holder has committed acts

of misconduct or violations of the statutes, court rules, or the applicable sections of the ACJA.

4. Role and Responsibilities of Division Staff. The director shall designate the division

director and other division staff to assist in the administration of all certification programs pursuant to the Az. Const. Art 6, § 7. Division staff shall administer all certification programs.

a. Role and Responsibilities of the Division Director. The division director may:

(1) Issue subpoenas in the investigation process pursuant to subsection (H)(1)(h); (2) Dismiss complaints where the supreme court has no jurisdiction pursuant to

subsection (H)(2)(b)(2); (3) Dismiss clearly insufficient complaints pursuant to subsection (H)(2)(b)(3); and (4) Refer complaints to another state agency or entity with jurisdiction, if appropriate,

pursuant to subsection (H)(2)(b)(4).

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b. Division staff shall:

(1) Submit completed applicant fingerprint cards and applicable fees to the Arizona Department of Public Safety, in accordance with A.R.S. § 41-1750 and Public Law 92-544, pursuant to subsection (E)(1)(d)(3);

(2) Make recommendations to the board on all matters of applications and certification and any other matters regarding applicants and certificate holders;

(3) Provide updates to the board on program activities; (4) Maintain a list of certificate holders and post the list on the applicable Website and

make the list available to the public; (5) Conduct investigations of allegations of acts of misconduct or violations of the

statutes, court rules, or the applicable sections of the ACJA by applicants, certificate holders or non-certificate holders and report the findings to the board; and

(6) Conduct compliance audits and monitoring as required by this section or the applicable sections of the ACJA.

5. Role and Responsibilities of Professional and Occupational Boards.

a. Establishment. The supreme court shall establish a board for each profession or

occupation regulated by the supreme court pursuant to this section and the applicable ACJA section.

b. Appointment of Members. Upon establishment of a board, the chief justice shall appoint

members to initial varying terms of one, two and three years to encourage continuity of the board. Thereafter, all terms are for three years, unless otherwise noted in the applicable ACJA section. The chief justice shall appoint the chair of each board who shall serve as chair no longer than three years, unless otherwise specified in the applicable ACJA section. If a vacancy occurs in a board member position, the chief justice shall fill the vacancy expeditiously in the manner provided for in the original appointment. The appointments shall provide geographical, gender and ethnic diversity and consist of members of the regulated profession or occupation, court staff, the public and other professionals pursuant to the applicable ACJA section. The chief justice may appoint members to serve successive terms. The members shall assist division staff in the recruitment of board members and in the recommendation to the chief justice regarding appointment of candidates to the board.

c. Duties of the Board.

(1) The board shall: (a) Make recommendations to the supreme court regarding rules, policies and

procedures for regulation of the profession or occupation, including: (i) applicant qualifications; (ii) applicant testing; (iii) fees; (iv) a code of conduct;

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(v) continuing education; and (vi) any other matter pertaining to the regulated profession.

(b) Establish a passing score on any examination used for certification purposes, other than a national validated examination;

(c) Make all decisions regarding requests for special consideration to sit for subsequent examinations pursuant to subsection (E)(1)(f)(2)(d)(ii) and (iii);

(d) Make all decisions regarding whether to certify applicants for initial or renewal of certification;

(e) Review the division director’s dismissal of a complaint, pursuant to subsection (H)(2)(d);

(f) Review the probable cause evaluator’s finding pursuant to subsection (H)(5)(a) and make a decision to: (i) Request division staff to conduct further investigation; (ii) Refer the complaint to another entity with jurisdiction; (iii) Determine no violation exists and dismiss the complaint with our without

prejudice, pursuant to subsection (H)(24)(a)(3); (iv) Order the preparation of documents necessary for informal or formal

disciplinary actions pursuant to subsection (H)(7)(b), (H)(8)(b) or (H)(9)(b); or

(v) Order an immediate emergency suspension of a certificate and set a date for an expedited hearing, if the public health, safety or welfare are at risk, pursuant to subsection (H)(9)(d)(1); and

(g) Make all final decisions regarding alleged acts of misconduct or violations of the statutes, court rules, or applicable sections of the ACJA by applicants, certificate holders or noncertificate holders pursuant to subsections (H)(24) and (H)(25). The board has the final decision on the disposition of a complaint and may take any action pursuant to subsection (H)(24), regardless of the recommendations of the division director or hearing officer.

(2) The board may: (a) Hold informal interviews of applicants regarding initial certification and

issue subpoenas for witnesses and documentary evidence, pursuant to subsection (E)(1)(a)(10);

(b) Hold informal interviews of certificate holders regarding renewal of certification and issue subpoenas for witnesses and documentary evidence, pursuant to subsection (G)(1)(b);

(c) Request additional investigation of a complaint dismissed by the division director, pursuant to subsection (H)(2)(d)(2);

(d) Hold formal interviews of certificate holders regarding disciplinary matters, whether any discipline is eventually imposed or not, and issue subpoenas for witnesses and documentary evidence, pursuant to subsection (H)(8); and

(e) Make procedural determinations to consolidate or sever any discipline matter.

d. The board shall follow the policies and procedures in subsection (I).

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e. Persons appointed by the supreme court to serve on boards are immune from civil liability for good faith conduct relating to their official duties.

6. Computation of Time. For the purposes of this section and the ACJA specific section,

the computation of days pursuant to Rule 6(a), Rules of Civil Procedure is calculated as follows:

[T]he day of the act, event or default from which the designated period of time begins to run shall not be included . . . if less than 11 days, intermediate Saturdays, Sundays and legal holidays shall not be included in the computation. When that period of time is 11 days or more, intermediate Saturdays, Sundays and legal holidays shall be included in the computation. The last day of the period so computed shall be included, unless it is a Saturday, a Sunday or a legal holiday, in which event the period runs until the end of the next day which is not a Saturday, a Sunday or a legal holiday.

E. Initial Certification.

1. Application for Initial Certification.

a. Forms. An applicant shall apply for certification on approved forms and file them with division staff.

(1) Division staff shall conduct a preliminary review of the submitted application and

determine if the application is deficient, the required supporting documents are deficient, fees are deficient, or a combination of these requirements are deficient.

(2) Division staff shall advise the applicant in writing of the deficiencies. (3) The applicant shall provide the information and a written response to correct or

explain the deficiencies, or otherwise remedy the defects in the application, supporting documents or fees.

(4) Division staff may require the applicant to provide additional information or an explanation reasonably necessary to determine if the applicant meets the required qualifications specified in this section or the applicable sections of the ACJA.

(5) Upon receipt of a complete application, division staff may conduct a personal credit review and review records regarding an application for initial certification, consistent with the policies and procedures developed by the director pursuant to subsection (D)(2)(a)(5).

(6) The applicant shall notify division staff of any changes relevant to the application for certification within five days of the change.

(7) Upon a final review of the application, division staff shall prepare and forward to the board a written recommendation regarding the applicant’s qualifications and eligibility for certification.

(8) Division staff shall advise the board in any written recommendation regarding certification of an applicant, of any complaints alleging acts of misconduct or violations of statute, court rules or order, this section, or the applicable sections of the ACJA, if the allegations occurred during the time the applicant held an active

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certificate and were received after the applicant’s certificate expired. (9) The division staff’s written recommendation to the board shall note any

deficiencies in the application. A deficient application for initial certification is lacking one or more of the following requirements: (a) An explanation or correction of any deficiencies, pursuant to subsection

(E)(1)(a)(4); (b) Payment of all appropriate fees, pursuant to subsection (E)(1)(b); (c) A photograph, pursuant to subsection (E)(1)(c); or (d) A readable fingerprint card or affidavit in lieu of a fingerprint card, pursuant to

subsection (E)(1)(d). (10) The board, upon review of the division staff recommendation, may request an

informal interview with an applicant for certification, pursuant to subsection (D)(5)(c)(2)(a), to establish if: (a) Additional information is needed to determine if the applicant meets all

qualifications for certification in this section and the applicable section of the ACJA;

(b) An explanation of the information provided by the applicant is needed to determine if the applicant meets all qualifications for certification in this section and the applicable section of the ACJA; or

(c) Any complaints, regarding allegations of misconduct or violations of the statutes, court rules or applicable sections of the ACJA, received after the applicant’s original certificate expired, require investigation by division staff pursuant to subsection (E)(1)(a)(4).

b. Fees. The applicant shall submit, with the application, any applicable certification,

examination and training fees specified in the applicable sections of the ACJA. Fees are not refundable or waivable. An applicant shall make the payment for any fee payable to the Arizona Supreme Court. An application submitted without fees is deficient.

c. Photograph. The applicant for certification shall provide with the application, one

color passport-size photograph, two inches by two inches of the applicant’s head, neck and shoulders only. The applicant shall ensure the photograph was taken within the last two years and clearly identifies the applicant. An application submitted without a photograph is deficient.

d. Fingerprinting. If required pursuant to law, the applicant shall submit with the

application, a full set of fingerprints, with the fee established by law, for the purpose of obtaining a state and federal criminal records check. An application submitted without a fingerprint card, if required by law, is deficient.

(1) The applicant shall provide a readable and complete fingerprint card. The

applicant shall pay any costs attributable to the original fingerprinting or subsequent re-fingerprinting due to unreadable fingerprints and any fees required for the submission or resubmission of fingerprints.

(2) If after two attempts, the FBI determines the fingerprints provided are not

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readable, the applicant shall submit a written statement, under oath, the applicant has not been arrested, charged, indicted, convicted of or pled guilty to any felony or misdemeanor, other than as disclosed on the application.

(3) Division staff shall submit completed applicant fingerprint cards and the applicable fees to the Arizona Department of Public Safety, pursuant to A.R.S. § 41-1750, Public Law 92-544 and subsection (D)(4)(b)(1).

e. Initial Training. If required by the applicable section of the ACJA, an applicant shall

attend and complete the initial training session. Division staff shall provide the applicant with a document signifying the applicant completed the training. If required by the applicable section of the ACJA, an applicant shall attend the entire training session for eligibility to sit for a certification examination.

f. Examination. If required by the applicable section of the ACJA, an applicant shall

take and pass the examination for initial certification. Specific examination requirements are located in subsection (E) of the applicable ACJA section. National examinations shall be at the time and place scheduled by the administering entity.

(1) Administration of the Initial Examination. In administering the examination,

division staff shall: (a) Offer the examination on dates in conjunction with the initial training for

certification, if initial training is required by the applicable section of the ACJA;

(b) Set a date and place for the examination; (c) Promptly notify qualified applicants in writing they are permitted to sit for the

examination, specifying the time and place of such examination; (d) Publish in advance of the examination, content specifications for the

examination and a study guide, as approved by the applicable board and make the specifications and study guide available to applicants;

(e) Announce, in advance of the examination, the passing score for the examination, as established by the applicable board. The passing score shall be consistent with the job analysis conducted at the direction of the board. An applicant shall pass with a final score on the examination meeting the guidelines established by the board;

(f) Use multiple versions of the examination and ensure no copies of the examination are released to applicants or the public;

(g) Inform each applicant in writing as to whether the applicant passed or failed the examination and if the grade is failing, a reexamination is required to meet all qualifications for certification; and

(h) Make and keep an accurate record of each examination used at each administration of the examination and the score of each person taking the examination.

(2) Administration of Reexaminations. Division staff shall allow an applicant who fails the first examination to: (a) Review the answer sheet and grade of the applicant, upon written request.

The applicant shall conduct the review during business hours in the presence of division staff and the applicant shall not copy materials provided for

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review. (b) Retake the examination two times under the following conditions:

(i) The applicant is not otherwise disqualified from retaking the examination;

(ii) The applicant sent a written request to retake the examination to division staff within 30 days of the date of the notice of the examination results;

(iii) The applicant files a new application and pays the applicable examination fee each time;

(iv) The applicant takes the second or third reexamination within 90 days of the date of the notice of the examination results indicating the applicant failed either the first or second examination; and

(v) An applicant who does not submit a written request to retake the examination within the 30 day time frame specified in subsection (E)(1)(f)(2)(b)(ii), may request an extension of time from the board upon a showing of good cause.

(c) An applicant taking and failing the examination three times, unless otherwise noted in the applicable ACJA section, shall not be permitted to take any subsequent examination unless granted permission by the board.

(d) Subsequent Examinations. (i) Any applicant who was unsuccessful on the third attempt to pass the

examination may request the board for permission to sit for a fourth examination. The applicant shall submit a written request to the board to sit for a fourth examination under the following conditions: a) The applicant has filed a new application with division staff and paid

the appropriate examination fee; b) The applicant is not otherwise disqualified from taking the subsequent

examination; c) The applicant has provided documentation attached to the new application

stating the additional study and preparation the applicant has made to qualify for a fourth examination; and

d) The applicant has provided documentation attached to the new application demonstrating the circumstances and reasons for believing the applicant now possesses the knowledge of the minimum competencies of the profession or occupation to pass the fourth examination.

(ii) If the board finds the applicant demonstrates additional study and preparation and the circumstances and reasons to believe the applicant now possesses the knowledge of the minimum competencies of the profession or occupation, the board may, pursuant to subsection (D)(5)(c)(1)(c), approve the applicant’s request to sit for the fourth examination. Division staff shall inform the applicant of the board’s decision to allow the applicant to sit for the fourth examination within ten days of the board’s decision. The notice shall state the earliest date for which the applicant may sit for the fourth examination.

(iii) If the board finds the applicant does not demonstrate additional study and preparation and the circumstances and reasons to believe the applicant now possesses the knowledge of the minimum competencies of the profession

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or occupation, the board shall, pursuant to subsection (D)(5)(c)(1)(c), deny the applicant’s request to sit for the fourth examination. Division staff shall inform the applicant of the board’s decision to deny the applicant’s request to sit for the fourth examination within ten days of the board’s decision. The notice shall state the reasons for the board’s denial. The decision by the board to deny the request is final and there is no right to a hearing.

(iv) If the applicant’s request to sit for the fourth examination is denied, the applicant may file a new application twelve months after the board’s decision to deny.

(v) An applicant who was unsuccessful on the fourth or any subsequent examinations may request permission from the board to sit for a subsequent examination pursuant to subsection (E)(1)(f)(2)(d).

g. An applicant is disqualified from taking any future examination if the board

determines the applicant engaged in fraud, dishonesty or corruption while taking the examination or any subsequent examination.

h. Updating of Examinations. Division staff shall update examinations as needed and

may ask representatives from the court community, regulated profession or occupation, the public, or any other knowledgeable resource to assist in the development and validation of examinations for the applicable sections of the ACJA.

2. Decision Regarding Certification.

a. Notification of Certification. Upon the board’s decision to issue a certificate, division

staff shall promptly notify qualified applicants of certification in writing, pursuant to this section and the applicable section of the ACJA. Each qualified applicant shall receive a document, badge or card evidencing certification, stating the applicant’s name, date of certification, certificate number and expiration date of the certification. Each certificate shall expire as provided in the applicable section of the ACJA. In addition, unless previously provided, each applicant granted certification shall receive a copy of this section and the applicable section of the ACJA, detailing the responsibilities of the certificate holder.

b. Certificate Status. All certificates are valid until expired, surrendered, suspended or

revoked.

c. Denial of Initial Certification.

(1) The board shall deny certification of the applicant if the applicant does not meet the qualifications or eligibility requirements at the time of the application described in this section or the applicable section of the ACJA; or has not submitted a complete application with all deficiencies corrected, the applicable documents and fees.

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(2) The board may deny certification of any applicant if one or more of the following is found: (a) Material misrepresentation, omission, fraud, dishonesty, or corruption on the

part of the applicant in the examination for certification; (b) The applicant or an officer, director, partner, member, trustee, or manager of

the applicant: (i) Has committed material misrepresentation, omission, fraud, dishonesty,

or corruption in the application form; (ii) Has committed any act constituting material misrepresentation, omission,

fraud, dishonesty or corruption in business or financial matters; (iii) Has conduct showing the applicant or an officer, director, partner,

member, trustee, or manager of the applicant is incompetent or a source of injury and loss to the public;

(iv) Has a conviction by final judgment of a felony, regardless of whether civil rights have been restored;

(v) Has a conviction by final judgment of a misdemeanor if the crime has a reasonable relationship to the practice of the certified profession or occupation, regardless of whether civil rights have been restored;

(vi) Has a denial, revocation, suspension or any disciplinary action of any professional or occupational license or certificate;

(vii) Has a censure, probation or any other disciplinary action of any professional or occupational license or certificate by other licensing or regulatory entities if the underlying conduct is relevant to the certification sought;

(viii) Has a termination, suspension, probation or any other disciplinary action regarding past employment if the underlying conduct is relevant to the certification sought;

(ix) Has been found civilly liable in an action involving misrepresentation, material omission, fraud, misappropriation, theft or conversion;

(x) Is currently on probation or parole; (xi) Has violated any decision, order, or rule issued by a professional

regulatory entity; (xii) Has violated any order of a court, judicial officer, administrative tribunal,

or the board; (xiii) Has made a false or misleading statement or verification in support of

an application for a certificate filed by another person; (xiv) Has made a false or misleading oral or written statement to division

staff or the board; (xv) Failed to disclose information on the certification application subsequently

revealed through the background check; (xvi) Failed to respond or furnish information to the division staff or the board

when the information is legally requested and is in the applicant’s control or is reasonably available to the applicant and pertains to certification or investigative inquiries; or

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(xvii) If the applicant is a business, a record of conduct constituting dishonesty or fraud on the part of an employee, board member, or the business.

(3) The board may consider any or all of the following criteria when reviewing the application for certification of an applicant with a misdemeanor or felony conviction, pursuant to subsection (E)(2)(c)(2)(b)(iv) and (v): (a) The applicant’s age at the time of the conviction; (b) The applicant’s experience and general level of sophistication at the time of

the pertinent conduct and conviction; (c) The degree of violence, injury or property damage and the cumulative effect

of the conduct; (d) The applicant’s level of disregard of ethical or professional obligations; (e) The reliability of the information regarding the conduct; (f) If the offenses involved fraud, deceit or dishonesty on the part of the applicant

resulting in harm to others; (g) The recency of the conviction; (h) Any evidence of rehabilitation or positive social contributions since the

conviction occurred as offered by the applicant; (i) The relationship of the conviction to the purpose of certification; (j) The relationship of the conviction to the applicant’s field of certification; (k) The applicant’s candor during the application process; (l) The significance of any omissions or misrepresentation during the application

process; and (m) The applicant’s overall qualifications for certification separate from the

conviction. (4) Upon the board’s decision to deny certification, division staff shall, notify each

applicant denied certification of the reasons for the denial and the right of the applicant to a hearing, pursuant to subsection (E)(2)(c)(5). The division staff shall provide the notice in writing and shall send the notice within ten days after the board’s decision.

(5) An applicant is entitled to a hearing on the decision to deny certification, if the disciplinary clerk receives a written request for a hearing within fifteen days after division staff mails the notice of the denial. The applicant is the moving party at the hearing and has the burden of proof. The provisions of subsections (H)(12) through (H)(23) and (H)(25) through (H)(27) apply regarding procedures for the hearing and appeal.

(6) An applicant denied certification by a final decision of the board, whether or not a hearing was requested and held, may reapply for certification, pursuant to subsection (E), under the following circumstances: (a) It has been twelve months since the final decision by the board; (b) If the initial reasons for denial were failure to meet the education and

experience requirements, the applicant shall attach to the new application written documentation demonstrating how the circumstances have changed to meet these requirements: (i) Division staff shall review the new application and supporting

documentation and consider if the applicant now meets the education and

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experience requirements; (ii) Division staff shall notify the applicant in writing within ten days if the

applicant has now provided sufficient documentation to demonstrate the applicant meets the education and experience requirements pursuant to this section and the applicable ACJA sections or has not provided sufficient documentation to demonstrate the applicant now meets the education and experience requirements;

(iii) If the applicant has met the education and experience requirements necessary for certification, division staff shall forward the application to the board pursuant to subsection (E)(1)(a)(7);

(iv) If the applicant has not met the education and experience requirements necessary for certification, division staff shall forward the application to the board noting the deficiencies and a recommendation for denial pursuant to subsection (E)(1)(a)(9) and provide written notice to the applicant of the deficiencies and recommendation; and

(v) The applicant may request an informal interview with the board to review the recommendation of division staff for denial of certification because of the deficiencies, if the request is submitted to the board in writing within ten days of the date of the notification.

(c) If the board denied certification for reasons other than failure to meet the education or experience requirements, the applicant shall present new documentation to address the original issues resulting in denial including all of the following: (i) Demonstration of acceptance of responsibility for the conduct leading to

the denial by the board; and (ii) Establishment of good moral character.

(d) In determining whether the applicant has established good moral character, the board shall conduct an informal interview with the applicant, no later than 60 days after the applicant has submitted a completed application.

(e) Upon a showing of good cause, the applicant may apply for certification sooner than twelve months if denied solely for lack of education or experience necessary for certification, if those circumstances have changed.

(f) The applicant may not reapply for certification if there are statutory provisions prohibiting certification as specified in the applicable ACJA section.

3. Time Frames for Certification.

a. The director shall develop time frames for the processing of certification applications

by division staff, pursuant to subsection (D)(2)(a)(7). b. An applicant shall respond timely to requests for information from division staff

pertaining to the applicant’s application. Unless the applicant can show good cause as to why the board should grant additional time, the board shall not approve any applicant for certification unless the applicant successfully completes all requirements within 90 days from the date division staff received the original initial application for certification or within 90 days of the applicant passing the examination for certification

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if required by the applicable section of the ACJA. c. If an applicant needs additional time to comply with division staff requests or to

complete the application process within the time frames specified in this subsection, the applicant shall file a written request for an extension with division staff. The request shall state the reasons for additional time to comply with time frames and certification requirements. The applicant shall file the request for additional time to complete the initial application at a minimum, ten days prior to the 90 day deadline, unless the applicant makes a showing of good cause. Failure to complete the certification process or file a written request for an extension of time within this time period shall nullify and void the original application and supporting documents, including fingerprints, fees and the applicable examination scores.

d. Division staff shall forward the written request for an extension of time to the board at

the next scheduled board meeting. e. If the applicant fails to meet the 90 day deadline or is not granted additional time by

the board to complete the initial certification process, the applicant is considered a new applicant. The applicant shall submit a new application including a fingerprint card and fee if applicable and certification and training fees. The applicant is not required to sit for the examination if the applicant submits the new application within one year of having successfully passed the required examination.

4. Records of Applicants for Certification and Certificate Holders. Unless otherwise provided by law, the following applies to applicant and certificate holder records:

a. Applicant and certificate holder’s certification records are open to the public, after

home addresses, home or cellular telephone numbers, social security numbers and all other personally identifying information, except for the name of the certificate holder, have been redacted.

b. Division staff shall retain applicant and certificate holder records for a period of five

years from the last activity in the record. Division staff shall take appropriate methods to ensure the confidentiality of any destroyed records.

c. If an applicant or certificate holder needs to have personally identifying information

contained in their files released to an employer or potential employer, the applicant or certificate holder shall sign a release of information form. Division staff shall provide the applicant or certificate holder with an approved form for this purpose.

5. Unlawful Use of Designation or Abbreviation. A person who has received a certificate to practice in a specific profession or occupation from the board is authorized to utilize the designation of “Arizona certified” in connection with their title or name and may use any appropriate abbreviation connected with this certification. No other person or business shall assume or use the title, designation or abbreviation or any other title, designation, sign or card, the use of which is reasonably likely to induce others to believe the person or business holds valid

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certification issued by the Arizona Supreme Court in the specified profession or occupation. The certificate holder shall not sell, transfer or assign its certification to any other entity.

6. Cease and Desist Order. The board, upon completion of an investigation or disciplinary proceeding, may issue a cease and desist order pursuant to subsection (H)(24)(a)(6)(g). A hearing officer or a superior court judge, upon petition by the board, may enter an order for an individual or business entity to immediately cease and desist conduct constituting engagement in the practice of the profession or occupation without the required certification.

7. Voluntary Surrender. A certificate holder in good standing may surrender their certificate

to the board. However, the surrender of the certificate is not valid until accepted by the board. The board or division staff may require additional information reasonably necessary to determine if the certificate holder has violated any provision of the statutes, court rules and this section or the applicable section of the ACJA. The surrender does not prevent the commencement of subsequent discipline proceedings for any conduct of the surrendered certificate holder occurring prior to the surrender.

a. Division staff shall present the surrendered certificate to the board at the next

available board meeting after receiving the surrender. Upon the board’s acceptance of the voluntary surrender division staff shall designate the certificate of the certificate holder as a “surrendered certificate holder in good standing”. Division staff shall notify the certificate holder in writing within ten days after the board’s acceptance of the surrender.

b. The board shall not accept the surrender if there is a complaint pending against the

certificate holder. However, this does not preclude the board from entering into a consent agreement to resolve the pending complaint pursuant to subsection (H)(24)(a)(6)(c) by terms including the voluntary surrender of the certificate.

c. The board shall, within 120 days of the receipt of the surrendered certificate by

division staff either accept the surrender or, based upon the recommendations of division staff, institute disciplinary proceedings pursuant to subsection (H). If the board subsequently imposes a sanction pursuant to subsections (H)(24) and (H)(25) upon the certificate of the surrendered certificate holder, division staff shall change the status of the certificate holder from “surrendered certificate holder in good standing” to that of a person so disciplined.

8. Inactive Status.

a. A certificate holder may transfer to inactive status, upon written request to the board. Upon recommendation of division staff the board may accept the transfer of the certificate holder to inactive status and division staff shall note in the certification database the certificate holder is on inactive status, in good standing. The inactive certificate holder shall not engage in the practice of the profession or occupation of certification pro bono or for a fee or other compensation while on inactive status and shall not present themselves as a certificate holder.

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b. Upon application and payment of any applicable fee for reactivation of certification, required by the applicable section of the ACJA, the board may require the applicant to comply with the following:

(1) Submit proof of compliance with the requirements for continuing education; (2) Submit other proof required by the board to:

(a) Demonstrate the applicant possesses the skills necessary to practice in the profession or occupation;

(b) Demonstrate the applicant remains in compliance with the applicable ACJA sections; and

(c) Demonstrate compliance with other requirements for certification. (3) If the applicant for reinstatement engaged in the profession or occupation in

another jurisdiction during the time the certificate holder’s certificate was inactive, the applicant shall submit all of the following: (a) Proof of practice in the profession or occupation in the other jurisdiction; (b) An affidavit affirming the applicant has not been disciplined in another

jurisdiction; and (c) An affidavit affirming the applicant is not subject to discipline or being

investigated in another jurisdiction. (4) If the applicant has been inactive for more than one year the board may require

the applicant to sit for and pass the applicable examination.

c. If the applicant meets the requirements of this subsection to the satisfaction of the board, the board shall return the inactive certificate holder to active status. Division staff shall change the status of the certificate holder from “inactive” to “active” and notify the certificate holder of the board’s decision within ten days.

d. A certificate holder shall only remain in an inactive status as specified by the

applicable ACJA section.

9. Reinstatement after Suspension or Revocation. A certificate holder whose certificate was suspended or revoked by a final order of the board may apply for reinstatement under the following conditions:

a. An applicant for reinstatement shall file a written application for reinstatement with

division staff, accompanied by the appropriate fees and the following documents:

(1) The reinstatement form and a copy of the final order of suspension or revocation; (2) A detailed description of the applicant’s occupation and sources of income or

earnings derived during the period between the filing of the final order by the disciplinary clerk and the date of application for reinstatement after suspension or an initial application for recertification;

(3) A statement of every civil or criminal action and a copy of the action, where the applicant was either plaintiff or defendant, since the submission of the last renewal application or, if no renewal application has been submitted, then since the initial application was submitted;

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(4) A list of all criminal or civil final judgments since the submission of the last renewal application, or if no renewal application has been submitted, then since the initial application was submitted;

(5) A list of all residences and business addresses since the submission of the last renewal application, or if no renewal application has been submitted, then since the initial application for certification and the date division staff receive the application for reinstatement;

(6) A statement of concise facts of how the applicant for reinstatement has maintained the minimum competencies and knowledge during the period of time from the date of the suspension order until the date division staff receives the reinstatement application;

(7) A statement of concise facts of how the applicant for recertification has maintained the minimum competencies and knowledge during the period of time from the date of the order revoking the applicant’s certificate until the date division staff receive the application for certification;

(8) A statement of facts supporting reinstatement to the profession or occupation after suspension; or a statement of facts supporting certification again to the profession or occupation; and

(9) A statement of all facts demonstrating the applicant’s rehabilitation during the period of time from the date of the board’s order revoking the applicant’s certificate or suspending the applicant’s certificate, until the date division staff receive the application for reinstatement or initial certification.

b. Division staff or the board may require additional information demonstrating the

applicant meets the minimum competencies of the profession or occupation. The board may require the applicant sit for and pass the applicable examination in order to process the application or determine if the applicant meets the minimum competencies of the profession or occupation. The applicant has the burden of proof to demonstrate by clear and convincing evidence the applicant’s rehabilitation, compliance with all discipline orders and rules and, the applicant meets the minimum competencies of the profession or occupation. An applicant denied reinstatement by the board has the right to a hearing pursuant to subsection (H)(12), except if the applicant fails to provide the information within the requested time frame. Failure to provide the information shall result in automatic denial of reinstatement without the right to a hearing.

c. Upon submission of all requirements of subsection (E)(9)(a), the applicant shall meet

all requirements of initial certification pursuant to subsection (E)(1). The applicant, for reinstatement after a suspension or revocation, shall pay the fee for reinstatement, pursuant to subsection (K) in the applicable section of the ACJA.

d. The board shall not issue any certification under this section to any person or business

entity whose certification has been suspended until:

(1) The person or business entity seeking reinstatement of a suspended certificate has demonstrated all the requirements of the suspension order have been met; and

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(2) The person or business entity qualifies in accordance with the applicable provisions of this section or other sections of the ACJA.

e. The board shall not issue any certification under this section to any person or business

entity whose certification has been revoked until: (1) One year has passed from the date of the board’s final order of revocation; (2) The person or business entity seeking certification provides proof of satisfaction

of any and all requirements in the order of revocation; and (3) The person or business entity again qualifies in accordance with the provisions of

subsection (E)(1) and the applicable sections of the ACJA. F. Role and Responsibilities of Certificate Holders.

1. Code of Conduct. Each individual certificate holder shall adhere to the code of conduct or standards of conduct, subsection (J) in the applicable section of the ACJA.

2. Identification. Upon request by any judicial officer, court employee or member of the

public, a certificate holder shall provide proof of certification.

3. Assumed Business Name. A certificate holder shall not transact business in this state under an assumed name or under any designation, name or style, corporate or otherwise, other than the legal name of the individual or business entity unless the person or business entity files with division staff a statement indicating the name for transaction of the business and the legal full name of the certificate holder.

4. Response. A certificate holder shall respond by the specific time stated in any request for

information from, and shall provide documents to the director, deputy director, division staff, or board pertaining to certification, renewal of certification, complaints alleging acts of misconduct or violations by the certificate holder, investigative inquiries and compliance audits or defensive driving course monitorings of the practice of the certificate holder. A certificate holder shall respond to any subpoenas or orders issued by the director, division director, board, or any judicial officer. Failure to comply with this subsection by a certificate holder constitutes grounds for discipline pursuant to subsection (H)(6)(c) or denial of renewal of certification pursuant to subsection (G)(3) and (G)(4). Failure to comply with this subsection by a certificate holder in completion of a corrective action plan or defensive driving course monitoring may constitute grounds for discipline, pursuant to subsection (H)(6)(b).

5. Candor.

a. A certificate holder shall not knowingly:

(1) Make a false statement of material fact or law to a tribunal; or (2) Fail to disclose a material fact to a tribunal, except as required by applicable law.

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b. A certificate holder shall notify division staff within ten days of a misdemeanor or felony conviction.

6. Change of Name or Address. A certificate holder shall notify division staff of any

change in name or business, directory, mailing or home address, telephone number or email address within 30 days of any change, pursuant to the applicable sections of the ACJA. The certificate holder shall make this notice in writing by U.S. Post, facsimile or email.

G. Renewal of Certification.

1. Expiration Date. Certificates expire on the date specified by the applicable section of the ACJA except as otherwise provided in this section. All certificates shall continue in force until expired, voluntarily surrendered, placed on inactive status, suspended or revoked.

2. Application. A certificate holder is responsible for applying for a renewal certificate. The certificate holder shall apply for renewal of certification on the form provided by division staff. The board shall set a deadline renewal application date, in advance of the expiration date, to allow a reasonable time frame for processing the renewal application. a. When a certificate holder has filed a timely and complete renewal application, the

existing certification does not expire until the administrative process for review of the renewal application has been completed.

b. When a certificate holder requests to file an untimely renewal application, the

division director may process the untimely application and recommend to the applicable Board to renew a certificate if the untimely renewal applicant demonstrates to the director good cause for the untimely filing. In addition, the following shall apply:

(1) The applicant shall submit a complete renewal application and applicable fees,

and any other documentation requested by division staff to verify the grounds for the good cause exception requested.

(2) The applicant shall not practice in the applicant’s profession: (a) until the director decides in writing based on good cause to process the

application or (b) if the director decides not to process the untimely application, until an initial

application is processed and the applicant is granted certification pursuant to the AJCA § 7-201(E) and the applicable sections of §§ 7-202 through 7-208.

c. When a timely renewal application is denied, the existing certification does not expire

until the last day for seeking a hearing on the denial decision pursuant to subsection (E)(2)(c)(5); or if a hearing is requested, until the final decision is made by the board pursuant to subsection (H)(25).

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d. The board may request an informal interview with the applicant for renewal, pursuant to subsection (D)(5)(c)(2)(b), to establish if additional information or an explanation of the information provided by the applicant is needed to determine if the applicant continues to meet the qualifications for certification in this section and the applicable section of the ACJA.

e. The certificate of a certificate holder who does not supply a complete renewal

application and payment of the renewal fee in the specified time and manner to division staff shall expire as of the expiration date in the applicable section of the ACJA. Division staff shall treat any renewal application received after the expiration date as a new application, except when the certificate holder requests to file an untimely renewal application pursuant to subsection (G)(2)(b).

3. Additional Information. Before recommending renewal of certification, division staff

may require additional information reasonably necessary to determine if the applicant continues to meet the qualifications specified in this section, which may include: a. Background information, pursuant to subsection (E)(1)(a) and the applicable section

of the ACJA; b. A personal credit review and review of records pertaining to the applicant by division

staff, pursuant to subsection (E)(1)(a)(5); and

c. Fingerprinting pursuant to subsection (E)(1)(d);

4. Decision Regarding Renewal.

a. The board may renew a certification if the certificate holder:

(1) Meets all requirements for renewal as specified in this section and the applicable section of the ACJA;

(2) Submits a completed renewal application; and (3) Pays the renewal fees on or before the expiration date as specified by the

applicable section of the ACJA.

b. Division staff shall promptly notify the applicant in writing of the board’s decision to renew the applicant’s certificate in accordance with this section and the applicable section of the ACJA. Each renewed applicant shall receive a document, badge or card evidencing renewal of certification, stating the applicant’s name, date of certification, certification number and expiration date.

c. The board may deny renewal of certification for any of the reasons stated in

subsection (E)(2)(c). Division staff shall promptly notify the applicant, in writing, within ten days of the board’s decision to deny renewal of certification. The notice shall include the board’s reasons for the denial of renewal of certification and the right of the applicant to a hearing, pursuant to subsection (G)(4)(d).

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d. An applicant is entitled to a hearing, on the decision to deny renewal of certification if the disciplinary clerk receives a written request for a hearing within fifteen days after the date of the notice of denial. The applicant is the moving party at the hearing and has the burden of proof. The provisions of subsections (H)(12) through (H)(23) and (H)(25) through (H)(27) apply regarding procedures for hearing and appeal.

H. Complaints, Investigations, Disciplinary Actions, Proceedings and Certification

and Disciplinary Hearings. 1. Complaints: Filing and General Provisions.

a. Filing of Complaint. All judicial officers, court employees and certificate holders

shall, and any person may, notify division staff if it appears a certificate holder has violated statutes, court rules, this section or the applicable section of the ACJA. The complainant shall provide the complaint in writing with sufficient specificity to warrant further investigation. The complaint form shall provide the name, telephone number and address of the complainant.

b. Director Initiated Complaints. In accordance with the policies and procedures developed

pursuant to subsections (D)(2)(a)(6) and (D)(2)(b)(2), the director may direct division staff to investigate allegations of acts of misconduct or violations of statutes, court rules, or the ACJA, which may result in a complaint, if such investigation protects and serves the best interest of the public. This shall include an investigation where the complainant does not wish to have their identity disclosed to the certificate holder.

(1) Review of allegations. Division staff shall:

(a) Review the allegations and determine if the supreme court has jurisdiction; (b) Determine if there is sufficient information to permit investigation; (c) Verify details in the allegations including the certificate holder’s status and, if

available, any addresses, phone numbers or other relevant factors; (d) Corroborate, by independent observations and information, the allegations of acts

of misconduct or violations of statutes, court rules or the ACJA, to determine if the allegations are credible and reliable; and

(e) Meet with the division director to confirm jurisdiction and relevant factors contained in the allegations.

(2) Division staff shall, upon completion of the review, prepare a written report of the allegations and include the following: (a) Confirmation of supreme court jurisdiction; (b) Determination, if the allegations are true, they would warrant discipline; (c) Verification of details in the allegations; and (d) Corroboration of relevant facts by independent observations.

(3) Division staff shall forward the written report to the director for review and schedule a meeting with the director and division director.

(4) The director shall review the written report and direct staff to: (a) Conduct further review of the allegations; (b) Initiate a complaint naming the director as the complainant, pursuant to

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subsection (D)(2)(b)(3); or (c) Determine the allegations do not warrant the filing of a director initiated

complaint. c. Anonymous Complaints. Division staff shall not accept anonymous complaints.

d. Authority after Expiration. If a complaint or investigation is pending prior to the

expiration date of a certificate, the provisions of subsection (G)(1) and the applicable sections of the ACJA do not affect the authority of:

(1) The director to initiate a complaint, pursuant to subsection (D)(2)(b)(3); (2) Division staff to investigate a complaint, pursuant to subsection (D)(4)(b)(5); or (3) The board to take disciplinary action regarding the certification of a certificate

holder, pursuant to subsection (D)(5)(c)(1)(g). e. Standing of Complainant. A complainant does not have standing regarding any

proceedings and is not a party to any proceedings. The complainant may, upon request to division staff, receive notice of any public proceeding concerning the complaint or any consent agreements. The complainant submits to the jurisdiction of the supreme court’s certification and licensing division for all purposes relating to the proceedings.

(1) The complainant shall keep division staff informed of any changes of mailing

address, telephone number or email address during the investigation and any disciplinary proceedings.

(2) Division staff shall forward any correspondence or notice to the complainant by United States mail to the last address of record with division staff.

(3) Division staff shall provide the complainant with the following information: (a) A written acknowledgement of the receipt of the complaint; (b) A copy of the letter sent to the certificate holder requiring a response to the

alleged acts of misconduct or violations and the initial response by the certificate holder, within twenty days of receipt of the certificate holder’s initial response;

(c) Notice, if the complainant has requested notice, of any public proceeding concerning the complaint or any consent agreement;

(d) Notice of the final disposition of each allegation; and (e) Notice of the dismissal of the complaint within ten days of the determination

by the division director, if applicable, pursuant to subsection (H)(2)(b). (4) Failure by division staff to provide the complainant with information as required

by this subsection shall not affect the ultimate disposition of any allegations of acts of misconduct or violations by the certificate holder.

(5) The complainant may file a request for review by the board of the division director’s dismissal of the complaint, within ten days of the date of the notice of dismissal pursuant to subsection (H)(2)(e).

f. Non-abatement. Unwillingness, failure of the complainant to cooperate with division staff or the board, withdrawal of the complaint or a specific allegation of misconduct

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or violation contained in the complaint, settlement or compromise between the complainant and the certificate holder, or restitution by the certificate holder shall not abate the processing of any complaint or disciplinary proceeding.

g. Confidentiality of Complaints. The director, deputy director, division staff, board and

court employees shall keep information or documents obtained or generated by the director, deputy director, division staff, board or court employees in the course of an open investigation or received in an initial report of misconduct confidential, except as mandated by court rules or this section.

(1) Confidential information may also be disclosed during the course of an open

investigation: (a) To court staff, the attorney general, county attorney, law enforcement and

other regulatory officials; (b) If the director makes a finding the disclosure is in the best interest of the public and

the interest is not outweighed by any other interests; or (c) Is not contrary to law.

(2) Once a finding of probable cause has been entered all information and documents are open for public inspection unless: (a) Confidential by law or public record rules adopted by the supreme court; or (b) If the deputy director, as probable cause evaluator, determines further

investigation is necessary, the information or documents and those compiled in the further investigation shall remain confidential until probable cause is determined.

(3) Complaints dismissed by the division director, pursuant to subsection (H)(2)(b) for lack of jurisdiction or clear insufficiency are confidential and not a matter of public record for inspection.

(4) Complaints dismissed by the board, pursuant to subsection (H)(24)(a)(3) are a matter of public record for inspection.

h. Investigative Subpoenas. Upon the recommendation of division staff and a

demonstration of good cause, the division director, pursuant to subsection (D)(4)(a)(1), may issue an investigative subpoena to any person or entity:

(1) For the purpose of securing documents or information from any person or entity,

if the documents or information are related to a pending investigation of alleged acts of misconduct or violations regarding statutes, court rules, this section or the applicable section of the ACJA.

(2) Subpoenas issued by the division director shall be issued and served in the same manner as provided by the Arizona Rules of Civil Procedure. An employee of the court or any other person as designated by the Arizona Rules of Civil Procedure may serve the subpoena.

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i. Processing Time Frames. Division staff shall:

(1) Prepare any complaint the division director has dismissed pursuant to subsections (H)(2)(b) and (c) and forward the complaint to the board for review, pursuant to subsection (H)(2)(d), at the next regularly scheduled board meeting.

(2) Prepare and forward to the board for review at the next regularly scheduled board meeting, any investigated complaint the deputy director has reviewed and entered a finding regarding probable cause, pursuant to subsection (H)(5)(c).

(3) Prepare the documents for informal discipline no later than 30 days following the order of the board, pursuant to subsections (H)(7)(b) and (H)(25), unless the board extends the time for good cause.

(4) Prepare the documents for formal discipline no later than 30 days following the order of the board pursuant to subsections (H)(9)(b) and (H)(25), unless the board extends the time for good cause.

(5) File the formal statement of charges with the disciplinary clerk and arrange for service no later than 30 days following the order of the board, pursuant to subsection (H)(10), unless the board extends the time for good cause.

(6) Serve the board’s order of emergency summary suspension and expedited hearing immediately on the certificate holder, pursuant to subsection (H)(9)(d)(2).

(7) Except as provided in subsections (H)(1)(i)(6) and (8), deposit in the United States mail addressed to the last known address on file with division staff, written notice of the board’s final decision and order, regarding a complaint matter, to the certificate holder and complainant within ten days after the board’s decision, pursuant to subsection (H)(26)(b) and (c). Notice by mail is complete upon deposit in the United States mail.

(8) Mail the board’s final order of suspension or revocation of the certificate, pursuant to subsection (H)(26)(b) to the certificate holder, by certified mail return receipt requested, within two days, after the board’s decision, addressed to the last known address on file with division staff; and

(9) Process complaints timely, with the goal of processing 98 percent of all complaints within 22 months from date of receipt to final decision by the board.

2. Initial Screening of a Complaint. Upon receipt of a complaint:

a. Division staff shall:

(1) Consider if a complaint: (a) Falls outside the supreme court’s jurisdiction; (b) Does not provide the name of a certificate holder; (c) Does not contain sufficient information to permit an investigation; (d) Does not provide specific allegations of acts of misconduct or violations of the

statutes, court rules, this section or the applicable section of the ACJA; (e) Contains allegations of acts of misconduct or violations, that if true, would not

constitute a violation of the statutes, court rule, this section or the applicable section of the ACJA, the certificate holder is required to comply with;

(f) Does not provide the name of the complainant; or

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(g) Does warrant further investigation and evaluation. (2) Recommend the division director dismiss the complaint if the complaint:

(a) Falls outside the jurisdiction of the supreme court, court rules, this section, the applicable section of the ACJA, or the laws applicable to the certificate holder;

(b) Does not provide the name of a certificate holder; (c) Does not contain sufficient information to permit an investigation; (d) Does not provide specific allegations of acts of misconduct or violations of the

statutes, court rules, this section or the applicable section of the ACJA; (e) Contains allegations of acts of misconduct or violations that if true, would not

constitute a violation of the statutes, court rules, this section or the applicable section the certificate holder is required to comply with; or

(f) Does not provide the name of the complainant. (3) Report all complaints dismissed by the division director to the board at the next

regularly scheduled board meeting following the determination by the division director; and

(4) Provide written notice to the complainant and the certificate holder of the division director’s decision to dismiss the complaint for the reasons in subsection (H)(2)(b) and (c), within ten days of the division director’s decision.

b. The division director may:

(1) Direct division staff to return an incomplete complaint to the complainant for additional information;

(2) Dismiss a complaint, pursuant to subsection (D)(4)(a)(2), with or without prejudice, if the complaint falls outside the jurisdiction of the supreme court, the statutes, court rules, this section or the applicable section of the ACJA;

(3) Dismiss a complaint, pursuant to subsection (D)(4)(a)(3), with or without prejudice, if the complaint meets any of the criteria of subsection (H)(2)(a)(2)(b) through (f); or

(4) Refer the complaint to another state agency or entity with jurisdiction, if appropriate, pursuant to subsection (D)(4)(a)(4).

c. The division director shall dismiss the complaint, if the complainant does not supply

documents or other information to remedy an insufficient complaint or demonstrate the alleged acts of misconduct or violations are within the certificate holder’s responsibilities as required by statutes, court rules, this section or the applicable section of ACJA.

d. The board shall review, pursuant to subsection (D)(5)(c)(1)(e), the division director’s

dismissal of a complaint and do one of the following:

(1) Affirm the division director’s dismissal; or (2) Request additional investigation of the dismissed complaint; pursuant to

subsection (D)(5)(c)(2)(c).

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e. The complainant may request the board review the division director’s dismissal of the complaint pursuant to subsection (H)(2)(b) or (c) by submitting a written request for review, specifying the requested reasons for the board’s review. The complainant shall submit the request for review to division staff within ten days of the written notice of the division director’s dismissal of the complaint.

3. Investigation. Division staff shall investigate the complaint, after completion of the

initial screening of the complaint and the determination a complaint is within the jurisdiction of the supreme court and warrants further investigation pursuant to subsection (H)(2)(a)(1)(g).

a. Preliminary Investigation. Division staff shall conduct an investigation of all

complaints not dismissed by the division director to determine if a certificate holder has violated statutes, court rules, this section, or the applicable section of the ACJA; or for the purpose of securing information useful in the lawful administration of the law, this section, or the applicable sections of the ACJA.

b. Notification to Certificate Holder of Complaint. Division staff shall send the

complaint to the certificate holder within fifteen days of receiving the complaint or the date the director initiates a complaint pursuant to subsections (D)(2)(b)(3) and (H)(1)(b)(4)(b).

c. Certificate Holder’s Response to Notification of Complaint. The certificate holder

shall provide a written response to the complaint within thirty days of the notification of the complaint. The board shall not proceed with disciplinary action without providing the certificate holder the complaint and an opportunity to respond to the complaint, except in a matter regarding an emergency suspension pursuant to subsection (H)(9)(d). Failure by the certificate holder to accept notification of a complaint or failure to respond to the complaint shall not prevent division staff from proceeding with an investigation and the board from taking any disciplinary action.

(1) If the certificate holder is unable to respond to a complaint within the time frame

established by subsection (H)(3)(c), the certificate holder may submit a written request to the division director for an extension of time to respond. The request for an extension of time to respond shall demonstrate good cause exists for an extension and shall provide a proposed date for fulfillment of the response requirement. The certificate holder shall file the written request for an extension of time to respond to the complaint, no later than five days prior to the date the response is due.

(2) The division director shall determine if good cause exists for an extension. Division staff shall notify the certificate holder of the division director’s decision on the request for an extension of time for providing a written response, within five days of the request for extension from the certificate holder.

4. Preparation of Investigation Summary. Upon completion of the investigation, division

staff shall prepare a written investigation summary for review by the probable cause

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evaluator. The investigation summary shall include an analysis of the allegations of misconduct and violations and a recommendation as to whether probable cause exists demonstrating the certificate holder committed any of the alleged acts of misconduct or violations.

5. Probable Cause Review. Pursuant to subsection (H)(4) division staff shall forward the

investigation summary to the probable cause evaluator for review and determination as to whether probable cause exists misconduct or violations occurred and are demonstrated in the investigation summary. a. The deputy director, serving in the capacity of probable cause evaluator pursuant to

subsection (D)(3)(a), shall review the written investigation summary of the allegations of acts of misconduct or violations. The deputy director may agree or disagree with the recommendations contained in the summary and may do one or more of the following:

(1) Direct division staff to investigate further; (2) Determine probable cause does not exist demonstrating the certificate holder has

committed any acts of misconduct or violations of the statutes, court rules, this section, or the applicable section of the ACJA and enter a written finding to that effect; or

(3) Determine probable cause exists demonstrating the certificate holder has committed one or more acts of misconduct or violations of the statutes, court rules, this section, or the applicable section of the ACJA and enter a written finding to that effect.

b. If the probable cause evaluator directs division staff to investigate the complaint

further, pursuant to subsection (H)(5)(a)(1), division staff shall do so immediately. c. Upon review of the finding by the probable cause evaluator, pursuant to subsection

(H)(5)(a)(2) and (3), division staff shall forward to the board, pursuant to subsection (H)(1)(i)(2), the investigation summary, finding by the probable cause evaluator and a written recommendation by the division director for the appropriate disposition of the complaint. The written recommendation by the division director shall include any sanctions if applicable, pursuant to subsections (H)(7), (H)(9), (H)(24)(a)(6) and (H)(24)(b). The board shall review these documents at the next regularly scheduled board meeting and do one of the following:

(1) Determine the certificate holder did not commit any acts of misconduct or

violations and dismiss the complaint pursuant to subsections (D)(5)(c)(1)(g) and (H)(24)(a)(3);

(2) Determine the allegations of acts of misconduct or violations do not warrant discipline pursuant to subsection (D)(5)(c)(1)(g), but the certificate holder’s actions need modification or elimination and send an advisory letter to the certificate holder pursuant to subsections (H)(24)(a)(4) and (H)(24)(b)(1);

(3) Determine the allegations of acts of misconduct or violations may be resolved

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through informal discipline proceedings pursuant to subsection (H)(7); (4) Determine the acts of misconduct or violations may be resolved through a formal

interview, pursuant to subsection (H)(8); (5) Determine the acts of misconduct or violations may be resolved through a formal

discipline proceeding, pursuant to subsection (H)(9); or (6) Determine the acts of misconduct or violations pose harm or a risk to the public

health, safety or welfare and require resolution through an emergency summary suspension, pursuant to subsection (H)(9)(d). An emergency summary suspension is a formal discipline proceeding.

6. Grounds for Discipline. A certificate holder is subject to disciplinary action if the board

finds the certificate holder has engaged in one or more of the following:

a. Failed to perform any duty to discharge any obligation in the course of the certificate holder’s responsibilities as required by law, court rules, this section or the applicable section of the ACJA;

b. Failed to comply with or complete a corrective action plan resulting from an audit or

course monitoring; c. Failed to cooperate with or supply information to the director, deputy director,

division staff or board by the specific time stated in any request; d. Aided or assisted another person or business entity to provide services requiring

certification if the other person or entity does not hold the required certification; e. Conviction of a criminal offense while certified by final judgment of a felony relevant

to certification; f. Failed to provide information regarding a criminal conviction; g. Exhibited gross negligence; h. Exhibited incompetence in the performance of duties; i. Evaded service of a subpoena or notice of the director, division director or board;

j. The existence of any cause for which original certification or renewal of certification

could have been denied pursuant to subsections (E)(2)(c) or (G)(4)(c) and the applicable section of the ACJA;

k. Engaged in unprofessional conduct, including:

(1) Assisted an applicant or certificate holder in the use of deception, dishonesty or fraud to secure an initial certificate or renewal of a certificate;

(2) Failed to comply with any court order, board order or other regulatory agency

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order relevant to the profession or occupation; (3) Failed to comply with any federal, state or local law or rule governing the practice

of the profession or occupation; (4) Failed to comply with any terms of a consent agreement, restriction of a

certificate or corrective action plan; (5) Failed to retain client or customer records for a period of three years unless law or

rule allows for a different retention period; (6) Failed to practice competently by use of unsafe or unacceptable practices; (7) Failed during the performance of any responsibility or duty of the profession or

occupation to use the degree of care, skill and proficiency commonly exercised by the ordinary skillful, careful and prudent professional certificate holder engaged in similar practice under the same or similar conditions regardless of any level of harm or injury to the client or customer;

(8) Failed to practice competently by reason of any cause on a single occasion or on multiple occasions by performing unsafe or unacceptable client or customer care or failed to conform to the essential standards of acceptable and prevailing practice;

(9) Used advertising intended to or having a tendency to deceive the public; (10) Used a supreme court certification to deceive the public in level of skills or

abilities; (11) Willfully made or filed false reports or records in the practice of the profession

or occupation; (12) Failed to file required reports, records or pleadings in the practice of the

profession or occupation; (13) Delegated professional or occupational responsibilities or duties to an employee or

person who the certificate holder knows does not possess the necessary level of education, experience, skills or credentials to perform the duties of the profession or occupation unless authorized to do so by the applicable section of the ACJA;

(14) Performed the responsibilities or duties of the profession or occupation when medically or psychologically unfit to do so;

(15) Engaged in habitual substance abuse; (16) Engaged in undue influence over a client or customer to the benefit, financial or

otherwise, of the certificate holder or a third party; or (17) Violated any statutory, court rule, or the applicable ACJA section regarding a

confidentiality requirement. 7. Informal Disciplinary Proceedings.

a. Commencement. Following entry of a finding of probable cause by the probable

cause evaluator and review of the recommendation of the division director pursuant to subsections (H)(5)(a) and (c), the board may commence informal disciplinary proceedings if the board finds the complaint is appropriate for resolution through informal disciplinary proceedings.

b. Decision of the Board. The board may resolve the complaint through informal

disciplinary proceedings and impose an informal sanction pursuant to subsection

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(H)(24)(a)(6)(a) or may take other action pursuant to this section. The Board, pursuant to subsection (D)(5)(c)(1)(f)(iv), shall order the preparation of documents necessary to commence informal disciplinary proceedings. The board may make procedural determinations to consolidate or sever any informal discipline matter pursuant to subsection (D)(5)(c)(2)(e). The provisions of subsections (H)(24) and (H)(25) apply to the decision and order of the board. Informal disciplinary proceedings: (1) Do not provide the certificate holder the right to a hearing; (2) May result in the informal sanction of a letter of concern; (3) Are not subject to special action proceedings pursuant to subsection (H)(27); and (4) Are not confidential.

8. Request for Formal Interview. Upon entry of a finding of probable cause by the

probable cause evaluator and review of the recommendation of the division director pursuant to subsections (H)(5)(a) and (c), and a board determination formal discipline is warranted, but before the filing of the formal statement of charges, the board may request a formal interview with a certificate holder, pursuant to subsection (D)(5)(c)(2)(d). The request for a formal interview is to determine if the facts of the complaint may be capable of resolution outside of a formal disciplinary process by consent agreement or other negotiated settlement, pursuant to subsection (H)(24)(a)(6)(c) between the board and certificate holder. The board shall hold the formal interview at the next regularly scheduled board meeting, unless the board determines good cause to expedite the interview.

a. Once the board determines a formal interview is necessary, division staff shall

provide the certificate holder a copy of the investigation summary, finding by the probable cause evaluator and the written recommendation by the division director for the appropriate disposition of the complaint. Division staff shall also provide written notice of the day and time of the scheduled interview. If the certificate holder declines the board’s request for an interview, the certificate holder does not forfeit the right to request a hearing pursuant to subsection (H)(12).

b. If the certificate holder declines the board’s request for a formal interview, or if the

division director’s recommended sanctions for future found violations include a suspension of more than twelve months or revocation, the board shall order the preparation of documents necessary for a filing of a formal statement of charges pursuant to subsections (D)(5)(c)(1)(f)(iv) and (H)(9)(b). The board may consolidate or sever any discipline matter pursuant to subsection (D)(5)(c)(2)(e).

c. Upon the completion of the formal interview, if the board enters a finding the

evidence obtained during the investigation or provided by the certificate holder merits a suspension of more than twelve months or revocation of the certificate, the board shall order the preparation of documents for filing a formal statement of charges, pursuant to subsections D(5)(c)(1)(f)(iv) and H(9)(b).

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d. Upon the completion of the formal interview, if the board enters a finding the evidence obtained during the investigation or provided by the certificate holder demonstrates the public’s health, safety, or welfare requires emergency action, the board shall issue an emergency summary suspension order pursuant to subsections (D)(5)(c)(1)(f)(v) and H(9)(d).

e. Upon completion of the formal interview, if the board determines the evidence

obtained during the investigation or provided by the certificate holder does not merit a suspension of more than twelve months, revocation, or an emergency summary suspension, the board may take one or more of the following actions:

(1) Determine the certificate holder did not commit any acts of misconduct or violations of statutes, court rules, this section, or the applicable section of the ACJA and dismiss the complaint pursuant to subsections (D)(5)(c)(1)(g) and (H)(24)(a)(3);

(2) Determine the allegations of acts of misconduct or violations of statutes, court rules, this section, or the applicable section of the ACJA, do not warrant discipline, but the certificate holder’s actions need modification or elimination and send an advisory letter to the certificate holder, pursuant to subsections (D)(5)(c)(1)(g), (H)(24)(a)(4) and (H)(24)(b)(1);

(3) Determine the certificate holder committed one or more acts of misconduct or violations of the statutes, court rules, this section or the applicable section of the ACJA, and the complaint is appropriate for resolution through informal discipline proceedings pursuant to subsections (D)(5)(c)(1)(g) and (H)(7);

(4) Determine the certificate holder committed one or more acts of misconduct or violations of the statutes, court rules, this section or the applicable section of the ACJA, and the compliant is appropriate for resolution through a consent agreement as part of formal disciplinary proceedings, pursuant to subsections (D)(5)(c)(1)(g) and (H)(24)(a)(6)(c); or

(5) Determine the certificate holder committed one or more acts of misconduct or violations of the statutes, court rules, this section or the applicable section of the ACJA and the complaint is appropriate for resolution only through formal discipline proceedings, pursuant to subsection (D)(5)(c)(1)(g) and (H)(9).

f. If the board, after the formal interview is concluded, determines the acts of

misconduct or violations warrant an emergency summary suspension, the board shall make an order for an expedited hearing, pursuant to subsections (H)(9)(d)(1) and (H)(12)(d).

9. Formal Disciplinary Proceedings.

a. Commencement. Upon entry of a finding of probable cause by the probable cause

evaluator and review of the recommendation of the division director pursuant to subsection (H)(5)(c), the board may commence formal disciplinary proceedings.

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b. Decision of the Board. On review of the recommendation of the division director, the board may resolve the complaint through formal disciplinary proceedings and impose informal and formal sanctions pursuant to subsection (H)(24)(a) and (b) or may take other actions pursuant to this section. The board, pursuant to subsection (D)(5)(c)(1)(f)(iv) shall order the preparation of the documents necessary to commence formal disciplinary proceedings. The board may make procedural determinations to consolidate or sever any formal disciplinary matter pursuant to (D)(5)(c)(2)(e). The provisions of subsections (H)(24) and (H)(25) apply to the decision and order of the board. Formal disciplinary proceedings:

(1) Provide the certificate holder the right to a hearing, pursuant to subsection

(H)(12)(c); (2) May result in informal and formal sanctions, including an emergency summary

suspension pursuant to subsections (H)(24)(5) and (6); (3) May result in costs and civil penalties pursuant to subsections (H)(24)(6)(j) and

(k); (4) Are subject to special action proceedings pursuant to subsection (H)(27); and (5) Are not confidential.

c. Notice to Certificate Holder. Upon commencement of formal disciplinary

proceedings by a board order, division staff shall notify the certificate holder of the board’s order and provide the certificate holder with a copy of the investigation summary, the division director’s recommendations and the deputy director’s finding of probable cause.

d. Emergency Summary Suspension.

(1) Upon entry of a finding of probable cause by the probable cause evaluator and

review of the recommendation of the division director pursuant to subsection (H)(5)(c), if the board finds the public health, safety or welfare is at risk and requires emergency action, the board shall order an immediate emergency summary suspension of a certificate and set a date for an expedited hearing while formal disciplinary proceedings are pending.

(2) Division staff shall ensure the order of emergency summary suspension is immediately served on the certificate holder with the notice of the emergency summary suspension and the expedited hearing as ordered by the board, pursuant to this subsection and subsection (H)(12)(d).

(3) The hearing shall be held within ten days of the board’s order of summary suspension.

(4) The hearing officer shall only grant an extension of the ten day time period for holding the expedited hearing under extraordinary circumstances at the request of either party. The certificate holder may consent to a longer time period for the extension and the reasons for the extension shall be part of the record.

(5) Division staff shall notify all applicable courts including superior court presiding judges, clerks of the superior court and superior court administrators of the emergency summary suspension.

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10. Notice of Formal Statement of Charges and Proceedings; and Right to Hearing. Upon motion and order of the board, division staff shall: a. Prepare the formal statement of charges pursuant to subsection (H)(1)(i)(4) and include

in the statement all of the following:

(1) A short and plain statement of the allegations; (2) A reference to statutes, court rules, this section and the applicable ACJA section; (3) A statement indicating the certificate holder has the right to a hearing, pursuant to

subsection (H)(12)(c); (4) A statement indicating the request for hearing shall be in writing and made within

fifteen days of receipt of the notice, pursuant to subsection (H)(13); and (5) A statement of the requirements for filing an answer pursuant to subsections

(H)(11) and (17).

b. Present the formal statement of charges to the board chair or designee for review and signature;

c. File the signed formal statement of charges with the disciplinary clerk; d. Arrange for service of the notice of formal statement of charges to the certificate holder

pursuant to Rule 4, Rules of Civil Procedure; and e. Amendments to the formal statement of charges are permissible upon motion and order

of the board.

11. Answer to Formal Statement of Charges or Default. The certificate holder shall file an answer to the formal statement of charges within fifteen days after the date the statement is served, unless otherwise ordered by the board for good cause. Answers shall comply with Rule 8, Rules of Civil Procedure. Any defenses not raised in the answer are waived. If a certificate holder fails to file an answer within the time provided, the certificate holder is in default and the factual allegations in the formal statement of charges are deemed admitted. The board may enter a finding or findings against the certificate holder of one or more of the assertions contained in the notice.

12. Right to Hearing.

a. Except as provided in subsection (E)(1)(f)(2)(d)(iii), an applicant denied initial or renewal certification pursuant to subsections (E)(2)(c) or (G)(4) may request a hearing.

b. Pursuant to subsection (E)(9)(b), an applicant denied reinstatement of certification

may request a hearing, except if the applicant fails to provide required information within the requested time frame.

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c. A certificate holder served with a formal statement of charges pursuant to subsection (H)(9) may request a hearing.

d. A certificate holder issued an emergency summary suspension pursuant to subsection (H)(9)(d)(1) shall have an expedited hearing.

13. Request for Hearing. The applicant or certificate holder shall request the hearing within

fifteen days of the notice of denial of initial or renewal certification; or the notice of a formal statement of charges. The request shall include the ACJA subsection entitling a person or business to a hearing, the factual basis supporting the request for hearing and the relief demanded.

14. Selection of Hearing Officer for Certification or Discipline Hearing. Upon written

request by an applicant or certificate holder entitled to a hearing pursuant to subsection (H)(12), the disciplinary clerk shall select a hearing officer.

a. The disciplinary clerk shall select a hearing officer from the list of hearing officers

appointed by the supreme court. The hearing officer shall have the following qualifications:

(1) Admitted to the practice of law in Arizona; and

(a) An active member in good standing for at least seven years with the State Bar of Arizona; or

(b) An active or retired judicial officer. (2) Have knowledge in the procedure for conducting administrative hearings

regarding the denial of initial or renewal of certification or alleged acts of misconduct or violations by a certificate holder pursuant to this section or the applicable ACJA section.

b. The disciplinary clerk may request the presiding judge of the superior court in the

county where the alleged acts of misconduct or violations occurred to supply a hearing room and any other necessary resources.

15. Time Line for Hearing. The disciplinary clerk or hearing officer shall:

a. Ensure the hearing is held within 60 days of receipt of the request for hearing. The hearing officer may continue the hearing date upon request or stipulation of the parties, or upon the hearing officer’s own motion, for good cause shown. The hearing officer shall grant continuances no more than 30 days at a time and may not extend the hearing on the merits beyond 120 days from the filing of the formal statement of charges.

b. If the request to continue the hearing is filed by division staff, the hearing officer shall

ensure the hearing is held as soon as practical at the discretion of the hearing officer but no less than fifteen days after notice, as required by subsection (H)(16).

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16. Notice of Hearing. The disciplinary clerk shall prepare and give notice of the hearing to the applicant or certificate holder and division staff, at least fifteen days prior to the date set for hearing.

a. The notice shall include the following information:

(1) A statement of the legal authority and jurisdiction for conduct of the hearing; (2) A statement of the date, time, place and nature of the hearing; and (3) A reference to the particular sections of the statutes, rules and ACJA sections

involved.

b. The disciplinary clerk shall accomplish service of the notice of hearing by United States mail to the last address of record on file with division staff. Service is accomplished in accordance with Rule 5, Rules of Civil Procedure by deposit in the United States mail.

c. If an attorney represents an applicant, certificate holder or division staff, the

disciplinary clerk shall make service to the attorney of record.

17. Filings of Pleadings, Motions and Other Documents.

a. The applicant or certificate holder and division staff shall file all pleadings, motions or other documents with the disciplinary clerk at least fifteen days prior to the scheduled hearing date, unless otherwise ordered by the hearing officer.

b. The applicant or certificate holder and division staff shall file responses to all

pleadings, motions, or other documents with the disciplinary clerk within ten days of the filing of the pleading, motion, or other document.

c. The party filing the pleading, motion, or other document may reply within five days

of the filing of the response to the motion. d. Copies of all filings shall be delivered to the disciplinary clerk, the hearing officer

and all parties to the proceeding.

18. Discovery.

a. There is no discovery, except as provided in this section, unless mutually agreed to by the parties or ordered by the hearing officer.

b. The hearing officer, upon written request, shall order a party to allow the requesting

party to have a reasonable opportunity to inspect and copy, at the requesting party’s expense, admissible documentary evidence or documents reasonably calculated to lead to admissible evidence prior to a hearing, provided the evidence is not privileged.

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c. Upon the hearing officer’s own motion or request by a party, the hearing officer shall order the disclosure of documentary evidence intended for use at the hearing provided the evidence is not privileged. The hearing officer shall order the disclosure at least ten days prior to the hearing.

d. A hearing officer shall review and rule upon any claims of privilege challenged by a

party with respect to subsections (H)(18)(b) and (c).

e. Within fifteen days of receipt of the notice of hearing, the parties shall exchange a list of witnesses containing the names, addresses and telephone numbers of all persons known to have knowledge of the relevant facts. The list of witnesses shall designate those persons the parties intend to call at the hearing and summarize the anticipated testimony of each witness.

f. Parties may submit a motion to the hearing officer to take depositions of witnesses

who cannot be subpoenaed or are otherwise unable to attend the hearing, for use as evidence at the hearing. The hearing officer may order the deposition of any other witness upon motion and for good cause shown. In either circumstance, the requesting party shall file a written motion for deposition with the hearing officer within ten days of the filing of the list of witnesses. The requesting party shall provide copies to all parties, setting forth the name and address of the witness, subject matter of the deposition, documents, if any, the parties are seeking for production, time and place proposed for the deposition and justification for the deposition.

g. Parties shall file responses to requests for depositions, including motions to quash,

within five days after the filing of the request for deposition. The hearing officer shall enter a final order regarding any motions for depositions.

h. If a deposition is permitted and ordered by the hearing officer, the hearing officer

shall issue a subpoena and written order. The subpoena and order shall identify the person to be deposed, scope of testimony to be taken, documents, if any, to be produced and the time and place of the deposition. The party requesting the deposition shall arrange for service of the subpoena and order with service on all parties five days before the time fixed for taking the deposition unless, for good cause shown, the time is shortened by the hearing officer.

19. Subpoena.

a. For the purpose of the hearing, a hearing officer may subpoena witnesses or

documentary evidence, administer oaths and examine under oath any individual relative to the subject of any hearing.

b. Subpoenas shall be issued by a hearing officer and served in the same manner as

provided by Rule 45, Rules of Civil Procedure. An employee of the court or any other person as provided by Rule 45, Rules of Civil Procedure may serve the subpoena.

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c. If a person fails to obey a subpoena served in accordance with the provisions of this section, the board or hearing officer may forward a report of the disobedience, together with a copy of the subpoena and proof of service, to the superior court and request the superior court judge issue an order requiring the appearance by a person or the production of documents, or both. The superior court may treat the failure to obey the subpoena as contempt of court and may impose penalties as though the person had disobeyed a subpoena issued by the court.

20. Prehearing Conference. The hearing officer may order and conduct a pre-hearing

conference at the request of any party or on the hearing officer’s own initiative. The purpose of the conference is to consider imposing limitations to promote simplicity in procedures, fairness in administration, elimination of unnecessary expense and protection of the public while preserving the rights of the certificate holder. The hearing officer may take any of the following actions:

a. Establish a hearing schedule to ensure early and continuing control so the matter shall

not be protracted because of lack of management; b. Dispose of outstanding procedural matters; c. Narrow the issues for adjudication; d. Dispose of preliminary legal issues, including ruling on pre-hearing motions; e. Obtain stipulations from the parties to the admission of evidence, facts and legal

conclusions not contested; f. Identify witnesses and coordinate testimony; and g. Consider any other matters to aid in the expeditious conduct of the hearing.

21. Procedure at Hearings.

a. Hearing Officer. The hearing officer shall preside over the hearing and decide all requests

for a continuance, motions, determine the order of proof and manner of presentation of other evidence, issue subpoenas, place witnesses under oath, recess or adjourn the hearing and prescribe and enforce general rules of conduct and decorum. Informal disposition may be made of any case by stipulation, agreed settlement, consent order or default.

b. Rights of Parties and Other Persons at a Hearing. At a hearing:

(1) A party is entitled to enter an appearance, introduce evidence, examine and cross-

examine witnesses, make arguments and generally participate in the conduct of the proceeding.

(2) An applicant or certificate holder may represent themselves or appear through counsel. An attorney who intends to appear on behalf of a party shall promptly file

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a notice of appearance with the disciplinary clerk providing the name, address and telephone number of the party represented and the name, address and telephone number of the attorney. A corporate officer or principal may represent a business entity in any proceeding under this section, as permissible pursuant to Arizona Supreme Court Rule 31.

(3) All persons appearing before a hearing officer in any proceeding shall conform to the conduct expected in the superior court.

c. Conduct of Hearing.

(1) All hearings are open to the public and shall conform to the provisions of ACJA §

1-202: Public Meetings. The hearing officer may close the hearing to the public, pursuant to ACJA § 1-202(C)(5).

(2) The hearing officer may conduct a hearing in an informal manner and without adherence to the rules of pleading or evidence. The hearing officer may question witnesses and shall require any evidence supporting a decision is substantial, reliable and probative and shall exclude irrelevant, immaterial or unduly repetitious evidence. There is no right to a jury.

(3) The hearing officer shall require all testimony taken is under oath or affirmation, except matters of which judicial notice is taken or entered by stipulation. The hearing officer may administer oaths and affirmations.

(4) In all formal disciplinary matters brought as the result of an order by the board, evidence in support of the formal statement of disciplinary charges is presented first and carries the burden of proof by a preponderance of the evidence. In matters brought at the request of any other person or entity, including requests for hearing on the denial of initial or renewal of certification, the person or entity seeking the hearing shall present first and carries the burden of proof, by a preponderance of the evidence.

d. Record of Hearing.

(1) The hearing officer shall ensure the oral proceedings, or any part of the oral

proceedings, are recorded. Upon the request of any party to the proceedings and payment of any costs, the record of the proceedings shall be transcribed.

(2) A certified reporter shall make a full transcript of the proceedings if requested by a party within five days prior to a hearing and upon order of the hearing officer. The requesting party shall pay the cost of the transcript. The hearing officer may require prepayment or a monetary deposit to cover the cost of the transcript. If transcribed, the record is part of the court's record of the hearing and any other party with a direct interest shall receive a copy of the record, at the request and expense of the requesting party.

22. Recommendation Report of Hearing Officer.

a. The hearing officer shall, within 30 days of the closing of the record of a hearing, prepare a written recommendation report and file the report with the disciplinary

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clerk. The recommendation report shall include findings of fact, based on a preponderance of the evidence and conclusions of law, separately stated.

b. The hearing officer shall take testimony and receive evidence regarding alleged acts of

misconduct or violations and possible sanctions. If the hearing officer recommends the board enter a finding the certificate holder committed one or more acts of misconduct or violations, the hearing officer shall include in the recommendation report, in a separately stated section, an analysis of mitigating and aggravating factors and recommended imposition of permissible sanctions pursuant to subsection (H)(24). The hearing officer shall base the recommendations exclusively on the matters officially noticed and the evidence presented. (1) Mitigating factors may include but are not limited to the following:

(a) The absence of a prior disciplinary record; (b) The absence of a dishonest motive; (c) The absence of a selfish motive; (d) Personal or emotional problems; (e) A timely good faith effort to make restitution or to rectify consequences of

misconduct; (f) Full and free disclosure to the division staff, the board or the hearing officer; (g) A cooperative attitude toward any proceedings; (h) Inexperience in the practice of the profession or occupation; (i) Character or reputation; (j) Physical or mental disability; (k) Physical or mental impairment; (l) Delays in the disciplinary proceedings; (m) Interim rehabilitation; (n) Imposition of other penalties or sanctions; (o) Remorse; or (p) The remoteness of prior offenses.

(2) Aggravating factors may include but are not limited to the following: (a) A prior disciplinary record; (b) A dishonest motive; (c) A selfish motive; (d) Multiple offenses; (e) Bad faith obstruction of the disciplinary proceedings by intentionally failing to

comply with this section, the applicable section of ACJA, court rules or orders of the hearing officer;

(f) Submission of false evidence, false statements or other deceptive practices during the discipline process;

(g) Refusal to acknowledge wrongful nature of the conduct; (h) Vulnerability of the victim; (i) Substantial experience in the profession or occupation; or (j) Indifference to making restitution.

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c. The disciplinary clerk shall distribute the hearing officer recommendation report to all parties and the board by United States mail to the last address on file with the division staff. Distribution is accomplished in accordance with Rule 5, Rules of Civil Procedure by deposit in the United States mail.

d. The board may adopt or modify the hearing officer’s recommendation report in whole

or in part. e. The board may remand the matter to the hearing officer in whole or in part,

designating the issues remanded. The board shall provide the hearing officer with an order identifying the issues remanded.

23. Rehearing. A party to the hearing may request a rehearing of the matters involved in the

hearing. The requesting party shall file the written request with the hearing officer and the disciplinary clerk within fifteen days after the disciplinary clerk has distributed the hearing officer’s recommendation report to the parties pursuant to subsection (H)(22)(c). The requesting party shall base the request for rehearing on one or more of the grounds listed in Rule 59, Rules of Civil Procedure. The hearing officer shall allow any party served with a request for rehearing to file a response within ten days of service. The hearing officer may grant a rehearing of the matters involved in the hearing and shall make the decision to grant or deny the request within ten days of the date the response for rehearing is filed.

24. Possible Actions for Resolution of a Complaint.

a. Upon completion of an investigation concerning alleged acts of misconduct or violations

by a certificate holder, which may or may not include a formal interview, informal or formal disciplinary proceedings, or a hearing, the board shall do one or more of the following:

(1) Request division staff to conduct further investigation; (2) Refer the complaint to another entity with jurisdiction; (3) Determine no violation exists and dismiss the complaint with or without

prejudice; (4) Determine no acts of misconduct or violation occurred and no discipline is

warranted; however, the certificate holder’s actions need modification or elimination and issue an advisory letter pursuant to subsection (D)(5)(c)(1)(g);

(5) Enter a finding the certificate holder has violated any of the provisions of the statutes, court rules, this section, or the applicable ACJA specific sections or subsection (H)(6) and order an emergency summary suspension, pursuant to subsection (H)(9)(d);

(6) Enter a finding the certificate holder has violated any of the provisions of the statutes, court rules, this section, the applicable ACJA sections or subsection (H)(6) and issue an order imposing any or a combination of the following informal or formal disciplinary sanctions: (a) Issue a letter of concern;

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(b) Issue a censure; (c) Resolve any found acts of misconduct or violations by consent order or other

negotiated settlement; (d) Place specific restrictions on a certificate; (e) Place the certificate holder on probation for a set period of time under

specified conditions; (f) Mandate additional training for the certificate holder; (g) Issue a cease and desist order pursuant to subsection (E)(6); (h) Order suspension of a certificate for a set period of time with specific

conditions for reinstatement; (i) Order revocation of a certificate with specific conditions for reinstatement; (j) Assess costs associated with the investigation and disciplinary proceedings; or (k) Impose civil penalties associated with the investigation and disciplinary

proceedings.

b. The following provisions apply to the actions specified in subsection (H)(24)(a):

(1) An advisory letter is not a discipline sanction and is confidential. While the conduct does not warrant any disciplinary action, the board believes the certificate holder should modify or eliminate certain practices and continuation of the activities leading to the documentation regarding the conduct being submitted to the board may result in future board action against the certificate holder. A certificate holder may file a response with the board no later than fifteen days after the date of the advisory letter. The certificate holder’s response is confidential and division staff shall file the response in the complaint file.

(2) An informal disciplinary proceeding may result in a letter of concern but may not include a censure, restrictions on a certificate, probation, mandated additional training, suspension or revocation of the certificate, or imposition of civil penalties or costs. A letter of concern is a written informal discipline sanction and is not confidential or appealable. A certificate holder may file a response to the letter of concern no later than fifteen days after the date of the letter of concern. The certificate holder’s response is public and division staff shall file the response in the complaint file.

(3) The board may impose informal discipline in combination with formal discipline.

25. Decisions and Orders. The board shall make final decisions or orders in writing and shall include findings of fact and conclusions of law, separately stated. The board shall make findings of fact by a preponderance of the evidence, based exclusively on the evidence and on matters officially noticed and consider mitigating or aggravating factors pursuant to subsections (H)(22)(b)(1) and (2).

26. Notice of Board’s Final Decision. Upon final order of the board regarding a certification

or complaint matter, division staff shall provide written notice of the board’s final decision and order:

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a. Regarding an initial or renewal certification matter, to the applicant or certificate holder within ten days, by deposit in the United States mail addressed to the last known address on file with division staff. Notice by mail is complete upon deposit in the United States mail.

b. Regarding suspension or revocation of certification to the certificate holder by

certified mail, return receipt requested, within two days, addressed to the last known address on file with division staff pursuant to subsection (H)(1)(i)(8). Division staff shall ensure the order of emergency summary suspension is immediately served on the certificate holder pursuant to subsection (H)(9)(d)(2). Division staff shall send any other disciplinary order by the board, not involving suspension or revocation of certification, to the certificate holder within ten days by deposit in the Unites States mail addressed to the last known address on file with division staff, pursuant to subsection (H)(1)(i)(7). Notice by mail is complete upon deposit in the United States mail.

c. Regarding a complaint matter, to the complainant within ten days, pursuant to

subsection H(1)(i)(7), by deposit in the United States mail addressed to the last known address on file with division staff. Notice by mail is complete upon deposit in the United States mail.

27. Filing of Special Action. Decisions of the board pursuant to this section and the

applicable ACJA sections are final. Parties may seek judicial review through a petition for a special action within 35 days after entry of the board’s final order. The petition for special action shall be pursuant to the Arizona Rules of Procedure for Special Actions.

I. Policies and Procedures for Board Members. The purpose of a board is to assist the

supreme court in the protection of the public through the certification and oversight of certificate holders, to ensure conformance by certificate holders to the highest ethical standards and performance of responsibilities in a professional and competent manner.

1. Establishment of Boards and Appointment and Terms of Members. The establishment of

the boards and the appointment and terms of members are specified in subsections (D)(5)(a) and (b).

2. Role and Responsibilities of Board Members. In addition to the provisions of subsection

(D)(5)(c), the following provisions apply:

a. Role. The primary role of the board members is protection of the public through the fair and impartial application of the applicable section of the ACJA and court rules. Members should consider the views and interests of regulated professionals and the profession; however, members shall balance this against the member’s primary role of protection of the public.

b. Attendance. Members shall attend and actively participate in board meetings and

assist with the administration of board affairs. Regular attendance by each member of

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the board helps ensure full contribution of all members. Therefore, members are required to regularly attend and participate in board meetings. The board chair shall address a board-attendance issue regarding a member as follows:

(1) A board-attendance problem occurs if a member:

(a) Has two consecutive un-notified absences where the member did not provide advance notification to division staff the member would be absent;

(b) Has three consecutive absences where the member did provide advance notification to division staff the member would be absent; or

(c) Misses one third of the total number of regular board meetings in a twelve month period.

(2) Upon determination of a board-attendance problem, the chair shall discuss the issue with the member. The chair shall share the member’s response at the next board meeting and the board shall consider the appropriate action to take regarding the member’s membership on the board. If the board decides to recommend to the chief justice for the termination of the membership of the member, the chair shall inform the member of the board’s decision. The chair shall request a letter of resignation from the member and the return of any board materials. The board shall promptly initiate the process for the recruitment and recommendation of a new member.

c. Expenses. Members shall not receive compensation for their services, but may

receive reimbursement for their travel and other expenses incidental to the performance of their duties, pursuant to the adopted state guidelines.

d. Gifts and Awards. A member shall not solicit or accept any gift or award from any

professional certified individual, business or association, including a testamentary gift, unless the member or other recipient of the gift is related to the provider of the gift or award. For the purposes of this paragraph, “gift” includes money, services, travel, food, or entertainment and “related persons” includes a spouse, child, grandchild, parent, grandparent or other relative or individual with whom the member maintains a close, familial relationship. It is acceptable for the board or a member to accept an award, in recognition of service, from an association not directly related to their respective professional association, for example, the American Judicature Society.

e. Contractual Arrangements. A member shall carefully consider entering into any

contractual arrangement with any professional certificate holder for the provision of any services related to the associated profession. The member shall consider whether such an association could result in a conflict of interest, or the appearance of a conflict of interest.

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f. Referrals. A member shall carefully consider whether to recommend the services of any professional certificate holder to a member of the public or to accept a referral from a regulated professional or regulated business. The member shall consider whether a referral could result in a conflict of interest, or the appearance of a conflict of interest.

g. Professional Associations. A member shall not serve simultaneously as an officer or

board member of a professional association for the regulated profession and as a member of the board.

3. Organization.

a. Chair. The chief justice shall designate the chair of the board, unless otherwise designated by the applicable ACJA section. If the chair resigns or ceases to be a member of the board, the chief justice shall appoint another person, either an existing member of the board or a new appointee, to serve as chair. The chair shall perform the duties normally associated with the office and shall preside over all general meetings of the board.

b. Vice Chair. The board shall elect a vice chair from among the appointed members of

the board. The vice chair shall serve in the capacity as vice chair for a specified term. If the vice chair resigns or ceases to be a member of the board, the board shall vote to elect a new vice chair from among the existing members. The vice chair shall act as chair in the absence of the chair.

c. Subcommittees. The chair or the board may establish such subcommittees as deemed

necessary to adequately serve the needs of the applicable program. Each subcommittee shall consist of a chair to be named by the board chair or the board and members who volunteer and are approved for service. The chair or the board may appoint additional individuals who are not appointed members of the board to a subcommittee. A subcommittee shall exist only so long as it serves a current, useful purpose. A subcommittee may be dissolved by the board chair or the board if it is deemed it has fulfilled its purpose.

4. Meetings. a. Regular Meetings. The board shall meet no less than six times per year for regular

meetings, unless other applicable ACJA sections state otherwise. The board chair may call additional regular meetings at the discretion of the board chair.

b. Emergency Meetings. The board chair may call emergency meetings of the board

upon a showing of good cause, including consideration of the emergency suspension of a certificate pursuant to subsection (H)(5)(c)(6).

c. Public Notice. All meetings shall be publicly noticed and open to the public, in

compliance with ACJA § 1-202.

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d. Quorum. The board shall have a quorum for all official actions. A quorum consists

of a majority of the board.

5. Actions. a. Voting. A majority of the votes shall decide motions arising at any meeting of the

board. All members may vote on any motion. All votes shall be taken by voice vote, signified by “aye” or “nay.” Any board member may require a recorded vote, to include the number of “ayes” or “nays” and the specific vote of the member requesting the recorded vote. In the case of an equality of votes the motion is defeated. A declaration by the chair a motion has carried and an entry to that effect in the minutes is admissible in evidence as prima facie proof of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution being necessary.

b. Recusal. A member shall recuse from discussing and voting on an issue pertaining to

an applicant or certificate holder who is related to the member or in any other situations where there is a conflict of interest, or may be the appearance of a conflict of interest. (1) For the purposes of this subsection:

(a) “related” includes the relationships of parent, child, sibling, spouse or cohabitant;

(b) “conflict of interest” includes situations where the member has a direct or indirect substantial interest in any contract, sale, purchase or service to the board or the AOC or who has, or whose relative has, a substantial interest in any decision of the board, or the existence of any situation where there is, or may be an appearance that the relationship is one that would affect the member’s ability to be impartial. The fact a member or the entire board has been named in a lawsuit by an applicant or certificate holder does not automatically constitute a conflict of interest requiring the recusal of the member in an issue relating to the applicant or certificate holder.

(2) The purpose of this recusal provision is to remove or limit the possibility of personal influence which might bear upon a member’s official decision, or provide the appearance of any impropriety in the member’s decision.

(3) A member may seek legal advice regarding specific conflicts of interest or other ethical issues pertaining to membership and action from the AOC legal counsel.

(4) The member shall recuse at the beginning of the discussion of the issue by the board, or at the first instance the member realizes the conflict. The member shall not participate in the discussion by the board and shall leave the meeting room during board discussion of the issue in executive session. The recusal shall be noted in the official minutes of the meeting.

c. A member shall not designate a proxy for attendance or voting.

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6. Staff. Under the direction of the chief justice, the director shall provide staff to assist and support the board and may conduct or coordinate research as recommended by the board.

7. Communications.

a. Board members shall not engage in improper ex parte communications with a hearing

officer, other board members or division staff as to the merits of a case regarding an individual or business entity application for certification or a complaint alleging acts or misconduct or violations of statutes, court rules, or the ACJA that have been filed against a certificate holder. Except as may be provided in the applicable sections of the ACJA, all communications among a board member, division staff or a hearing officer in these situations shall occur during board meetings.

b. AOC legal counsel shall provide legal advice for the board. The Office of the

Arizona Attorney General provides legal representation to the board as an entity or individual member, consistent with the Arizona constitution and statutes. AOC legal counsel shall coordinate with the Attorney General for representation.

c. Board members shall not engage in ex parte communications with applicants for

certification or certificate holders regarding the board’s action or potential action. Members shall not engage in ex parte communications with any other person, including the attorney of record of an applicant or certificate holder.

d. Board members should refer all contacts from the media to the AOC public

information officer. e. Board members shall maintain the confidentiality of all information provided to the

board during confidential executive sessions of the board and other documents that are confidential pursuant to court rules or law.

f. Board members should always be cognizant they are seen as representatives of the

board and the program at professional gatherings and in public settings, including, for example, at the legislature. Board members should not speak for the board unless specifically authorized to do so. A board member shall make the following statement, either verbally or in writing, or both, “the views and opinions expressed are my own and do not represent the views or opinion of the board, the AOC or the Arizona Supreme Court.”

g. Board members shall refer inquiries from the public, certificate holders, applicants for

certification and other governmental and private entities regarding matters within the board’s jurisdiction to division staff. Division staff, in coordination with the board chair, shall refer appropriate issues to the full board at a regularly scheduled board meeting.

h. These provisions apply to all forms of communication, including verbal, written and

electronic.

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Adopted by Administrative Order 2003-109, effective December 4, 2003. Amended by Administrative Order 2006-70. The amended section takes effect January 1, 2007, unless otherwise delineated in the administrative order adopting the section. Amended by Administrative Order 2007-103, effective January 1, 2008. Amended by Administrative Order 2014-74, effective July 9, 2014.

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ARIZONA CODE OF JUDICIAL ADMINISTRATION Part 7: Administrative Office of the Courts

Chapter 2: Certification and Licensing Programs Section 7-208: Legal Document Preparer

A. Definitions. In addition to ACJA § 7-201(A), the following definitions apply:

“Board” means the Board of Legal Document Preparers. “Designated principal” means the individual associated with a certified business entity, on file with the Certification and Licensing Division, who is a certified legal document preparer and is responsible for supervising all certified legal document preparers, trainees and staff working for the business.

“Legal document preparer” means an individual or business entity certified pursuant to this section to prepare or provide legal documents, without the supervision of an attorney, for an entity or a member of the public who is engaging in self representation in any legal matter. An individual or business entity whose assistance consists merely of secretarial or receptionist services is not a legal document preparer. “Trainee” means a person who would qualify for certification as a legal document preparer but for the lack of required experience, and who is seeking to gain the required experience to qualify as a certified legal document preparer by working under the supervision of a designated principal, on behalf of a certified business entity, to perform authorized services, as set forth in this section.

B. Applicability. This section applies to individuals or business entities that provide services within the exemption to the prohibition of the unauthorized practice of law set forth in Rule 31 (a)(2)(B), Rules of the Supreme Court. In order to qualify to provide legal document preparation services under the specified exemption pursuant to Rule 31 (d)(23), legal document preparers and business entities who provide legal document preparation services shall hold valid certification and perform their duties in accordance with subsections (E) and (F). A person or qualified business entity shall not engage in the preparation of legal documents as specified in subsection (F)(1) without the supervision of an attorney in good standing with the State Bar of Arizona, unless the person or qualified business entity is certified pursuant to this section. A person or business entity shall not represent they are a certified legal document preparer unless the person or business entity, if applicable, holds an active certificate as a certified legal document preparer. This section is read in conjunction with ACJA § 7-201: General Requirements. In the event of any conflict between this section and ACJA § 7-201, ACJA § 7-208 shall govern.

C. Purpose. The supreme court has inherent regulatory power over all persons providing legal

services to the public, regardless of whether they are lawyers or nonlawyers. The court recognizes, however, that the need to protect the public from possible harm caused by nonlawyers providing legal services must be balanced against the public’s need for access to legal services. Accordingly, this section is intended to:

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1. Protect the public through the certification of legal document preparers to ensure conformance to the highest ethical standards and performance of responsibilities in a professional and competent manner, in accordance with all applicable statutes, ACJA §§ 7-201 and -208, and Arizona court rules; and

2. Result in the effective administration of the legal document preparer program.

D. Administration.

1. Role and Responsibilities of the Supreme Court. In addition to the requirements of ACJA § 7-201(D), the supreme court shall review recommendations from the board for certification or renewal of certification of applicants subject to the provisions of subsection (E)(3)(c) or (G)(3) and make a final determination on the certification or renewal of certification of these applicants.

2. Establishment and Administration of Fund. The supreme court shall establish a legal

document preparer fund consisting of monies received for certification fees, costs and civil penalties. The supreme court shall administer the legal document preparer fund and shall receive and expend monies from the fund.

3. Role and Responsibilities of the Division Staff. These responsibilities are contained in

ACJA § 7-201(D).

4. Board of Legal Document Preparers. In addition to the requirements of ACJA § 7-201(D) the following requirements apply:

a. The Board of Legal Document Preparers is established, comprised of the following

eleven members:

(1) Five certified legal document preparers who have each worked as a legal document preparer for at least five years;

(2) One judge or court administrator; (3) One clerk of the superior court or designee; (4) One attorney; (5) Two public members; and (6) One additional member appointed by the chief justice of the supreme court.

b. The board shall issue certificates to qualified applicants pursuant to subsections (E)

and (G) and shall make recommendations to the supreme court regarding the certification and renewal of certification of applicants subject to the provisions of subsections (E)(3)(c) or (G)(3).

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E. Certification. In addition to the requirements of ACJA § 7-201(E) the following requirements apply: 1. Necessity. A person or qualified business entity shall not represent they are a certified

legal document preparer, or are authorized to prepare legal documents, without holding valid certification pursuant to this section.

2. Eligibility for Applying for Individual Standard Certification.

a. From and after July 1, 2006, all potential applicants for individual certification, in

addition to meeting the requirements set forth in subsection (E)(3)(a), shall meet the examination requirements of this subsection.

(1) Potential applicants for standard certification shall successfully pass the

examination prior to submitting an application for certification. (2) Upon a potential applicant passing the examination, division staff shall forward

notice to the potential applicant of the potential applicant’s fulfillment of the examination requirement and provide the potential applicant with an individual standard certification application form.

b. Administration of the Examination. In addition to the requirements of ACJA § 7-

201(E):

(1) The examination for standard individual certification shall consist of a test on legal terminology, client communication, data gathering, document preparation, ethical issues, and professional and administrative responsibilities pertaining to legal document preparation, as identified through a job analysis conducted at the direction of the board. The examination shall be administered in a board approved format and delivery method.

(2) Administration of reexaminations. These requirements are contained in ACJA § 7-201(E).

3. Individual Standard Certification.

a. Fingerprinting. Pursuant to A.R.S. § 12-102 and ACJA § 7-201(E), an applicant shall

furnish fingerprints for a criminal background investigation. b. Eligibility for Individual Certification. Except for applicants subject to the provisions

of subsections (E)(3)(c) or (G)(3) the board shall grant a standard individual certificate to an applicant who possesses the following qualifications:

(1) A citizen or legal resident of the United States; (2) At least eighteen years of age; (3) Of good moral character; (4) Complies with the laws, court rules, and orders adopted by the supreme court

governing legal document preparers in this state; and (5) The applicant has successfully passed the legal document preparer examination.

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(6) The applicant shall also possess one of the following combinations of education or experience: (a) A high school diploma or a general equivalency diploma evidencing the

passing of the general education development test and a minimum of two years of law-related experience in one or a combination of the following situations: (i) Under the supervision of a licensed attorney; (ii) Providing services in preparation of legal documents prior to July 1, 2003; (iii) Under the supervision of a certified legal document preparer after July 1, 2003;

or (iv) As a court employee;

(b) A four-year bachelor of arts or bachelor of science degree from an accredited college or university and a minimum of one year of law-related experience in one or a combination of the following situations: (i) Under the supervision of a licensed attorney; (ii) Providing services in preparation of legal documents prior to July 1, 2003; (iii) Under the supervision of a certified legal document preparer after July 1, 2003;

or (iv) As a court employee;

(c) A certificate of completion from a paralegal or legal assistant program approved by the American Bar Association;

(d) A certificate of completion from a paralegal or legal assistant program that is institutionally accredited but not approved by the American Bar Association, and that requires successful completion of a minimum of 24 semester units, or the equivalent, in legal specialization courses;

(e) A certificate of completion from an accredited educational program designed specifically to qualify a person for certification as a legal document preparer under this section;

(f) A degree from a law school accredited by the American Bar Association; or (g) A degree from a law school that is institutionally accredited but not approved

by the American Bar Association.

c. Any applicant for certification who has been disbarred by the highest court in any state, and who has not been reinstated, or who has been denied admission to the practice of law in Arizona, is subject to the additional requirements specified in subsection (E)(4).

d. Eligibility for Business Entity Standard Certification.

(1) All corporations, limited liability companies, partnerships, and all sole

proprietorships that offer authorized legal document preparation services to non-represented parties and employs certified legal document preparers, or supervises trainees pursuant to subsection (F)(5), shall obtain certification as a business entity. The business entity shall execute and submit a principal form designating a certified individual legal document preparer pursuant to this section. The designated principal shall have the duties and responsibilities set forth in subsections (F)(4), (F)(5) and (F)(6). In the event a designated principal is no

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longer able or willing to serve as the principal, a certified business entity shall immediately designate another certified individual legal document preparer as the new designated principal and within twenty days file an updated designated principal form with the division staff.

(2) The owner or officers of a certified legal document preparer business entity are not required to hold individual certification, provided the business entity has a designated principal who holds valid individual certification as a legal document preparer.

(3) A sole proprietor who does not employ certified legal document preparers or supervise trainees pursuant to subsections (A) and (F)(5), is not required to hold certification as a business entity, provided the sole proprietor holds valid certification as an individual legal document preparer.

(4) The board may grant a waiver of the business entity application fee to a corporation, limited liability company, or partnership that essentially operates as a sole proprietorship because it does not employ more than one certified legal document preparer, does not supervise trainees pursuant to subsections (A) and (F)(5), provided: (a) The individual operating the business holds valid certification as an individual

legal document preparer; and (b) The business entity has applied for and obtained a business entity

certification fee exemption. (5) The board will review each fee exemption request individually. (6) If the board approves a business entity certification fee exemption, the board shall

refund the fees submitted with the exempted business entity’s application. (7) A person who has been disbarred by the highest court in any state, and who has

not been reinstated, may not: (a) retain any ownership interest in a certified legal document preparer business;

or (b) provide any legal document preparation or legal services to or on behalf of a

certified legal document preparer business, including training and legal research, whether for or without compensation. This prohibition does not apply to a person certified as an individual providing legal document preparation services in compliance with Rule 31, ACJA § 7-201 and this section.

(8) A person whose individual application has been denied or whose individual certificate has been revoked by the board may not: (a) retain any ownership interest in a certified legal document preparer business;

or (b) provide any legal document preparation or legal services to or on behalf of a

certified legal document preparer business, including training and legal research, whether for or without compensation.

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e. Procedures for Business Entity Certification. In addition to the requirements contained in ACJA § 7-201(E), a verified designated principal form and a list of all certified legal document preparers and subsection (F)(5) trainees acting for or on behalf of the business entity shall accompany the application for initial business entity certification.

4. Decision Regarding Certification. In addition to the requirements of ACJA § 7-201(E)

the following requirements apply to an applicant for certification who has been disbarred by the highest court in any state, and who has not been reinstated, or who has been denied admission to the practice of law in Arizona.

a. The board shall review the application of the applicant during a board meeting. If the

board is satisfied the applicant meets the requirements of this section, and by majority vote of the board in public session, recommends certification of the applicant, the board shall forward a written recommendation for certification, along with the application, to the supreme court for review by the court.

b. The court may decline review, or it may grant review on its own motion. If the court

declines review, the board’s recommendation for certification is final and the applicant shall be issued certification. If the court grants review, the court may issue such orders as appropriate for its review, including remanding the matter to the board for further action, ordering transmittal of the applicant’s file, or ordering the applicant to provide additional information. If the court is satisfied the applicant meets the requirements of this section and approves the certification, the division staff, upon notice from the court, shall issue a certificate to the applicant in accordance with this section and ACJA § 7-201(E).

c. The board, or the court when considering applicants subject to the provisions of

subsection (E)(3)(c), may refuse to issue a certificate if the board or court finds that any of the following applies:

(1) The applicant has been disbarred by the highest court in any state and has not

been reinstated; or (2) The applicant has been denied admission to the practice of law in Arizona.

d. An applicant who is subject to the provisions of subsection (E)(3)(c) and who is

denied certification by the board may exercise the right to hearing pursuant to ACJA § 7-201(E)(2)(c)(5). The decision of the court to deny certification to an applicant who is subject to the provisions of subsection (E)(3)(c) is final and the hearing provisions of ACJA § 7-201(E)(2)(c)(5) do not apply.

F. Role and Responsibilities of Certificate Holders. In addition to the requirements of

ACJA § 7-201(F) the following requirements apply:

1. Authorized Services. A certified legal document preparer is authorized to:

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a. Prepare or provide legal documents, without the supervision of an attorney, for a person or entity in any legal matter when that person or entity is not represented by an attorney;

b. Provide general legal information, but may not provide any kind of specific advice, opinion, or recommendation to a person or entity about possible legal rights, remedies, defenses, options, or strategies;

c. Provide general factual information pertaining to legal rights, procedures, or options

available to a person or entity in a legal matter when that person or entity is not represented by an attorney;

d. Make legal forms and documents available to a person or entity who is not

represented by an attorney; and e. File, record, and arrange for service of legal forms and documents for a person or

entity in a legal matter when that person or entity is not represented by an attorney. A certified legal document preparer may not sign any document he or she prepares for or provides to a person or entity, but this provision does not prohibit the signing of (i) 20-Day Notices prepared pursuant to A.R.S. § 33-992.01, (ii) notices related to condominium or planned community association liens that are created pursuant to A.R.S. § 33-1256 (condominiums) and § 33-1807 (planned communities); (iii) health care provider liens that are created pursuant to A.R.S. § 33-932, or (iv) mechanic’s liens created pursuant to A.R.S. § 33-993.

2. Code of Conduct. Each certified legal document preparer shall adhere to the code of

conduct in subsection J.

3. Identification. Beginning July 1, 2003, a certified legal document preparer shall include the legal document preparer’s name, the title “Arizona Certified Legal Document Preparer” or the abbreviation “AZCLDP” and the legal document preparer’s certificate number on all documents prepared by the legal document preparer, unless expressly prohibited by a non-judicial agency or entity. A legal document preparer providing services on behalf of a certified business entity shall also include the business entity name and certificate number on all documents prepared, unless expressly prohibited by a non-judicial agency or entity. The legal document preparer shall also provide their name, title and certificate number to any person upon request.

4. Notification of Changes. In addition to the requirements of ACJA § 7-201(F) the

following requirements apply:

a. If the status of an individual certificate holder changes from being associated with a business entity, the legal document preparer shall, within 30 days of the change, notify the division staff in writing.

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b. A designated principal shall notify the division staff in writing within 30 days of the termination of employment when an employee who is a certified legal document preparer or an (F)(5) trainee leaves the employment of the business entity.

5. Supervision of Trainees.

a. If a certified business entity employs a person who would qualify for certification as a

legal document preparer but for the lack of required experience, the designated principal may train the employee to perform services authorized by this section until such time as the trainee meets the minimum eligibility requirements for individual certification pursuant to subsection (E)(3)(b) for a period not to exceed two and one-half years.

b. The trainee may perform authorized services, as set forth in subsection (F)(1) of this

section, only under the supervision of the designated principal. Neither the trainee nor the designated principal may represent that the trainee is a certified legal document preparer.

c. Any designated principal who undertakes to train an employee shall:

(1) Assume personal professional responsibility for the trainee’s guidance in any work undertaken and for supervising, generally or directly, as necessary, the quality of the trainee’s work;

(2) Assist the trainee in activities to the extent the designated principal considers it necessary;

(3) Ensure the trainee is familiar with and adheres to the provisions of ACJA §§ 7-201 and -208;

(4) Provide the designated principal’s name and certificate number, as required by subsection (F)(3), on any documents prepared by the trainee under the designated principal’s supervision; and

(5) Prepare and submit a written acknowledgement of the roles and responsibilities of the designated principal and trainee pursuant to subsections (F)(5) and (F)(6). The written acknowledgement shall include the name, address, start date of the trainee, and the anticipated date the trainee will meet the minimum eligibility requirements to seek individual certification.

6. Designated Principal. The designated principal of a certified business entity shall:

a. Prepare and submit, with the business entity application, a list of all certified legal

document preparers and subsection (F)(5) trainees acting for or on behalf of the business entity;

b. File with the division staff , by May 1st of each year, a list of all certified legal

document preparers and a list of all subsection (F)(5) trainees acting for or on behalf of the business entity;

8

c. Actively and directly supervise all other certified legal document preparers, subsection (F)(5) trainees, and staff working for the certified business entity; and

d. Represent the business entity, at the discretion of the entity, in any proceeding under

this section.

7. Notification of Discipline. A certificate holder who has been disbarred from the practice of law in any state since original certification as a legal document preparer shall provide the information regarding the disbarment to the board within 30 days of service of the notice of the disbarment.

8. Notification of Denial of Admission. A certificate holder who has been denied admission to the practice of law in Arizona since original certification as a legal document preparer shall provide the information regarding the denial to the board within 30 days of service of the notice of the denial.

G. Renewal of Certification. In addition to the requirements contained in ACJA § 7-201(G)

the following requirements apply:

1. Expiration Date. All standard certifications expire at midnight, on June 30th of each odd numbered year.

2. Continuing Education. All certified legal document preparers shall complete ten hours of

continuing education each year for a total of twenty hours every certification period pursuant to subsection (L).

3. Decision Regarding Renewal. In addition to the requirements contained in ACJA § 7-

201(G), the review and certification decision and hearing provisions of subsection (E)(4) shall apply to a certificate holder who has been disbarred or who has been denied admission to the practice of law since the date of the original certification.

H. Complaints, Investigation, Disciplinary Proceedings and Certification and Disciplinary

Hearings. These requirements are contained in ACJA § 7-201(H). I. Policies and Procedures for Board Members. These requirements are contained in ACJA

§ 7-201(I). J. Code of Conduct. This code of conduct is adopted by the supreme court to apply to all

certified legal document preparers in the state of Arizona. The purpose of this code of conduct is to establish minimum standards for performance by certified legal document preparers.

9

1. Ethics.

a. A legal document preparer shall avoid impropriety and the appearance of impropriety in all activities, shall respect and comply with the laws, and shall act at all times in a manner that promotes public confidence in the integrity and impartiality of the legal and judicial systems.

b. A legal document preparer shall be alert to situations that are conflicts of interest or that may give the appearance of a conflict of interest.

c. A legal document preparer shall promptly make full disclosure to a consumer of any

relationships which may give the appearance of or constitutes a conflict of interest.

d. A legal document preparer shall refrain from knowingly making misleading, deceptive, untrue, or fraudulent representations while assisting a consumer in the preparation of legal documents. A legal document preparer shall not engage in unethical or unprofessional conduct in any professional dealings that are harmful or detrimental to the public.

2. Professionalism.

a. A legal document preparer shall treat information received from the consumer as confidential, yet recognize and acknowledge that the privilege of attorney – client confidential communications is not extended to certified legal document preparers.

b. A legal document preparer shall be truthful and accurate when advertising or

representing the legal document preparer’s qualifications, skills or abilities, or the services provided. A legal document preparer shall demonstrate respect for the legal system and for those who serve it, including judges, judicial staff, attorneys, other legal document preparers and public officials. A legal document preparer shall not make a statement the legal document preparer knows is false or with reckless disregard as to its truth or falsity concerning the qualifications or integrity of a judge, adjudicatory officer, public legal officer, attorney, other legal document preparer or judicial staff.

c. A legal document preparer shall maintain and observe the highest standards of

integrity and truthfulness in all professional dealings.

d. A legal document preparer shall keep abreast of current developments in the law as they relate to legal document preparation and shall fulfill ongoing training requirements to maintain professionalism and the skills necessary to perform their duties competently.

3. Fees and Services.

a. A legal document preparer shall, upon request of a consumer at any time, disclose in writing an itemization of all rates and charges to that consumer.

10

b. A legal document preparer shall determine fees independently, except when otherwise established by law, entering into no unlawful agreements with other legal document preparers on the fees charged to any user.

c. A legal document preparer shall at all times be aware of and avoid impropriety or the

appearance of impropriety, which may include, but is not limited to: (1) Establishing contingent fees as a basis of compensation; (2) Directly or indirectly receiving of any gift, incentive, reward, or anything of value

as a condition of the performance of professional services; and (3) Directly or indirectly offering to pay any commission or other consideration in

order to secure professional assignments. d. A legal document preparer may consult, associate, collaborate with, and involve other

professionals in order to assist the consumer.

4. Skills and Practice.

a. A legal document preparer shall provide completed documents to a consumer in a timely manner. The legal document preparer shall make a good faith effort to meet promised delivery dates and make timely delivery of documents when no date is specified. A legal document preparer shall meet document preparation deadlines in accordance with rules, statutes, court orders, or agreements with the parties. A legal document preparer shall provide immediate notification to the consumer of any delays.

b. A legal document preparer shall accept only those assignments for which the legal

document preparer’s level of competence will result in the preparation of an accurate document. The legal document preparer shall decline an assignment when the legal document preparer’s abilities are inadequate for that assignment.

5. Performance in Accordance with Law.

a. A legal document preparer shall perform all duties and discharge all obligations in

accordance with applicable laws, rules or court orders. b. A legal document preparer shall not represent they are authorized to practice law in

this state, nor shall the legal document preparer provide legal advice or services to another by expressing opinions, either verbal or written, or by representing another in a judicial, quasi-judicial, or administrative proceeding, or other formal dispute resolution process, except as authorized in Rule 31(d), Rules of the Supreme Court. A legal document preparer shall not attend court with a consumer for the purpose of assisting the consumer in the court proceeding, unless otherwise ordered by the court.

c. A legal document preparer shall not provide any kind of advice, opinion or

recommendation to a consumer about possible legal rights, remedies, defenses, options, or strategies. This shall not, however, preclude a certified legal document

11

preparer from providing the type of information permitted in subsection (F)(1) of this section. A legal document preparer shall inform the consumer in writing that a legal document preparer is not a lawyer, is not employed by a lawyer, and cannot give legal advice, and that communications with a legal document preparer are not privileged. A legal document preparer shall not use the designations “lawyer,” “attorney at law,” “counselor at law,” “law office,” “JD,” “Esq.,” or other equivalent words, the use of which is reasonably likely to induce others to believe the legal document preparer is authorized to engage in the practice of law in the state of Arizona.

K. Fee Schedule.

1. Standard Certification Fees

a. Individual Certification for Two Year Certification Period $650.00

(1) For certification expiring more than one year after application date $650.00 (2) For certification expiring less than one year after application date $325.00

b. Fingerprint Application Processing. Rate set by Arizona law and

subject to change.

2. Business Entity Certification for Two Year Certification Period $650.00

a. For certification expiring more than one year after application date $650.00 b. For certification expiring less than one year after application date $325.00

3. Examination Fees

a. New Applicants for Certification $ 50.00

b. Reexaminations $ 50.00

(For any applicant who does not pass the examination on the first attempt. The $50.00 fee applies to each reexamination.)

c. Reregistration for Examination $ 50.00

(For any applicant who registers for an examination date and fails to appear at the designated site on the scheduled date and time.)

4. Renewal Certification Fees.

a. Individual Renewal for Two Year Renewal Period $600.00

b. Business Entity Renewal for Two Year Renewal Period $600.00

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c. Inactive Status $200.00

d. Late Renewal $ 50.00

e. Delinquent Continuing Education $ 50.00

5. Miscellaneous Fees.

a. Replacement of Certificate or Name Change $ 25.00

b. Public Record Request per Page Copy $ .50

c. Certificate of Correctness of Copy of Record $ 18.00

d. Reinstatement Application $100.00

(Application for reinstatement to certification after suspension or revocation of certification.)

L. Continuing Education Policy.

1. Purpose.

a. Ongoing continuing education (“CE”) is one method to ensure legal document preparers maintain competence in the field after certification is obtained. Continuing education also provides opportunities for legal document preparers to keep abreast of changes in the profession and the Arizona judicial system.

b. Pursuant to ACJA § 7-201(D) the board shall make recommendations to the supreme

court regarding rules, policies, and procedures to implement and enforce the requirements regarding legal document preparers, including continuing education. This subsection is intended to provide direction to legal document preparers to ensure compliance with the continuing education requirements and to provide for equitable application and enforcement of the continuing education requirements.

2. Applicability.

a. Pursuant to subsection (G)(2), all legal document preparers who hold individual

certification shall attend ten hours of approved continuing education each year between the period of May 1st and April 30th of the following year, for a total of no less than twenty hours of continuing education completed on or before April 30th of every odd numbered year. The continuing education requirements do not apply to certified legal document preparer business entities. Hours of participation are not transferable to certification periods other than the one in which the participation occurred.

13

b. All certified legal document preparers shall comply with the continuing education policies in this subsection.

3. Responsibilities of Legal Document Preparers.

a. It is the responsibility of each legal document preparer to ensure compliance with the

continuing education requirements, maintain documentation of completion of continuing education, and to submit the maintained documentation to the legal document preparer program upon the request of the board or division staff.

b. Upon request, each legal document preparer shall provide any additional information

required by the board or division staff when reviewing renewal applications and continuing education documentation.

c. Continuing education not recognized for credit upon board review does not in any way

relieve the legal document preparer of the responsibility to complete the required hours of continuing education.

4. Authorized Continuing Education Activities.

a. A CE activity shall address the areas of proficiency, competency, and performance of

legal document preparation, impart knowledge and understanding of the profession, the Arizona judiciary, legal process, and increase the participant's understanding of the responsibilities of a certified legal document preparer. Authorized continuing education activities include the following subjects:

(1) The role and responsibility of certified legal document preparers including ACJA

§§ 7-201, -208 and Rule 31. (2) Ethics for legal document preparers and business entities, including cooperation

with judges, attorneys, court staff, and other certified legal document preparers, professional courtesy and impartiality to all litigants, and information versus legal advice. Each certified legal document preparer shall complete a minimum of one hour of the total continuing education requirement each year in an ethics based curriculum.

(3) The Arizona court system including the state and federal constitution, branches of government, Arizona court jurisdiction and responsibilities, Arizona tribal court system, resource materials including Arizona Revised Statutes, Arizona Rules of Court, administrative orders and rules, as well as current issues in the Arizona court system.

(4) Research skills including utilizing reference materials and libraries and research techniques.

(5) Management issues including public relations, customer service, accounting, time management, human resources, financial and retirement planning, and office management. The maximum hours of continuing education credits earned as business management credit shall not exceed three hours per year of the total number of continuing education hours required for renewal.

(6) The maximum hours of continuing education credits earned from tax related

14

curriculum shall not exceed three hours per year of the total number of continuing education hours required for renewal.

b. Conferences. A legal document preparer may receive continuing education credit for

attendance at a conference relevant to the profession. A legal document preparer may receive 100 percent of the continuing education credits for attendance at the conference, if the conference is directly related to the legal document preparer profession. Introductory remarks sessions, breaks, meals, business meetings, and general sessions of the conference do not qualify as continuing education hours.

c. University, college and other educational institution courses. A legal document

preparer may receive continuing education credit for a course provided by a university, college or other institutionally accredited educational program if the legal document preparer successfully completes the course with a grade of "C" or better or a "pass" in a pass/fail grading system. A legal document preparer may receive continuing education credit if the course is relevant to the legal document preparer profession, up to two times the number of credit hours awarded by the educational institution. The maximum hours of continuing education credits earned from educational course work shall not exceed 50 percent of the total number of continuing education hours required for renewal.

d. Self study. A legal document preparer may receive continuing education credit for

self study activities, including video and audio tapes, online computer seminars, and other methods of independent learning. The maximum hours of continuing education credits earned in a self study format shall not exceed 50 percent of the total number of continuing education hours required for renewal.

e. Serving as faculty. A legal document preparer may receive continuing education

credit for serving as faculty, instructor, speaker, or panel member of an instructional seminar directly related to the profession of legal document preparation. A legal document preparer may receive continuing education credit for the presentation time and up to two hours of preparation time for each hour of presentation. The maximum hours of continuing education credits earned as faculty credit shall not exceed 50 percent of the total number of continuing education hours required for renewal and a legal document preparer shall not receive duplicate credit for repeating a presentation during the certificate period.

5. Minimum time. Each continuing education activity shall consist of at least 30 minutes of

actual clock time spent by a legal document preparer in actual attendance at and completion of a continuing education activity. “Actual clock time” includes the total number of hours attended, minus the time spent for introductory remarks, breaks, meals, and business meetings. After completion of the first 30 minutes of a continuing education activity, credit shall be recognized in fifteen minute increments.

6. Maximum credit. Unless the board otherwise determines a continuing education activity is

directly related to the legal document preparer profession, a legal document preparer shall

15

not receive more than 50 percent of the credit requirement for the certificate period through one activity.

7. Non-Qualifying Activities.

a. The following activities shall not qualify for continuing education credit for legal document preparers:

(1) Educational course work and training completed to qualify for certification; (2) Trainee supervision activities. A legal document preparer shall not receive continuing

education credit for trainee supervision; (3) Attendance or participation at professional or association business meetings,

general sessions, elections, policymaking sessions or program orientation; (4) Serving on committees or councils or as officers in a professional organization;

and (5) Activities completed as required by the board as part of a disciplinary action.

b. Repeat of an Activity. Continuing education activities repeated during a certificate

period do not qualify for credited duplicate hours.

c. If a legal document preparer attends part, but not all of a continuing education course, the legal document preparer holder is not eligible to claim partial credit completion.

8. Documentation of attendance or completion. When attending or completing a continuing

education activity, each legal document preparer shall obtain documentation of attendance or completion from the sponsoring entity. At a minimum, this documentation shall include the:

a. name of the sponsor; b. name of the participant; c. topic of the subject matter; d. number of hours actually attended or the number of credit hours awarded by the

sponsoring entity; e. date and place of the program; and f. signature of the sponsor or an official document from the sponsoring entity.

9. Compliance and Non-Compliance.

a. Affidavit of compliance. A legal document preparer shall submit an affidavit of continuing education compliance when applying for renewal of certification. The affidavit shall be in the format provided by division staff.

16

b. Proration of continuing education requirement. A legal document preparer whose certificate expires less than one year from the effective date of certification shall complete no less than ten hours of continuing education credit during the balance of the certification period. In subsequent certification periods, the legal document preparer shall complete the biannual twenty hour continuing education requirement. Proration of the continuing education requirement does not apply to a legal document preparer who previously held certification and allowed their certification to lapse.

c. Extension or waiver of continuing education requirements. A legal document preparer

seeking renewal of certification who has not fully complied with the CE requirements may request an extension or waiver of the CE requirements under the following conditions:

(1) The legal document preparer submits a notarized written statement to the board,

explaining the facts regarding non-compliance and requesting an extension or waiver of the requirements no later than the May 15th preceding the June 30th expiration of the certificate. Upon a showing of extenuating circumstances, the board may grant an extension of a maximum of 90 days for the legal document preparer to complete the continuing education requirement.

(2) The board shall determine whether extenuating circumstances exist. In reviewing the request, the board shall consider if the legal document preparer has been unable to devote sufficient hours to fulfill the requirements during the certificate period because of: (a) full-time service in the armed forces of the United States during a substantial

part of the certificate period; (b) an incapacitating illness documented by a statement from a currently licensed

health care provider; (c) a physical inability to travel to the sites of approved programs documented by

a statement from a currently licensed health care provider; or (d) any other special circumstances the board deems appropriate.

(3) A legal document preparer whose certificate has been suspended or revoked by the board is not eligible to request a waiver or extension of the continuing education requirement.

(4) The board or division staff may request documentation or additional information from a legal document preparer applying for renewal to verify compliance with the continuing education requirements. If the legal document preparer fails to provide the requested documentation or additional information, the board may deem the application for renewal incomplete and deny renewal of certification.

d. Random audits of continuing education compliance. During each renewal review

period, the board shall direct division staff to randomly select a specified number of legal document preparers to demonstrate continuing education requirement compliance through submission of proof of continuing education participation. Refusal or failure to respond to a board or division staff request for audit documentation of continuing education compliance may result in denial of renewal of certification or disciplinary action pursuant to ACJA § 7-201(H) and this section.

17

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e. A legal document preparer who fails to complete the continuing education requirement, completes any portion of the continuing education requirement after April 30th of each odd numbered year, falsifies documents, or misrepresents attendance or an activity is subject to any or all of the following actions of the board;

(1) Assessment of the delinquent continuing education fee; (2) Denial of renewal of certification; and (3) Disciplinary action pursuant to ACJA § 7-201(H) and this section.

10. Board Decision Regarding Continuing Education Compliance.

a. Upon a review of continuing education documentation and any applicable additional

information requested, the board may:

(1) Recognize legal document preparer compliance with the continuing education requirement;

(2) Require additional information from the legal document preparer seeking renewal before making a decision;

(3) Recognize partial compliance with the requirement and order remedial measures; or

(4) Enter a finding of non-compliance.

b. The division staff shall promptly notify the legal document preparer, in writing, of the board’s decision. A legal document preparer may appeal the decision by submitting a written request for review to the legal document preparer program within fifteen days of receipt of notification of the board’s decision. The legal document preparer requesting review may request to appear before the board at the next available regularly scheduled board meeting.

c. The certification of a legal document preparer who timely appeals a decision by the board

regarding continuing education shall continue in force until a final decision is made by the board.

d. The board shall make the decision on the appeal in writing. The decision is final and

binding. Adopted by Administrative Order 2003-14, effective April 1, 2005. Amended by Administrative Order 2003-64, effective June 6, 2003. Amended by Administrative Order 2004-95, effective November 24, 2004. Amended by Administrative Order 2005-24, effective April 7, 2005. Amended by Administrative Order 2006-75. The amended section takes effect January 1, 2007, unless otherwise delineated in the administrative order adopting the section. Amended by Administrative Order 2012-85, effective November 21, 2012. Rescinded by Administrative Order 2012-94, effective December 6, 2012. Amended by Administrative Order 2013-39, effective April 10, 2013.

Arizona Bankruptcy American Inn of Court

Arizona Supreme Court Certification Issue Cases and Summaries

January 8, 2015

QB\Personal.EFELLA\32310159.1

Bisbee v. Security National Bank & Trust Co. of Norman, Oklahoma (In re Bisbee) 157 Ariz. 31, 754 P.2d 1135 (1988)

Facts: In 1982, Charles Bisbee ("Bisbee") recorded a deed of trust and assignment of rents to secure a loan he received from Security National Bank & Trust Company of Norman, Oklahoma ("Bank"). The deed of trust, recorded against 100 acres, failed to name a trustee. In 1983, Bisbee received another loan from the Bank and recorded a second deed of trust against the same acreage. Like the first, it failed to designate a trustee. Later in 1983, Bisbee and his wife filed a Chapter 11 case. They commenced an adversary proceeding under 11 U.S.C. § 544(a), seeking to invalidate the liens of the Bank (which was by then the FDIC). By that time, the acreage had been sold and the Bank and Bisbee were fighting over more than $800,000 in sale proceeds. Bisbee argued that the transfer of an interest in the property that the deeds of trust purported to make failed since no trustee was named to receive such interest. The Bank disagreed, arguing that in all events, the documents were mortgages creating valid liens, even if the Court were to find they were not technically deeds of trust. Procedural History: The Bankruptcy Court reserved ruling on the issue and instead certified two questions to the District Court1 to certify to the Arizona Supreme Court:

1. Whether the failure of a deed of trust and assignment of rents executed in Arizona and covering Arizona realty to designate a trustee to whom the trust property is conveyed results in an invalid trust deed under the Arizona Trust Deeds Act, A.R.S. § 33–801 et seq. 2. Assuming arguendo the above results in an invalid trust deed, whether such a document constitutes a mortgage or other enforceable realty interest as defined by A.R.S. § 33–702(A).

Issue 1: Does failure of a deed of trust and assignment of rents executed in Arizona and covering Arizona realty to designate a trustee to whom the trust property is conveyed result in an invalid trust deed under the Arizona Trust Deeds Act, A.R.S. § 33–801 et seq.? Holding 1: No. The deed of trust and liens it creates remain valid, even if no trustee is designated. Rationale 1: The Court began its analysis of this issue of first impression by reviewing Arizona's Trust Deeds Act. The Court noted that the A.R.S. § 33-804(D) expressly contemplates lack of a trustee: It provides that if a trustee "fails to qualify or is unwilling or unable to serve or

1 This cumbersome procedure existed prior to the Arizona Supreme Court's PriceWaterhouse decision, 202 Ariz. 397, 46 P.3d 408 (2002) discussed elsewhere in these materials, which eliminated the step of certification to the District Court, streamlining the process so that bankruptcy courts may now certify questions directly to the Arizona Supreme Court.

QB\Personal.EFELLA\32310159.1

resigns, it does not invalidate the deed of trust." The Court held that, therefore, under the plain language of the Act, a deed of trust and the liens it creates are not invalidated by lack of a trustee. Further, the Court examined traditional trust law. It noted that in Arizona, a valid trust can be created notwithstanding failure to designate a trustee. If a trust can exist without a trustee, certainly a deed of trust could exist without the "tenuous" trustee designation of the deed of trust, which creates neither the legal powers nor the obligations of a traditional trustee. Instead, the trustee under a deed of trust is more of a neutral agent for both parties to the deed of trust. The Court further noted that the deed of trust at issue had clear language creating liens. Moreover, they had been properly recorded and indexed, and therefore served to give constructive notice to would-be bona fide purchasers of the liens created in favor of the Bank. As such, the liens created by the valid (though imperfect) deeds of trust could not be avoided by a bona fide purchaser. Issue 2: Assuming arguendo the above results in an invalid trust deed, does such a document constitute a mortgage or other enforceable realty interest as defined by A.R.S. § 33–702(A)? Holding 2: The Court did not reach Issue 2, given its holding with respect to Issue 1.

In re Bisbee, 157 Ariz. 31 (1988) 754 P.2d 1135

© 2014 Thomson Reuters. No claim to original U.S. Government Works. 1

157 Ariz. 31 Supreme Court of Arizona, In Banc.

In re Charles Martin BISBEE and Wanta Rhea Bisbee, Debtors.

Charles Martin BISBEE and Wanta Rhea Bisbee, Debtors and Debtors in Possession, Plaintiffs,

v. SECURITY NATIONAL BANK & TRUST

COMPANY OF NORMAN, OKLAHOMA, By and Through the Federal Deposit Insurance

Corporation, Defendant.

No. CV–87–0248–CQ. | April 28, 1988.

Debtors in bankruptcy sought to have deed of trust declared invalid. The United States District Court for the District of Arizona, William P. Copple, J., certified a question from the United States Bankruptcy Court. The Supreme Court, Moeller, J., accepted the question and held that: (1) failure to deed of trust to designate trustee did not invalidate underlying lien on realty between parties, and (2) recordation of deed of trust which did not designate a trustee constituted constructive notice to subsequent purchasers and encumbrancers. So ordered.

West Headnotes (5) [1]

Mortgages

Necessity and Sufficiency of Writing in General

Failure of deed of trust to designate a trustee did not invalidate underlying claim on realty between the parties. A.R.S. § 33–801 et seq.

5 Cases that cite this headnote

[2]

Trusts

Nature and Requisites in General

Valid trust is created notwithstanding the failure

to designate a trustee.

2 Cases that cite this headnote

[3]

Mortgages

Trust or Power

In practical effect, deed of trust is little more than a mortgage with power to convey upon default.

5 Cases that cite this headnote

[4]

Mortgages

Rights, Duties and Liabilities of Trustee in General

Trustee under deed of trust has neither legal powers nor legal obligations of a trustee under traditional trust law, but instead serves as a type of common agent for both parties.

8 Cases that cite this headnote

[5]

Vendor and Purchaser

Mortgages and Other Liens or Incumbrances

Recordation of deed of trust, which did not designate a trustee, constituted constructive notice to subsequent purchasers and encumbrancers. A.R.S. §§ 33–815, 33–818.

5 Cases that cite this headnote

In re Bisbee, 157 Ariz. 31 (1988) 754 P.2d 1135

© 2014 Thomson Reuters. No claim to original U.S. Government Works. 2

Attorneys and Law Firms

**1135 *31 Carmichael & Powell by Donald W. Powell, Claudia J. Kroman, Phoenix, for plaintiffs.

Streich, Lang, Weeks & Cardon by Thomas J. Salerno, Jonathan D. Brunk, Phoenix, for defendant.

MOELLER, Justice.

JURISDICTION

This action arises out of a certification order to this court from the United States District Court for the District of Arizona. The certification order requests us to resolve a matter of first impression under Arizona law which may be determinative of a cause now pending in the United States Bankruptcy Court. We accepted certification on July 15, 1987, and held oral argument on November 19, 1987. We have jurisdiction pursuant to A.R.S. § 12–1861 et seq., and Rule 27, Rules of the Supreme Court of Arizona, 17A A.R.S.

LEGAL ISSUES

The legal issues to be resolved, as stated by the certifying court, are:

1. Whether the failure of a deed of trust and assignment of rents executed in Arizona and covering Arizona realty to designate a trustee to whom the trust property is conveyed results in an invalid trust deed under the Arizona Trust Deeds Act, A.R.S. § 33–801 et seq.

2. Assuming arguendo the above results in an invalid trust deed, whether such a document constitutes a mortgage or other enforceable realty **1136 *32 interest as defined by A.R.S. § 33–702(A).

Since we conclude that the instruments in question are valid trust deeds under Arizona law, the second alternative certified question is moot.

FACTS

The district court supplied us with the following statement of facts and applicable federal law which it deemed relevant to a resolution of the certified questions of state law:

On December 7, 1982, Charles Martin Bisbee, acting as a married man dealing with his sole and separate property, executed and had recorded in Maricopa County, Arizona a deed of trust and assignment of rents to secure a debt in the original amount of $600,000, listing as beneficiary the Security National Bank and Trust Company of Norman, Oklahoma. The trust deed purports to encumber approximately 100 acres of undeveloped Maricopa County land but fails to designate a trustee.

On March 28, 1983, Bisbee executed and recorded a similar trust deed and assignment to secure the Bank’s additional loan of $218,000. That instrument also lacked a designation for a trustee and purported to cover the same realty.

Charles and Wanta Rhea Bisbee, his wife, filed a voluntary business reorganization case under Chapter 11 of the Bankruptcy Reform Act of 1978 on April 11, 1983. 11 U.S.C. § 1101, et seq. Pursuant to Court order, the 100 acres were sold for $2,250,000.00 and nondisputed lienholders paid. Currently, the sum of not less than $834,076.23 is escrowed at interest pending resolution of the validity of the trust deeds.

On February 10, 1986, Mr. and Mrs. Bisbee, as debtors in possession, filed an adversary complaint against Security National Bank seeking to invalidate the Bank’s security interests. Rule 7001(2), F.Bk.R. Under federal bankruptcy law, a Chapter 11 debtor in possession has the same rights to avoid security interests as those possessed by a hypothetical lien creditor or bona fide purchaser of real property. 11 U.S.C. §§ 544, 1107(a). Accordingly, debtors take the position that failure of the instruments to designate a trustee results in invalidity of the security instruments under Arizona law. On May 1, 1987, defendant’s successor, the Federal Deposit Insurance Corporation, moved for summary judgment of dismissal, arguing inter alia the liens are enforceable as a deed of trust or, in the alternative, as an Arizona mortgage.

At oral argument on June 25, 1987, the Bankruptcy Court reserved ruling on the merits of defendant’s motion until the issue of apparent first impression could be considered by the Arizona Supreme Court.

This certification procedure followed.

In re Bisbee, 157 Ariz. 31 (1988) 754 P.2d 1135

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DISCUSSION

The Bisbees (hereinafter debtors), as debtors in possession of their Chapter 11 estate, may exercise the avoidance powers of a trustee under the Federal Bankruptcy Code. 11 U.S.C. § 1107(a) (1984). One avoidance power is the ability of the debtor in possession to avoid a lien he consensually granted prior to filing bankruptcy by assuming the rights of a hypothetical lien creditor and/or a bona fide purchaser of the collateral. The debtor in possession is cloaked with these powers as of the date bankruptcy is commenced, 11 U.S.C. § 544(a) (1984), which in this case was April 11, 1983. [1] Therefore, the determinative issue is whether the failure to designate a trustee in the two security instruments would preclude the Federal Deposit Insurance Corporation (FDIC), as successor in interest to the lending bank, from enforcing the two instruments against bona fide purchasers and/or lien creditors deemed to come into existence as of the date the debtors filed bankruptcy. Under A.R.S. § 33–801(5), a deed of trust is defined as:

[A] deed executed in conformity with this chapter and conveying trust property to a trustee or trustees qualified under **1137 *33 § 33–803 to secure the performance of a contract or contracts....

(Emphasis added.) Under A.R.S. § 33–801(7), a trustee is defined as:

[A]n individual, association or corporation qualified pursuant to § 33–803, or the successor in interest thereto, to whom trust property is conveyed by trust deed.

The debtors’ argument is based on a theory of strict statutory construction. They correctly note that every definitional statute in the Arizona Deeds of Trust Act, A.R.S. §§ 33–801 et seq., (the Act) refers to a conveyance of trust property from a trustor to a trustee through a conveyance document.1 They maintain that because no trustee was designated, there was no one to receive a transfer of the property, and, therefore, no lien was created.

The Act is a comprehensive set of statutes governing the execution and operation of deeds of trust. Taken as a whole, we do not believe the Act supports the debtors’ arguments. A.R.S. § 33–804(D) expressly provides that if a trustee “fails to qualify or is unwilling or unable to serve or resigns, it does not invalidate the deed of trust.”2 Under that subsection, the only effect of the absence of a valid trustee is that no action required to be taken by the trustee may be taken until a successor trustee is appointed. We perceive no logical distinction between a failure to designate a trustee and a failure to designate a legally qualified trustee. Nor do we perceive any valid policy reason to treat the two situations differently. In either event, there is no trustee. The Act clearly contemplates that the absence of a trustee does not invalidate the underlying lien. The debtors also rely on Weaver v. Tri City Credit Bureau, 27 Ariz.App. 640, 557 P.2d 1072 (1976), for the proposition that a transfer of interest in real property is essential for the creation of a valid deed of trust. However, Weaver arose under unique circumstances not at issue here and is therefore inapposite. In Weaver, the court was called upon to determine whether a real property “agreement,” taken by a bank to circumvent a then-existing statute which prohibited banks from accepting as loan collateral anything but purchase money real property liens, constituted a “mortgage” on the realty. The court held, based upon the express wording of the “agreement,” that it did not purport to create any lien on the real property, but only created an interest in the rents and profits from the real property. In the instant case, however, the language of the instruments indisputably expresses the parties’ intentions to create liens on the property. Thus, we do not read Weaver as supporting debtors’ position. [2] While not controlling, reference to traditional trust law is helpful in our analysis of the effect of the failure to designate a trustee. Under traditional trust law, the Arizona rule is clear—a valid trust is created notwithstanding the failure to designate a trustee. In re Harber’s Estate, 99 Ariz. 323, 409 P.2d 31 (1965). The Arizona rule accords with generally prevailing traditional trust law principles. See Shaw v. Johnson, 15 Cal.App.2d 599, 605, 59 P.2d 876, 879 (1936). See also Powell on Real Property, § 511 at 76 (1986); Restatement (Second) of Trusts § 32(2) comment j (1959); 59 C.J.S. Mortgages § 107 (1949); Yao, Want of Trustee as Affecting the Creation of Trusts, 2 St. Mary’s L.J. 159, 162 (1970). As the certifying court observed, no Arizona case deals with the precise issue presented here in the context of a statutory **1138 *34 deed of trust. A non-Arizona case

In re Bisbee, 157 Ariz. 31 (1988) 754 P.2d 1135

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involving analogous facts and procedural similarities is Mid City Management Corp. v. Loewi Realty Corp., 643 F.2d 386 (5th Cir.1981). In that case, a property owner who executed a deed of trust which failed to name a trustee subsequently went into bankruptcy. A “substitute” trustee, appointed by the beneficiary according to the terms of the deed of trust, conducted a non-judicial foreclosure sale. A junior lienholder attacked the validity of the sale, arguing that it was invalid because the beneficiary had failed to obtain judicial reformation of the deed of trust to name a trustee before appointing a substitute trustee. The Fifth Circuit Court of Appeals, applying Texas law, held that there were no defects in the non-judicial foreclosure sale. The court held that the failure to appoint an original trustee was such an obvious mistake that it was unnecessary to first judicially reform the deed of trust before appointing a substitute trustee. Therefore, the appointment of the substitute trustee and the exercise of the power of sale by that trustee were valid. Id. at 388. The Mid City court clearly recognized that the failure to name a trustee did not render the lien unenforceable against a subsequent bona fide lienholder and did not prevent the appointment of a substitute trustee who could then validly sell the property. Essentially, the debtors’ argument is that it is an absolute requirement that conveyance of title be simultaneous with the creation of a deed of trust for the deed of trust to create a lien under the Act. That argument, however, ignores both the nature and purpose of a trustee in a deed of trust and the legal import of the conveyance of “title” transferred to a trustee upon execution of a deed of trust:

The Arizona Act defines a trust deed as a deed conveying legal title to real property to a trustee to secure the performance of a contract. This definition suggests that the trust deed, unlike the Arizona mortgage, will convey title rather than create a lien. Nonetheless, the trustee is generally held to have bare legal title—sufficient only to permit him to convey the property at the out of court sale. All other incidents of title remain in the trustor. Thus, in legal effect, there would seem to be no substantial difference between the trustee’s “title” and the mortgagee’s “lien.”

Brant v. Hargrove, 129 Ariz. 475, 480 n. 6, 632 P.2d 978, 983 n. 6 (App.1981) (footnotes omitted; emphasis added), quoting Note, The Deed of Trust: Arizona’s Alternative To the Real Property Mortgage, 15 Ariz.L.Rev. 194, 196 (1973). [3] In practical effect, a deed of trust is little more than a mortgage with a power to convey upon default. Brant, 129 Ariz. at 480, 632 P.2d at 983. Arizona statutes on liens of real property were adopted primarily from California law. In re Sapphire Investments, 27 B.R. 56, 57 (Bankr.D.Ariz.1983). Notwithstanding the conveyance of “title” in a deed of trust, the trustor remains free to transfer the property and continues to enjoy all other incidents of ownership. See A.R.S. § 33–806.01(A). As stated in Brant:

[T]he bare legal title held by the trustee is very tenuous, and may at any time prior to sale be terminated by unilateral action of the beneficiary. A.R.S. § 33–804(B).

129 Ariz. at 481, 632 P.2d at 984. [4] A trustee under a deed of trust has neither the legal powers nor the obligations of a trustee under traditional trust law. Instead he serves as a type of common agent for both parties. Kerivan v. Title Insurance and Trust Co., 147 Cal.App.3d 225, 229, 195 Cal.Rptr. 53, 56 (1983). The primary duty of a trustee arises upon default. See, e.g., A.R.S. §§ 33–807(A) and 806.01. Indeed, in this case, the services of a trustee were never required because the property sale was handled by others. We therefore hold that the mere failure to designate trustees does not render the deeds of trust invalid as between the parties to the trust deed instruments. Those instruments created liens on the property in favor of the FDIC’s predecessor, the lending bank. This does not quite end our inquiry, however, since, for purposes of the **1139 *35 certified question, the trustor Bisbee stands in the shoes of a subsequent bona fide purchaser and/or lien creditor. Thus, it is necessary to determine whether the recordation of the instruments in question constituted constructive notice to subsequent purchasers or encumbrancers. [5] The failure to name a trustee does not affect the manner in which a trust deed is indexed by the county recorder. A.R.S. § 33–815 provides that trust deeds are indexed in the same way as mortgages, with the trustor indexed as the mortgagor and the beneficiary indexed as the mortgagee. It is undisputed that the instruments in this

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case were properly indexed. It is also undisputed that the property was correctly described and the instruments were properly acknowledged. They were recorded prior to the filing of the bankruptcy proceedings. Thus, under the express provisions of A.R.S. § 33–818, the recordation constituted constructive notice to subsequent purchasers and encumbrancers unless it can be successfully argued that the failure to name a trustee renders the recording inoperative. We believe Watson Constr. Co. v. Amfac Mortgage Corp., 124 Ariz. 570, 606 P.2d 421 (1979), is dispositive on the issue of the validity of the constructive notice. In Watson, the court held that neither the failure to caption a deed of trust, nor the failure to include two pages of it, destroyed the constructive notice imparted by the recordation of the instrument. The plaintiff, a junior lienholder, argued that the failure to record two pages rendered the deed of trust invalid and, as such, failed to give him constructive notice of its lien. However, the court rejected plaintiff’s argument and cited Carley v. Lee, 58 Ariz. 268, 119 P.2d 236 (1941), for the proposition that an instrument is constructive notice of the rights claimed thereunder if it is of a character which the recording statutes permit to be recorded and if it sufficiently apprises third parties of the rights claimed by it. Although the Watson deed of trust was not complete, it was of a character entitled to be recorded pursuant to A.R.S. § 33–411, and, because it set forth the essential elements of the lien, it apprised readers of the nature of the transaction. 124 Ariz. at 576, 606 P.2d at 427. See also In re Wonderfair Stores, Inc. of Arizona, 511 F.2d 1206 (9th Cir.1975) (holding, under Arizona law, that even if certain pages of a recorded lease were not properly

notarized, a recorded lease gave constructive notice of the encumbrance even though a technical violation of the recording statute could be found). We have held that the instruments validly created liens in favor of the lending bank. Because they were properly recorded, any subsequent purchaser or lien creditor, in whose place the debtors now stand, had constructive notice of the liens even if they could not identify the trustee from the recorded documents.

CONCLUSION

Under the facts of this case, the mere fact that the trust instruments failed to designate trustees does not render them invalid as deeds of trust under Arizona law. Therefore, the answer to the first certified question is “no,” and we do not reach the second one.

GORDON, C.J., FELDMAN, V.C.J., and CAMERON and HOLOHAN, JJ., concur.

Parallel Citations

754 P.2d 1135

Footnotes 1

Certain portions of the Arizona Deeds of Trust Act, A.R.S. §§ 33–801 et seq., were amended by Laws 1987, Ch. 286, § 1, eff. Jan. 1, 1988. These changes, like those made in 1984, do not affect the result in this case.

2

A.R.S. § 33–804(D) was added to the Deeds of Trust Act in 1984, after the execution of the deeds of trust involved in this case, but well before this litigation was commenced. The parties have briefed and argued the case on the assumption that Subsection D applies, and we have treated it accordingly. In any event, it is clear that even before the amendment, the Act contemplated the appointment of a substitute or successor trustee by a beneficiary whenever a named trustee failed to qualify, or was unwilling or unable to serve. A.R.S. § 33–804(A).

End of Document

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In re McKeever 169 Ariz. 312 (1991)

** Argued for the City of Prescott by the Honorable Robert Brutinel Facts: Robert and Christine McKeever (“McKeevers”) sold their convenience store and leased the business premises to the Summerlets in 1987. The sales agreement was secured by a security interest in the equipment, fixtures, and inventory. In 1988, the McKeevers filed a Chapter 11 bankruptcy petition. In 1989, the Summerlets defaulted under the lease and the McKeevers repossessed the business premises and assets. The McKeevers later sought approval of a sale of the business in partial satisfaction of the McKeever’s landlord’s lien on the assets. During their ownership of the convenience store, the Summerlets had incurred sales tax obligations to the City of Prescott (the “City”), for which the City sought to hold the McKeevers liable under a theory of successor liability. The issue was raised in the McKeevers’ bankruptcy case, with the bankruptcy judge finding that there was no Arizona precedent that determined whether the McKeevers had successor liability for sales tax for a repossessed business. The bankruptcy court certified two questions to the Arizona Supreme Court, only one of which was decided. The second certified question was mooted by the Supreme Court’s decision on the first question. Procedural History: Questions certified from the United States Bankruptcy Court for District of Arizona to the Supreme Court of Arizona. Issue 1: Are the McKeevers successors within the meaning of A.R.S. § 42-119 and Prescott City Code § 4-1-595 by reason of their foreclosure and repossession such that they can be held liable for the sales tax obligations of their predecessors in interest? Holding 1: No. Persons taking a property by foreclosure and repossession with nothing more are not purchasers within the meaning of Prescott City Code § 4-1-595 and therefore, cannot be held liable as successors for sales tax obligations. Rationale 1: The Arizona Supreme Court based its decision on an analysis of Prescott City Code § 4-1-595 (the “City Code Section”), as only the City, and not the State, sought to collect taxes against the McKeevers. In analyzing the City Code Section, the Court noted that tax laws must be strictly construed in favor of the taxpayer, and should not be extended to include subject matter not specifically covered by the language in the statute cited. Here, the only relevant portion of the Prescott City Code that contemplates successor liability, subsection (d) of the City Code Section,1 does so based on a “purchaser of a business or stock of goods” withholding

1 Prescott City Code § 4-1-595(d) states, in relevant part: “A person’s successor or assigned shall withhold from the purchase money an amount sufficient to cover the taxes required to be paid, and interest or penalties due and payable . . .(2)If the purchaser of a business or stock of goods fails to obtain a certified as provided by this Section, he is personally liable for payment of the

unpaid taxes from the “purchase money.” However, a person acquiring property cannot withhold “purchase money” unless the transaction generated purchase consideration sufficient to account for predecessor tax liability. A repossession of a leasehold interest and assets is not a purchase as the McKeevers merely exercised their rights to possession of the business premises upon default and no consideration was generated. Therefore, the McKeeevers could not be held liable for the sales tax under a theory of successor liability.

amount of taxes required to be paid by the former owner on account of the business so purchased . . .”

In re McKeever, 169 Ariz. 312 (1991) 819 P.2d 482

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KeyCite Yellow Flag - Negative Treatment Distinguished by Schnyder v. State Bd. of Equalization, Cal.App. 3

Dist., August 23, 2002 169 Ariz. 312

Supreme Court of Arizona, In Banc.

In re Robert C. McKEEVER and Christine McKeever, dba the Store and the Other Store,

Debtors, City of Prescott.

No. CV–91–0026–CQ. | Oct. 15, 1991.

Bankruptcy debtors repossessed convenience store under security agreement following default on lease. City sought to impose sales tax obligations which were incurred before repossession upon debtors. The United States District Court for the District of Arizona certified question of law. The Supreme Court, Moeller, J., held that debtors had no successor liability for disputed city sales tax since no “purchase” of business occurred within meaning of city code. Certified question answered.

West Headnotes (2) [1]

Taxation

Construction and operation

Tax laws must be strictly construed in favor of taxpayer, and should not be extended to include subject matter not specifically covered by language of statute itself, especially where statute seeks to impose one person’s tax liability on another person in order to facilitate collection.

3 Cases that cite this headnote

[2]

Taxation

Persons Subject to or Liable for Tax

Creditors who repossessed convenience store under landlord lien after operators defaulted on lease had no successor liability for city sales tax obligations which became due before business was repossessed, even though city code imposed successor liability upon purchasers of businesses who fail to withhold amount to cover unpaid taxes from purchase money; no “purchase” occurred within meaning of city code from repossession under security agreement with nothing more.

3 Cases that cite this headnote

Attorneys and Law Firms

**482 *312 Wm. Lee Eaton and James C. Lerch, Prescott, for debtors.

Robert M. Brutinel, Prescott, for City of Prescott.

OPINION

MOELLER, Justice.

STATEMENT OF THE CASE

The United States District Court for the District of Arizona has certified two questions of law to this court pursuant to the certification procedures set forth in A.R.S. § 12–1861 et seq. The questions arise in connection with a claim for delinquent city sales (transaction privilege) taxes which the City of Prescott (City) filed against Robert C. and Christine McKeever (Debtors) in a Chapter 11 proceeding in bankruptcy court. The bankruptcy court found that no Arizona precedent determined whether the Debtors had successor liability for sales taxes due from a repossessed business. Therefore, the district court certified the questions of law to this court. We have jurisdiction pursuant to Supreme Court Rule 27 and

In re McKeever, 169 Ariz. 312 (1991) 819 P.2d 482

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A.R.S. § 12–1861.

ISSUE

The first question certified by the District Court is: “Are the Debtors, by reason of their foreclosure on the Summerlets, ‘successors’ within the meaning of A.R.S. § 42–119 and Prescott City Code § 4–1–595, and as such liable for the sales tax obligation of their predecessors in interest.” The second certified question raises constitutional issues in the event we conclude the Debtors have successor liability for the taxes. Because we conclude there is no successor liability under the facts of this case, we do not address the second question.

FACTUAL AND PROCEDURAL HISTORY

Debtors owned a convenience store in Prescott, Arizona. In August 1987, they sold the business and leased the premises to the Summerlets (Tenants). The sales agreement included the business name, **483 *313 business equipment, fixtures, and rental of the business premises. The sales agreement was secured by a security interest in the equipment, fixtures, and inventory. On December 9, 1988, the Debtors filed a Chapter 11 bankruptcy petition. In July 1989, the Tenants defaulted on the lease and the Debtors, exercising their statutory landlord’s lien, repossessed the business premises and assets. Later, the Debtors petitioned the bankruptcy court to approve a sale of the business to obtain funds in partial satisfaction of their landlord’s lien. The City contends that the Tenants failed to pay city sales taxes which became due while they operated the business. The City filed a claim reflecting its belief that the Debtors have “successor liability” for the Tenants’ city sales tax obligation. Debtors, on the other hand, deny that they have “successor liability” merely by reason of having repossessed the business.

DISCUSSION

A.R.S. § 42–119 provides in relevant part:

B. A person’s successors or assigns shall withhold from the purchase money an amount sufficient to cover the taxes required to be collected and interest or penalties due and payable until the former owner produces a receipt from the department showing that the department has been paid.... If the purchaser of a business or stock of goods fails to withhold sufficient purchase money as provided by this subsection, he is personally liable for payment of the amount of taxes required to be collected or paid by the former owner on account of the business so purchased, with interest and penalties accrued and unpaid by the former owner or assignors.

The Prescott City Code § 4–1–595 provides in relevant part:

(a) ... [T]he Tax Collector may apply the provisions of subsections (b) through (d) below concerning the collection of taxes when there is succession in and/or cessation of business.

* * * * * *

(c) Any person who purchases, or who acquires by foreclosure, by sale under trust deed or warranty deed in lieu of foreclosure, or by any other method, improved real property or a portion of improved real property for which the Privilege Tax imposed by this Chapter has not been paid shall be responsible for payment of such tax as a speculative builder or owner builder, as provided in Sections 4–1–416 and 4–1–417.

(d) A person’s successors or assigns shall withhold from the purchase money an amount sufficient to cover the taxes required to be paid, and interest or penalties due and payable, until the former owner produces a receipt from the Tax Collector showing that all City tax has been paid or a certificate stating that no amount is due as then shown by the records of the Tax Collector. The Tax Collector shall respond to a request from the seller for a certificate within fifteen (15) days by either providing the certificate or a written notice stating why the certificate cannot be issued.

(1) If a subsequent audit shows a deficiency arising before the sale of the business, the deficiency is an obligation of the seller and does not constitute a liability against a buyer who has received a

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certificate from the Tax Collector.

(2) If the purchaser of a business or stock of goods fails to obtain a certificate as provided by this Section, he is personally liable for payment of the amount of taxes required to be paid by the former owner on account of the business so purchased, with interest and penalties accrued by the former owner or assignees.

The questions certified to us by the federal court, as well as the briefs of the parties, assume the applicability of both the state statute and the city code provisions. As we understand the facts, however, the claim in the bankruptcy court involves only a claim by the city for city sales tax. The **484 *314 state has not advanced any claims for state tax in this court nor, as far as we know, in the bankruptcy or district court. Because the question of successor liability for city taxes is governed by city code provisions, we limit our discussion to the city code. We note first that the City makes no argument that subsection (c) of the city code imposes liability here. Subsection (c) is the only subsection that refers to acquisitions by foreclosure, but it is limited to acquisitions of improved real property, something not involved in this case. Resolution of the first certified question therefore depends on whether subsection (d) of § 4–1–595 of the Prescott City Code imposes successor liability upon the Debtors for the city sales tax liability incurred by their predecessors. Subsection (d) contemplates that a successor or assignee will withhold from the “purchase money” an amount sufficient to cover unpaid taxes until the former owner produces a receipt from the tax collector showing that all taxes have been paid. If the “purchaser” fails to do so, the purchaser is personally liable for the amount owed by his predecessor in interest. As the City points out, “the purpose of successor liability statutes is to secure collection of taxes by imposing derivative liability on purchasers of a business who are generally in a better financial position to collect or pay the tax from the sale price than the seller quitting the business.” Bates v. Director of Revenue, 691 S.W.2d 273, 276 (Mo.1985) (citing Bank of Commerce v. Woods, 585 S.W.2d 577 (Tenn.1979)). [1] However, tax laws must be strictly construed in favor of the taxpayer, and should not be extended to include subject matter not specifically covered by the language of the statute itself. Ebasco Services Inc. v. Arizona State Tax Comm’n, 105 Ariz. 94, 97, 459 P.2d 719, 722 (1969). This is especially true where, as here, the statute seeks to

impose one person’s tax liability on another person in order to facilitate collection. See Knudsen Dairy Products Co. v. State Bd. of Equalization, 12 Cal.App.3d 47, 52–53, 90 Cal.Rptr. 533, 537 (1970). [2] To have successor liability under subsection (d)(2) of the city code, one must be a “purchaser of a business or stock of goods.” Thus, we must decide whether the Debtors are “purchasers” within the meaning of the statute. If the Debtors are found to be “purchasers,” then they will be liable for the sales tax as successors to the Summerlets. A “purchase” need not be a cash transaction. See, e.g., Bates, 691 S.W.2d at 277–78 (promissory note); Woods, 585 S.W.2d at 580–82 (cancellation of debt); A. Copeland Enterprises, Inc. v. Commissioner of Revenue, 703 S.W.2d 624, 625 (Tenn.1986) (same). As the California Court of Appeal stated in Knudsen Dairy:

However, as we interpret it, the term “withhold” as used in the statute does not necessarily mean having physical assets in hand but simply means dealing with the purchase consideration in such a manner as to deny to the seller the benefit of the purchase consideration and to thereby make a portion of it available for the satisfaction of the tax liability.

12 Cal.App.3d at 55, 90 Cal.Rptr. at 539 (promissory note). The key to determining whether a “purchase” has occurred for the purposes of determining successor liability, therefore, is determined by an analysis of the underlying transaction. A person acquiring property cannot withhold “purchase money” unless the transaction generates purchase consideration such that the “purchaser” is in a position to account for his predecessor’s tax liability. See, e.g., Knudsen Dairy, 12 Cal.App.3d at 54, 90 Cal.Rptr. at 539 (“successor liability cannot be imposed when the duty to withhold ... cannot possibly be performed by the successor”). In the instant case, the Debtors exercised their statutory rights under their landlord’s lien and repossessed the business premises after the Summerlets defaulted on the lease. A repossession of a leasehold is not a “purchase”; the Debtors merely exercised their rights to possession of the business premises upon default. No consideration **485 *315 of any kind was generated by this transaction,

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and thus the Debtors could not have withheld the tax due. Therefore, no successor liability attached. The Debtors were similarly entitled to take possession of the fixtures, equipment and inventory pursuant to their rights under the security agreement. Again, no successor liability attached because no purchase consideration was generated. The fact that the repossessed property was subsequently sold to satisfy the lien is immaterial to this analysis. Successor liability is measured by the mechanism used to acquire the property, not by the fact that it is subsequently sold. Clearly, a cash transaction results in successor liability because the purchaser can withhold from the purchase price the amount of tax due. Similarly, in the case of a promissory note or debt cancellation, the amount of the note or debt can be adjusted to take into account the amount of tax liability. But where, as here, there is a repossession of a business or enforcement of creditor’s rights under a security agreement, and nothing more, there is no source from which to withhold purchase money. See State v. Standard Oil Co., 39 Ohio St.2d 41, 45–46, 313 N.E.2d 838, 841 (1974) (foreclosure of defaulting debtor’s property by a creditor holding a perfected security interest in such property was not a “sale” within the meaning of successor liability statute); but see Woods, 585 S.W.2d at 580–82 (bank held to be successor when it chose to purchase the store instead of foreclosing on its security interest). An Arizona case involving a claim of successor tax liability is Levy v. Arizona Dep’t of Economic Sec., 132 Ariz. 1, 643 P.2d 704 (1982). Levy challenged a decision by the Arizona Department of Economic Security that, because he had acquired substantially all of the assets of Coronado Inns, Inc., he was therefore liable for past due unemployment taxes pursuant to A.R.S. § 23–733(D). Id. at 1, 643 P.2d at 704. Although this court in that case held that Levy was liable for the unemployment insurance taxes, Levy is distinguishable from the instant case on two grounds. First, Levy involved unemployment insurance taxes and was decided under A.R.S. § 23–733(D), a statute much broader than the city code provision at issue in this case. Section 23–733(D) extends successor liability to “any individual or organization ... which in any manner acquires” the business of another. The court found that this broad language implied that any successor in interest of a continuing business was liable for unpaid unemployment taxes. Levy, 132 Ariz. at 3, 643 P.2d at 706. Second, Levy purchased the property at a public trustee’s sale. As noted previously, a purchase, whether a cash transaction or otherwise, provides a means by which the tax obligation may be accounted for. A repossession, on the other hand, does not.

In support of its claim, the City cites cases from other jurisdictions holding that a person who acquires assets through a security interest is a “purchaser” regardless of whether a cash transaction occurs or purchase money is paid. Each of these cases is distinguishable, however, because each involved transactions in which “purchase money” could have been withheld. In Tri–Financial Corp. v. Department of Revenue, 6 Wash.App. 637, 495 P.2d 690 (1972), Tri–Financial organized a wholly-owned subsidiary for the purpose of foreclosing on the lease of an insolvent and delinquent lessee. The Tax Commission of the State of Washington issued a tax warrant against Tri–Financial for the lessee’s unpaid taxes, id. at 638–39, 495 P.2d at 691, and the Washington Supreme Court held that Tri–Financial was liable as a successor under R.C.W. 82.32.140. Tri–Financial Corp. is distinguishable from the present case because it involved more than a simple foreclosure. Tri–Financial not only cancelled a lease, it also purchased the business’ unused supplies, took assignment of leases on various items of equipment, and took over the lease of the premises. Id. at 638–39, 495 P.2d at 691. The transaction provided a means by which Tri–Financial could have adjusted its consideration to account for the unpaid taxes. For example, it could have adjusted the purchase price for the unused supplies to account for the taxes. **486 *316 Moreover, the language of Washington’s successor liability statute, R.C.W. 82.32.140, is much broader than Arizona’s. Under the Washington statute, a successor is liable for unpaid taxes “[w]henever any taxpayer quits business, or sells out, exchanges, or otherwise disposes of his business or his stock of goods....” Id. The statute also includes a broad definition of “successor,” which encompasses direct and indirect acquisitions of any portion of a business: “any person who, through direct or mesne conveyance, purchases or succeeds to the business, or portion thereof, or the whole or any part of the stock of goods, wares, merchandise, or fixtures or any interest therein of a taxpayer quitting, selling out, exchanging, or otherwise disposing of his business.” R.C.W. 82.04.180. The City also relies on A. Copeland Enterprises, Inc. v. Commissioner of Revenue, 703 S.W.2d 624 (Tenn.1986). In Copeland, Copeland Enterprises subleased six fried chicken franchises to Coyote, Inc. Coyote purchased the equipment at each franchise, subject to a chattel mortgage held by Copeland. Coyote became delinquent on payments on the leases, equipment and the franchises, and eventually defaulted. In return for a transfer of the

In re McKeever, 169 Ariz. 312 (1991) 819 P.2d 482

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equipment and cancellation of the subleases, Copeland agreed to cancel Coyote’s debt. During its operation of the franchises, Coyote incurred approximately $20,000 in tax liability for unpaid sales taxes. Copeland was assessed this amount as successor to Coyote following transfer of the franchises. In challenging the assessment, Copeland argued that because no “purchase money” had been paid, it could not be held liable for Coyote’s tax liability as a successor. Id. at 625. The Supreme Court of Tennessee, citing Woods, held otherwise. According to the court, Copeland was liable as a successor because it “stepped into the shoes of Coyote and took over the operation of the restaurants.” Id. The court reasserted its earlier position in Woods that the Tennessee successor statute imposes broad liability, id., and that the words “purchase money” are descriptive only and should not be construed as limiting liability. See Woods, 585 S.W.2d at 581. Copeland is distinguishable from the present case on the ground that, although no “purchase money” changed hands, Copeland made a conscious decision to retake possession of the franchises and continue to operate them. Copeland was aware of the tax debt due and owing, and “[i]t would have been one more factor to weigh in the decision whether to foreclose on their security interest or continue the business.” Woods, 585 S.W.2d at 582. As the Woods court notes, “[w]hen [a creditor] decide[s] to purchase the [property] instead of foreclosing on the loan, it [takes] the risk that it [will] be liable for unpaid sales taxes.” Id. Thus, as the Woods court suggests, had Copeland chosen to foreclose, as the Debtors did in the present case, no tax liability would have attached. The City also relies on In re Wine Boutique, Inc., 117 B.R. 506 (W.D.Mo.1990). In that case, a Chapter 11 debtor sold all of its major assets, including a liquor business. Twin City State Bank, a creditor with a security interest in all of the sales proceeds, sought to have the sale proceeds paid to it. The bankruptcy court, however, held

that under Missouri’s successor tax liability statute, unpaid taxes must be paid from the sales proceeds. Id. at 509. Again, though, this case involved a sale and sale proceeds, which could have been adjusted to reflect the tax liability. In the instant case, the Debtors repossessed the business premises, fixtures, equipment and inventory. Because the Debtors are not “purchasers” within subsection (d) of Prescott City Code § 4–1–595, they are not liable to the City for the unpaid sales taxes of their predecessors. In short, Debtors are not “purchasers” within subsection (d) of Prescott City Code § 4–1–595 and are, therefore, not liable to the city for the unpaid sales taxes of their predecessor.

CONCLUSION

The answer to the first certified question is “no.” The Debtors, under the facts presented, are not liable under Prescott **487 *317 City Code § 4–1–595 for the city sales tax obligations of their predecessors in interest. Because of this conclusion with respect to the first certified question, we do not address the District Court’s second certified question.

GORDON, C.J., FELDMAN, V.C.J., and CAMERON and CORCORAN, JJ., concur.

Parallel Citations

819 P.2d 482

End of Document

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In re Petition of Price Waterhouse Ltd. v. Decca Design Build, Inc. 202 Ariz. 397 (2002)

Facts: Fairway Condominium Development, Inc. (“Fairway”) obtained a $7.5 million loan from 49457 B.C. Ltd (“B.C.”) to develop real property, which loan became a first lien on real property (the “First Lien”). Decca Design Build, Inc. (“Decca”) held a $350,000 mechanic’s lien in second position on the real property (the “Second Lien”). First Mortgage Bank (“First Mortgage”) lent a $3 Million loan in third position (the “Third Lien”), to which loan the First Lien agreed to subordinate. Eventually, there was a foreclosure sale and the real property sold for $5 Million. B.C. filed bankruptcy in British Columbia, Canada, with an ancillary proceeding commenced in the Southern District of California by Price Waterhouse as B.C.’s trustee. Procedural History: Question certified from the United States Bankruptcy Court for Southern District of California to the Supreme Court of Arizona. Issue 1: Does the Arizona Supreme Court have jurisdiction over certified questions from a bankruptcy court? Holding 1: Ariz. Rev. Stat. § 12-1861 gives the Arizona Supreme Court jurisdiction to accept certified questions from bankruptcy courts. Rationale 1: The Arizona Supreme Court analyzed Ariz. Rev. Stat. § 12-1861, which is based on the Uniform Certification of Questions of Law Act (the “Act”). The Court noted that although the Ariz. Rev. Stat. § 12-1861 did not specifically include bankruptcy courts, the Act had been amended in 1995 to include bankruptcy courts such that it makes clear that the intent of the Arizona statute, modeled after the Act, is to accept certified questions from bankruptcy courts. This, coupled with the fact that Ariz. Rev. Stat. § 12-1861 allows certification of questions from federal courts, provides the Arizona Supreme Court sufficient discretion to accept certified questions from bankruptcy courts. Thus the Arizona Supreme Court has jurisdiction to accept certified questions from bankruptcy courts. Issue 2: “Where real property is subject to a first priority deed of trust, a second priority mechanic’s lien, and a third priority deed of trust, where the holder of the first priority deed of trust and the holder of the third priority deed of trust enter into a written subordination agreement pursuant to which the holder of the first priority deed of trust agrees that the third priority deed of trust shall constitute a lien or charge upon said land which is unconditionally prior to and superior to the lien or charge of the first priority deed of trust, and where the holder of the second priority mechanic’s lien is not a party to the subordination agreement, what effect, if any, does the subordination agreement have on the relative priorities of the liens of the three parties based on the facts set forth below?” Holding 2: Arizona follows the partial subordination analysis which means that the alteration of priority between the First Lien and Third Lien has no effect on the Second Lien, and the Second Lien will be placed in no better or worse position by the subordination agreements of third parties.

Rationale 2: The Court found that the shift in lien priority should relate only to the amount of the Third Lien. In this case, since the Third Lien was less than the First Lien, the liens would be adjusted such that the Third Lien replaced the First Lien up to its full amount, with the remainder of the original amount of the First Lien retaining its senior priority position over the Second Lien. The Court found that, since Decca was not a party to the subordination agreement, it should be affected by it. This means that the Decca should not be put it a worse position, nor should it receive a windfall, as a result of the subordination agreement. Applied to the facts, this meant that the liens after application of the subordination agreement were: First Mortgage (in first position) with $3 Million; B.C. (in second position) with $4.5 Million of original First Lien; Decca (in third position) with $350,000; B.C. (in fourth position) with the remaining $3 Million of its First Lien. The Supreme Court specifically rejected complete subordination, which theory was advanced by Decca, as complete subordination would have had the effect of subordinating B.C.’s entire First Lien to the Second Lien, thereby providing Decca with a windfall and full payout of its Second Lien.

In re Price Waterhouse Ltd., 202 Ariz. 397 (2002) 46 P.3d 408, 378 Ariz. Adv. Rep. 59

© 2014 Thomson Reuters. No claim to original U.S. Government Works. 1

202 Ariz. 397 Supreme Court of Arizona,

En Banc.

In re Petition of PRICE WATERHOUSE LIMITED as Judicial Trustee and Receiver of, inter alia, Eron Mortgage Corporation, Eron Financial

Services, Ltd., and as Judicial Trustee of 494597 BC Ltd.; 519722 BC Ltd.; 530884 BC Ltd.; 534172 BC Ltd.; 494043 BC Ltd.; Maxim Resources, Ltd.; 533373 BC Ltd.; 545054 BC Ltd.; 533175 BC Ltd.; 729720 Alberta Ltd.; and 532285 BC Ltd., each a

company incorporated under the laws of the Province of Canada, in a foreign proceeding by appointment of the Supreme Court of British

Columbia, Debtor. PricewaterhouseCoopers, Inc. as Foreign

Representative herein, and Judicial Trustee of, inter alia, Eron Mortgage Corporation and 494597 B.C. Ltd. by Appointment of the Supreme Court of

British Columbia, Plaintiff, v.

Decca Design Build, Inc., an Arizona corporation, Defendant.

No. CV–01–0074–CQ. | May 23, 2002.

In a bankruptcy action involving the holder of a mortgage lien, the United States Bankruptcy Court for the Southern District of California, Peter Bowie, J., certified a question to the Arizona Supreme Court. The Supreme Court, Jones, C.J., held that Arizona applies a partial subordination analysis to a subordination agreement between property owner and the holders of first priority and third priority liens. Certified question answered.

West Headnotes (2) [1]

Federal Courts

Proceedings following certification

The Arizona Supreme Court had discretionary authority to answer a United States Bankruptcy Court’s certified question. A.R.S. § 12–1861.

3 Cases that cite this headnote

[2]

Mortgages

Priority as affected by provisions of mortgage or by agreement

Arizona applies a partial subordination analysis to a subordination agreement between property owner and the holders of first priority and third priority liens, under which the shift in priority relates only to the amount of the original third priority lien and the holder of the second priority lien is neither advantaged nor disadvantaged by the agreement; if the third priority lien is larger than the original first priority lien, then the original first priority lien moves completely to the third position but the original third priority lien moves into first position only to the amount of the original first priority lien, while if the third priority lien is smaller than the original first priority lien, then the difference between the two amounts, up to the total of the original first priority lien, is still in a priority position relative to the second priority lienholder.

2 Cases that cite this headnote

Attorneys and Law Firms

**409 *398 Perkins Coie, LLP by Steven G.F. Polard, Santa Monica, and Squire, Sanders & Dempsey, LLP by Donald A. Wall, Debora L. Verdier, Phoenix, Attorneys for PriceWaterhouseCoopers, Inc. as Judicial Trustee and Foreign Representative of Eron Mortgage Corporation, Eron Arrowhead Ltd., and 494597 BC Ltd., et al.

Alhadeff & Solar, LLP by Robert K. Edmunds, S. Douglas Kerner, San Diego, and Sacks Tierney by Sharon Shively, Isabel M. Humphrey, James W. Armstrong, Scottsdale, Attorneys for Decca Design Build, Inc.

In re Price Waterhouse Ltd., 202 Ariz. 397 (2002) 46 P.3d 408, 378 Ariz. Adv. Rep. 59

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OPINION

JONES, Chief Justice.

[1] ¶ 1 This case involves a certified question from a bankruptcy court in California. We address first the jurisdictional issue. The Arizona Constitution confers jurisdiction on the state supreme court as “provided by law.” Article VI, § 5(6). By statute, this court has jurisdiction over questions certified to it by other courts, including the Supreme Court of the United States, a court of appeals of the United States, a United States district court, or a tribal court. Arizona Revised Statutes § 12–1861 (1994) (A.R.S.). Section 12–1861 is based on the 1967 version of the Uniform Certification of Questions of Law Act. That act was modified in 1995 specifically to include bankruptcy courts.1 While Arizona has not directly amended its version of that law to include any federal court, the intent of the statute as it currently exists, coupled with our own supreme court rule allowing certification of questions from federal and tribal courts, sufficiently provides this court with the discretionary authority to answer the bankruptcy court’s certified question. Ariz. S.Ct. R. 27(a)(1); see also 28 U.S.C.A. § 151 (1993) (bankruptcy judges constitute “a unit of the district court.”). ¶ 2 The Honorable Peter Bowie of the United States Bankruptcy Court for the Southern District of California has certified the following question to this court upon stipulation of the parties:

Where real property is subject to a first priority deed of trust, a second priority mechanic’s lien, and a third priority deed of trust, where the holder of the first priority deed of trust and the holder of the third priority deed of trust enter into a written subordination agreement pursuant to which the holder of the first priority deed of trust agrees that the third priority deed of trust shall constitute a lien or charge upon said land which is unconditionally prior to and superior to the lien or charge of the first priority deed of trust, and where the holder of the second priority mechanic’s lien is not a party to the **410 *399 subordination agreement, what effect, if any, does the subordination agreement have on

the relative priorities of the liens of the three parties based on the facts set forth below?

The bankruptcy court then attached a statement of facts. We will summarize those facts as follows. ¶ 3 Fairway Condominium Development, Inc. (Fairway), a real estate development company, obtained a loan from a Canadian company known as 494597 B.C. Ltd. (the Canadian company) for $7.5 million to develop real property. This $7.5 million loan became the first lien on the subject property. The Canadian company later went into bankruptcy in British Columbia, Canada. An ancillary bankruptcy proceeding is underway in California commenced by Pricewaterhouse as the Canadian company’s trustee. ¶ 4 Decca Design Build, Inc. (Decca) had a second position mechanic’s lien on the same property. This mechanic’s lien was for $350,000. An additional $3 million in funding was sought by Fairway for the development of the property. First Mortgage Bank (First Mortgage) supplied that additional funding, taking back the third priority deed of trust, and the property was then subject to three liens. The Canadian company and Fairway entered into a subordination agreement with First Mortgage at the time Fairway sought the additional $3 million funding. That subordination agreement specified that the $7.5 million loan would be subordinated to the $3 million lien of First Mortgage. First Mortgage’s $3 million lien would then become the first priority lien on the property. The foreclosure sale of the property yielded $5 million.

The Agreement ¶ 5 The subordination agreement was between the Canadian company that funded the first $7.5 million loan and Fairway, the borrower, and First Mortgage. First Mortgage agreed to fund the second $3 million loan to the development company in exchange for the priority of its lien before the Canadian company’s lien. The agreement did not involve or consider Decca’s intervening second priority mechanic’s lien. ¶ 6 The language of the agreement reads:

This subordination agreement results in your security interest in the property becoming subject to and of lower priority than the lien of some other or later security

In re Price Waterhouse Ltd., 202 Ariz. 397 (2002) 46 P.3d 408, 378 Ariz. Adv. Rep. 59

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instrument ... it is a condition precedent to obtaining said [$3 million] loan that said deed of trust last above mentioned shall unconditionally be and remain at all times a lien or charge upon the land ... prior and superior to the lien or charge of the deed of trust first above mentioned....

Appendix re Order re Stipulation re Request to Certify State Law Question to the Arizona Supreme Court, Exhibit C, p. 1 (Appendix, Ex. C). The Canadian company “intentionally and unconditionally waives, relinquishes and subordinates the lien ... first above mentioned in favor of the lien ... in favor of [First Mortgage].” Appendix, Ex. C, p. 3. “[T]his Agreement shall be the whole and only agreement with regard to the subordination of the lien ... and shall supersede and cancel, but only insofar as would affect the priority between the deeds of trust hereinbefore specifically described, any prior agreements as to such subordination....” Appendix, Ex. C., p. 2.

Analysis ¶ 7 The issue, requiring that we determine the effect of a subordination agreement between first and third lienholders, presents a case of first impression in Arizona. We are aware that courts from other jurisdictions have approached the same issue in two different ways. One approach follows the partial subordination analysis of the Supreme Court of Texas in ITT Diversified Credit Corp. v. First City Capital Corp., 737 S.W.2d 803 (Tex.1987). The other follows the complete subordination analysis of the Supreme Court of Alabama in AmSouth Bank v. J & D Financial Corp., 679 So.2d 695 (Ala.1996). For the reasons stated below, we adopt the partial subordination analysis. [2] ¶ 8 Partial subordination means that this alteration of the priority of liens between the first and third lienholders has no effect **411 *400 on the second priority lienholder. The shift in priority relates only to the amount of the original third priority lien. If the third priority lien is larger than the original first priority lien, then the original first priority lien moves completely to the third position. The original third priority lien moves into first position but only to the amount of the original first priority lien. If the third priority lien is smaller than the original first priority lien, then the difference between the two amounts, up to the total of the original first priority lien, is still in a priority position relative to the second priority lienholder. The holder of the second priority lien

is neither advantaged nor disadvantaged by the agreement. The second priority lienholder is not a party to the agreement and should not be affected by it. His status remains the same to the extent of any remaining assets available once the amount of the first priority lien has been satisfied. The consequence of a subordination agreement is that the amount of the first lien simply goes toward satisfying in whole or in part two liens as opposed to one. ¶ 9 Without any subordination agreement, the following would be the distribution of assets:

Canadian company—$7.5 million

Decca—$350,000

First Mortgage—$3 million

With the subordination agreement, the following is the distribution of assets:

First Mortgage—$3 million

Canadian company—$4.5 million

Decca—$350,000

Canadian company—$3 million

The sum total of liens ahead of Decca remains at $7.5 million both before and after the subordination agreement. ¶ 10 The foreclosure sale of the subject property yielded only $5 million. The first $3 million of that amount goes to First Mortgage under the subordination agreement. The remaining $2 million goes towards satisfying the $4.5 million lien still owing to the Canadian company. No additional funds are available to satisfy Decca’s lien. ¶ 11 This is a fair result under the circumstances as $7.5 million in liens were in priority ahead of Decca’s second priority lien prior to the subordination agreement, and the same $7.5 million in liens is still ahead of Decca after subordination, but it will be distributed in respective amounts to First Mortgage and to the Canadian company. Decca’s position has not been altered or modified in any way by the agreement to which it was not a party. Decca has not received a windfall nor has it suffered negative consequences. The agreement between the Canadian company and First Mortgage has no effect whatever upon Decca’s lien. ¶ 12 Other courts follow this line of reasoning. Grise v. White, 355 Mass. 698, 247 N.E.2d 385 (1969); ITT, id. at 804; In the Matter of Cliff’s Ridge Skiing Corp., 123 B.R.

In re Price Waterhouse Ltd., 202 Ariz. 397 (2002) 46 P.3d 408, 378 Ariz. Adv. Rep. 59

© 2014 Thomson Reuters. No claim to original U.S. Government Works. 4

753 (Bankr.W.D.Mich.1991); Duraflex Sales & Service Corp. v. W.H.E. Mechanical Contractors, 110 F.3d 927 (2d Cir.1997); Mid–Ohio Chemical Co., Inc. v. Petry, 140 F.Supp.2d 828 (S.D.Ohio 2000); Bratcher v. Buckner, 90 Cal.App.4th 1177, 109 Cal.Rptr.2d 534, 541 (2001); see also Gilmore, Security Interests in Personal Property § 39.1 at 1021 (1965). ¶ 13 Decca advances the theory that complete, not partial, subordination occurred here. Under such a reading of the agreement, the original first priority lienholder would have waived all priority to the third party lienholder unless some reservation of first priority status occurred in the language of the agreement. Decca argues that no such reservation language exists in this agreement. It would have the result appear as follows after the subordination agreement:

First Mortgage—$3 million

Decca—$350,000

Canadian company—$7.5 million

Decca reasons that where other liens on the same property exist, parties to subordination agreements are presumed to know about and consider them. ¶ 14 Some courts have followed this logic. Shaddix, et al. v. National Surety Co., 221 Ala. 268, 128 So. 220 (1930); J.C. McConnell, et al. v. Mortgage Inv. Co., 292 S.W.2d 636 (Tex.Civ.App.1955); Ladner v. Hogue Lumber **412 *401 & Supply Co., Inc., 229 Miss. 505, 91 So.2d 545

(1956); Old Stone Mortgage and Realty Trust v. New Georgia Plumbing, Inc., 239 Ga. 345, 236 S.E.2d 592 (1977); AmSouth, id. at 695; in rE exeC tecH partners V. resolutioN trusT corp., 107 F.3d 677 (8tH cir.1997). ¶ 15 We reject the latter reasoning because it affects the rights of others not in privity. Decca was not intended to be a beneficiary of this agreement and is not entitled to a windfall. Because Decca’s position is unaffected, a result that appears fully equitable, we embrace the partial subordination analysis.

Conclusion ¶ 16 We find that a partial subordination occurred from the subordination agreement in this matter. Decca’s status as second priority lienholder remains undisturbed by the subordination agreement between the other parties.

¶ 17 CONCURRING: RUTH V. McGREGOR, Vice Chief Justice, STANLEY G. FELDMAN, Justice, and THOMAS A. ZLAKET, Justice.

Parallel Citations

46 P.3d 408, 378 Ariz. Adv. Rep. 59

Footnotes 1

Unif. Certif. Questions of Law Act § 3, 12 U.L.A. 73 (1996). “The [Supreme Court] of this State may answer a question of law certified to it by a court of the United States....” The comment notes that “[t]his section has been revised to replace the previous list of federal courts with the term ‘a court of the United States.’ This is intended to permit a court in a State adopting the section to answer questions certified by any United States court including bankruptcy courts.”

End of Document

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QB\Personal.EFELLA\32307915.1

Krohn v. Sweetheart Properties, Ltd (In re Krohn) 203 Ariz. 205, 52 P.3d 774 (2002)

Facts: Linda Krohn ("Krohn"), a disabled woman, resided with her two daughters in a home subject to a lender's deed of trust. Krohn defaulted on payments to the lender. In February, 2000, she filed a Chapter 13 case that was dismissed in August, 2000 because she failed to comply with Chapter 13 requirements. In the interim, the lender had moved for stay relief (opposed by Krohn) based on the payment default. Krohn's home, which she posited had a fair market value of $57,500.00,1 was sold at a trustee's sale on September 27, 2000 to Sweetheart Properties, Ltd. ("Sweetheart") for $10,304.00, the only bid made at the sale. Krohn filed another bankruptcy petition on September 29, 2000, seeking to invalidate the trustee's sale. Procedural History: In the Debtor's second bankruptcy case, Judge Baum found that Krohn's posited fair market value was undisputed, and that the sale price was not only inadequate, but was "grossly" inadequate because it was less than 20% of fair market value. He certified the following question to the Arizona Supreme Court:

May a trustee's sale of real property be set aside solely on the basis that the bid price was grossly inadequate?

Threshold Jurisdictional Issue: Does the Arizona Supreme Court have jurisdiction over certified questions from a bankruptcy court? Holding and Rationale for Threshold Issue: Yes; based on the then-recent decision in In re PriceWaterhouse Ltd. v. Decca Design Build, Inc., 202 Ariz. 397, 46 P.3d 308 (2002) (summarized elsewhere in these materials), the Court held that Ariz. Rev. Stat. § 12-1861 gives the Arizona Supreme Court jurisdiction to accept certified questions from bankruptcy courts. Issue 1: “May a trustee's sale of real property [under a deed of trust] be set aside solely on the basis that the bid price was grossly inadequate?” Holding 1: Yes. A trustee's sale may be set aside based on a "grossly" inadequate sale price alone when the sale price is less than 20% of the fair market value of the property. Rationale 1: It has long been held in Arizona that judicial foreclosures may be invalidated when "the inadequacy of price is so great as to shock the conscience." Whether this was true as to trustee's sale under deeds of trust was a question of first impression, and Arizona statutes were silent on the issue. The Court found that it had always retained an equitable power, even after 1 Although not mentioned in the factual statement, the Court's opinion later seems to indicate that Krohn had significant equity in the home and relatively little remaining to be paid under the deed of trust, so that had the bid price been adequate, Krohn would have received funds from the trustee's sale.

QB\Personal.EFELLA\32307915.1

enactment of the judicial foreclosure statutes that were silent on the issue, to invalidate judicial foreclosure sales based on inadequacy of price. Therefore, the same should pertain to sales under deeds of trusts, and the Restatement (Third) of Property indicated as much. An amicus brief filed in support of Sweetheart detailed fears that allowing courts to invalidate trustee's sales based on inadequacy of price would introduce uncertainty that would damage the lending industry and chill bidding at trustee's sales by creating uncertainty regarding the standard for fair market value vs. gross inadequacy, and by undermining bona fide purchaser status. The Court reasoned that higher bid prices at trustee's sales benefit both lenders and homeowners: The only people who do not benefit from high bid prices are speculators, and there is no injustice in preventing them from receiving unjustly-enriching windfalls. The Court reasoned that fears of bid chilling and undermining bona fide purchaser status had not come to pass in the context of judicial foreclosure sales, despite judicial foreclosure sales being subject to invalidation for inadequacy of price. Moreover, the Court pointed out that trustee's sales have always been subject to invalidation when prices were grossly inadequate and there was absence of strict statutory compliance. There was no reason to think that trustee's sale bidders, who always run the risk of failed statutory compliance, would be more adverse to risk based on gross inadequacy of price. Additionally, the rule of caveat emptor applies to bona fide purchasers at judicial foreclosure sales, and there was no reason not to apply it to trustee's sales. Bidders are able to evaluate adequacy of bid prices. And there is no reason to dispense with the "gross inadequacy" rule merely because fair market value is difficult to fix. It should not be difficult to find gross inadequacy because generally it will be so extreme. Finally, the Court pointed out that although the historic rule was that trustee's sales have always been subject to invalidation when prices were grossly inadequate and there was absence of strict statutory compliance or some other fundamental unfairness, the second component was unnecessary. The Court reasoned this was so because gross inadequate is fundamental unfairness, so no further unfairness need be shown. Dissent: Justice McGregor dissented, arguing that the Court was supplementing, not interpreting, the deed of trust statutes. Such making of public policy should be left to the legislature. The Court's decision was, in her view, flawed, because, among other things, it created a new cause of action out of whole cloth, with attendant uncertainty and expense.

In re Krohn, 203 Ariz. 205 (2002) 52 P.3d 774, 381 Ariz. Adv. Rep. 47

© 2014 Thomson Reuters. No claim to original U.S. Government Works. 1

203 Ariz. 205 Supreme Court of Arizona,

En Banc.

In re Linda Lorraine KROHN, Debtor. Linda Lorraine Krohn, Plaintiff,

v. Sweetheart Properties, LTD. an Arizona

Corporation; Citimortgage, Inc., Defendants.

No. CV–01–0246–CQ. | Aug. 27, 2002. | Reconsideration Denied Sept. 24, 2002.

Debtor filed bankruptcy petition, seeking to have sale of her home vacated for gross inadequacy of price. The United States Bankruptcy Court, District of Arizona, No. 00–10623– PHX–RTB, Redfield T. Baum, J., certified question. The Supreme Court, Feldman, J., held that sale of real property under power of sale in a deed of trust may be set aside solely on the basis that the bid price was grossly inadequate. Question answered. McGregor, V.C.J., filed a dissenting opinion.

Attorneys and Law Firms

**775 *206 Allen D. Butler, Tempe, Attorney for Linda Lorraine Krohn.

David L. Knapper, Phoenix, Attorney for Sweetheart Properties, Ltd.

Miles & Associates, L.L.P., By Jeremy T. Bergstrom, Las Vegas, Attorneys for Citimortgage, Inc.

Jaburg & Wilk, P.C., By Kathi M. Sandweiss, Lawrence E. Wilk, Roger L. Cohen, Phoenix, Attorneys for Amicus Curiae Arizona Trustee Association, Inc.

OPINION

FELDMAN, Justice.

¶ 1 Linda Lorraine Krohn (Krohn) filed a chapter 13 bankruptcy petition that was dismissed. Shortly after that

dismissal, her home was sold to Sweetheart Properties, Ltd. (Sweetheart) at a trustee’s sale conducted under authorization of a deed of trust. She filed a second bankruptcy petition seeking to have the sale of her home vacated for gross inadequacy of price. Bankruptcy Judge Redfield T. Baum certified a question of Arizona law to this court: “May a trustee’s sale of real property [under a deed of trust] be set aside solely on the basis that the bid price was grossly inadequate?”

JURISDICTION [1] ¶ 2 Sweetheart argues that we lack jurisdiction. Our jurisdiction to accept a certified question from a United States bankruptcy judge was settled by our recent decision in In re PriceWaterhouse Ltd. v. Decca Design Build, Inc., in which we held that A.R.S. § 12–1861 gives us jurisdiction to accept certified questions from federal bankruptcy courts. 202 Ariz. 397, 398 ¶ 1, 46 P.3d 408, 409 ¶ 1 (2002). “[T]he intent of the statute as it currently exists, coupled with our own supreme court rule allowing certification of questions from federal and tribal courts, sufficiently provides this court with the discretionary authority to answer the bankruptcy court’s certified question. Ariz. S.Ct. R. 27(a)(1); see also 28 U.S.C.A. § 151 (1993) (bankruptcy judges constitute ‘a unit of the district court.’).” Id. (emphasis in original). ¶ 3 Thus, we accepted jurisdiction. We answer the certified question in the affirmative.

FACTS

¶ 4 The facts of this case were well described by Judge Baum. The following facts are relevant to our disposition and are quoted from his minute entry of March 31, 2001:

The facts before the court are undisputed. Debtor filed this case on September 29, 2000. The debtor was in default on the payments on her home and her lender scheduled a trustee’s sale. Prior to the scheduled sale, the debtor filed her first Chapter 13 case on February 27, 2000. That case was dismissed on August 28, 2000 because she had not complied with certain requirements in her Chapter 13 case. Prior to the dismissal, the lender moved for stay relief. In its motion, the lender stated that a trustee’s sale “was **776 *207 originally scheduled for Jule 15, 2000 and

In re Krohn, 203 Ariz. 205 (2002) 52 P.3d 774, 381 Ariz. Adv. Rep. 47

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that the Trustee’s Sale was postponed and will be postponed from time to time, pending authorization from this Court that such Sale may take place.” Debtor filed a response and contested the motion for stay relief.

On or about September 24, 2000, the debtor receive a letter from her lender, which stated in part:

“The mortgage for the property in which you are living is about to be foreclosing (sometimes referred to as repossessed). We expect that ownership of the property will be transferred to ______ probably within the next 60 to 90 days.”

In fact, the trustee’s sale was held on September 27, 2000. The amount paid at that sale was $10,304.00 by Sweetheart Properties, LTD, an Arizona corporation (“Sweetheart”). Sweetheart was a purchaser who bought in good faith and without any notice about the dealings between the debtor and her lender, including the letter described above.

The debtor states that her residence is worth at least $57,500.00 and no other evidence of value has been presented to the court by the parties. The foregoing facts are compounded by the fact that debtor is disabled and resides in the residence with her two daughters.

¶ 5 In the present case the winning (and only) bid was slightly more than $10,000 for a property worth $57,000. Judge Baum found “the price paid is not merely inadequate but under applicable case law ‘grossly’ inadequate because the price was less than 20% of fair market value....” Our analysis of the question certified is informed by Judge Baum’s finding that the price paid was grossly inadequate.

DISCUSSION

A. Judicial foreclosure [2] [3] ¶ 6 Sales in actions to foreclose mortgages are subject to judicial review for substantive fairness as well as for procedural compliance. Thus, it is well established that such sales can be overturned based on price alone. “Where a grossly inadequate price is bid, such as shocks one’s conscience, an equity court may set aside the sale, thus insuring within limited bounds a modicum of

protection to a party who has absolutely no control over the amount bid and this, in effect, insures that the foreclosed property is not ‘given away.’ ” Nussbaumer v. Superior Court, 107 Ariz. 504, 507, 489 P.2d 843, 846 (1971). [4] ¶ 7 But this does not apply to bids that are merely inadequate when compared to the fair market value of the property. As our court of appeals has explained, the rule has a long history in this state:

Since the case of McCoy v. Brooks, 9 Ariz. 157, 80 P. 365 (1905) the general rule in Arizona dealing with vacation of execution sales because of inadequate bids is that mere inadequacy of price, where the parties stand on an equal footing and there are no confidential relations between them, is not, in and of itself, sufficient to authorize vacation of the sale unless the inadequacy is so gross as to be proof of fraud or shocks the conscience of the court.

Wiesel v. Ashcraft, 26 Ariz.App. 490, 494, 549 P.2d 585, 589 (1976) (citations omitted). The general rule is simply that judicial foreclosure sales are set aside when “the inadequacy [of price is] so great as to shock the conscience....” Graffam v. Burgess, 117 U.S. 180, 192, 6 S.Ct. 686, 692, 29 L.Ed. 839 (1886). While the rationale of setting aside judicial foreclosure sales for gross inadequacy is well understood, it is not the only basis for upsetting such sales. Judicial foreclosure sales have been set aside even in the absence of gross inadequacy when there has been some irregularity. “[W]here there is an inadequacy of price which in itself might not be grounds for setting aside the sale, slight additional circumstances or matters of equity may so justify.” Mason v. Wilson, 116 Ariz. 255, 257, 568 P.2d 1153, 1155 (App.1977) (citing Johnson v. Jefferson Standard Life Ins., 5 Ariz.App. 587, 429 P.2d 474 (1967)). Thus, even in a judicial sale inadequate price cannot, alone, guarantee vacation of the sale. A sale may be set aside, however, for inadequate price combined with other irregularity or for grossly inadequate price. The question **777 *208 is whether the same rules are applicable to trustee’s sales.

B. Deed of trust and borrower’s protection from inequity [5] ¶ 8 Unlike their judicial foreclosure cousins that

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involve the court, deed of trust sales are conducted on a contract theory under the power of sale authority of the trustee. They are therefore held without the prior judicial authorization ordered in a mortgage foreclosure. “[A] power of sale is conferred upon the trustee of a trust deed under which the trust property may be sold ... after a breach or default in performance of the contract or contracts, for which the trust property is conveyed as security....” A.R.S. § 33–807(A). ¶ 9 The deed of trust scheme is a creature of statutes1 that do not contain explicit provisions for courts to set aside non-judicial sales based on the price realized at the sale, and no policy for such action has yet evolved with these sales as there has in judicial foreclosure sales. ¶ 10 The deed of trust provisions were added to Arizona law in 1971 following complaints by representatives of the mortgage industry that the “mortgage and foreclosure process in Arizona [was] unnecessarily time-consuming and expensive.”2 It was said at the time that an uncontested $25,000 mortgage foreclosure could take eight months and a contested foreclosure twelve to fourteen months.3 The deed of trust alternative permitted lenders to bypass this time-consuming and expensive judicial foreclosure by simply using their new power of sale authority to sell the property securing a delinquent loan after complying with statutory procedural requirements. There is even a statutory presumption of procedural fairness and accuracy by the mere completion of a sale. “The trustee’s deed shall raise the presumption of compliance with the requirements of ... this chapter....” A.R.S. § 33–811(B). Commenting on the two foreclosure methods, this court has said:

A mortgage generally may be foreclosed only by filing a civil action while, under a Deed of Trust, the trustee holds a power of sale permitting him to sell the property out of court with no necessity of judicial action. The Deed of Trust statutes thus strip borrowers of many of the protections available under a mortgage. Therefore, lenders must strictly comply with the Deed of Trust statutes, and the statutes and Deeds of Trust must be strictly construed in favor of the borrower. Patton v. First Federal Sav. & Loan Ass’n, 118 Ariz. 473, 477, 578 P.2d 152, 156 (1978) (emphasis added).

¶ 11 Aside from the issue in this case, the primary loss in protection for deed of trust borrowers lies in the absence of redemptive right because purchasers at a deed of trust sale no longer take title subject to a mortgagor’s six-month right of redemption.4 Most observers could regard that loss of right as quite disadvantageous to the mortgagor. However, an offsetting theory holds that because there is less uncertainty as a consequence of the

elimination of redemptive rights and because there is no judicial oversight, bidders can afford to offer higher prices at a deed of trust sale. Model deed of trust procedures include notice requirements and bidder qualification intended to “encourage more vigorous bidding in order to produce a price closer to the property’s fair market value than would otherwise be possible....” 4 RICHARD R. POWELL, POWELL ON REAL PROPERTY § 37.42[5] (Michael Allan Wolf ed., 2000) (citing Uniform Land Security Interest Act § 509(b) (1985)). The Powell **778 *209 treatise, however, does not take the position that judicial consideration of gross inadequacy as a ground for upsetting a sale is forbidden.

Like a Judicial sale arising out of foreclosure by auction, a sale under a power may not be attacked on the ground of mere inadequacy of price unless the bid was so low as to shock the conscience of the court or elements of unconscionable action or chilling of the bidding are present. Id. at § 37.42[6] (emphasis added).

¶ 12 Our court of appeals has held that “the setting aside of a trustee sale for inadequacy of price ” was not part of Arizona law. Security Sav. & Loan Ass’n v. Fenton, 167 Ariz. 268, 270, 806 P.2d 362, 364 (App.1990) (emphasis added). The policy articulated in Fenton is correct as to inadequacy of price and, as noted, applies also to judicial sales. See ante ¶ 7. But Fenton did not involve a price found to be grossly inadequate, one that shocked the conscience of the court.5 Thus, the Fenton court did not consider the question before us now. The RESTATEMENT OF PROPERTY takes a view that encompasses both judicial and non-judicial sales:

Adequacy of Foreclosure Sale Price:

(a) A foreclosure sale price obtained pursuant to a foreclosure proceeding that is otherwise regularly conducted in compliance with applicable law does not render the foreclosure defective unless the price is grossly inadequate.

(b) Subsection (a) applies to both power of sale and judicial foreclosure proceedings.

RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES § 8.3 (hereinafter RESTATEMENT).

¶ 13 The present case is one of first impression as neither we nor our court of appeals has ever considered the particular issue of setting aside a deed of trust sale for gross inadequacy of price. We also note that the statutes dealing with deeds of trust are silent on that question. Moreover, as we have already discussed, we have always

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followed the rule that courts of equity have the power to vacate a judicial sale for gross inadequacy of price compared to fair market value even though there is no express statutory authorization to do so.

C. Issues and positions ¶ 14 Krohn urges the courts to set aside the sale of her house on the grounds that the winning bid was grossly inadequate, and she urges adoption of RESTATEMENT § 8.3. Sweetheart urges approval of the sale, arguing its position as a bona fide purchaser and asserting there is no express statutory provision for overturning a trustee’s sale based on price. ¶ 15 An amicus brief filed in support of Sweetheart urges us to take a comprehensive view. Emphasizing that its member trustees are from Arizona, California, Texas, and Washington, the Arizona Trustee Association (ATA) informs us that the proper resolution of this issue is crucial to the continued viability of the foreclosure industry in Arizona. ¶ 16 ATA describes its active members as “individuals and entities engaged in all aspects of non-judicial foreclosures, including the preparation of title reports, the posting and publishing of notices, the legal analyses, the appraisals and valuation, and the conduct of trustee’s sales at public auctions.” It defines its twin purposes as educating its members and ensuring fairness and consistency in the trustee’s sale process. Their interest therefore derives from reliance on the statutory scheme and security in the knowledge that if the statutory scheme is followed and strictly enforced, the sale will be valid. This appreciation for the orderliness of the process is to be commended and preserved, but there must also be recognition that those interests are not co-extensive with the interests of the other parties. ¶ 17 The mortgage banking and lending industry is of great importance to our economy, but lenders are primarily and vitally concerned with getting their money back with the agreed upon interest payments. The health of their industry depends on repayment,, **779 *210 not on foreclosure. Borrowers are justifiably concerned with legitimate protection against inequitable loss of their property if there is a foreclosure. To the extent that judicial oversight to prevent gross inadequacy of bidding at trustee’s sales may actually increase prices realized, both lenders and borrowers would benefit. We doubt ATA’s thoughtful brief meant to suggest there is such a thing as a foreclosure industry that opposes either the interests of lenders or borrowers. There are, of course, those waiting for opportunities based on individual

misfortune, and we believe this makes it even more important that courts of equity are open to assure debtors receive not only procedural but fundamental fairness. Windfall profits, like those reaped by bidders paying grossly inadequate prices at foreclosure sales, do not serve the public interest and do no more than legally enrich speculators. We doubt this serves the legitimate interests of trustees any more than it serves the legitimate interests of lenders or borrowers.

D. Resolution ¶ 18 We have long followed the “rule that where not bound by [our] previous decisions or by legislative enactment, [we] would follow the Restatement of the Law.” Reed v. Real Detective Pub. Co., 63 Ariz. 294, 302–03, 162 P.2d 133, 137 (1945). Because the deed of trust statutes contain neither permission for nor prohibition against limited equitable oversight of deed of trust sales, and as noted earlier, no appellate court in this state has considered deed of trust sales that are grossly inadequate, we must now ask whether RESTATEMENT § 8.3 is good legal policy. If it is not, then we should reject it. ¶ 19 Thus we turn to the reasons ATA and Sweetheart advanced against even the limited judicial oversight over deed of trust sales provided in Section 8.3. Specifically, these are that judicial oversight will chill the market and discourage bidders, that the status of bona fide purchasers will be undermined, and that it will be difficult to determine the appropriate fair market value against which evaluations of gross inadequacy will be made. We will discuss those in turn.

1. Chilled market ¶ 20 We are presented with no evidence or data indicating that prices paid at sales made under a power of sale bring an appreciably higher percentage of fair market value than prices bid at judicial foreclosure sales.6 To be sure, neither Sweetheart nor ATA made this argument, but it is perhaps the only compelling policy reason to support the loss of all judicial oversight. See Bauman v. Day, 892 P.2d 817, 824 n. 8 (Alaska 1995). Moreover, we have been presented with no data indicating that the traditional judicial foreclosure market has been disrupted by existing judicial oversight to prevent grossly inadequate prices, and such a result is not self-evident. In fact, without apparent adverse effect on the market, even sales under deeds of trust have been set aside when prices have been grossly inadequate and there was also absence of strict statutory compliance.

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¶ 21 For example, the Washington Supreme Court voided a trustee’s sale when it found the trustee had breached fiduciary duties by ignoring a suit by the grantor and had sold, for less than $12,000, a home in which the grantor had equity of at least $100,000. Cox v. Helenius, 103 Wash.2d 383, 693 P.2d 683 (1985). A federal court voided the sale of property appraised at $240,000 after it had been incorrectly described in the notice and was purchased at the foreclosure sale for less than $15,000, only to be sold seventeen days later for $130,000. In re Worcester, 811 F.2d 1224 (9th Cir.1987). There is no reason to expect a rule that also permits courts of equity to overturn grossly inadequate deed of trust sales would disrupt that market, and so far as we know, the cases just cited have not destroyed or impaired the foreclosure industry on the west coast. **780 *211 ¶ 22 Indeed, purchasers continue to come forward, making deed of trust purchases without certain knowledge that the trustee has fully complied with the statutory procedural obligations and thus take a risk that the sale may be set aside for that reason. For example, there was no apparent flight from deed of trust sales after we vacated such a sale when we found a ninety-day statutory notice of sale did not negate the additional thirty-day notice required in the deed of trust itself. Schaeffer v. Chapman, 176 Ariz. 326, 861 P.2d 611 (1993). ¶ 23 Perhaps this is because most purchasers believe, as we do, that only the smallest minority of deed of trust sales are conducted without statutory compliance, just as we also believe that most purchasers will assume only the smallest number of deed of trust sales are concluded at a price that could shock the conscience of the court because of gross inadequacy. That said, we think it just as likely that the possibility of judicial oversight on the ground of gross inadequacy will result in higher prices. If so, we think this will serve rather than impair the public interest.

2. Bone fide purchaser ¶ 24 The bankruptcy judge found that Sweetheart was a bona fide purchaser. Absent special circumstances, sales to bona fide purchasers are not upset by the courts. But the status of bona fide purchaser by itself cannot insulate even a well meaning purchaser innocent of wrongdoing when other circumstances are present. “Also to be noted is that the rule of ‘caveat emptor’ applies to purchasers at execution sales.” Nussbaumer, 107 Ariz. at 508, 489 P.2d at 847 (citing Lebrecht v. Beckett, 96 Ariz. 389, 396 P.2d 13 (1964)). We see no reason why the same rule should not apply in non-judicial sales.

¶ 25 Judge Baum found that Sweetheart had no knowledge of the dealings between Krohn and her lender. One easily imagines, however, that although any potential purchaser at a trustee’s sale or a judicial foreclosure may be unaware of the details of the relationship between a particular lender and debtor, every potential purchaser is certainly aware that there were dealings between a lender and a debtor, for how else would the property be set for execution sale? Purchasers at such sales already take the risk of unknown procedural errors. Schaeffer, 176 Ariz. at 328, 861 P.2d at 613. Such bidders can reasonably expect to get bargains because of the nature of foreclosure sales, but public policy and the courts should not endorse extraordinary bargains at the expense of already troubled debtors. ¶ 26 Finally, while bona fide purchasers have not been deterred by the possibility of a vacated sale caused by circumstances out of their knowledge and control before the sale, the price paid is completely within the purchaser’s control. Knowledgeable purchasers can reasonably evaluate the fair market value of a property to make an appropriate bid that is not grossly inadequate. Thus, while Sweetheart was a bona fide purchaser with respect to the dealings between Krohn and her lender, it is chargeable with knowledge as to the sale price.

3. Fair market value ¶ 27 The United States Supreme Court has stated that fair market value cannot be expected in foreclosure sales. “In short, ‘fair market value’ presumes market conditions that, by definition, simply do not obtain in the context of a forced sale.” BFP v. Resolution Trust Corp., 511 U.S. 531, 538, 114 S.Ct. 1757, 1761, 128 L.Ed.2d 556 (1994). We agree and do not expect that prices in forced sales would reflect the same market value “as would be fixed by negotiation and mutual agreement, after ample time to find a purchaser, as between a vendor who is willing (but not compelled) to sell and a purchaser who desires to buy but is not compelled to take the particular ... piece of property.” Id. (quoting BLACK’S LAW DICTIONARY 971 (6th ed.1990)). It is to be expected, therefore, that courts will occasionally experience difficulty when attempting to determine fair market value in the context of a forced sale. But again, we must note that the debtor will have the burden of showing gross inadequacy as compared to fair market value, and the need to make these judgments has not disrupted the system of judicial foreclosure. **781 *212 ¶ 28 Simply because a determination of fair market value is or may be difficult does not mean the

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courts should or could avoid the problem. For example, there is statutory protection in Arizona when a deficiency judgment is sought following a deed of trust sale and the debt owed is more than the amount bid at sale. In such cases, the debt(s) owed will be credited with “the fair market value of the trust property on the date of the sale as determined by the court or the sale price at the trustee’s sale, whichever is higher.” A.R.S. § 33–814(A) (emphasis added).7 It is clear, therefore, that our legislature contemplated that courts might have to consider the fair market value of property sold through a deed of trust. By adopting the statutory procedure described above, it is also clear that the legislature determined the risk of a below-market sale price belonged with the mortgagee and not the mortgagor.

4. Determining gross inadequacy ¶ 29 There is an additional problem, of course, in determining just when a price is grossly inadequate. However, guidance can be found in the comment to Section 8.3:

“Gross inadequacy” cannot be precisely defined in terms of a specific percentage of fair market value. Generally, however, a court is warranted in invalidating a sale where the price is less than 20 percent of fair market value and, absent other foreclosure defects, is usually not warranted in invalidating a sale that yields in excess of that amount.

RESTATEMENT § 8.3 cmt. b (emphasis added). In Fenton, our court of appeals noted, “even assuming that the price was inadequate, that fact standing alone would not justify setting aside the trustee’s sale ... ‘there must be in addition proof of some element of fraud, unfairness, or oppression as accounts for and brings about the inadequacy of price.’ ” 167 Ariz. at 270, 806 P.2d at 364 (quoting C.R. Oller v. Sonoma County Land Title Co., 137 Cal.App.2d 633, 290 P.2d 880, 882 (1955) (emphasis added)). We believe gross inadequacy is proof of unfairness, and as we have seen, gross inadequacy, as defined in comment b to RESTATEMENT § 8.3, is more than inadequacy. Thus, a rule allowing limited judicial oversight does not conflict with Fenton—it is still the law in Arizona that trustee’s sales will not be set aside for inadequacy of price without more. Further, the statutory presumption of compliance in A.R.S. § 33–811(A) need not be weakened today; issuance of a trustee’s deed

carries with it the presumption of compliance with all requirements.

E. The dissent ¶ 30 The dissent is concerned that no statute permits a court to use its equity powers to intervene in a trustee’s sale. That is true, but as we have noted, it is also quite true that there is no statute prohibiting it. There is also no statute permitting or prohibiting intervention in a trustee’s sale in which there has been some procedural irregularity. But as the dissent acknowledges, case law establishes that courts may do so. Dissent at ¶¶ 48–49. Moreover, though there is no Arizona statute permitting a court of equity to intervene in a judicial sale because of gross inadequacy of the bid price, this court did not hesitate to hold that it had equitable power to do so. Nussbaumer, 107 Ariz. at 507, 489 P.2d at 846. ¶ 31 Why should the equitable rule regarding gross inadequacy be different with respect to trustee’s sales? The dissent says that in overseeing judicial sales, the court is simply supervising its own process—the writ of execution. Dissent at ¶ 40. But equitable powers are not limited to supervision of the court’s process. See 1 DAN B. DOBBS, LAW OF REMEDIES § 2.1(3) (2d ed.1993). Our court long ago faced the issue presented by the present case: In the absence of statutory authority, can a court use its equitable powers to intervene and set aside a foreclosure sale made for a grossly inadequate price? The argument against doing so was the argument **782 *213 recognized in the cases, that the sale can be set aside only if the inadequate price was accompanied by some other irregularity. We rejected that argument for judicial sales in 1905 and do so today with regard to non-judicial sales for the same reasons:

An examination of the authorities will show that the courts hesitate to declare inadequacy of the selling price a sufficient ground in itself for vacating an execution or judicial sale.... “So far as any general rule has been formulated upon the subject, it seems to be this: ‘That mere inadequacy of price, where parties stand on an equal footing, and there are no confidential relations between them, is not, of itself, sufficient to set aside a sale unless the inadequacy is so gross as to be proof of fraud, or to shock the judgment and the conscience.’ ” Freeman on Executions, 3d ed. sec. 3041. If the inadequacy can be connected with or shown to result from any mistake, accident, surprise, misconduct, fraud, or irregularity, the sale will generally be vacated. Id. sec. 309. And in the same section the learned author observes: “We think the better rule is that inadequacy of price may be so gross

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as to create the presumption of fraud or misconduct on the part of the officer or the purchaser.” It was said by the supreme court of Alabama, in the case of Henderson v. Sublett, 21 Ala. 626, 630: “When the inadequacy is so glaring and gross as at once to shock the understanding and conscience of an honest and just man, it will, of itself, authorize the court to set aside the sale....”

McCoy v. Brooks, 9 Ariz. 157, 159–60, 80 P. 365, 366 (1905). ¶ 32 Nor do the cases that recite that the court may use its equitable power to intervene if the inadequacy of price is combined with some procedural irregularity explain why the combination is required and why, to borrow a phrase, we cannot have one without the other. See, e.g., Moeller v. Lien, 25 Cal.App.4th 822, 30 Cal.Rptr.2d 777, 784 (1994). But tracing Moeller’s antecedents, we come eventually to a 1924 case, the first or one of the first that lays down the rule, ending with the comment that “where the price thus bid ... is greatly disproportionate to its actual value, very slight evidence of unfairness or irregularity will suffice to authorize the relief sought.” Baldwin v. Brown, 193 Cal. 345, 224 P. 462, 465 (1924) (emphasis added). We are not told the importance of “very slight” unfairness or irregularity. Why the need for such a makeweight? ¶ 33 We could no doubt find very slight irregularity in the present case, given the error regarding the timing indicated in the notice of sale. See ante ¶ 4. But that error is not the core of the case; nor does it justify relief. At its core, this is a case about inequity on the one hand and unjust enrichment on the other. When these factors are present, our court has been available to give relief so long as there is no statutory prohibition. Sparks v. Douglas & Sparks Realty Co., 19 Ariz. 123, 129, 166 P. 285, 288 (1917). In any event, deeds of trust are creatures of statute, and if the legislature believes that the doors of the courthouse should be closed and the courts forbidden to grant relief to those who are unjustly and inequitably deprived of their homes by speculators or others seeking windfall profits, it may say so. ¶ 34 The dissent is also concerned for boundaries for today’s holding. Dissent at ¶ 41. There is, of course, no statute of limitations as to when the question of gross inadequacy must be raised, though the legislature could certainly enact such a statute. Of course, the doctrine of laches applies, and we seem to have survived despite there being no statute limiting the time when gross inadequacy may be raised as a ground for setting aside a judicial sale. Moreover, the balance of equities would be considerably different if the person who acquired the

property for a grossly inadequate price sold it to a bona fide purchaser. As to the guidance provided by this opinion in defining grossly inadequate price, we can only point out that the RESTATEMENT indicates that twenty percent of market value is generally considered a grossly inadequate price. The parties, of course, are free to argue under the facts of a particular sale that a different percentage is or is not grossly inadequate. See RESTATEMENT § 8.3 cmt. b and illus. 6. **783 *214 ¶ 35 Finally, the dissent asserts that there is no question of unjust enrichment in the present case because the purchaser at the trustee’s sale “was not the lender, but a third party.” Dissent at ¶ 50. We are unable to understand the distinction. It makes little difference whether a lender or a speculator was unjustly enriched. The important considerations are the questions of inequity on the one hand and unjust enrichment on the other. When these are present, the court may use its equitable powers.

CONCLUSION

¶ 36 As we said earlier, if one result of our adoption of RESTATEMENT § 8.3 is that slightly higher prices prevail for sales conducted at the margin of the twenty percent yardstick, then we believe public policy is served. Accepting Sweetheart’s argument and approving the sale in question would yield an inequitable and illogical result. It would protect the financial interests of defaulting mortgagors with high debt who receive credit for fair market value when creditors pursue a deficiency judgment and would neglect the financial interests of defaulting mortgagors with low debt, like Krohn, who lose all or nearly all their equity to a grossly inadequate bid price. ¶ 37 The rule we adopt today is consistent with our legislature’s concern for debtors and its desire to respond to needs of the mortgage and home lending industry. The interests of debtors in need are protected without changing the obligations of debtors or the rights of lenders or trustees conducting valid sales, without throwing into disorder the well-established procedures for making purchases at those sales, and without creating risk for purchasers seeking bargains, albeit fair ones. ¶ 38 For the foregoing reasons we answer the question in the affirmative. We adopt RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES § 8.3: a sale of real property under power of sale in a deed of trust may be set aside solely on the basis that the bid price was grossly

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inadequate.

CONCURRING: CHARLES E. JONES, Chief Justice, and THOMAS A. ZLAKET, Justice (retired).

McGREGOR, Vice Chief Justice.

¶ 39 I respectfully dissent. I am not certain whether the procedure the majority approves today represents wise public policy; it may well. I am certain that today’s opinion places this court in the position of adding to, not interpreting, a statutory procedure. That process should be left to the legislature. ¶ 40 The defects in the majority’s approach stem from its insistence upon treating the court’s authority over trustee’s sales, which are non-judicial foreclosures, in the same manner as we treat our authority over judicial foreclosures. Our authority to set aside a judicial sale arises from the court’s “inherent power to control [our] own process[es].” Nussbaumer v. Superior Court, 107 Ariz. 504, 506, 489 P.2d 843, 845 (1971); Wiesel v. Ashcraft, 26 Ariz.App. 490, 493, 549 P.2d 585, 588 (1976). That authority, however, does not extend to sales pursuant to deeds of trust, which, as the opinion recognizes, are entirely creatures of statute. Op. ¶ 9. By extending our authority to this statutory creation, we commit error.

A.

¶ 41 I disagree with the majority’s conclusion for several reasons. The first involves the difficulty in understanding just what cause of action today’s opinion creates. The action approved today is a legal action without parameters, for it has no common law antecedent and finds no authority in statute. We now know that a trustor can move to set aside a trustee’s sale of property under a deed of trust solely on the basis that the bid price was grossly inadequate, even if the successful bidder is a bona fide purchaser for value. But when must the action be brought? Certainly not within a redemption period, for no redemption period exists under the statutes governing deeds of trust. If the limitations period for this action falls within Arizona’s general limitations period, a purchaser at a trustee’s sale must wait four years to know whether the sale will be challenged. See Ariz.Rev.Stat. (A.R.S.) § 12–550 *215 **784 (Supp.2001). If this action is in the

nature of an equitable action, as the majority suggests, does the right to trial by jury attach? And what of the majority’s statement that the comment to Restatement (Third) of Property: Mortgages section 8.3 (1997) provides “guidance” as to what constitutes a grossly inadequate price? Op. ¶ 29. Should litigants and trial courts now understand that a comment to the Restatement has established a presumptive level of gross inadequacy? Are the parties free to argue that, under the facts of a particular sale, a sale price of less than twenty percent of fair market value is not grossly inadequate? ¶ 42 I will not further belabor the point. When the court creates a new cause of action out of whole cloth, litigants may justly question how to establish or defend against the vaguely-described claim created.

B.

¶ 43 As the majority notes, we tend to follow the Restatement unless its views do not represent good legal policy or conflict with legislative enactments or our prior decisions. In my view, adopting the view expressed in Restatement section 8.3 falls within both the exceptions. ¶ 44 Arizona’s Deed of Trust Act (the Act), A.R.S. §§ 33–801 to 33–821, first authorizes deeds of trust and then provides a detailed and comprehensive framework for carrying out non-judicial foreclosures. Essential to this action, the Act omits any requirement that the bidder at a trustee’s sale make a minimum bid. Instead, the Act requires that the trustee “determine which conditional sale or sales result in the highest total price bid for all of the trust property.” A.R.S. § 33–810.A (Supp.2001). The sale “shall be completed” when the purchaser makes payment in a form satisfactory to the trustee. Id. The trustee’s deed, once issued, “shall raise the presumption of compliance with the requirements” of the Act. A.R.S. § 33–811.B (Supp.2001). The Act also makes provision, in some instances, for obtaining a deficiency judgment. If a deficiency action is not timely filed, however, the proceeds of the sale are deemed to be in full satisfaction of the obligation, “regardless of the amount.” A.R.S. § 33–814.D (2000). Although the Act refers to fair market value with respect to determining the amount of a deficiency judgment, A.R.S § 33–814.A, it pointedly does not refer to fair market value as a measuring point for the amount of a purchaser’s bid, which the Act does not limit in any manner. ¶ 45 If the legislature had intended to require a minimum bid, whether related to fair market value or some other

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measure, it surely would have done so. See, e.g., Ark.Code. Ann. § 18–50–107(b) (Michie Supp.2001) (requiring bids of at least two-thirds the amount of the indebtedness due). I see no basis for regarding the absence of a minimum bid requirement as an oversight. Instead, the legislature quite clearly intended that the trustee determine the highest bid made and issue a trustee’s deed on that basis. The view of the Restatement thus conflicts with Arizona’s statutory law, and we should not adopt that approach. ¶ 46 Today’s opinion does not simply permit “a court to use its equity powers to intervene in a trustee’s sale.” Op. ¶ 30. Rather, the opinion writes a new statutory section that defines and requires a minimum bid, if the bidder wishes to avoid a challenge to the trustee’s sale at some undefined future time. It may well be wise policy for the legislature to add a minimum bid requirement to the Act, but the legislature, not this court, should make that decision. The answer to the question why the rule for a trustee’s sale should be different than that for judicial foreclosures, Op. ¶ 31, thus is simply that the trustee’s sale proceeds under statutory authority, which we lack authority to amend.

C.

¶ 47 We also do not adopt the Restatement view if it does not reflect good legal policy. So far as I can determine, only one other state has adopted the Restatement position that we accept today. See Rife v. Woolfolk, 169 W.Va. 660, 289 S.E.2d 220, 223 (1982). Although we are not bound by the decisions of other courts, the fact that other jurisdictions do not permit setting aside a trustee’s sale solely on the basis of grossly inadequate **785 *216 price reveals much about the validity of the Restatement view. ¶ 48 The majority cites little authority to support its decision to adopt the Restatement view. The reason may be that authority supporting today’s decision is lacking. Although Restatement section 8.3 applies to both judicial and non-judicial foreclosures, the numerous cases the Restatement cites in support of the position taken in fact apply, with one exception, to judicial foreclosures. Certainly considerable authority exists for the proposition that courts may set aside judicial sales that, although lacking other defects, involve a grossly inadequate sales price. E.g., Moody v. Glendale Fed. Bank, 643 So.2d 1149, 1149 (Fla.Dist.Ct.App.1994); Union Nat’l Bank v. Johnson, 209 A.D.2d 775, 617 N.Y.S.2d 993, 995 (1994); United Okla. Bank v. Moss, 793 P.2d 1359, 1364

(Okla.1990); Vend–A–Matic, Inc. v. Frankford Trust Co., 296 Pa.Super. 492, 442 A.2d 1158, 1162 (1982). Still other judicial sale cases support setting aside a sale if the price is so low “as to shock the conscience of the Court or to amount to fraud.” Allied Steel Corp. v. Cooper, 607 So.2d 113, 118 (Miss.1992) (quoting Wansley v. First Nat’l Bank of Vicksburg, 566 So.2d 1218, 1224 (Miss.1990)) (quotation marks omitted); see also Burge v. Fidelity Bond & Mortgage Co., 648 A.2d 414, 419 (Del.1994); Bascom Constr., Inc. v. City Bank & Trust, 137 N.H. 472, 629 A.2d 797, 800 (1993); Armstrong v. Csurilla, 112 N.M. 579, 817 P.2d 1221, 1233 (1991); Crown Life Ins. Co. v. Candlewood, Ltd., 112 N.M. 633, 818 P.2d 411, 414 (1991); Trustco Bank New York v. Collins, 213 A.D.2d 819, 623 N.Y.S.2d 642, 642 (1995); Crossland Mortgage Corp. v. Frankel, 192 A.D.2d 571, 596 N.Y.S.2d 130, 131 (1993); Verex Assurance, Inc. v. AABREC, Inc., 148 Wis.2d 730, 436 N.W.2d 876, 879 (Ct.App.1989). I agree with the holdings of those decisions, which are consistent with Arizona law, but they shed no light on the issue considered here. ¶ 49 Those states that permit setting aside a trustee’s sale almost uniformly require something more than a grossly inadequate price to invalidate a sale. E.g., Savers Fed. Sav. & Loan Ass’n v. Reetz, 888 F.2d 1497, 1503 (5th Cir.1989) (concluding that under Texas law, in order for inadequacy of price to invalidate a trustee’s sale, “there must also be some irregularity in the foreclosure” leading to the inadequate price); Moeller v. Lien, 25 Cal.App.4th 822, 30 Cal.Rptr.2d 777, 784 (1994) (“Where there is no irregularity in a nonjudicial foreclosure sale and the purchaser is a bona fide purchaser for value, a great disparity between the sales price and the value of the property is not a sufficient ground for setting aside the sale.”); Aikens v. Wagner, 231 Ga.App. 178, 498 S.E.2d 766, 768 (1998) (requiring a grossly inadequate price and additional circumstances that bring about the inadequate price); Brunzell v. Woodbury, 85 Nev. 29, 449 P.2d 158, 159 (1969) (same). ¶ 50 In addition to the dearth of legal authority supporting the Restatement rule for non-judicial sales, the policies underlying Restatement section 8.3 do not apply in this case. The comments to section 8.3 describe two intertwined policy considerations that support the rule: protecting debtors from large deficiency judgments and preventing lenders from being unjustly enriched. Restatement § 8.3 cmt. a. We further neither of these considerations by applying the Restatement rule here. Our deficiency statute addresses the first concern, by limiting deficiencies to the difference between the amount owed and the fair market value of the property. A.R.S. § 33–814.A. While the second consideration may apply

In re Krohn, 203 Ariz. 205 (2002) 52 P.3d 774, 381 Ariz. Adv. Rep. 47

© 2014 Thomson Reuters. No claim to original U.S. Government Works. 10

generally, it does not apply to this case because the purchaser was not the lender, but a third party. ¶ 51 Only one and, as of today, two jurisdictions have adopted the Restatement view for non-judicial sales. The reason, I think, is clear: courts have no inherent power to control the processes selected by the legislature to govern non-judicial foreclosures.

D.

¶ 52 The public policy considerations raised by the situation presented deserve careful consideration. The majority may be right in stating that its decision will benefit both lenders and borrowers, Op. ¶ 17, and may be right in stating that setting aside deeds of trust will cause no adverse effect on the market. Op. ¶ 20. The majority may also be **786 *217 correct in concluding that judicial oversight on the ground of gross inadequacy will result in higher prices being paid at non-judicial foreclosures. Op. ¶ 23. It may be accurate to conclude that today’s decision will protect debtors without affecting the rights of lenders and trustees or “throwing into disorder the well-established procedures” of trustee’s sales. Op. ¶ 37. ¶ 53 On the other hand, amicus Arizona Trustee Association, Inc. (the Association), may be correct in asserting that imposing a burden on trustees to determine

fairness of bids will have far-reaching economic consequences, will have a chilling effect at sales, and will make third party bidders reluctant to participate, knowing a sale can be set aside at some later date. The Association also may be correct in arguing that the absence of competitive bidding will reduce sales prices and result in more deficiency judgments, which will in turn harm debtors. It may be true that today’s holding will make property purchased at trustee’s sales much less marketable. ¶ 54 I do not pretend to know which of these arguments should carry the day. Presumably, these are the types of concerns that the legislature took into consideration and balanced before adopting the Act. Any further balancing of these competing interests should be undertaken by the legislature.

E.

¶ 55 For the foregoing reasons, I respectfully dissent.

Parallel Citations

52 P.3d 774, 381 Ariz. Adv. Rep. 47

Footnotes 1

A.R.S. § 33–801 et seq.

2

Gary E. Lawyer, Note, The Deed of Trust: Arizona’s Alternative to the Real Property Mortgage, 15 ARIZ. L.REV. 194, 194 (1973) (citing Legislative Council Comm. on Deeds of Trust, 29th Ariz. Leg. (minutes of meeting, May 16, 1969)).

3

Id. (citing Comm. on Mortgage Law & Practice, ABA; comments of State Superintendent of Banks Franklin J. Stowell).

4

Cf. A.R.S. § 12–1283, which provides for a six-month period following a judicial sale during which a debtor may redeem his interest. By contrast, reinstatement under a deed of trust by payment of the delinquency is possible only to the afternoon preceding the sale. A.R.S. § 33–813.

5

We purposefully conflate the two phrases because we see no meaningful distinction between them. Some cases, however, have attempted to draw a distinction. See RESTATEMENT OF PROPERTY § 8.3, Reporter’s Notes, cmt. b.

6

The several reasons for this are described in RESTATEMENT § 8.3 cmt. a. The real possibility that foreclosure by sale is no more that a charade resulting in windfall profits to the high bidder who later resells the property is tellingly described by one investigator. See Steven Wechsler, Through the Looking Glass: Foreclosure by Sale as De Facto Strict Foreclosure—An Empirical Study of Mortgage Foreclosure and Subsequent Resale, 70 CORNELL L.REV. 850, 896 (1985).

7 This is consistent with the approach promulgated by RESTATEMENT § 8.4(d): “If it is determined that the fair market value is greater than the foreclosure sale price [the debtor is] entitled to an offset against the deficiency in the amount by which the fair

In re Krohn, 203 Ariz. 205 (2002) 52 P.3d 774, 381 Ariz. Adv. Rep. 47

© 2014 Thomson Reuters. No claim to original U.S. Government Works. 11

market value, less the amount of any liens on the real estate that were not extinguished by the foreclosure, exceeds the sale price.”

End of Document

© 2014 Thomson Reuters. No claim to original U.S. Government Works.

QB\Personal.EFELLA\32315037.1

Lachter v. Smith (In re Smith) 209 Ariz. 343, 101 P.3d 637 (2004)

Facts: In 1987, Sidney and Sandra Lachter (“Lachters”) obtained a money judgment against James Smith (“Smith”) and recorded the same. They renewed the judgment within the five-year period allowed by Arizona law on March 6, 1992. Such renewed judgment would again need to be renewed in March, 1997. In 1995, Smith, who had failed to repay the debt to the Lachters, filed a bankruptcy petition. The Lachters commenced a non-dischargeability proceeding. Meanwhile, Smith received his discharge on November 12, 1996. On October 24, 1997, the Bankruptcy Court determined that Smith’s debt to the Lachters was non-dischargeable, but did not finalize its decision. On November 7, the Lachters filed an affidavit of renewal of their judgment against Smith. After the Bankruptcy Court issued a signed minute entry memorializing its October 24 decision on the record, the Lachters filed a “supplement” to the affidavit on December 5, 1997. Procedural History: Smith filed various post-judgment motions and appealed to the Bankruptcy Appellate Panel, which affirmed the Bankruptcy Court’s decision. In one of his motions for reconsideration, Smith asserted the Lachters’ judgment had lapsed, because they failed to timely file their affidavit of judgment renewal required by Arizona law. The Lachters sought and obtained a determination from the Bankruptcy Court that the judgment renewal was timely. Although the Bankruptcy Court based its timeliness determination on 11 U.S.C. § 108(c)(2), the BAP held that that Section was not applicable. Instead, 11 U.S.C. § 108(c)(1) was the operative provision. It reasoned that such provision extended the time to renew the judgment by the number of days Smith’s automatic stay had lasted, which was 487 days. As a result of the 487-day extension, the Lachters’ judgment expired on July 6, 1998. However, A.R.S. § 12-1612(E) calls for the renewal affidavit to be filed “within ninety days of expiration of five years from the date of the filing of a prior renewal affidavit. Therefore, the window in which to file the renewal affidavit ran from April 6, 1998, to July 6, 1998. The BAP remanded to the Bankruptcy Court to determine whether the renewal affidavit filed on November 7, 1997 was effective to renew the Lachters’ judgment. On remand, Judge Baum certified two questions to the Arizona Supreme Court for resolution:

1. When a pending bankruptcy case is unresolved and the time period under Arizona law to file the required affidavit of renewal of judgment has passed, under what circumstances, if any, is the time period under A.R.S. [§ ] 12–1551 extended or otherwise changed to allow the judgment creditor to file a timely affidavit of renewal of judgment? 2. Were either of the affidavits of renewal of judgment filed by the Lachters timely filed?

QB\Personal.EFELLA\32315037.1

Issue 1: When a pending bankruptcy case is unresolved and the time period under Arizona law to file the required affidavit of renewal of judgment has passed, under what circumstances, if any, is the time period under A.R.S. § 12–1551 extended or otherwise changed to allow the judgment creditor to file a timely affidavit of renewal of judgment? Holding 1: None. A judgment creditor’s inability to enforce a judgment does not extend the deadline imposed by A.R.S. §§ 12-1551 and 12-1612 in which the judgment debtor must file a renewal affidavit; however, under state law, a bankruptcy filing tolls the deadline for judgment enforcement. Rationale 1: The Court explained that the Arizona statutes envision two different types of filing with respect to judgments. The first filing is an enforcement action, in which the judgment is recorded. The second type of filing, which occurs once every five years, is a ministerial, non-enforcement act. It serves merely to notify interest parties that the judgment remains viable and unsatisfied. In the Court’s interpretation of 11 U.S.C. § 362, the latter ministerial act of renewal is not an action to “‘create, perfect, or enforce’ liens or judgments” and therefore should not be stayed. The Court held that the BAP’s determination that A.R.S. § 12-1551 falls within the purview of 11 U.S.C. § 108(c)(1) as dictating the time for commencing or continuing a civil action that may be stayed by bankruptcy proceedings does no violence to Arizona law, because Arizona law also provides for such tolling. Under Arizona law, judgment enforcement is stayed during the pendency of bankruptcy actions, just as it is while supersedeas bonds preclude enforcement, and in other similar circumstances. However, the Court emphasized that the ministerial judgment renewal filing is merely a notice function that is not stayed under Arizona law. The Court gave the following example: A creditor with a judgment entered on January 1, 2000, may be prevented under Arizona law by a supersedeas bond or bankruptcy stay from executing on its judgment until January 1, 2004. However, the creditor could still file a renewal affidavit within the 90 days preceding the judgement’s expiration on January 1, 2005, as allowed by A.R.S. § 12-1612(B). And, regardless of renewal affidavit filings, the time the creditor could enforce the original judgment would be tolled and extended under Arizona law through January 1, 2009 to accommodate the time the creditor was precluded by the bond or stay from attempting to collect on the debt. Issue 2: Were either of the affidavits of renewal of judgment filed by the Lachters timely filed? Holding 2: Yes. In these unique circumstances, Arizona law should honor renewal affidavits filed at any time from ninety days before the expiration of the five-year period the judgment remains effective under Arizona law through the expiration of the extended deadline allowed by 108(c), as being timely filed. This is consistent with the remedial purposes of A.R.S. §§ 12-1551 and 12-1612.

QB\Personal.EFELLA\32315037.1

Rationale 2: The Court explained that it read the BAP’s decision as determining that the deadline to renew the judgment was extended under 11 U.S.C. § 108(c)(1) by 487 days. Therefore, the Court concluded that the time for filing the renewal affidavit was also extended. Although the purpose of A.R.S. §§ 12-1551 and 12-1612 is to minimize record-searching by interested parties and to provide notice that a judgment remains valid, that purpose is frustrated by a bankruptcy because the ability to enforce the judgment is extended by 11 U.S.C. § 108(c)(1) beyond the typical five-year window. Interested parties are unable to determine whether the judgment is effective without also searching bankruptcy records, and therefore little additional burden is imposed by requiring the party to more fully search the state records to determine the effectiveness of the judgment. Moreover, the debtor is not harmed because the debtor’s action in filing the bankruptcy invoked this frustration of purpose. The Court therefore held that given this frustration of the purpose of the state statutes, Arizona law would treat the Lachters’ affidavit of renewal filed anytime between the earliest date for filing an affidavit of renewal in the case (December 6, 1996), and the extended deadline of July 6, 1998, as being timely filed.

637Ariz.IN RE SMITHCite as 101 P.3d 637 (Ariz. 2004)

209 Ariz. 343

In re James M. SMITH, Debtor.

Sidney Lachter and Sandra Lachter, Suc-cessors to Neepawa Enterprises, Ltd., aManitoba corporation (registered to dobusiness in Arizona), Plaintiffs,

v.

James M. Smith, Defendant.

No. CV–04–0153–CQ.

Supreme Court of Arizona,En Banc.

Dec. 1, 2004.

Background: Judgment creditors filed af-fidavits of renewal of their judgment, afterjudgment debtor filed for bankruptcy pro-tection. Bankruptcy judge ruled that judg-ment creditors had timely renewed theirjudgment, but the Bankruptcy AppellatePanel, 293 B.R. 220 (B.A.P. 9th Cir. 2003),reversed and remanded. Subsequently, theUnited States Bankruptcy Court, No. B–95–06077–PHX–RTB, Redfield T. Baum,J., certified two questions of Arizona lawto Supreme Court for resolution regardingtimeliness of affidavits of renewal of judg-ment. The Supreme Court agreed to an-swer the certified questions.

Holdings: The Supreme Court, Berch, J.,held that:

(1) under Arizona law, time to file affidavitof renewal of judgment is not changedor extended by pending bankruptcycase, and

(2) affidavits of renewal of judgment filedby judgment creditors were timelyfiled.

Questions answered.

1. Bankruptcy O2157 Judgment O868(1)

Under Arizona law, the time to file anaffidavit of renewal of judgment is notchanged or extended by a pending bankrupt-

cy case; filing of an affidavit of renewal issimply a ministerial action intended in partto alert interested parties to the existence ofthe judgment, and such a ministerial filingserves a notice function and does not seek toenforce the judgment. A.R.S. § 12-1551.

2. Bankruptcy O2157

Judgment O868(1)

Affidavits of renewal of judgment filedby judgment creditors were timely filed afterBankruptcy Appellate Panel determined thatfederal statute extended the time to renewthe judgment by the number of days anautomatic bankruptcy stay was in effect forjudgment debtor; given the panel’s determi-nation that renewal deadline was extended,time for filing renewal affidavit was also ex-tended. Bankr.Code, 11 U.S.C.A.§ 108(c)(1).

Hirsch Law Office, P.C. by Lawrence D.Hirsch and Iva S. Hirsch, Scottsdale, Attor-neys for Plaintiffs.

Ellett Law Offices, P.C., by Ronald J. El-lett and Jay S. Volquardsen, Phoenix, Attor-neys for Defendant.

OPINION

BERCH, Justice.

¶ 1 This case asks us to resolve whetherjudgment creditors timely renewed a state-court judgment. The matter is before us oncertified questions from the United StatesBankruptcy Court for the District of Arizona.

FACTS AND PROCEDURALBACKGROUND1

¶ 2 In 1987, Sidney and Sandra Lachtersecured a money judgment against the debt-or, James Smith. They renewed the judg-ment, as permitted by Arizona law, on March6, 1992, within the five-year period providedby statute for such renewals. See Ariz.Rev.Stat. (‘‘A.R.S.’’) §§ 12–1551, –1612(B) (1992).The debtor did not satisfy the debt and, in

1. These facts are taken largely from the opinionof the Bankruptcy Appellate Panel in In re Smith,293 B.R. 220 (B.A.P. 9th Cir.2003) (Smith II ). A

more detailed exposition of the facts and proce-dural background can be found in that opinion.

638 Ariz. 101 PACIFIC REPORTER, 3d SERIES

July of 1995, filed for bankruptcy protection,invoking the shield of the automatic stay ofproceedings.

¶ 3 To protect their interests, the Lachtersfiled a complaint in the bankruptcy courtalleging that Smith’s debt to them was non-dischargeable. See 11 U.S.C. § 523(a)(2)(1994). Because Smith had no assets, thebankruptcy court issued a general dischargeon November 12, 1996, before any determina-tion had been made regarding the discharge-ability of Smith’s debt to the Lachters. Theinitial determination that Smith’s debt to theLachters was nondischargeable was notmade until October 24, 1997, and not finalizeduntil much later.

¶ 4 On November 7, 1997, within thirtydays of the bankruptcy court’s determinationof nondischargeability, the Lachters filed anaffidavit of renewal of their judgment. Theyfiled a ‘‘supplement’’ to the affidavit less thana month later, on December 5, 1997, after thebankruptcy court issued a signed minute en-try memorializing its previously announceddecision.2 Following motions and an appealby Smith, the Bankruptcy Appellate Panel(‘‘BAP’’) eventually affirmed the bankruptcycourt’s determination of nondischargeabilityon December 9, 1999. In re Smith, 242 B.R.694, 696 (B.A.P. 9th Cir.1999).

¶ 5 In one of the earlier-filed motions forreconsideration, Smith had asserted that theLachters’ judgment had lapsed because theyhad failed to timely file their affidavit ofrenewal, as required by Arizona law. SeeSmith II, 293 B.R. at 222 n. 4; see alsoA.R.S. §§ 12–1551, –1612. The Lachtersthen sought a determination from the bank-ruptcy court that they had timely renewedtheir judgment. The bankruptcy judgeagreed with the Lachters, but his determina-tion was reversed on appeal by the BAP.Smith II, 293 B.R. at 226. The BAP, citingIn re Spirtos, 221 F.3d 1079 (9th Cir.2000),and In re Morton, 866 F.2d 561 (2d Cir.1989),agreed that 11 U.S.C. § 108(c) extended thetime for renewing the judgment, but conclud-ed that the bankruptcy court erred in relyingon § 108(c)(2) in finding that the Lachters

timely renewed their judgment. Smith II,293 B.R. at 223–24. The BAP concludedinstead that § 108(c)(1) applied. Id. at 225.

¶ 6 The BAP reasoned that § 108(c)(1) ex-tended the time to renew the judgment bythe number of days the automatic stay was ineffect. Id. It concluded that the extension inthis case was 487 days, encompassing theperiod from the filing of Smith’s bankruptcypetition on July 13, 1995, until the date ofdischarge, November 12, 1996. Id. at 226.Under this analysis, the Lachters’ judgmentexpired on July 6, 1998, 487 days after theoriginal renewal deadline of March 6, 1997.Id. Because A.R.S. § 12–1612(E) calls for therenewal affidavit to be filed ‘‘within ninetydays of expiration of five years from the dateof the filing of a prior renewal affidavit,’’ theBAP determined that the ninety-day periodfor filing the affidavit of renewal ran fromApril 6, 1998 to July 6, 1998. Id. at 227.Although the BAP stated that the renewalaffidavit filed on November 7, 1997, immedi-ately after the entry of the signed ‘‘nondis-chargeability’’ minute entry, was filed ‘‘muchearlier’’ than this period, it stopped short ofconcluding that this renewal affidavit wasineffective and remanded the case to thebankruptcy court to determine whether theLachters’ filing of their renewal affidavitmight be deemed timely under § 108(c)(1).Id.

¶ 7 On April 30, 2004, United States Bank-ruptcy Court Judge Redfield T. Baum certi-fied two questions of Arizona law to thiscourt for resolution:

A. When a pending bankruptcy case isunresolved and the time period underArizona law to file the required affida-vit of renewal of judgment has passed,under what circumstances, if any, isthe time period under A.R.S. [§ ] 12–1551 extended or otherwise changedto allow the judgment creditor to file atimely affidavit of renewal of judg-ment?

B. Were either of the affidavits of renew-al of judgment filed by the Lachterstimely filed?

2. Absent a further renewal, the judgment wouldhave lapsed in March, 1997. See A.R.S. § 12–1551. During the relevant renewal period, the

bankruptcy court had not finally determinedwhether the debt was dischargeable.

639Ariz.IN RE SMITHCite as 101 P.3d 637 (Ariz. 2004)

¶ 8 We agreed to answer the certifiedquestions. See A.R.S. § 12–1861 (2003) (per-mitting the Arizona Supreme Court, on cer-tain conditions, to ‘‘answer questions of lawcertified to it by TTT a United States districtcourt’’). We have jurisdiction to decide certi-fied questions pursuant to Article 6, Section5(6) of the Arizona Constitution, A.R.S.§§ 12–1861 to 12–1867, and Arizona SupremeCourt Rule 27.

DISCUSSION

[1] ¶ 9 The first certified question askswhether under Arizona law the time for filinga renewal affidavit is extended if the debtorhas a bankruptcy proceeding pending and anautomatic stay is in effect during the ninety-day renewal period of A.R.S. § 12–1551 or§ 12–1612. The answer under Arizona law isno. A judgment creditor’s inability to en-force a judgment during the initial or a sub-sequent statutory five-year period, whetherbecause of bankruptcy stay or other reasons,does not extend the deadline imposed byA.R.S. §§ 12–1551 and 12–1612 to file a re-newal affidavit.

¶ 10 Arizona law allows a judgment credi-tor to execute on a judgment within fiveyears after entry of the judgment. A.R.S.§ 12–1551(A). To execute after that time,the creditor must, within ninety days beforethe end of the five-year period, have filed anaffidavit renewing the judgment pursuant toA.R.S. § 12–1612(B) or (E), or have broughtan action on the judgment pursuant to A.R.S.§ 12–1611. The Arizona statutory schemediscusses two separate events: enforcementof the judgment, and the ministerial filing ofan affidavit to renew the judgment. Theaffidavit of renewal serves to notify interest-ed parties of the existence and continuedviability of the judgment. J.C. Penney v.

Lane, 197 Ariz. 113, 119, ¶ 29, 3 P.3d 1033,1039 (App.1999).

¶ 11 Under the bankruptcy laws, a petitionfor bankruptcy operates to stay any action to‘‘create, perfect, or enforce’’ liens or judg-ments. 11 U.S.C. § 362(a) (1998). Actionsto collect from the debtor may be filed orreinstituted either ‘‘30 days after notice ofthe termination or expiration of the stay,’’ 11U.S.C. § 108(c)(2), or after a period set by‘‘applicable nonbankruptcy law,’’ as extendedby ‘‘any suspension of such period’’ that re-sults from the bankruptcy proceedings. 11U.S.C. § 108(c)(1). The BAP determinedthat A.R.S. § 12–1551 is an ‘‘applicable non-bankruptcy law’’ setting the time for ‘‘com-mencing or continuing a civil action’’ thatmay be stayed by bankruptcy proceedings.3

Smith II, 293 B.R. at 223 (citing § 108(c)).

¶ 12 That determination does no violenceto Arizona law with respect to that portion ofA.R.S. § 12–1551 that addresses bringing anaction to enforce the judgment or seeking awrit of execution. Under Arizona law, en-forcement is stayed and the time in which toenforce the judgment is tolled during thependency of bankruptcy actions, just as it iswhile supersedeas bonds preclude enforce-ment and in other similar circumstances.

¶ 13 As a matter of Arizona law, however,the filing of an affidavit of renewal is simplya ministerial action intended in part to alertinterested parties to the existence of thejudgment. Such a ministerial filing serves anotice function and does not seek to enforce ajudgment. See J.C. Penney, 197 Ariz. at 119,¶ 29, 3 P.3d at 1039. It therefore is notprohibited under Arizona law by an automat-ic bankruptcy stay or any stay of the enforce-ment of the judgment, such as might beimposed by the filing of a supersedeas bond.4

3. We assume, by implication, that A.R.S. § 12–1612, which provides the mechanism for filingsubsequent renewal affidavits, would also qualifyas an ‘‘applicable nonbankruptcy law’’ that maybe stayed by bankruptcy proceedings. Cf. SmithII, 293 B.R. at 223 (holding A.R.S. § 12–1551 toqualify); 11 U.S.C. § 108(c) (employing term‘‘applicable nonbankruptcy law’’).

4. Several jurisdictions have similarly held that11 U.S.C. § 362(a)(4) does not prevent the filing

of a renewal affidavit. See, e.g., Morton, 866F.2d at 564; Barnett v. Lewis, 170 Cal.App.3d1079, 1090, 217 Cal.Rptr. 80, 86 (1985); O’Lanev. Spinney, 110 Nev. 496, 874 P.2d 754, 756(1994) (citing with approval the holding in Mor-ton ); Barber v. Emporium P’ship, 800 P.2d 795,797 (Utah 1990). The BAP declined to decidethis question in this case. Smith II, 293 B.R. at223.

640 Ariz. 101 PACIFIC REPORTER, 3d SERIES

¶ 14 Thus, for example, under Arizona law,a creditor with a judgment entered on Janu-ary 1, 2000, who was prevented by the exis-tence of a supersedeas bond or bankruptcystay from executing on the judgment untilJanuary 1, 2004, could nonetheless file a re-newal affidavit within the ninety days preced-ing January 1, 2005. See A.R.S. § 12–1612(B). But even if an affidavit were notfiled, the time in which to enforce the judg-ment would be tolled and extended throughJanuary 1, 2009, to accommodate the timethe creditor was precluded by the bond orstay from attempting to collect on the judg-ment. Accord Hazel v. Van Beek, 135Wash.2d 45, 954 P.2d 1301, 1310 (1998) (sum-marizing position of several jurisdictions re-garding suspensions, stays, and tolling oftime limits).

¶ 15 We therefore answer the first certi-fied question in the negative: Under Arizonalaw, the time to file an affidavit of renewal ofjudgment is not changed or extended by thependency of a bankruptcy case.

[2] ¶ 16 In addressing the second ques-tion, we start from the premise that the BAPhas ruled as a matter of federal law that§ 108(c)(1) extended the time for filing therenewal affidavit in this case. Smith II, 293B.R. at 226. The BAP has also concluded asa matter of federal law that the effectivenessof a judgment is extended by the number ofdays that A.R.S. § 12–1551 would have beensuspended by a stay preventing enforcementof the judgment. In this case, the BAPdetermined that period to be 487 days, thelength of time the bankruptcy stay precludedenforcement of the judgment. Id.

¶ 17 The second certified question askswhether, under these circumstances, eitherof the affidavits of renewal that the Lachtersfiled was timely. Given the BAP’s determi-nation in this case that the renewal deadlinewas extended under § 108(c)(1) by 487 days,see id., we conclude that the time for filingthe renewal affidavit was also extended. Asnoted above, one purpose of the filing re-quirements of A.R.S. §§ 12–1551 and 12–1612 is to provide notice and to limit theamount of record searching interested par-

ties must do to ascertain whether the judg-ment remains valid. J.C. Penney, 197 Ariz.at 119, ¶ 29, 3 P.3d at 1039. Once a bank-ruptcy stay is imposed, however, that pur-pose has been frustrated because § 108(c)extends the effectiveness of the judgmentbeyond the five-year statutory period.5

Creditors and other interested parties cannotknow the number of days that a stay remainsin effect without searching bankruptcy rec-ords outside the usually applicable ninety-day window. Under these circumstances, lit-tle additional burden is imposed by requiringan interested party to conduct a full searchof state records to determine whether a re-newal affidavit had been filed.

¶ 18 The debtor is not harmed by thisfrustration of purpose because the debtorhimself filed the bankruptcy action and in-voked the stay. The debtor already hasnotice of the status of the judgment. Cf.Nowels v. Bergstedt, 120 Ariz. 112, 114, 584P.2d 576, 578 (App.1978) (noting that debtorhas no vested right in prior interpretation ofA.R.S. §§ 12–1551 and 12–1612).

¶ 19 Because the rationale supporting thelimited filing window has been frustrated inthese circumstances, we hold that Arizonalaw would treat an affidavit of renewal filedanytime between December 6, 1996, the dateninety days preceding the Lachters’ originalsecond renewal deadline under A.R.S. § 12–1612(E), and the extended deadline of July 6,1998, as having been timely filed.

¶ 20 We reach our conclusion as follows:The BAP concluded in Smith II that § 108(c)applies to determine the renewal period for astate-court judgment. 293 B.R. at 223.That period is extended by either subsection(c)(2) to a date thirty days after notice of thetermination of the automatic stay, or by sub-section (c)(1) to a date set by ‘‘applicablenonbankruptcy law,’’ including ‘‘any suspen-sion of such period.’’ Id. If either of thosesections expands the deadline for filing arenewal affidavit past the five-year period setforth in state statute, we will treat an affida-vit filed at any time from ninety days beforethe expiration of the five-year period throughthe expiration of the extended deadline astimely. Honoring affidavits filed after the

5. The other purpose, renewing the judgment, re- mains unaffected.

641Ariz.UNITED EFFORT PLAN TRUST v. HOLMCite as 101 P.3d 641 (Ariz.App. Div. 1 2004)

fifth year but before the end of the extendedperiod serves the remedial purposes ofA.R.S. §§ 12–1551 and 12–1612. See Nowels,120 Ariz. at 114, 584 P.2d at 578.

CONCLUSION

¶ 21 For the foregoing reasons, we answerthe first certified question in the negative,and the second certified question in the affir-mative.

CONCURRING: CHARLES E. JONES,Chief Justice, RUTH V. McGREGOR, ViceChief Justice, MICHAEL D. RYAN andANDREW D. HURWITZ, Justices.

,

209 Ariz. 347

UNITED EFFORT PLAN TRUST,Plaintiff/Appellant,

v.

Milton HOLM and Lenore Holm,Defendants/Appellees.

No. 1 CA–CV 04–0175.

Court of Appeals of Arizona,Division 1, Department C.

Nov. 30, 2004.

Background: Church-created trustbrought forcible detainer action againsthusband and wife living on trust land inhouse built by husband. The SuperiorCourt, Maricopa County, No. CV-00-0528,James Chavez, J., dismissed the complaint.Trust appealed.

Holding: The Court of Appeals, Ehrlich,J., held that dispute between parties re-quired conventional action rather thanforcible detainer action.

Affirmed in part, vacated in part.

1. Landlord and Tenant O290(1)

Forcible detainer statutes apply onlywhen the parties have a landlord-tenant rela-tionship. A.R.S. §§ 12-1171, 12-1173.

2. Landlord and Tenant O288

The purpose of a forcible-detainer actionis limited; it is not a vehicle to decide wheth-er the parties have a landlord-tenant rela-tionship or were under a lease agreement,but rather, it is intended to afford a sum-mary, speedy and adequate remedy for ob-taining possession of the premises withheldby a tenant in violation of the covenants ofhis or her tenancy or lease.

3. Forcible Entry and Detainer O12(1)

No counterclaims, offsets, or cross com-plaints are available either as a defense orfor affirmative relief in a forcible detaineraction.

4. Forcible Entry and Detainer O32, 38(2)

As the only issue to be decided in aforcible detainer action is the right of actualpossession, the only appropriate judgment isthe dismissal of the complaint or the grant ofpossession to the plaintiff.

5. Landlord and Tenant O290(.5)

A real dispute regarding a landlord-ten-ant relationship must be tried in an ordinarycivil action rather than in a forcible detaineraction; in ordinary civil actions, time periodsare not accelerated, counter-claims and crossclaims are allowed, and there is an opportuni-ty for discovery.

6. Forcible Entry and Detainer O6(2)

Forcible detainer action by church-creat-ed trust against husband and wife living ontrust land was subject to dismissal, inasmuchas a genuine dispute existed between theparties that could only be resolved beyondthe limitations of a summary forcible detain-er action and in the context of a conventionalcivil action; legal relationship between theparties depended upon their history of oraland written understandings and agreements,as did issues of a life estate and defensivecollateral estoppel, which could not be re-solved in forcible detainer proceedings.

702 352 BANKRUPTCY REPORTER

Court of equity under the doctrine of un-clean hands. For these reasons, the plain-tiffs’ complaint for turnover as to all defen-dants is dismissed.

IT IS SO ORDERED.

,

In re James M. SMITH, Debtor.

James M. Smith, Appellant,

v.

Sidney Lachter, SandraLachter, Appellees.

BAP No. AZ–05–1116–SBMo.Bankruptcy No. 95–06077–PHX–RTB.Adversary No. 00–00539–PHX–RTB.

United States Bankruptcy Appellate Panelof the Ninth Circuit.

Argued and Submitted Jan. 20, 2006.

Filed Sept. 26, 2006.

Background: Judgment creditors broughtadversary proceeding for determination asto whether they had timely renewed theirjudgment. The United States BankruptcyCourt for the District of Arizona, RedfieldT. Baum, J., concluded that judgment hadbeen timely renewed, and debtor appealed.The Bankruptcy Appellate Panel, Perris,J., 293 B.R. 220, reversed and remanded.On remand, the Bankruptcy Court firstcertified questions to the Arizona SupremeCourt and, following answer to certifiedquestions, 209 Ariz. 343, 101 P.3d 637,again found that judgment was timely re-newed. Chapter 7 debtor appealed.

Holding: The Bankruptcy Appellate Pan-el, Smith, J., held that, absent any provi-sion of Arizona law providing for suspen-sion of time for filing renewal of judgment

based on pendency of bankruptcy casefiled by judgment debtor, no additionaltime for filing renewal affidavit was pro-vided by first paragraph of subsection ofthe Bankruptcy Code governing extensionof nonbankruptcy deadlines for commenc-ing or continuing actions against debtor,and renewal affidavit filed by judgmentcreditors more than eight months afterdeadline was untimely.

Reversed and remanded.

1. Bankruptcy O3782

Bankruptcy Appellate Panel (BAP)reviews bankruptcy court’s legal conclu-sions, including its interpretation of theBankruptcy Code and state law, de novo.

2. Bankruptcy O2002

Federal Courts O382.1

In matters of state law, BankruptcyAppellate Panel (BAP) was compelled todefer to interpretation given to such lawby state’s highest court.

3. Bankruptcy O2157

Judgment O868(1)

Under Arizona law, time for judgmentcreditors to file renewal affidavit, in orderto renew their judgment, was not suspend-ed during pendency of judgment debtor’sbankruptcy case. A.R.S. § 12-1612(B).

4. Bankruptcy O2157

First paragraph of subsection of theBankruptcy Code governing extension ofnonbankruptcy deadlines for commencingor continuing actions against debtor doesnot itself provide for tolling of such dead-lines, but merely incorporates suspensionsof deadlines which are expressly providedin other nonbankruptcy federal or statestatutes. 11 U.S.C.A. § 108(c)(1).

703IN RE SMITHCite as 352 B.R. 702 (9th Cir.BAP 2006)

5. Bankruptcy O2157 Judgment O868(1)

Absent any provision of Arizona lawproviding for suspension of time for filingrenewal of judgment based on pendency ofbankruptcy case filed by judgment debtor,no additional time for filing renewal affida-vit was provided by first paragraph ofsubsection of the Bankruptcy Code gov-erning extension of nonbankruptcy dead-lines for commencing or continuing actionsagainst debtor, and renewal affidavit filedby judgment creditors more than eightmonths after deadline was untimely. 11U.S.C.A. § 108(c)(1).

Ronald J. Ellett, Phoenix, AZ, for Debt-or.

Before: SMITH, BRANDT, andMONTALI, Bankruptcy Judges.

OPINION

SMITH, Bankruptcy Judge.

James M. Smith (‘‘Debtor’’) appeals adeclaratory judgment entered on May 20,2005, which determined that a state court

judgment held by Sidney and Sandra La-chter (‘‘Lachters’’) was timely renewed.We REVERSE and REMAND.

I. FACTS1

This matter is reminiscent of that oldBeatles’ standard, ‘‘The Long and WindingRoad,’’ a brooding song about a road thatnever ends.2 One can only hope that, withthis opinion, the end of the road is indeedin sight.

Neepawa Enterprises, Ltd. obtained ajudgment in state court (‘‘Judgment’’)against Debtor in April 1987 and assignedits rights thereunder to the Lachters.Pursuant to an Arizona law that requiresjudgments be renewed every five years,the Lachters timely renewed the Judg-ment on March 6, 1992.3

Debtor filed a chapter 13 4 petition onJuly 13, 1995, which was subsequently con-verted to a chapter 7. Debtor received hisdischarge on November 12, 1996.

On September 27, 1996, the Lachtersfiled a complaint to determine the dis-chargeability of the Judgment under§ 523(a)(2). The bankruptcy court en-tered a non-dischargeability judgment infavor of the Lachters on November 24,1998.5 We affirmed the bankruptcy

1. This appeal is related to a prior appealdecided by this panel in Smith v. Lachter (Inre Smith), 293 B.R. 220 (9th Cir. BAP 2003)(‘‘Smith II ’’) and a subsequent Arizona Su-preme Court decision, Lachter v. Smith (In reSmith), 209 Ariz.343, 101 P.3d 637 (2004)(‘‘Smith’’).

2. Paul McCartney/John Lennon, circa 1970:The long and winding roadThat leads to your doorWill never disappearI’ve seen that road before TTTT

3. Under Arizona law, a judgment creditormay renew a judgment by filing a renewalaffidavit within ninety days prior to the fiveyear expiration of the entry of judgment.Ariz.Rev.Stat. (‘‘A.R.S.’’) § 12–1612(B). Ad-ditional and successive renewal affidavits may

be made following the same formality. A.R.S.§ 12–1612(E). Thus, in the normal course ofthings, the deadline to file the next renewalwould have been March 6, 1997.

4. Absent contrary indication, all ‘‘Code,’’chapter and section references are to theBankruptcy Code, 11 U.S.C. §§ 101–1330,prior to its amendment by the BankruptcyAbuse Prevention and Consumer ProtectionAct of 2005, Pub.L. 109–8, 119 Stat. 23, as thecase from which these appeals arise was filedbefore its effective date (generally October 17,2005).

5. A minute entry/order was entered prior tothe final judgment on October 24, 1997.

704 352 BANKRUPTCY REPORTER

court’s ruling in Smith v. Lachter (In reSmith), 242 B.R. 694 (9th Cir. BAP 1999)(‘‘Smith I ’’).

On November 7, 1997, eight months af-ter the March 6, 1997 statutory deadlinefor renewing the Judgment, the Lachtersfiled another renewal (‘‘November 1997 re-newal’’).6 Nearly three years later, on Au-gust 29, 2000, the Lachters filed a secondcomplaint in the bankruptcy court, thistime seeking a determination that the No-vember 1997 renewal was timely. Oncross motions for summary judgment, thebankruptcy court concluded that the No-vember 1997 renewal was timely under§ 108(c)(2) 7, finding that the last date torenew was tolled until the entry of thenondischargeability judgment, i.e., Novem-ber 24, 1998. Debtor once again appealedto this panel.

In Smith II, we determined that thebankruptcy court erred by applying§ 108(c)(2), rather than § 108(c)(1).8 Inother words, we held that § 108(c)(1) pro-duced the ‘‘later’’ deadline for filing therenewal. In so doing, we presumed thatArizona law provided for a suspension ofthe requirement to file a renewal duringthe pendency of the bankruptcy, and

therefore calculated that the Lachters haduntil July 6, 1998, to renew the Judgment.9

Smith II, 293 B.R. at 226.

We were, however, concerned about theefficacy of the November 1997 renewal inlight of the presumed tolling period andthe requirement under A.R.S. § 12–1612(E) that a renewal affidavit of judg-ment be filed within 90 days prior to theexpiration of the judgment. If the expira-tion of the deadline to renew the Judgmentwas tolled to July 6, 1998, could the renew-al be filed earlier than April 7, 1998? Un-certain of the answer, we remanded thematter to the bankruptcy court for clarifi-cation and suggested that the questionmight be appropriate for certification tothe Arizona Supreme Court. Id. at 227.

On April 30, 2004, the bankruptcy courtcertified two questions to the Arizona Su-preme Court:

A) When a pending bankruptcy case isunresolved and the time period un-der Arizona law to file the requiredaffidavit of renewal of judgment haspassed, under what circumstances, ifany, is the time period under A.R.S.§ 12–1551 extended or otherwisechanged to allow the judgment credi-

6. On December 5, 1997, the Lachters filed asupplement to the affidavit, attaching thebankruptcy court’s signed minute order/entrydeclaring the debt non-dischargeable.

7. Section 108 provides, in relevant part:(c) [I]f applicable nonbankruptcy law TTT

fixes a period for commencing or continu-ing a civil action in a court other than abankruptcy court on a claim against thedebtor TTT and such period has not expiredbefore the date of the filing of the petition,then such period does not expire until thelater of—(1) the end of such period, including anysuspension of such period occurring on orafter the commencement of the case; or(2) 30 days after notice of the terminationor expiration of the stay under § 362 TTT asthe case may be, with respect to such claim.

11 U.S.C. § 108(c).

8. We concluded that the bankruptcy courtimproperly interpreted § 108(c)(2) to toll therenewal deadline to the date of the entry ofthe non-dischargeability judgment rather thansimply 30 days following the termination ofthe stay. Smith II, 293 B.R. at 224.

9. We determined that a stay was in effect for487 days, i.e., from the petition date (July 13,1995) until Debtor received his discharge(November 12, 1996). Smith II, 293 B.R. at226. As a result, we arrived at the July 6,1998 deadline by adding 487 days to theMarch 6, 1997 expiration date of the Judg-ment (March 6, 1997 v 487 days = July 6,1998). Id.

705IN RE SMITHCite as 352 B.R. 702 (9th Cir.BAP 2006)

tor to file a timely affidavit of renew-al of judgment?

B) Were either of the affidavits of re-newal of judgment filed by the La-chters timely filed? 10

Smith, 101 P.3d at 638.

As to the first question, the ArizonaSupreme Court responded that a ‘‘judg-ment creditor’s inability to enforce a judg-ment during the initial or a subsequentstatutory five-year period, whether be-cause of a bankruptcy stay or other rea-sons, does not extend the deadline imposedby A.R.S. §§ 12–1551 and 12–1612 to file arenewal affidavit.’’ Smith, 101 P.3d at 639.It reasoned that the filing of an affidavit ofrenewal was merely a ministerial act in-tended to notify parties in interest of theexistence of a judgment, and did not serveas a vehicle for enforcing the judgment.Id. Thus, the court concluded, the act ofrenewing a judgment was unaffected by apending bankruptcy case. Id.

In addressing the second question, theArizona court, ‘‘start[ing] from the premisethat the BAP ha[d] ruled as a matter offederal law that § 108(c)(1) extended thetime for filing the renewal affidavit’’, heldthat the November 1997 renewal was time-ly even though the filing date was morethan 90 days prior to July 6, 1998. Id. at640. Expanding on our analysis of§ 108(c)(1) in Smith II, the court ex-plained that a renewal affidavit of judg-ment filed any time from December 6,1996 (90 days prior to the original March6, 1997 deadline) to the extended deadlineof July 6, 1998 would be timely. Id. Basedon these findings of the Arizona court, thebankruptcy court entered a declaratoryjudgment in favor of the Lachters.

Debtor appeals.

II. ISSUE ON APPEAL

Whether the bankruptcy court erred indetermining that the Lachters timely re-newed the Judgment.

III. JURISDICTION

Federal subject matter jurisdiction isfounded under 28 U.S.C. §§ 1334(b) and157(b). We have appellate jurisdictionover final orders pursuant to 28 U.S.C.§§ 158(b)(1) and (c)(1).

IV. STANDARD OF REVIEW

[1] We review a bankruptcy court’s le-gal conclusions, including its interpretationof the Bankruptcy Code and state law, denovo. Roberts v. Erhard (In re Roberts),331 B.R. 876, 880 (9th Cir. BAP 2005).

V. DISCUSSION

Debtor contends that because the Ari-zona Supreme Court determined that thestatutory time to renew a judgment is nottolled by a pending bankruptcy, the bank-ruptcy court erred when it entered judg-ment in favor of the Lachters. According-ly, the November 1997 renewal should bedeemed untimely. We agree, however, un-derstanding why this is so requires a closeexamination of applicable federal and statelaw.

A. The November 1997 renewal affidavitwas untimely because the time forrenewing the Judgment was not ex-tended under § 108(c)(1).

Section 108(c) applies to the renewal ofstate court judgments. Smith II, 293 B.R.at 223; Spirtos v. Moreno (In re Spirtos),221 F.3d 1079, 1080–81 (9th Cir.2000).The time for renewing a state court judg-ment does not expire until the later of theapplicable state law period or thirty days

10. By the word ‘‘either,’’ we assume thebankruptcy court is referring to either the

November 1997 filing of the renewal affidavitor its supplement filed on December 5, 1997.

706 352 BANKRUPTCY REPORTER

after the termination of the automatic stay.11 U.S.C. § 108(c)(1) & (c)(2); Smith II,293 B.R. at 224–25. So, what was theapplicable period under state law in thiscase?

[2, 3] In Smith II, we interpreted Ari-zona law as tolling the time for filing arenewal affidavit during the pendency of abankruptcy case. 293 B.R. at 225–26. Wedid not, however, enjoy the benefit of theArizona Supreme Court’s analysis of theissue. Subsequent to Smith II, the Ari-zona court ruled unequivocally that ‘‘[u]n-der Arizona law, the time to file an affida-vit of renewal of judgment is not changedor extended by the pendency of a bank-ruptcy case.’’ Smith, 101 P.3d at 640.11

In matters of state law, we are compelledto defer to the interpretation given suchlaw by the state’s highest court. See Mar-cus v. McKesson Drug Co. (In re Mistura,Inc.), 22 B.R. 60, 62 (9th Cir. BAP 1982).Accordingly, we find that Arizona state lawdid not suspend the time for the Lachtersto file the renewal affidavit during thependency of the bankruptcy case.

[4, 5] As we observed in Smith II, thephrase ‘‘suspension of such period’’ refer-

enced in § 108(c)(1) refers to ‘‘either stateor federal nonbankruptcy law.’’ 293 B.R.at 225. As a result, § 108(c)(1) does notoperate without regard to existing non-bankruptcy law to stop the running of anyperiods of limitation. Id.; see also Rogersv. Corrosion Prods., Inc., 42 F.3d 292, 297(5th Cir.1995); Aslanidis v. U.S. Lines,Inc., 7 F.3d 1067, 1073 (2d Cir.1993) (‘‘Thereference in § 108(c)(1) to ‘suspension’ oftime limits clearly does not operate initself to stop the running of a statute oflimitations; rather, this language merelyincorporates suspensions of deadlines thatare expressly provided in other federal orstate statutes.’’). We have previously re-jected the minority view to the contrary.Smith II, 293 B.R. at 226 n. 7. Absentstate law suspending the time for filing therenewal affidavit, the original limitationdate of March 6, 1997 applied. No addi-tional time was afforded under§ 108(c)(1).12

The Lachters did not file an affidavit ofrenewal until November 11, 1997, morethan eight months after the renewal dead-line of March 6, 1997. We therefore con-clude that the bankruptcy court erred infinding that the renewal was timely filed.13

11. We note that the Arizona court’s conclu-sion is based in part on its view that, unlikethe enforcement of a judgment, the automaticstay is not implicated by the ‘‘ministerial’’ actof filing the renewal affidavit. Morton v. Nat.Bank of New York City (In re Morton), 866F.2d 561, 564 (2nd Cir.1989) (automatic staydoes not apply to the filing of an extension ofa statutory lien); accord Wussler v. Silva (In reSilva), 215 B.R. 73, 77 (Bankr.D.Idaho 1997)(the filing of an application for renewal ofjudgment pursuant to California law is not aviolation of the automatic stay). But see In reLobherr, 282 B.R. 912, 917 (Bankr.C.D.Cal.2002) (the filing of a renewal application pur-suant to California law violates the automaticstay). We declined to address the issue inSmith II, 293 B.R. at 223.

12. In Smith II, we held that because the stayterminated as of November 12, 1996, whenDebtor received his discharge, the deadline torenew the Judgment under § 108(c)(2) wasDecember 12, 1996 (30 days after the expira-tion of the stay). Smith II, 293 B.R. at 226.Under § 108(c)(1), the Judgment would ex-pire on March 6, 1997. As the ‘‘later’’ of thetwo dates under § 108(c) was the originalMarch 6, 1997 date, our conclusion that§ 108(c)(1) is the applicable subsection re-mains unchanged.

13. As in Smith II, we need not decide wheth-er a renewal of judgment is a violation of theautomatic stay under § 362 as the issue nec-essary to the disposition of the appeal beforeus.

707IN RE MUNTONCite as 352 B.R. 707 (9th Cir.BAP 2006)

B. The Arizona Supreme Court’s state-ment that the November 1997 renewalwas timely based on assumptionsmade by this panel in Smith II doesnot render the renewal timely.

In Smith II, we erroneously presumedthat Arizona law might provide a tollingperiod for the renewal of a judgment uponthe filing of a bankruptcy petition. Thesecond question posed to the Arizona courtregarding the efficacy of a renewal filedmore than 90 days prior to the expirationdate of the judgment reflected that errone-ous possibility. The Arizona court wascareful to point out that its response wasnarrowly premised on the BAP’s ruling ‘‘asa matter of federal law that § 108(c)(1)extended the time for filing the renewalaffidavit in this case’’ for 487 days andthat, ‘‘under these circumstances[,]’’ theNovember 1997 renewal would have beentimely. Smith, 101 P.3d at 640. The Ari-zona court’s response to a specific ques-tion, itself based upon a flawed assump-tion, does not undermine or contradict itsclear finding that nothing in A.R.S. §§ 12–1551 and 12–1612 provide for a suspensionof the time for filing a renewal of judg-ment during the pendency of a bankruptcycase.

VI. CONCLUSION

For the foregoing reasons, we RE-VERSE the judgment entered by thebankruptcy court finding that the Lachtershad timely renewed the Judgment andREMAND for entry of judgment in favorof Debtor.

,

In re Peter MUNTON, Debtor.

T & D Moravits & Co., Appellant,

v.

Peter Munton, Appellee.

BAP No. SC–05–1314–SRyMa.Bankruptcy No. 03–05103.Adversary No. 03–90314.

United States Bankruptcy Appellate Panelof the Ninth Circuit.

Argued and Submitted by TelephoneConference on July 14, 2006.

Filed Sept. 28, 2006.

Background: Unpaid subcontractor thathad previously obtained state court judg-ment against Chapter 7 debtor-contractorsued to except this judgment debt fromdischarge. The United States BankruptcyCourt for the Southern District of Califor-nia, Peter W. Bowie, Chief Judge, deniedsubcontractor’s motion for summary judg-ment, and subcontractor appealed.

Holdings: The Bankruptcy AppellatePanel, Smith, J., held that:

(1) duties that debtor owed, under theTexas construction trust fund statute,to subcontractor on construction pro-ject with respect to monies that hereceived placed debtor in ‘‘fiduciary ca-pacity’’ to subcontractor, as thoseterms are used in nondischargeabilityprovision; and

(2) failure on part of Chapter 7 debtor-contractor to properly pay over, tosubcontractor on construction project,funds that he had received was in na-ture of ‘‘defalcation.’’

Reversed and remanded.

1. Bankruptcy O3782Bankruptcy Appellate Panel (BAP)

reviews bankruptcy court’s decision on mo-tion for summary judgment de novo.

Arizona Bankruptcy American Inn of Court

Arizona Supreme Court Certification Issue Articles

January 8, 2015

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© 2014 Thomson Reuters. No claim to original U.S. Government Works. 1

2004 No. 1 Norton Bankr. L. Adviser 3

Norton Bankruptcy Law Adviser January 2004

To Certify or Not to Certify: When Can a Bankruptcy Court Certify Questions of State Law?

Sharron B. Lane Law Clerk, Hon. Keith M. Lundin Bankr. M.D. Tenn.

Since the pronouncement in Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938), that “[t] here is no federal general common law [, that] the law to be applied in any case is the law of the state[,] [a]nd [that] the law of the state shall be declared by its Legislature in a statute or by its highest court in a decision,” federal courts have been obliged to predict how a state’s highest court would answer unresolved questions of state law. In bankruptcy cases and proceedings, federal courts routinely apply state law to determine such things as property interests, secured creditor status and priority, and exemptions. See, e.g., Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 918, 59 L. Ed. 2d 136 (1979) (“Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”). State law issues that arise in bankruptcy cases often recur and have significance beyond the parties before the court. Not infrequently, however, state law is in doubt, with no determination from the state’s highest court. See, e.g., In re Arnold, 73 P.3d 861 (Okla. 2003) (scope of homestead exemption); In re Akins, 87 S.W.3d 488 (Tenn. 2002) (validity of deed acknowledgment); In re Crim, 81 S.W.3d 764 (Tenn. 2002) (validity of acknowledgment by only one settlor); In re Zimmerman, 46 P.3d 599 (Mont. 2002) (personal property exemptions); In re Holt, 932 P.2d 1130 (Okla. 1997) (entitlement to state tax refund); In re Butler, 552 N.W.2d 226 (Minn. 1996) (whether Minnesota’s Fraudulent Transfer Act applies to regularly conducted, noncollusive statutory cancellations of contracts for deed). As recognized in Butner, “[u]niform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving a windfall merely by reason of the happenstance of bankruptcy.” Butner, 440 U.S. 48 at 55. The procedure available to federal courts to prompt the highest court of a state to answer an unresolved question of state law is called certification. The value of certification has long been acknowledged by the Supreme Court: “[W]here there is doubt as to local [state] law and where the certification procedure is available, resort to [certification] is not obligatory[, but] [i]t does, of course, in the long run save time, energy, and resources and helps build a cooperative judicial federalism.” Lehman Bros. v. Schein, 416 U.S. 386, 390 to 391, 94 S. Ct. 1741, 1744, 40 L. Ed. 2d 215 (1974). Certification procedures are available in nearly every state. See Appendix A. Only Pennsylvania and North Carolina today lack procedures for certification to their state’s highest courts. The District of Columbia and Puerto Rico also have certification procedures. Seeking to expand the use of certification, in 1995 the National Conference of Commissioners on Uniform State Laws approved a revision of the Uniform Certification of Questions of Law Act. The 1995 Act recommends the following provision for which courts may certify questions to a state’s highest court: “The [Supreme Court] of this State may answer a question of law certified to it by a court of the United States[.]” Unif. Certif. Questions of Law Act § 3 (1996). The Official Comment notes that “[t]his section has been revised to replace the previous list of federal courts with the term ‘a court of the United States.’ This is intended to permit a court in a State adopting the section to answer questions certified by any United States court including bankruptcy courts.” The use of the phrase “a court of the United States” by the Uniform Law Commissioners while intending to encompass bankruptcy courts may provide fodder for dispute. “Court of the United States” is defined in 28 U.S.C. § 451 to include “the Supreme Court of the United States, courts of appeals, district courts constituted by chapter 5 of this title, including the Court of International Trade and any court created by Act of Congress the judges of which are entitled to hold office during good behavior.” This definition has led to a split in the circuits on the status of

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bankruptcy courts as courts of the United States. Compare In re TCI Ltd., 769 F.2d 441, 450 (7th Cir.1985) (affirming bankruptcy court’s imposition of sanctions under § 1927) with, Perroton v. Gray (In re Perroton), 958 F.2d 889, 893 to 896 (9th Cir.1992) (bankruptcy court is not a court of the United States entitled to waive filing fees under 28 U.S.C. § 1915(a)); see also Brown v. Mitchell (In re Arkansas Communities, Inc.), 827 F.2d 1219, 1221 (8th Cir.1987) (“questionable whether a bankruptcy court falls within the definition of ‘courts of the United States’ for purposes of imposing sanctions against attorneys”). The 1995 Act sought the widest possible use of the certification process to promote judicial economy and the proper application of a particular jurisdiction’s law in a foreign forum. Notwithstanding this effort toward uniformity, certification procedures--whether codified by statute or implemented through rule by the state’s highest court--vary from state to state and may or may not be available to a bankruptcy court. Some states narrowly define the courts from which the state supreme court may received certified questions. In New Jersey, for example, only the Court of Appeals for the Third Circuit may certify questions to the New Jersey Supreme Court. N.J. R. App. Prac. 2:12A-1. Similarly, in Illinois certification to its supreme court is limited to the United States Supreme Court or the United States Court of Appeals for the Seventh Circuit. Ill. Sup. Ct. R. 20. By contrast, Alaska authorizes certification from “the Supreme Court of the United States, a court of appeals of the United States, a United States district court, a United States bankruptcy court or [a] United States bankruptcy appellate panel.” Alaska R. App. P. 407. See also Tenn. Sup. Ct. R. 23 (includes “a United States Bankruptcy Court in Tennessee”); Mo. Ann. Stat. § 477.004 (includes “a United States Bankruptcy Court”). A number of states accept certification from “the United States Supreme Court, United States Courts of Appeal and United States District Courts.” While not expressly inclusive of bankruptcy courts, the language has been construed by some state courts to include bankruptcy courts. See Price Waterhouse Ltd. v. Decca Design Build, Inc. (In re Price Waterhouse Ltd.), 46 P.3d 408 (Ariz. 2002) (Ariz. Rev. Stat. § 12-1861 gives Arizona Supreme Court jurisdiction to accept certified questions from federal bankruptcy courts. “[T]he intent of the statute as it currently exists, coupled with our own supreme court rule allowing certification of questions from federal and tribal courts, sufficiently provides this court with the discretionary authority to answer the bankruptcy court’s certified question.”); In re Beardsley, 745 A.2d 986 (Me. 2000); Colonial Tavern, Inc. v. Boston Licensing Bd., 425 N.E.2d 284 (Mass. 1981); Jackman v. Nance, 857 P.2d 7 (Nev. 1993); In re D’Ellena, 640 A.2d 530 (R.I. 1994). Given the intention of the 1995 Act to include bankruptcy courts among the federal courts from which certifications may be taken, states that have modeled their procedures on the 1995 Act should accept certification from bankruptcy courts. Those states include Connecticut, Maryland, Minnesota, Montana, New Mexico, Oklahoma, Vermont, and West Virginia. See In re Williams, 584 S.E.2d 922 (W. Va. 2003); In re Arnold, 73 P.3d 861 (Okla. 2003); In re Zimmerman, 46 P.3d 599 (Mont. 2002); In re Butler, 552 N.W.2d 226 (Minn. 1996). Alabama’s certification procedures while not modeled upon the 1995 Act also contain the language “a court of the United States.” Ala. R. App. P. 18. The Alabama Supreme Court has read its rule to include certification from bankruptcy courts. See Morgan v. Farmers & Merchants Bank, 856 So.2d 811 (Ala. 2003); McRae v. Security Pacific Housing Services, Inc., 628 So.2d 429 (Ala. 1993). The potential benefits of certification are deftly demonstrated by the current state of law in the Eleventh Circuit on the issue whether a Chapter 13 debtor retains a sufficient interest in a vehicle repossessed prepetition to render the vehicle property of the estate. In Charles R. Hall Motors, Inc. v. Lewis (In re Lewis), 137 F.3d 1280 (11th Cir. 1998), purporting to apply Alabama law, the Eleventh Circuit held that prepetition repossession of a car stripped the debtor of an interest sufficient to support turnover of property of the estate. The Eleventh Circuit confessed in Lewis that the interest a debtor holds upon repossession of collateral under Alabama’s version of Article 9 of the Uniform Commercial Code, was not a settled issue under Alabama law, and there appeared to be no “clear controlling precedents in the decisions” of the Alabama Supreme Court. Lewis has been much criticized for its interpretation of Alabama law, including from bankruptcy courts within Alabama. In Greene v. The Associates (In re Greene), 248 B.R. 583, 585 (Bankr. N.D. Ala. 2000), the bankruptcy judge declared Lewis “wrong in its holding on what property interest a defaulted debtor retain in a motor vehicle under Alabama law following its repossession, but before its sale.” See also Smith v. Ford Motor Credit Co. (In re Smith), 301 B.R. 585 (N.D. Ala. 2003) (district court makes no judgment on the merits of Lewis, but finds itself bound by Lewis until and unless an en banc panel of the Eleventh Circuit overrules Lewis).

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In Bell-Tel Federal Credit Union v. Kalter (In re Kalter), 292 F.3d 1350 (11th Cir. 2002), the Eleventh Circuit was presented with the same issue under Florida law. The court concluded that Florida’s certificate of title statute, read separate and apart from the rights and obligations of parties under Florida’s version of the Uniform Commercial Code, passes title to secured creditors upon repossession leaving no ownership interest that could be considered property of the estate. As in Lewis, the issue before the court in Kalter had not been addressed by the Florida Supreme Court, and guidance from lower state courts was meager. Presented for a third time with the issue, this time under Georgia law, the Eleventh Circuit exercised its ability to ask the state’s highest court to make a definitive determination of Georgia law. In Motors Acceptance Corp. v. Rozier (In re Rozier), 348 F.3d 1305 (11th Cir. 2003), the Eleventh Circuit certified the question: “Does legal title, or any other ownership interest that would give a right or possession, pass to that creditor under Georgia law upon repossession of an automobile subsequent to a debtor’s default on an automobile installment loan contract, or does such legal title or other ownership interest remain in the debtor?” Depending on the outcome in the Georgia Supreme Court in Rozier, debtors’ attorneys in Florida and Alabama may wish that a similar route had been taken in Lewis and Kalter. Whether certification is available in the Eleventh Circuit when Florida or Alabama law are concerned is a matter for debate. See Lee v. Frozen Food Exp., Inc., 592 F.2d 271 (5th Cir. 1979) (“Once a panel of this Court has settled on the state law to be applied in a diversity case, the precedent should be followed by other panels without regard to any alleged existing confusion in state law, absent a subsequent state court decision or statutory amendment which makes this Court’s decision clearly wrong.”). It has been suggested that deferring excessively to precedent is such cases violates Erie and is certainly contrary to the spirit of the Supreme Court in Lehman. See Jed I. Bergman, Putting Precedent in Its Place: Stare Decisis and Federal Predictions of State Law, 96 Colum. L. Rev. 969 (1996). As the Supreme Court observed in Lehman, “in the long run [certification can] save time, energy, and resources and helps build a cooperative judicial federalism.” Lehman, 416 U.S. 386 at 391. Certainly the Uniform Law Commissioners saw the value of certification to bankruptcy courts when they revised the uniform law in 1995. Nevertheless, certification remains an under-utilized procedure in the bankruptcy courts. Perhaps the experience of Rozier and the Eleventh Circuit in Lewis-Kalter-Rozier will shine new light on certification.

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87 Am. Bankr. L.J. 483

American Bankruptcy Law Journal Fall 2013

Article

*483 CERTIFICATION OF STATE-LAW QUESTIONS BY BANKRUPTCY COURTS

Verity Winshipa1

Copyright (c) 2013 the National Conference of Bankruptcy Judges; Verity Winship

ABSTRACT

Bankruptcy courts must often decide unsettled questions of state law. This Article seeks to bring to the bankruptcy courts’ attention their ability to certify open questions of state law directly to the highest level state court. By identifying existing language in state statutes and rules that permits certification from bankruptcy courts, and drawing on an original study of prior certification of state-law questions arising in bankruptcy proceedings, the Article demonstrates that the mechanism has been available for over forty years, across numerous judicial districts, and involving a wide range of subject areas and types of bankruptcy cases. This Article not only provides this broad range of precedent, but also proposes model language for a local rule and makes recommendations to increase the chances of acceptance of a certified question by the state court. Finally, tables in the Article’s appendix provide readers with easy access to state enabling language and past precedent. I.

INTRODUCTION

484

II.

HOW BANKRUPTCY CERTIFICATION WORKS

486

A. Certification’s Relevance to Bankruptcy

486

B. State Courts’ Authority to Hear Bankruptcy Certifications

490

1. Legal versus Factual Issues

491

2. Dispositive Issues

491

3. Unsettled Law

491

4. Important Issues

491

5. Procedural Requirements

493

6. Permissible Certifying Courts

494

C. Bankruptcy Courts’ Authority to Certify Questions

499

III.

THE PRECEDENT FOR BANKRUPTCY CERTIFICATION

500

A. The Study 500

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B. The Findings

501

1. Broad Precedent for Direct Certification from Bankruptcy Courts

502

2. Response Time

505

3. State-Court Refusals of Certified Questions

506

4. The Role of Counsel

507

IV.

RECOMMENDATIONS

509

A. Model Language for a Local Rule

509

B. A List of Recommendations for Certifying Courts

510

1. Provide that the state court may reformulate the question

510

2. Provide assurance that the state-law issue is dispositive

511

3. Provide guidance as to the record to be transmitted to the state court

511

4. Give counsel input into the statement of facts and/or formulation of the question

511

5. Require parties to notify the certifying court of state-court decisions

511

6. Provide for allocation of costs

512

V.

CONCLUSION

512

*484 I. INTRODUCTION

Bankruptcy courts frequently must apply state law. Sometimes the state-law question is well settled. Other times, the state courts have yet to issue an opinion on a thorny question of state law. The bankruptcy court must then either attempt to predict how the highest state court would decide the issue or find a means to deflect it. Bankruptcy courts have often used abstention, remand after removal, dismissal, and withdrawal of the reference to the district court as a means for sending the question back to the state courts, or at least to a federal court with broader jurisdiction. In fact, abstention has had a long-standing role in bankruptcy.1 One of the earliest U.S. Supreme *485 Court cases to develop the abstention doctrine arose in the bankruptcy context,2 and was designed specifically to permit cases that were otherwise within the bankruptcy court’s jurisdiction to be decided by the originating state court. Abstention and broad remand provisions are built into the statutory framework of bankruptcy law.3 Another option is available to the bankruptcy court when it is wrestling with an open question of state law. It is an underutilized, lesser known method, referred to as “certification.” It involves a request by a federal court or agency to the highest state court within the territory that created the cause of action for an interpretation of the particular state law. This method allows the bankruptcy court to retain jurisdiction to later apply the state court’s interpretation to its proceeding. It also bypasses the otherwise lengthy process of having an issue percolate through the state court system, starting with the trial court, proceeding next to the first level appellate court, and then finally reaching the state’s highest appellate court. This option is especially attractive when the open question is one that recurs often in bankruptcy cases, such as questions regarding state exemptions and other debtor-creditor laws.4 When a state court receives a request for certification of a legal question, it does not have to accept the question. Even if it is

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willing to do so, the state court must consult its statutes, rules, and state constitution to assure itself that it has the authority to hear certified questions. These sources of jurisdictional grants of authority are referred to in this Article as the “state enabling language,” as these sources enable the state court to issue an opinion on a certified question. While a state’s enabling language may authorize its highest state court to accept certifications generally, it may also limit the types of courts or agencies from which the state court may accept a question. This Article focuses exclusively on certifications that arise during bankruptcy proceedings. It includes certifications by bankruptcy courts and district courts during initial proceedings, as well as certification by courts hearing bankruptcy appeals. The study identifies precedent for the use of certification in initial bankruptcy proceedings in a wide variety of circumstances. Examination of bankruptcy certification is long overdue.5 The U.S. Supreme *486 Court has praised certification for promoting “cooperative judicial federalism.”6 This function is especially relevant to bankruptcy because of the sheer volume of state law decided by bankruptcy courts. This Article identifies precedent for the use of bankruptcy certification and suggests how certification can and should be used in bankruptcy proceedings going forward. Part Two discusses the relevance of certification to the bankruptcy context, the authority of state courts to answer questions certified by bankruptcy courts, and the authority of bankruptcy courts to certify questions to the state courts. In Part Three, this study details how bankruptcy certifications have arisen in a wide range of subject areas and types of bankruptcies. It demonstrates that bankruptcy certifications have occurred over a wide geographical area throughout the past forty years. It examines, among other things, the criteria and procedures employed by state courts in determining whether to accept or reject a certification request. Part Four focuses on the implementation of bankruptcy certification by providing proposed language for a local rule, as well as recommended practices to increase the certifying court’s chances of having the question accepted by the state court. The final element of this Article lifts one barrier to the use of certification. Because certification is enabled at the state level and its scope and application differ by state, information about its availability and use is particularly important, but not always easy to find. Table 1 provides citations to the state enabling statutes, rules, and constitutional provisions, with a focus on the type of textual provision that has provided a basis for certification directly from bankruptcy courts. Table 2 aggregates bankruptcy certification data and allows readers to see if a particular court has answered any certified questions that arose in a bankruptcy proceeding, by providing specific citations.7

II. HOW BANKRUPTCY CERTIFICATION WORKS

A. Certification’s Relevance to Bankruptcy

The concept of certification grew out of the Supreme Court’s decision in *487 Erie Railroad Co. v. Tompkins, in which the Court held that “[t]here is no federal general common law” and required federal courts sitting in diversity to apply state substantive law.8 This decision, and the statutory grant of diversity jurisdiction, put federal courts in the position of having to predict how the highest state court would interpret state law.9 This prompted a concern that the prediction (the so-called “Erie guess”) might turn out to be “wrong.” In other words, a state court addressing the same legal question might come out a different way.10 If the federal court makes a bad Erie guess, then it not only affects the particular litigants, but it also may decrease respect for courts in general.11 Certification has become one of the major tools available to aid federal courts in avoiding the Erie guess dilemma. In fact, the primary purpose behind the Uniform Certification of Questions of Law Act (“Uniform Act”), promulgated in 1967 and later revised in 1995, was to provide a way for courts to “avoid guessing what that law is when there is no definitive answer in the law of the controlling State.”12 In its 1974 opinion in Lehman Brothers v. Schein, the U.S. Supreme Court praised certification procedures as a means of “sav[ing] time, energy, and resources and help[ing] build a cooperative judicial federalism.”13 Following the Supreme Court’s lead, almost all states now allow the certification of questions to their highest courts (and sometimes allow certification requests by entities like the Securities and Exchange Commission).14 The most common form of certification is from a federal court of appeals to the highest court of a state, which most states permit in their jurisdictional statute or rules.15 In its earliest years, critics warned that certification would force state courts to issue advisory opinions, but state courts have generally determined that these answers are permissible, and certain *488 aspects of

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the state enabling language address this concern.16 Over the years, certification has garnered both critics and supporters who have studied the effects of certification, primarily in the context of requests from federal circuit courts.17 In general, certification from federal courts of appeal has become a well-established piece of the federal jurisdictional landscape.18 By way of contrast, very little scholarship has been devoted to studying the effects of certification in the bankruptcy context. This inattention is surprising in part because of the significant part that state law plays in bankruptcy disputes. Many debtor-creditor rights that are raised in bankruptcy cases have not been addressed by the state’s highest court.19 Bankruptcy courts, therefore, suffer from the same problem of having to guess how the highest state court would decide the issue.20 The broad sweep of bankruptcy jurisdiction may pull in many debtor-creditor disputes that would otherwise arise in state court cases.21 Plus, the sheer volume of bankruptcy cases intensifies *489 the concerns.22 The neglect of bankruptcy certification is also striking because of the attention given to other mechanisms, especially abstention, that enable bankruptcy courts to direct state-law questions to a state court. Abstention has a longstanding role in bankruptcy. In fact, the so-called Pullman abstention--which permits a federal court to abstain when a federal constitutional case raises an open state-law issue--has its roots in bankruptcy proceedings.23 In Thompson v. Magnolia Petroleum Co., courts of appeals from two different circuits issued conflicting interpretations of Illinois state law.24 The U.S. Supreme Court accepted certiorari and remanded the case to the federal district court (acting as a bankruptcy court in this pre-Code period), with instructions to submit the state-law question to the Illinois state courts.25 The Court’s reasoning echoes the same concerns voiced in Erie that underlie the development of both abstention and certification:

Unless the matter is referred to the State courts, upon subsequent decision by the Supreme Court of Illinois it may appear that rights in local property of parties to this proceeding have--by the accident of federal jurisdiction--been determined contrary to the law of the State which in such matters is supreme.26

The abstention doctrines have been codified, allowing bankruptcy courts to abstain “in the interest of justice, or in the interest of comity with State courts or respect for State law.”27 These abstention powers are complemented (and sometimes effectuated) by a broad remand power “on any equitable *490 ground.”28 According to the U.S. Supreme Court, Congress has signaled through these statutory provisions that the bankruptcy court may decline jurisdiction in favor of a state forum. In its 2011 Stern v. Marshall opinion, the Court described the statutory framework as “already contemplat[ing] that certain state law matters in bankruptcy cases will be resolved by judges other than those of the bankruptcy courts,” pointing specifically to abstention as its example.29 Although it employs a different mechanism than abstention, certification has the same effect of sending legal questions to the highest court of the state whose law applies. In sum, certification is an underutilized tool in bankruptcy. When properly used, it provides a means of redirecting compelling state law questions to the hands of the highest state court. Because of the vast array of debtor-creditor issues that come before the bankruptcy court, and due to the sheer volume of bankruptcy cases, bankruptcy provides recurring opportunities for certification.

B. State Courts’ Authority to Hear Bankruptcy Certifications

In deciding whether to accept a particular certification request, state courts look to their jurisdictional grants for guidance. A state court’s authority to hear certified questions may be found in state statutes, court rules, and sometimes state constitutional provisions, all of which define the jurisdiction of the highest state court. These sources play a key gatekeeping role. This section focuses on the most common criteria employed in deciding whether to grant certification, as well as common procedural requirements. It then examines from what level of federal court the state court will accept a certification (i.e. whether it will accept direct certification from the bankruptcy court or whether it limits certification requests to appellate courts). State authorizations vary, but the Uniform Act has often served as a model for states. Due in part to the Act’s influence, some criteria for certification have become widespread. State enabling language often includes requirements that the certified questions be (1) legal rather than factual; (2) determinative or dispositive; (3) unsettled in state law; and (4) important,30 *491 as well as listing (5) procedural requirements and (6) permissible certifying courts. 1. Legal versus Factual Issues.

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The first requirement is that the question be legal. The Alabama Supreme Court, responding to a certified question from a bankruptcy court, noted the limited scope to be given to a certified question:

Because we are called upon to address only “questions or propositions of law” [[when a question is certified], we venture no opinion as to the proper resolution of the fact-based issue . . . . We naturally leave that determination to the bankruptcy court, having provided our Rule 18 “instructions” concerning the applicable legal standard.31

2. Dispositive Issues. Second, most states require that the question certified be “determinative,” “dispositive,” or at least potentially determinative or dispositive of the proceeding before the certifying court.32 Early debates about whether certification required impermissible advisory opinions were resolved in part by including this restriction.33 3. Unsettled Law. The third common requirement is that the certified state-law question be unsettled or “open” in state law. Many state provisions require that no relevant decisions of the highest state court exist.34 Others further require that there be no intermediate appellate court decisions on the issue.35 4. Important Issues The fourth requirement of “importance” surfaces as a factor in the judicial decisions asking and responding to certified questions rather than in any statute, rule, or constitutional provision addressing certification. For example, the Nevada Supreme Court has said that it exercises its discretion to answer *492 certified questions based in part on whether “the answer will help settle important questions of law.”36 A similar emphasis on “importance” of the state-law issue can be found in federal court descriptions of the types of questions that warrant certification in the bankruptcy context and in federal courts generally.37 Sometimes an issue is considered “important” because it will impact broad state regulatory schemes or it involves peculiarly local questions regarding land use and the like.38 While there are no bright line tests for identifying the importance of an issue, one of the factors weighed in assessing importance is the extent to which an issue is expected to recur. Although the statutes or rules governing certification do not require recurrence, both certifying and answering courts frequently mention the possibility of recurrence in their decisions.39 These courts may view the potential for recurrence in terms of the particular issue before the court or they may view the issue and the impact of its resolution in a broader context that would implicate many cases or transactions.40 Sometimes the recurring issue is expected to come before the state courts or to have a significant impact on the citizens of the particular state.41 Other *493 times the courts recognize that the state-law issue will recur, but primarily or even exclusively in bankruptcy cases. After all, a prerequisite to certification is that there be no controlling opinion from the state’s highest court, which sometimes occurs because the issue simply arises infrequently or not at all in a state court context.42 Bankruptcy courts may, for instance, have more opportunities to interpret state debtor-creditor laws, such as exemption laws and U.C.C. issues.43 5. Procedural Requirements State enabling language, from which the court derives its authority to hear certified questions, often also prescribes the procedures that will apply. The particular state language may indicate, among other things: • Whether the state court can reformulate or amend the question • The contents and form of the certification order • Documentation and portions of the record that must be sent to the answering state court • Which system’s procedural rules apply

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• Who bears the costs of certification Answers to these questions vary among states. Table 1 provides a citation to the authorizing language of each state from which its specific requirements may be gleaned. For example, Delaware’s enabling language departs from the model language. Its enabling language gives the state court broad discretion to accept certified questions if it “appears to the [Delaware] Supreme Court that there are important and urgent reasons for an immediate determination of such questions by it.”44 Unlike most other states, the fact that the question is open or unsettled is only one possible reason to accept a certified question, but is not a requirement.45 *494 6. Permissible Certifying Courts To this point, the limits and procedures described have applied to all certifying entities. After ascertaining these general criteria, the next step for the certifying court is to determine whether it is one of the types of federal courts46 from which the state court is allowed to accept a certification request. This aspect of the enabling language is particularly important to bankruptcy certification because it determines whether or not the state court is permitted to receive a certification request from a bankruptcy court. A statute that permits certification only from the U.S. Supreme Court and federal circuit courts of appeals would, for instance, prevent the state court from answering questions certified by the bankruptcy court. In a small minority of states, the state’s enabling language explicitly includes bankruptcy courts in the list of permissible certifying courts. More often the state’s enabling language is broad enough to support an interpretation that it includes bankruptcy courts. Much state enabling language is modeled on the Uniform Act, which includes a list of courts that the Act proposes should be authorized to make requests for certification. The 1967 version of the Act enumerated specific courts, including federal district courts, but omitted any reference to bankruptcy courts because bankruptcy courts were not to come into being for eleven more years.47 The 1995 version proposed model language allowing the highest state courts to answer questions from “a court of the United States,” as well as courts of other states, tribes, Canada and Mexico.48 Despite its more general reference to “a court of the United States,” the model language has never explicitly included bankruptcy courts. The omission of bankruptcy courts was the subject of much debate among the uniform law commissioners who approved the 1995 revisions.49 Some commissioners *495 viewed certification as particularly relevant to bankruptcy courts, which often face novel state-law questions.50 On the other side of the debate, some commissioners worried that including bankruptcy courts would impede state adoption of the Uniform Act, in part because of state courts’ reluctance to accept certifications from any courts other than federal appellate courts.51 Such an expansion, these commissioners worried, might also trigger extension to administrative agencies and thus discourage state adoption.52 In compromise, the model language did not list bankruptcy courts explicitly, but its more general language left open the possibility of an inclusive interpretation. In fact, the comments noted that this “[revision] is intended to permit a court in a State adopting the section to answer questions certified by any United States court including bankruptcy courts.”53 It addressed the commissioners’ concerns by noting that the state courts retained the discretion to decline to answer. “Ultimately, the receiving court retains the power to accept or reject a certified question so that it can control its docket even though the number of courts from whom it may receive a certified question has been expanded.”54 Despite the lack of express inclusion of bankruptcy courts in the Uniform Act and in many state enabling provisions, as of December 31, 2012, thirty-nine out of fifty states use language in their statutes, rules, or constitutions that either expressly encompasses, or may be interpreted as indirectly encompassing, certification requests from bankruptcy courts, such as: • “a court of the United States,” “any federal court,” or a similar phrase (15 states as of Dec. 31, 2012) *496 • U.S. District Courts (20 states as of Dec. 31, 2012, omitting those that also list bankruptcy courts) • U.S. Bankruptcy Courts (4 states as of Dec. 31, 2012)55 Courts have sometimes held the phrase “a court of the United States” allows for certification directly from bankruptcy

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courts,56 sometimes drawing on courts’ interpretation of this language in other statutory contexts.57 Certainly, the official comments to the Uniform Act, which suggested that bankruptcy courts be included in this broad grant, should bolster this interpretation.58 In states with a reference to “U.S. District Courts,” state courts have sometimes justified acceptance of certified questions from bankruptcy courts on the ground that the bankruptcy court is a unit of the federal district court.59 Some of the commissioners on uniform state laws articulated this same rationale.60 *497 Finally, as of December 31, 2012, four states had enabling language that explicitly permitted their highest state courts to hear questions from bankruptcy courts: Alaska, Missouri, Nevada, and Tennessee (but only from Tennessee bankruptcy courts).61 Of these, only Nevada and Tennessee state courts have actually accepted questions from bankruptcy courts. Despite express language authorizing certification from bankruptcy courts, the Missouri Supreme Court has held that the Missouri Constitution does not allow jurisdiction over any certified questions, regardless of the requesting court’s identity.62 In contrast, Nevada has a long history of accepting requests from bankruptcy courts,63 even though its enabling language did not expressly include them until a more recent revision that became effective on July 1, 2009.64 More recently, Delaware has amended its constitution to add an express reference to “a United States Bankruptcy Court.”65 This change followed another expansion of certification authority in Delaware in 2007 that allowed the S.E.C. to certify questions.66 Although the legislative history for the recent expansion is sparse, this change may be a way to re-direct thorny questions of Delaware corporate law that arise in complex Chapter 11 cases to the Delaware Supreme Court, as suggested in a 2012 seminar on the topic involving a number of Delaware state judges, bankruptcy judges and practitioners.67 *498 Despite the movement in a handful of states to include bankruptcy courts expressly, there are still thirteen states (and Washington DC) that are unlikely to hear certified questions posed by the bankruptcy courts. North Carolina lacks a procedure that would allow such certifications, and Missouri state courts have held the procedure to be unconstitutional. In Michigan, the state courts have been reluctant to answer certified questions from anyone.68 Indeed, in 2006, Michigan’s highest state court explicitly declined to answer a question certified directly from an in-state bankruptcy court, pointing in part to its uncertainty about its constitutional power to answer certified questions from bankruptcy courts and others.69 Many more states have limited certification by drafting their enabling language narrowly to include only the U.S. Supreme Court, U.S. Courts of Appeals, highest courts of other states, or some combination of these courts. Finally, questions abound as to the state courts’ authority to respond to questions posed by bankruptcy appellate panels (“BAPs”), which presently exist in the First, Sixth, Eighth, Ninth, and Tenth Circuits. Alaska and Oregon explicitly authorize their highest courts to hear certified questions from BAPs, although this study could not identify any instances in which these courts had done so through December 2012.70 Despite the lack of an explicit reference to BAPs, some state courts have accepted questions from BAPs based on either their expansive interpretation of “a court of the United States,”71 prior acceptance of questions from bankruptcy courts,72 or an analogy drawn between the role of the BAPs and that of federal district courts hearing bankruptcy appeals.73

*499 C. Bankruptcy Courts’ Authority to Certify Questions

So far this Part has considered the authority of the state courts to answer certified questions received from bankruptcy courts. Since it takes two to tango, it is necessary to also consider the basis for the bankruptcy court’s authority to certify a question to the state court. No statutory provision or rule of bankruptcy procedure explicitly grants this power.74 The absence of explicit authorization, however, is not dispositive. Few circuits and district courts have a rule of procedure or local rule that expressly enables them to certify questions.75 Nevertheless, ever since the endorsement of certification by the U.S. Supreme Court in a series of cases in the 1960s and 1970s, federal circuit courts and district courts have viewed their authority to certify questions as part of the inherent power of the federal courts.76 Logically, if the district court has the inherent power to do so, then the bankruptcy court as a “unit of the district court” and the bankruptcy judge “as a judicial officer of the district court,”77 should have the same power by extension.78 Moreover, the bankruptcy court has other powers analogous to certification that are also derivative of the district court’s powers. Broad statutory abstention and remand powers are expressly granted to district courts rather than bankruptcy courts.79 The bankruptcy courts have these powers by referral from the district court.80 Certification is closely related to both abstention and remand powers, allowing bankruptcy courts to decline to exercise its jurisdiction, particularly in favor of state courts. This suggests that the power to certify may be exercised by the bankruptcy courts as a power derivative *500 from

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federal district courts.81 Furthermore, the bankruptcy court’s authority to certify questions extends not only to transmitting the requests made by the parties in a particular bankruptcy case, but also to questions originating from the bankruptcy judge sua sponte. The few existing local rules addressing the certification process expressly state that these requests may be made by the court sua sponte or on the motion of a party.82 State enabling language sometimes specifies that the court may certify on its own motion or that of the parties,83 as does the Uniform Act.84 Moreover, earlier surveys of federal appellate judges reflect a widespread understanding that the court could certify on its own motion.85

III. THE PRECEDENT FOR BANKRUPTCY CERTIFICATION

A. The Study

This Part analyzes a body of state-court opinions responding to questions certified. To be included in the study, the opinion had to meet five criteria. First, the question had to arise either in the course of a bankruptcy proceeding (conducted by a bankruptcy judge or district judge) or a bankruptcy appeal. It had to be unsettled in state law. The state court had to be empowered through its jurisdictional grant to answer certified questions from the particular certifying court. The state court must have chosen to respond to it. Finally, the response must have been in the form of a written decision as opposed to an oral ruling.86 The body of cases covers the full period between the first bankruptcy *501 certification identified, a state-court opinion filed in 1968,87 and December 31, 2012. The starting date closely follows the promulgation of the first Uniform Act in 1967, although states vary in the date they first enabled certification.88 All of the opinions in the study were identified through searches on legal databases, supplemented by docket searches.89 This study did not attempt to include requests that were rejected by the state courts. It also does not indicate the number of times a “certifiable” question arises. Thus, it does not reflect how often these questions were answered or ignored, and under what circumstances.

B. The Findings

Based on these criteria, the study identified 175 state-court answers to questions certified during bankruptcy proceedings or appeals. Ninety responded to questions certified during initial bankruptcy proceedings. Of these, seventy-five responded to questions certified directly by a bankruptcy court. Fifteen opinions responded to questions certified by federal district courts hearing bankruptcy proceedings in the first instance, most of which were acting as a bankruptcy court in the pre-Bankruptcy Code period,90 or were certifying questions at the request of the bankruptcy court.91 The study also identified eighty-two state court opinions responding to questions *502 certified in the course of bankruptcy appeals. These appellate requests came from federal district courts (thirty certifications), BAPs (eight), and federal circuit courts of appeals (forty-four).92 1. Broad Precedent for Direct Certification from Bankruptcy Courts The results of this study indicate that certifications during initial bankruptcy proceedings are not dominated by any one type of bankruptcy, any particular bankruptcy court or judge, or a particular year or time period. As a result, this body of cases provides wide-ranging precedent for the use of certification in initial bankruptcy proceedings. Within the body of direct certifications, questions were certified by judges in twenty-nine different districts.93 The districts with the most responses to direct bankruptcy certifications over the full period were the Western District of Oklahoma (twelve) and the District of Nevada (eight). The certifications were not concentrated in any particular year, with a range of zero to seven nationwide in any single year. These questions were certified by at least forty-four individual judges.94 Most of these judges (thirty-two of the forty-four) received a response to a certified question only one time throughout the time period studied. The highest number of times a certifying judge received a response was a total of five times over the study period.

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Reponses to certifications from initial bankruptcy proceedings were also geographically diverse. The opinions in this study reflect responses from the highest state court in twenty-three different states. The most responses were received from courts sitting in Oklahoma (eighteen), Nevada (nine), Tennessee (seven), and Arizona (seven). Again, the responses were not concentrated in any one year. For instance, Oklahoma’s highest state court has answered certified questions arising in bankruptcy proceedings since 1981, answering zero to two such questions per year. Nevada’s highest state court has answered zero to two certified questions per year, beginning in 1993. None of the twenty-three state courts have answered more than three certified questions in any one year. These response rates reflect the low level of certified question responses overall, regardless of which court is certifying the question. Most state courts that answer certified questions of any kind respond to less than ten questions in any given year. For instance, from 2000 to 2005, New York’s *503 highest court accepted an average of approximately five questions per year.95 A study of certifications by federal circuit courts of appeals and district courts from 1990 to 1994 found that state courts issued opinions answering certified questions an average of only 6.6 times a year.96 The number of bankruptcy certifications arising from appeals, as opposed to the original bankruptcy proceedings, reflect similar low raw numbers. Bankruptcy appeals, however, account for a much larger percentage of the overall certification of bankruptcy questions than the percentage arising from initial proceedings.97 Like the direct bankruptcy certifications, these appellate certifications were not concentrated in any one year or in certifications or responses by a single district or state.98 Some commentators, including judges, have suggested that certification would be most useful when the federal court has to interpret state law from a state other than the one in which the federal court is sitting or, for federal appellate courts, from a state outside of the judicial circuit (“out-of-state” law).99 Few of the cases in the study, however, involve certification across jurisdictional boundaries. In the context of initial bankruptcy proceedings, only 3% (three of ninety) of the opinions in the study responded to out-of-state certifications. The percentage was slightly higher for questions certified *504 from bankruptcy appeals. Approximately 7% (six of eighty-two) of the opinions answered out-of-state questions from BAPs or federal circuit courts of appeal.100 As reflected in the chart below, certifications have come from all types of bankruptcies and involve a wide range of state law issues. Certification from Initial

Proceedings (of 90 certifications)

Certification on Appeal (of 82 certifications)

Bankruptcy Chapter101

Chapter 7

41%

44%

Chapter 11

16%

16%

Chapter 13

8%

6%

Other (including conversions)

12%

4%

Debtor Type102

Individual

57%

44%

Individual (business owner)

18%

21%

Legal entity

23%

29%

Multiple Debtors of Different Types

2%

1%

Legal Issue103

Exemptions (Personal Property and Homestead)

32%

29%

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Security Interests

41%

29%

State Tax Obligations

8%

6%

Corporate Internal Affairs

2%

9%

Other

16%

26%

This data shows that a larger percentage of the direct certifications stem from consumer bankruptcies (57%) than do the certifications on appeal (44%). Certified questions regarding security interests are the single largest category of direct certifications (41%), but account for only 29% in the appellate context. In sum, there is precedent for the use of certification in initial bankruptcy proceedings in a wide variety of circumstances. *505 2. Response Time A key objection to the use of certification is the potential for delay in the underlying proceedings.104 Bankruptcy courts have sometimes considered the docket and backlogs in the state court when deciding whether to certify and may have information about the specific state court’s docket that will influence their decision.105 Where the information was available,106 this study measured the response time by identifying the number of days that elapsed between the date of the certification order and the date the state court opinion entered. In this sampling, the response time ranged from 76 to 849 days, with an average of about one year (364 days) and a median of 348 days, when the certified question came directly from the bankruptcy court (and district courts acting as bankruptcy courts). It is worth noting, however, that the length of the response time in a direct certification does not necessarily equate to the length of delay in a bankruptcy proceeding. Other matters may be considered in the bankruptcy court while the certified question is pending before the state court. State courts responded slightly more quickly to certification requests received from courts hearing bankruptcy appeals. On average, the response time ranged from 145 to 855, with an average of 352 days and a median of 307.107 Sometimes the state court responded to the certifying court before issuing its final opinion to indicate that it would accept the certification.108 Based on the limited information available,109 the time between the initial certification and the formal acceptance of the question(s) ranged from 3 to 208 days. The average was sixty-seven days, with a median of fifty. In the appeals context, again based on limited information,110 the acceptance time *506 ranged from 8 to 205 days, with an average of fifty-five and a median of forty-eight. 3. State-Court Refusals of Certified Questions State courts have the discretion to refuse to answer any certified question.111 This study did not identify the rate of refusal. It did, however, identify examples of requests that were declined. This section summarizes existing studies of refusal rates of certified questions more generally and also identifies some of the reasons state courts have given for their refusal in the bankruptcy context. Existing studies outside of the bankruptcy context identify refusal rates during particular time periods and for particular states. The studies identified a percentage range of denials between less than 1% and 7%. A study of state-court responses to certified questions from 1990 to 1994 identified denials in one of 120 cases (less than one percent) in which federal courts of appeal certified questions. It also found that state courts refused to answer in six of 171 cases (approximately 4%) in which federal district courts had certified questions.112 A study of all certifications of state law questions to New York’s highest court found that the state court rejected 7% (five of seventy-one) of the certification requests between 1986 and the end of 2005.113 State courts sometimes decline requests for certification without detailing the reasons.114 In the bankruptcy context, some certified questions were not answered because the case settled before an opinion could issue.115 The courts in some states, such as Michigan, declined because they disfavor certification in general. In others, such as Missouri, they have found the

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procedure unconstitutional under the state constitution.116 Sometimes the state court chose to answer some, but not all of the certified questions from a particular case. More than half (61%) of the direct bankruptcy certifications asked a single question,117 but in the remaining cases the number of questions ranged from one to seven.118 State courts responded *507 to some questions and declined to answer others in 20% of the direct bankruptcy certifications studied. Various reasons have been given for declining some questions. The most common explanation was that an answer to another question was unnecessary or moot given the court’s response to the other questions answered.119 Other reasons related to the failure of the certified question to satisfy one or more of the requirements in the state’s enabling language, such as the question was not determinative of the case,120 or it was primarily factual rather than legal in nature.121 The Supreme Judicial Court of Maine responded to one question from the bankruptcy court, but rejected three others “as there is clear controlling Maine precedent, and/or material facts that are either in dispute or not before us.”122 The Alabama Supreme Court likewise answered one question but declined two others, reasoning that it was unclear what was being asked and that at least one possible interpretation of the question could be answered by existing Alabama law.123 4. The Role of Counsel A court may certify a question on its own motion or at the request of a party. Generally, the state-court opinions studied did not specify whether the request had originated from the court or a party. This study was able to identify the originating source only in thirty-one certifications, based either on language in the opinion or from a study of the docket.124 Of these, eleven motions were made sua sponte and the remaining twenty were made by a party.125 *508 Bankruptcy courts have sometimes denied a party’s motion to certify a question. This study did not identify denial rates, but provides a few anecdotal examples of the reasons given. Often the reasons mirrored those given by state courts that have refused to answer certified questions. Examples include denial because the question did not present a novel issue of state law,126 or state law provided enough guidance even where the precise issue was novel,127 the question was controlled by bankruptcy rather than state law,128 the proposed question was not dispositive,129 the bankruptcy court was bound by circuit decision,130 or certification would be “inefficient and uneconomical” in the particular case.131 Uncertainty about whether the state court would accept a certified question from the bankruptcy court also played a role in some bankruptcy court denials.132

*509 IV. RECOMMENDATIONS

The recommendations in this Part are designed to enable bankruptcy courts to use bankruptcy certification effectively and in a way that encourages state courts to accept their certified questions. The rules and recommended practices draw on examples from case law and the use of certification outside the bankruptcy context.

A. Model Language for a Local Rule

The majority of states have enabling language that is broad enough to encompass direct bankruptcy court certification without further legislative action or judicial rulemaking, either at the state court or federal level. However, if it would be beneficial to specify procedures for federal certifications, both state enabling language and the Uniform Act should be consulted in drafting such a rule.133 A new rule might take the form of either a national bankruptcy rule or a local rule, but certainly the latter would be more easily adopted. The following language, modeled on a rule of the Tenth Circuit BAP,134 is designed to make explicit the ability of the BAP or of a bankruptcy court to certify open questions of law to state courts. a) Certification and Stay. When state law permits, this court may certify a state law question to that state’s highest court in accordance with that court’s rules and may stay the case to await the state court’s decision. b) Motion. Certification may be raised on motion of a party or on this court’s own motion. This language serves two purposes. Although existing state-law enabling language is generally broad enough to allow direct certification, adoption of such a rule would encourage certification by making courts and parties more aware of this option.135 It signals the availability of the process and points the court *510 to the key state enabling language.

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The second purpose served is to give guidance on the procedure for certifications. It clarifies that it may be based on either a sua sponte request or on the motion of a party, and that the proceedings may or may not be stayed pending a response. It might also specify any deadlines for a motion by a party, the process to be followed after the state court has responded, and whether a motion for certification should be filed separately or as part of a brief.136 Regardless of whether a local or national rule is adopted, individual bankruptcy judges may establish these procedures as part of their own guidelines.

B. A List of Recommendations for Certifying Courts

1. Provide that the state court may reformulate the question The chances of acceptance may be increased if the certifying court acknowledges the independence afforded to the state court: “This Court’s wording of the issue certified to the [State] Supreme Court . . . is not intended to limit the scope of the . . . Court’s consideration of the issues involved or the manner in which it responds to this certification.”137 The state enabling language sometimes provides explicit authorization to revise the question,138 but not all do, and courts have sometimes noted that a perceived inflexibility may have contributed to the denial of the request.139 *511 2. Provide assurance that the state-law issue is dispositive The requirement that the issue be (or may be) dispositive of a particular case has long been viewed by many state courts as the means by which they insure against issuing impermissible advisory opinions.140 The bankruptcy court is often in the best position to explain the centrality of the question of law to the case more generally.141 3. Provide guidance as to the record to be transmitted to the state court Although many state rules include requirements about providing copies of the record to the court, in an abundance of caution, the certifying courts should also specify what the parties must provide to the state court.142 4. Give counsel input into the statement of facts and/or formulation of the question Again, courts have noted the importance of allowing participation of parties and counsel in formulating the question to prevent dispute and delay.143 Chances are greatly enhanced if the parties have prepared a stipulation of facts. 5. Require parties to notify the certifying court of state-court decisions This practice puts the burden on the parties to keep the bankruptcy court informed as to the progress of the matter. The bankruptcy court may want to require notification both of the state court’s decision to accept or reject the certified question and, if applicable, any responses received.144 Other procedures may specify further actions required of the parties following receipt of a state-court opinion on the question. “If the state court decides the certified issue, then within twenty-one days after the issuance of its *512 opinion the parties must file in this court statements of their positions about what action this court should take to complete the resolution of the appeal.”145 6. Provide for allocation of costs State enabling language sometimes establishes that, unless the certifying court specifies otherwise, the costs of certification will be assessed evenly between the parties. Thus, the bankruptcy court may wish to consider another manner of allocation.146

V. CONCLUSION

Bankruptcy certification is an underutilized resource available to bankruptcy courts faced with open state-law questions. Like abstention, certification provides a way to sort state-law questions to the home court. The legal infrastructure for direct bankruptcy certification already exists in a majority of states, whose enabling language is broad enough to encompass these certifications. Moreover, as outlined in this study, bankruptcy judges and practitioners have the ability to increase their chances of acceptance of a certified question by drawing on precedent from a forty-year history of bankruptcy certification,

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spanning twenty-three states and involving a broad range of issues and types of bankruptcy cases. *513 Table 1: State Statutes, Constitutional Provisions and Rules Enabling Certification (in effect as of Dec. 31, 2012) Enabling Language

State

Accepted certification from bankruptcy court

Citation

Bankruptcy courts

Federal district courts

“any federal court” or similar

Alabama

X

Ala. R. App. P. 18.

X

Alaska

Alaska R. App. P. 407.

X147

X

Arizona

X

Ariz. Rev. Stat. Ann. § 12-1861 (West 2011); Ariz. Sup. Ct. R. 27 (filing procedure).

X

Arkansas

X

Ark. Sup. Ct. R. 6-8.

X

California

Cal. R. Ct. 8.548.

Colorado

X

Colo. App. R. 21.1.

X

Connecticut

Conn. Gen. Stat. Ann. § 51-199b (West 2011).

X

Delaware

Del. Const. art. 4, § 11(8); Del. Sup. Ct. R. 41.

X

DC

D. C. Code § 11-723 (2011).

Florida

Fla. Stat. § 25.031 (2011); Fla. R. App. P. 9.150.

Georgia

Ga. Code Ann. § 15-2-9 (West 2011); Ga. Sup. Ct. R. 46.

X

Hawaii

Haw. Rev. Stat. § 602-5 (2011); Haw. R. App. P. 13(a).

X

Idaho

Idaho App. R. 12.3.

X

Illinois

Ill. Sup. Ct. R. 20(a).

Indiana

Ind. Code Ann. § 33-24-3-6 (West 2011); Ind. R. App. P. 64(A).

X

Iowa

Iowa Code Ann. § 684A.1 (2011).

X

Kansas

Kan. Stat. Ann. § 60-3201 (West 2011).

X

Kentucky

X

Ky. R. Civ. P. 76.37(1).

X

Louisiana

La. Rev. Stat. Ann. § 72.1 (West 2011); La. Sup. Ct. R. 12.

Maine

X

Me. R. App. P. 25.

X

Maryland

X

Md. Code Ann., Cts. & Jud. Proc. § 12-603 (West 2011).

X

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Massachusetts

X

Mass. Sup. Jud. Ct. R. 1:03.

X

Michigan

Mich. Ct. R. 7.305(B)(1).

X

Minnesota

X

Minn. Stat. Ann. § 480.065 (West 2011).

X

Mississippi

Miss. R. App. P. 20.

Missouri

Mo. Ann. Stat. § 477.004 (West 2011).

X

X

Montana

X

Mont. R. App. P. 15.

X

Nebraska

Neb. Rev. Stat. § 24-219 (2011).

X

Nevada

X

Nev. R. App. P. 5.

X

X

New Hampshire

N. H. Sup. Ct. R. 34.

X

New Jersey

N. J. R. Ct. 2:12A.

New Mexico

N. M. Stat. Ann. § 39-7-4 (West 2011); N.M. R. App. P. 12-607.

X

New York

N. Y. Ct. R. 500.27(a).

North Carolina

N/A

N/A

N/A

N/A

North Dakota

X

N. D. R. App. P. 47(a).

X

Ohio

Ohio Sup. Ct. R. 18.1.

X

Oklahoma

X

Okla. Stat. tit. 20, § 1602 (2011).

X

Oregon

Or. Rev. Stat. Ann. § 28.200 (West 2011).

X148

Pennsylvania

Pa. Sup. Ct. P. § 10, 42.

Rhode Island

X

R. I. Sup. Ct. R. 6.

X

South Carolina

S. C. R. App. Prac. 224.

X

South Dakota

S. D. Codified Laws § 15-24A-1 (2011).

X

Tennessee

X

Tenn. Sup. Ct. R. 23.

X (in Tennessee only)

X (in Tennessee only)

Texas

Tex. R. App. P. 58.1.

Utah

X

Utah R. App. P. 41.

X

Vermont

Vt. R. App. P. 14.

X

Virginia

Va. Sup. Ct. R. 5:40.

X

Washington

X

Wash. Rev. Code § 2.60.020 (2011).

X

West Virginia

X

W. Va. Code § 51-1A-3 (2011).

X

Wisconsin

Wis. Stat. § 821.01 (2011).

Wyoming

X

Wyo. Stat. Ann. § 1-13-105(a)(ii) (West 2011); Wyo. Stat. Ann. § 1-13-106 (West 2011).

X

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*516 Table 2: State-Court Answers to Questions Certified during Bankruptcy Proceedings (by State, as of Dec. 31, 2012) Answering State Court

Initial Proceedings (Direct) or on Appeal

Certifying Court

Year

Case Name

Citation

Alabama

Direct

ND Ala. (Bankr.)

1993

McRae v. Security Pacific Housing Services, Inc.

628 So.2d 429

2003

Morgan v. Farmers & Merchants Bank

856 So.2d 811

2005

Pope v. Gordon (In re Camp)

922 So. 2d 893

2010

Heatherwood Holdings, LLC v. First Commercial Bank

61 So.3d 1012

Appeal

MD Ala.

1984

First Alabama Bank v. Renfro

452 So. 2d 464

2007

Horton v. Alexander

977 So.2d 462

SD Ala.

2012

City of Prichard v. Balzer

95 So.3d 1

B. A.P. 9th Cir.

2012

Malfatti v. Bank of America

99 So.3d 1221

Arizona

Direct

D Ariz. (Bankr.)

2002

Krohn v. Sweetheart Properties, Ltd.

203 Ariz. 205, 52 P.3d 774

2004

Lachter v. Smith (In re Smith)

209 Ariz. 343, 101 P.3d 637

2011

Vasquez v. Saxon Mortgage Services Inc. (In re Vasquez)

228 Ariz. 357, 266 P.3d 1053

D Ariz.

1988

Bisbee v. Security National Bank & Trust Co. (In re Bisbee)

157 Ariz. 31, 754 P.2d 1135

1991

In re McKeever

819 P. 2d 482

1994

America W. Airlines v. Department of Revenue (In re America W. Airlines)

179 Ariz. 528, 880 P.2d 1074

SD Cal. (Bankr.)

2002

Price Waterhouse Ltd v. Decca Design Build, Inc

202 Ariz. 397, 46 P.3d 408

Arkansas

Direct

ED Ark. (Bankr.)

2010

Wetzel v. Mortgage Electronic Registration Systems, Inc.

2010 Ark. 242

California

Appeal

9th Cir.

2009

Imperial Merchant Services, Inc. v. Hunt

212 P.3d 736

Colorado

Direct

D Colo. (Bankr.)

2012

Sender v. Cygan (In re Rivera)

2012 CO 43

Appeal

D Colo.

2006

In re Phillips

139 P.3d 639

10th Cir.

1996

Smith v. Walker (In re Smith)

924 P.2d 155

2007

Fowler & Peth, Inc., v. Regan (In re Regan)

151 P.3d 1281

Connecticut

Direct

D Conn.

1987

Dart & Bogue Co. v. Slosberg

202 Conn. 566, 522 A.2d 763

Florida

Appeal

5th Cir.

1978

Dade County Taxing Authorities v. Cedars of Lebanon Hospital Corp., Inc.

355 So.2d 1202

1982

Cooke v. Uransky (In re Cooke)

412 So.2d 340

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11th Cir.

1993

Camp v. St. Paul Fire & Marine Ins. Co.

616 So.2d 12

LeCroy v. McCollam (In re McCollam)

612 So.2d 572

2001

Goldenberg v. Sawczak

791 So.2d 1078

Havoco of America v. Hill

790 So.2d 1018

2008

Raborn v. Menotte (In re Raborn)

974 So.2d 328

2011

Osborne v. Dumoulin (In re Dumoulin)

55 So.3d 577

Georgia

Appeal

ND Ga.

2011

U.S. Bank Nat. Ass’n v. Gordon

289 Ga. 12, 709 S.E.2d 258

SD Ga.

2010

Phillips v. Moore

286 Ga. 619, 690 S.E.2d 620

2d Cir.

2010

Holmes v. Grubman

286 Ga. 636, 691 S.E.2d 196

5th Cir.

1978

In re McClintock; In re Portman

240 Ga. 606, 241 S.E.2d 831

11th Cir.

1985

In re Fulton Air Service

254 Ga. 649, 333 S.E.2d 581

1986

U. S., on behalf of Farmers Home Administration v. Kennedy (In re Kennedy)

256 Ga. 345, 348 S.E.2d 636

2004

Motors Acceptance Corp. v. Rozier

278 Ga. 52, 597 S.E.2d 367

2005

Baillie Lumber Company v. Thompson (In re Icarus Holding, LLC)

279 Ga. 288, 612 S.E.2d 296

Hawaii

Appeal

4th Cir.

2001

Meindl, Genesys Data Tech., Inc. v. Genesys Pacific Tech., Inc. (In re Genesys Data Tech.)

95 Haw. 33, 18 P.3d 895

9th Cir.

1988

In re Bishop, Baldwin, Rewald, Dillingham & Wong

69 Haw. 523, 751 P.2d 77

Idaho

Appeal

Idaho

2001

Hegg v. IRS

136 Idaho 61, 28 P.3d 1004

9th Cir.

1984

Benjamin Franklin Savings & Loan Assoc. v. New Concept Realty & Development, Inc. (In re New Concept Realty & Development, Inc.)

107 Idaho 711, 692 P.2d 355

Indiana

Direct

ND Ind.

1993

In re Zumbrun

626 N.E.2d 452

Appeal

ND Ind.

1993

In re McPheeters

626 N.E.2d 456

SD Ind.

1996

Citizens Nat. Bank of Evansville v. Foster

668 N.E.2d 1236

7th Cir.

1987

Sandy Ridge Oil Co., Inc. v. Centerre Bank National Assoc. (In re Sandy Ridge Oil Co.)

510 N.E.2d 667

Iowa

Direct

ND Ill.

1983

In re Chicago, M., S. P. & P. R. Co.

334 N.W.2d 290

SD Iowa

1997

Hartford-Carlisle Sav. Bank v. Shivers

566 N.W.2d 877

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Appeal

ND Iowa

2011

Oyens Feed & Supply, Inc. v. Primebank

808 N.W.2d 186

Kansas

Appeal

10th Cir.

2007

Redmond v. Kester (In re Kester)

284 Kan. 209, 159 P.3d 1004

Kentucky

Direct

WD Ky. (Bankr.)

2009

Wilson v. Paine

288 S.W.3d 284

Appeal

6th Cir.

2010

Brock v. Branch Banking & Trust Co.

313 S.W.3d 557

Louisiana

Appeal

5th Cir.

1999

Wilson v. Bryan (In re Wilson)

734 So.2d 1214

Maine

Direct

D Me. (Bankr.)

2000

In re Beardsley

2000 ME 24, 745 A.2d 986

2004

Jackson Brook Institute, Inc. v. Maine Insurance Guaranty Association

861 A.2d 652

Maryland

Direct

D. Md. (Bankr.)

2011

Ford Motor Credit Co., LLC v. Roberson

420 Md. 649, 25 A.3d 110

Guttman v. Wells Fargo Bank

421 Md. 227, 26 A.3d 856

Scotch Bonnett Realty Co. v. Matthews

417 Md. 570, 11 A.3d 801

D Md.

1977

Frankel v. Associates Financial Services Co.

281 Md. 172, 377 A.2d 1166

Appeal

D Md.

1988

In re Taylor

312 Md. 58, 537 A.2d 1179

4th Cir.

1996

Schlossberg v. Citizens Bank of Maryland

341 Md. 650, 672 A.2d 625

2003

Bank of America f/k/a/ Nationsbank v. Stine (In re Stine)

379 Md. 76, 839 A.2d 727

Massachusetts

Direct

D Mass. (Bankr.)

1981

Colonial Tavern, Inc., v. Boston Licensing Board

384 Mass. 372, 425 N.E.2d 284

2012

Boyle v. Weiss

461 Mass. 519, 962 N.E.2d 169

D. Mass.

1999

Shamban v. Masidlover

429 Mass. 50, 705 N.E.2d 1136

Appeal

D. Mass.

1996

Dwyer v. Cempellin

424 Mass. 26, 673 N.E.2d 863

2005

In the Matter of Darryl Chimko

444 Mass. 743, 831 N.E.2d 316

B. A.P. 1st Cir.

1999

Treglia v. MacDonald

430 Mass. 237, 717 N.E.2d 249

1st Cir.

2009

Ropes & Gray LLP v. Jalbert (In re Engage, Inc.)

454 Mass. 407, 910 N.E.2d 330

2011

Janice Hundley v. Marsh (In re [Kirk] Hundley)

459 Mass. 78, 944 N.E.2d 127

Minnesota

Direct

D Minn. (Bankr.)

1987

In re Tveten

402 N.W.2d 551

1989

In re Haggerty

448 N. W.2d 363

1996

Butler v. Goldetsky

552 N.W.2d 226

D. Minn.

1976

In Re Application of Raymond W. Jones and Esther W. Jones to the Commissioner

310 Minn. 500, 246 N.W.2d 578

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of Securities for Payment of Judgment Pursuant to Minn. St. 82.34

Appeal

D. Minn.

1991

Medill v. Halverson

477 N.W.2d 703

2004

Clark v. Lindquist

683 N.W.2d 784

Mississippi

Appeal

5th Cir.

2011

Kinwood Capital Group, LLC v. Bankplus (In re Northlake Development LLC)

60 So.3d 792

Montana

Direct

D Mont. (Bankr.)

2002

In re Zimmermann

2002 MT 90, 46 P.3d 599

2006

In re Archer

136 P. 3d 563

In re Maynard

332 Mont. 485, 139 P.3d 803

In re Snyder

335 Mont. 11, 149 P.3d 26

2011

In re Holzapfel

362 Mont. 251, 262 P.3d 1114

Appeal

D Mont.

1986

MacDonald v. Mercill

220 Mont. 146, 714 P.2d 132

Nevada

Direct

D. Nev. (Bankr.)

1993

Delta Traffic Service, Inc. v. Las Vegas Fertilizer Co. (In re System 99)

109 Nev. 66, 847 P.2d 741

Jackman v. Nance

109 Nev. 716, 857 P.2d 7

1999

In re Galvez

115 Nev. 417, 990 P.2d 187

2006

In re Christensen

122 Nev. 1309, 149 P.3d 40

2007

In re Contrevo

123 Nev. 20, 153 P.3d 652

Savage v. Pierson

123 Nev. 86, 157 P.3d 697

2010

Howard v. Sandoval (In re Sandoval)

232 P.3d 422

D. Nev.

1997

In re Security Investment Bancorp

N/A

SD Fla. (Bankr.)

2012

In re Fontainebleau Las Vegas Holdings, LLC

289 P.3d 1199

Appeal

9th Cir.

1990

Sanson Investment Co. v. 268 Limited

106 Nev. 429, 795 P.2d 493

New Mexico

U. S. D. Ct. (unclear role)

D N.M.

1995

Finch v. Beneficial New Mexico, Inc. (In re Finch)

120 N.M. 658, 905 P.2d 198

2002

In re Portal

132 N. M. 171, 45 P.3d 891

Appeal

10th Cir.

1993

Swink v. Fingado (In re Fingado)

115 N.M. 275, 850 P.2d 978

New York

Appeal

2d Cir.

2004

Zube v. Philippone (In re Carney)

1 N.Y.3d 333, 806 N.E.2d 131

2009

Reiber v. GMAC, LLC (In re Peaslee)

13 N.Y.3d 75, 913 N.E.2d 387, 885 N.Y.S.2d 1

2010

Kirschner v. KPMG LLP

15 N.Y.3d 446, 938 N.E.2d 941

11th Cir.

1999

Chemical Bank v. First Trust, N.A. (In re Southeast Banking Corp.)

93 N.Y.2d 178, 710 N.E.2d 1083

North Dakota

Direct

D N. D. (Bankr.)

1996

In re Craig

545 N.W.2d 764

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Ohio

Appeal

SD Ohio

1991

Scott v. Bank One Trust Co.

62 Ohio St.3d 39, 577 N.E.2d 1077

B. A.P. 6th Cir.

2002

In re Stewart

96 Ohio St.3d 67, 771 N.E.2d 250

2004

In re Gill

104 Ohio St. 3d 654, 821 N.E.2d 559

In re Nowak

104 Ohio St. 3d 466, 820 N.E.2d 335

Oklahoma

Direct

ND Okla. (Bankr.)

1981

Woodson v. Ford Motor Credit Company (In re Cook)

1981 OK 144, 637 P.2d 588

Woodson v. General Motors Acceptance Corporation (In re Hembree)

1981 OK 119, 635 P.2d 601

1983

Jarboe v. First National Bank of Pryor (In re Boyd)

1983 OK 5, 658 P.2d 470

1997

Holt v. Oklahoma (In re Holt)

932 P.2d 1130

In re Key

1996 OK 130, 930 P. 2d 824

1998

Price v. State of Oklahoma (In re Holt)

1998 OK 99, 968 P.2d 1227

WD Okla. (Bankr.)

1987

Amarex, Inc. v. El Paso Natural Gas Co.

1987 OK 48, 772 P.2d 905

Fairview State Bank v. Edwards

1987 OK 53, 739 P.2d 994

1988

In re Siegmann

1988 OK 59, 757 P. 2d 820

1989

Shawver & Son Inc., v. Tefertiller (In re Tefertiller)

1989 OK 60, 772 P.2d 396

1994

In re Martin

1994 OK 48, 875 P. 2d 417

1996

In re Anderson

1996 OK 135, 932 P. 2d 1110

1999

In re Alexander

1999 OK 31, 980 P. 2d 659

2001

In re Kaufman

2001 OK 88, 37 P. 3d 845

2002

Stevens v. Harris (In re Harris)

2002 OK 35, 49 P.3d 710

2003

In re Arnold

2003 OK 63, 73 P. 3d 861

2004

Gregory v. Green Tree Financial Servicing Corp. (In re Gregory)

2004 OK 57, 97 P.3d 639

2012

In re Jackson

287 P. 3d 986

Appeal

ED Okla.

1988

Peoples State Bank & Trust Co. v. Brooks

1988 OK 12, 750 P.2d 479

ND Okla.

1998

In re O’Carroll

952 P.2d 45

WD Okla.

1992

Lindsey v. Kingfisher Bank & Trust Co.

1992 OK 66, 832 P.2d 1

6th Cir.

1989

In re N-REN Corp.

773 P.2d 1269

10th Cir.

1980

McConnico v. GMAC (In re Foster)

1980 OK 37, 611 P.2d 232

Pennsylvania Appeal 3d Cir. 2010 Official Comm. of Unsecured 605 Pa. 269, 989 A.2d 313

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Creditors of Allegheny Health Educ. & Research Found. v. Pricewaterhousecoopers, LLP

Rhode Island

Direct

D RI (Bankr.)

1993

Greater Providence Deposit Corp. v. Barnacle (In re Barnacle)

623 A.2d 445

1994

In re D’Ellena

640 A. 2d 530

2011

In re Tetreault

11 A. 3d 635

D RI

1975

In re Shepard

115 R. I. 290, 342 A.2d 918

Appeal

B. A.P. 1st Cir.

1983

In re Gibbons

459 A.2d 938

South Carolina

Direct

D SC

2007

McCullough v. Goodrich & Pennington Mortg. Fund, Inc.

373 S.C. 43, 644 S.E.2d 43

Appeal

D SC

1995

C&S National Bank v. Gregory

Docket: 3:93-cv-01654-DWS

B. A.P. 6th Cir.

1999

Royal Z Lanes Inc. v. Collins Holding Corp.

337 S.C. 592, 524 S.E.2d 621

unknown

1999

Ryan Inv. Co. v. Richland County (In re Ryan Investment Co., Inc.)

335 S.C. 392, 517 S.E.2d 692

South Dakota

U. S. District Court (unclear role)

SD SD

2004

In re Davis

681 N.W.2d 452

Tennessee

Direct

ED Tenn. (Bankr.)

2002

In re Akins

87 S.W.3d 488

MD Tenn. (Bankr.)

1995

Storey v. Bradford Furniture Co., Inc. (In re Storey)

910 S.W.2d 857

2000

Marsh v. Fleet Mortgage Group (In re Marsh)

12 S.W.3d 449

2002

Lemeh v. EMC Mortgage Corp. (In re Crim)

81 S.W. 3d 764

2008

Waldschmidt v. Reassure America Life Ins. Co.

271 S.W.3d 173

2009

In re Hogue

286 S. W.3d 890

2010

In re Music City RV, LLC

304 S. W.3d 806

Appeal

ED Tenn.

1995

Still v. First Tennessee Bank

900 S.W.2d 282

Texas

Appeal

5th Cir.

2007

Norris v. Thomas (In re Norris)

215 S.W.3d 851

2011

Tawes II v. Barnes (In re Moose Oil & Gas)

340 S.W.3d 419

Utah

Direct

D Utah (Bankr.)

2000

In re WestsideProp

2000 UT 85, 13 P.3d 168

2004

In re Kunz; In re Rockwell

2004 UT 71, 99 P. 3d 793

Appeal

D Utah

1990

Garrett v. Rushton

801 P.2d 908

B. A.P. 10th Cir.

2009

Smith v. Mosier (In re Smith)

2009 UT 3, 201 P.3d 1001

10th Cir.

2011

Gladwell v. Reinhart (In re Reinhart)

2011 UT 77, 267 P.3d 895

2012

Gladwell v. Reinhart (In re Gladwell)

291 P.3d 228

Vermont Appeal 2d Cir. 2004 Mortgage Lenders Network, 177 Vt. 592, 873 A.2d 892

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USA v. Sensenich (In re Potter)

Washington

Direct

WD Wash. (Bankr.)

1992

In re F.D. Processing, Inc.

119 Wn.2d 452, 832 P.2d 1303

ED Wash. (Bankr.)

1982

Washburn v. Central Premix Concrete Co. (In re Washburn)

98 Wn.2d 311, 654 P.2d 700

1992

Starbuck v. Esparza (In re Esparza)

118 Wn.2d 251, 821 P.2d 1216

1995

Spokane Concrete Prods., Inc. v. U.S. Bank of Washington (In re Spokane)

126 Wn.2d 269, 892 P.2d 98

WD Wash.

1968

In re Elliott

74 Wn.2d 600, 446 P.2d 347

1986

Brazier Forest Industries, Inc., v. Northern Transport, Inc. (In re Brazier Forest Products, Inc.)

106 Wash.2d 588, 724 P.2d 970

Appeal

WD Wash.

1980

Freeborn v. Seattle Trust & Savings Bank (In re Freeborn)

94 Wash.2d 336, 617 P.2d 424

1981

Macumber v. Shafer

96 Wash.2d 568, 637 P.2d 645

1986

Crichton v. Himlie Properties

105 Wn.2d 191, 713 P.2d 108

1995

Sehome Park Care Center v. Department of Revenue (In re Sehome Park Care Center, Inc.)

127 Wash.2d 774, 903 P.2d 443

West Virginia

Direct

ND W. Va. (Bankr.)

2001

Sheehan v. WFS Financial (In re Sorsby); Sheehan v. Mercedes-Benz Credit Corp. (In re Squires)

210 W. Va. 708, 559 S.E.2d 45

2003

Trumble v. GMAC Mortgage & Key Home Equity Servs. (In re Williams)

213 W. Va. 780, 584 S.E.2d 922

Appeal

D W. Va.

1999

Lowe v. Albertazzie

205 W.Va. 47

Wisconsin

Appeal

7th Cir.

1999

Mann v. Badger Lines, Inc. (In re Badger Lines, Inc.)

224 Wis.2d 646, 590 N.W.2d 270

Wyoming

Direct

D Wy. (Bankr.)

1995

Kingston v. Honeycutt (In re Honeycutt)

908 P.2d 976

2002

Zubrod v. Winters (In re Winters)

2002 WY 29, 40 P.3d 1231

2004

Royal v. Walsh (In re Walsh)

2004 WY 96, 96 P.3d 1

2010

Zubrod v. CW Capital Asset Management, LLC (In re Patel)

2010 WY 147, 242 P.3d 1015

Appeal

D Wy.

1990

Coones v. FDIC

796 P.2d 803

Footnotes a1

Associate Professor of Law, Richard W. & Marie L. Corman Scholar, College of Law, University of Illinois at Urbana-Champaign. I appreciate the helpful conversations and comments on earlier drafts from Ralph Brubaker, Pamela Foohey, Summer Kim, Bob

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Lawless, Peter Molk, Jennifer Robbennolt, Arden Rowell, Charles Tabb, and Suja Thomas. The research assistance of Justin Bernbrock, Alex Gura and Sierra Hennings was invaluable, as was the early assistance of Lauren Myers. Errors and omissions are my own. I am also grateful for the financial support of this project provided by the National Conference of Bankruptcy Judges Endowment for Education. In funding the project,the Endowment does not endorse or express any opinion about the approach used by the project, or any conclusions, opinions, or report of any research results expressed in or disseminated by the project.

1

See Susan Block-Lieb, Permissive Bankruptcy Abstention, 76 Wash. U. L.Q. 781, 781-82 (1998) (noting and criticizing the fact that “federal courts abstain from exercising bankruptcy jurisdiction far more frequently than they abstain from other grants of federal jurisdiction”).

2

Thompson v. Magnolia Petroleum Co., 309 U.S. 478 (1940).

3

28 U.S.C. § 1334(c) (abstention); 28 U.S.C. § 1452 (remand).

4

See, e.g., Jackman v. Nance, 857 P.2d 7 (Nev. 1993) (answering a certified question from a bankruptcy court about the treatment of a residence that is also a business under Nevada’s homestead statute).

5

Certification has mostly been studied outside of the bankruptcy context with a focus on its use by federal appellate courts. But see Sharron B. Lane, To Certify or Not to Certify: When Can a Bankruptcy Court Certify Questions of State Law?, Norton Bankr. L. Adviser, no. 1, Jan. 2004, at 6 app. A (listing the state certification statutes or rules and identifying language and case law relating to the bankruptcy courts); Verity Winship, Cooperative Interbranch Federalism: Certification of State-Law Questions by Federal Agencies, 63 Vand. L. Rev. 181, 192-95 (2010) (briefly discussing certification from non-Article III courts, including bankruptcy courts).

6

Lehman Bros. v. Schein, 416 U.S. 386, 391 (1974).

7

It is important for parties to know early on whether and when certification is available because some courts have disfavored motions for certification made only after adverse judgments. See, e.g., Ropes & Gray LLP v. Jalbert (In re Engage, Inc.), 544 F.3d 50, 57 n.10 (1st Cir. 2008) (certifying an issue that arose initially in bankruptcy court but noting that the litigants’ failure “to request certification prior to the bankruptcy court’s first order... may weaken [their] claim for certification”); Boston Car Co. v. Acura Auto. Div., 971 F.2d 811, 817 n.3 (1st Cir. 1992) (“[T]he practice of requesting certification after an adverse judgment has been entered should be discouraged.”) (quoting Perkins v. Clark Equip. Co., 823 F.2d 207, 210 (8th Cir. 1987)).

8

304 U.S. 64, 78 (1938).

9

When a federal court interprets state law, it must predict how it thinks the highest state court would decide the issues because the highest state court is always the final arbiter on state law. West v. American Tel. & Tel. Co., 311 U.S. 223, 236 (1940) (“[T]he highest court of the state is the final arbiter of what is state law.”).

10

Dolores K. Sloviter, A Federal Judge Views Diversity Jurisdiction Through the Lens of Federalism, 78 Va. L. Rev. 1671, 1679 (1992) (listing instances when state courts came out differently than the Third Circuit had predicted).

11

Judith S. Kaye & Kenneth I. Weissman, Interactive Judicial Federalism: Certified Questions in New York, 69 Fordham L. Rev. 373, 378 (2000) (suggesting that incorrect predictions embarrass judges); John B. Corr & Ira P. Robbins, Interjurisdictional Certification and Choice of Law, 41 Vand. L. Rev. 411, 415 & n.11 (1988) (same).

12

Hon. Randall T. Shepard, Is Making State Constitutional Law Through Certified Questions a Good Idea or a Bad Idea?, 38 Val. U. L. Rev. 327, 338 (2004) (citing to Unif. Certification of Questions of Law Act (1995), prefatory note, 12 U.L.A. 68)).

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13

416 U.S. 386, 391 (1974).

14

See 17A Charles Alan Wright, et al., Federal Practice & Procedure § 4248 (3d ed. 2008).

15

See id.

16

Corr & Robbins, supra note 11, at 419-22 (describing the varied approaches of state courts to determining that answers to certified questions were not impermissible advisory opinions).

17

Compare Ira P. Robbins, The Uniform Certification of Questions of Law Act: A Proposal for Reform, 18 J. Legis. 127, 134 (1992) (praising certification because it promotes “judicial economy, comity, ease of application, [and] fairness to the litigants” as well as “avoiding judicial guesswork”), with Justin R. Long, Against Certification, 78 Geo. Wash. L. Rev. 114, 114 (2009) (arguing that, “[f]or federal courts to show genuine respect for state law, they should stop treating it as foreign and decide open state law questions without certification”), and Hon. Bruce M. Selya, Certified Madness: Ask a Silly Question..., 29 Suffolk U. L. Rev. 677, 687-88 (1995) (claiming that certification causes delays, expense and court congestion).

18

See Wendy L. Watson, McKinzie Craig & Daniel Orion Davis, Federal Court Certification of State-Law Questions: Active Judicial Federalism, 28 Just. Sys. J. 98, 100 fig.1 (2007) (charting the growth in the number of states with certification procedures from 1960 to 2002 from one to forty-six).

19

See, e.g., Lane, supra note 5, at 7 (citing cases before a bankruptcy court in which the court had to decide an unresolved issue of state law); see generally Butner v. United States, 440 U.S. 48, 55 (1979) ( “Property interests are created and defined by state law.”); Vern Countryman, The Use of State Law in Bankruptcy Cases (Part I), 47 N.Y.U. L. Rev. 407 (1972); Vern Countryman, The Use of State Law in Bankruptcy Cases (Part II), 47 N.Y.U. L. Rev. 631 (1972).

20

Bankruptcy courts do not usually describe rationales for certification that are specific to bankruptcy, but instead draw on reasons put forward for certification more generally by the United States Supreme Court, other federal courts, and the Uniform Law Commission. See, e.g., In re Bostic Constr., Inc., 435 B.R. 46, 61 (Bankr. M.D.N.C. 2010) (in the absence of certification procedure, court must “predict how [the highest state court] would decide an issue of state law... considering canons of construction, restatements of the law, treatises, recent pronouncements of general rules of policies, well-considered dicta, and the state’s trial court decisions”); In re Malden Mills, Inc., 45 B.R. 408, 413 (Bankr. Mass. 1984) (noting that certification would “tend to avoid the uncertainty and inconsistency in the exposition of state law caused when federal courts render decisions of State law which have an interim effectiveness until the issues are finally settled by the state court of last resort” (citing White v. Edgar, 320 A.2d 668, 675-76 (Me. 1974)); Angus v. Wald (In re Wald), 208 B.R. 516, 545 (Bankr. N.D. Ala. 1997) (“[S]ubsequent pronouncements by the courts of a state may prove the bankruptcy’s court’s [sic.] guess to be wrong, or may clarify state law in a manner that will require the bankruptcy court to reach a different conclusion as to judgments rendered by courts of the same state in subsequent cases.”).

21

See, e.g., Hon. G. Harvey Boswell & Abigail Gerlach, Coming and Going: The Revolving Jurisdictional Door of the Bankruptcy Court, 28 U. Memphis. L. Rev. 885, 905-09 (1998) (expressing concern that “[o]nce again, bankruptcy court’s revolving door spun around and ushered an issue normally outside the reach of federal court into the federal forum”).

22

In 2012, for instance, the ratio between bankruptcy cases filed and cases commenced in United States district courts on the basis of diversity jurisdiction was approximately 16:1. See Admin. Office of the U.S. Courts, Statistical Tables for the Federal Judiciary, December 30, 2012, Tables F, C-2, available at http:// www.uscourts.gov/Statistics/StatisticalTablesForTheFederalJudiciary/december-2012.aspx (reporting that 1,221,091 bankruptcy cases and 76,251 diversity cases in the U.S. district courts were filed during the twelve months ending December 31, 2012).

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23

R.R. Comm’n of Tex. v. Pullman Co., 312 U.S. 496, 501 (1941); 17A Charles Alan Wright, et al., Federal Practice and Procedure § 4241 (3d ed. 2008) (discussing the development of abstention).

24

309 U.S. 478, 481 (1940).

25

Id. at 484.

26

Id. (citing Erie R. Co. v. Tompkins, 304 U.S. 64 (1938)); see also Ralph Brubaker, The Erie Doctrine, Code Common Law, and Choice-of-Law Rules in Bankruptcy (Part I), 32 Bankruptcy Law Letter, no. 4, April 2012, at 1-2 (pointing to this language as an illustration of Erie’s role in bankruptcy).

27

28 U.S.C. § 1334(c)(1) (“[N]othing in this section prevents a... court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.”).

28

28 U.S.C. § 1452(b). See generally Susan Block-Lieb, The Costs of a Non-Article III Bankruptcy Court System,72 Am. Bankr. L.J. 529, 566(1998) (describing the relationship between abstention and equitable remand in bankruptcy).

29

131 S. Ct. 2594, 2619-20 (2011) (citing the mandatory and permissive abstention provisions in the 1984 Act, § 1334(c)(1) and (2)).

30

Unif. Certification of Questions of Law Act § 3, 12 U.L.A. 53 (1995) (proposing model language enabling answers to certified questions “if the answer may be determinative of an issue in pending litigation in the certifying court and there is no controlling appellate decision, constitutional provision, or statute of this State”); Jona Goldschmidt, Certification of Questions of Law: Federalism in Practice 18-20 (1995) (listing common requirements in the state laws that enable certification).

31

Morgan v. Farmers & Merchants Bank, 856 So.2d 811, 825 (Ala. 2003); see also Heatherwood Holdings, LLC v. First Commercial Bank, 61 So.3d 1012, 1024 (Ala. 2010) (“[W]e emphasize that our answer should not be construed as an expression of an opinion on the merits of the underlying case, because it appears that a number of factual disputes remain to be developed.”); Manchester v. Green Tree Fin. Serv. Corp (In re Gregory), 97 P.3d 639, 640 n.1 (Okla. 2004) (“Although we must outline the factual underpinnings of the matter to place the certified question in proper perspective, it is the federal court--where the matter is pending--that must analyze the impact of our answer to the certified question based upon whatever facts it ultimately decides are pertinent to the case before that court.”).

32

Goldschmidt, supra note 30, at 18-19.

33

See, e.g., Corr & Robbins, supra note 11, at 419-22, 455 (describing how state courts overcame the concern that their responses were advisory opinions and surveying state and federal judges in 1985 and finding that the connection to the federal case minimized concerns about issuing advisory opinions).

34

See, e.g., N.D. R. App. P. 47; Ohio Sup. Ct. Prac. R. 19.01(A).

35

See, e.g., Ariz. Rev. Stat. § 12-1861 (2013).

36

Rivera v. Philip Morris, Inc., 209 P.3d 271, 274 (Nev. 2009) (quoting Fed. Ins. v. Am. Hardware Mut. Ins., 184 P.3d 390, 392 (Nev. 2008)).

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37

In re Hunt, 250 B.R. 482, 487 n.4 (Bankr. E.D.N.Y. 2000) (“[T]his Court is reluctant to decide important issues of state law as a matter of first impression. Nevertheless, the Court has no ability to certify open issues of state law to the New York State Court of Appeals.”); In re Badger Lines, Inc., 140 F.3d 691, 698 (7th Cir. 1998) (“We have held that... certification is appropriate when the case concerns a matter of vital public concern, where the issue will likely recur in other cases.”); State Farm Mut. Auto. Ins. Co. v. Mallela, 372 F.3d 500, 505 (2d Cir. 2004) (noting that certification is appropriate where the question “raises important issues of public policy, where the question is likely to recur, and where the result may significantly impact a highly regulated industry”) (internal citations and quotations omitted); see generally Goldschmidt, supra note 30, at 29.

38

See, e.g., Clay v. Sun Ins. Office Ltd., 363 U.S. 207, 213 (1960) (Black, J., dissenting) (indicating that the particular question was not appropriate for certification because it did not involve the “first interpretation of a broad, many-pronged, state regulatory scheme,” nor “peculiarly local questions such as the eminent domain power a State has allowed a city to exercise, or the local land law of a State”).

39

In deciding whether to certify in the context of bankruptcy proceedings, federal courts have considered, for instance, that a “profusion of cases percolating through the federal courts,” and “the nature of the automotive finance industry... establish that the issue, which has major implications for this industry and the availability of bankruptcy for individual debtors, is guaranteed to recur.” Reiber v. GMAC, LLC (In re Peaslee), 547 F.3d 177, 184 (2d Cir. 2008).

40

See e,g., Kirschner v. KPMG LLP, 590 F.3d 186, 194 (2d Cir. 2009) (“Although the precise allegations in the pending case are distinctive, the recent frequency of insider misconduct in the corporate world underscores the virtue of using certification.”).

41

See, e.g., Imperial Merch. Serv., Inc. v. Hunt, 528 F.3d 1129, 1131 (9th Cir. 2008) (“Resolution of the state law issue involved in this litigation will have a substantial effect on California law and the citizens of California, not only on the question presented by this case, but in future debt collection actions. Therefore, principles of comity suggest that decisions about California state law be made by California courts.”); Wilson v. Bryan (In re Wilson), 162 F.3d 378, 378 (5th Cir. 1998) (certifying “[b]ecause of the impact that the question of statutory exemptions under Louisiana law will have on both state court and bankruptcy proceedings”).

42

See, e.g., Mortgage Lenders Network, USA v. Sensenich (In re Potter), 313 F.3d 93, 96 (2d Cir. 2002) (“We note that the effect that filing a foreclosure complaint has on an improperly witnessed mortgage is much more likely to arise in federal bankruptcy courts than in state courts. Perhaps as a result, even though the question raises an important question of state law, apparently no Vermont court has ruled on it.”) (citation omitted).

43

See, e.g., Morgan v. Farmers & Merchant Bank, 856 So.2d 811, 821 (Ala. 2003) (relying on a relevant body of caselaw developed in large part within the bankruptcy courts to answer a question of state law about whether a nonnegotiable certificate of deposit can qualify as an “other writing” under U.C.C. Article 9); Chemical Bank v. First Trust, N.A. (In re Se. Banking Corp.), 710 N.E.2d 1083, 1085-86 (N.Y. 1999) (“The [certifying] court then aptly noted that since the issue of post-petition interest arises almost exclusively in bankruptcy proceedings, New York courts have not previously considered the issue.”).

44

Del. Const. art. IV, § 11(8); see also Del. Sup. Ct. R. 41.

45

Del. Sup. Ct. R. 41(b) (“Without limiting the Court’s discretion to hear proceedings on certification, the following illustrate reasons for accepting certification: (i) Original question of law. The question of law is of first instance in this State; (ii) Conflicting decisions. The decisions of the trial courts are conflicting upon the question of law; (iii) Unsettled question. The question of law relates to the constitutionality, construction or application of a statute of this State which has not been, but should be, settled by the Court.”) (emphasis added).

46

For convenience, this Article refers to certifying “courts,” because they make up most of the certifying entities listed in state enabling language. A few exceptions exist, however. See, e.g., Del. Sup. Ct. R. 41(a)(ii) (allowing Delaware’s highest court to hear questions from the Securities and Exchange Commission).

47 See Unif. Certification of Questions of Law Act § 1 (1967) (proposing language allowing the highest state court to answer certified

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questions from “the Supreme Court of the United States, a Court of Appeals of the United States, a United States District Court, the United States Court of International Trade, the Judicial Panel on Multidistrict Litigation, the United States Claims Court, the United States Court of Military Appeals, the United States Tax Court, [or the highest appellate court or the intermediate appellate court of any other state]”) (alteration in original).

48

Unif. Certification of Questions of Law Act § 3, 12 U.L.A. 53 (1995) (“The [Supreme Court] of this State may answer a question of law certified to it by a court of the United States or by [an appellate] [the highest] court of another State [or of a tribe] [or of Canada, a Canadian province or territory, Mexico, or a Mexican state]....”) (alteration in original).

49

Letter from Lawrence J. Bugge, President of the Nat’l Conf. of Comm’r on Unif. State Laws, to Neal Ossen, Comm’r of the Nat’l Conf. of Comm’r on Unif. State Laws (June 26, 1990) (noting that the omission of bankruptcy courts and panels “was considered at some length by the committee”); Letter from Norman Krivosha, Exec. Vice President, Secretary and Corp. General Counsel, to Lawrence J. Bugge, (June 26, 1990) (noting that “[t]he matter” of leaving out bankruptcy courts “was not an oversight on the part of the Committee but was thoroughly discussed and resolved as proposed to the Conference”). All letters referred to herein are available in The Edward Cutler Commissioner Papers, Box 14, Folder 12, NCCUSL Archives, Biddle Law Library, University of Pennsylvania Law School.

50

See, e.g., Letter from Neal Ossen to Edward I. Cutler (Apr. 10, 1989) (“I was not happy to read that Bankruptcy Courts were not included. I trust that after a talk with your bankruptcy department, referrals from Bankruptcy Judges will be included.”); Letter from Edward I. Cutler to Neal Ossen (Apr. 21, 1989) (“You certainly have good reason to want bankruptcy judges to let state courts pass on difficult questions of state law with which bankruptcy judges may frequently have trouble deciding or will decide wrongly.”).

51

Letter from Norman Krivosha to Lawrence J. Bugge (June 26, 1990), supra note 49 (“[M]ost Supreme Courts were reluctant to accept certification from the United State District Court desiring that certification only came from the Court of Appeals which they perceive to be their peer.”).

52

Letter from Lawrence J. Bugge to Neal Ossen (June 26, 1990) (“I believe the committee felt that if Article I courts were given the power to certify, there would be no logical stopping point for excluding any federal administrative agency created under Article I which has adjudicative as well as rule making authority. Opening the dockets of state supreme courts to certifications from such a multiplicity of courts and agencies would likely be a disincentive to the adoption of the act.”).

53

Unif. Certification of Questions of Law Act § 3 cmt., 12 U.L.A. 53 (1995).

54

Id.

55

As previously noted, Table 1 provides citations to the current sources of enabling language in each state as of December 31, 2012. What is not reflected in this table is the fact that, in some cases, the particular state’s enabling language has changed over time and these courts have found a way to accept bankruptcy certifications despite the particular language used. For example, Oklahoma’s highest court responded to eighteen certifications by the bankruptcy court. Half were under a grant to the “district court” and half under language revised in 1997 to allow “a court of the United States” to certify questions. See Okla. Stat. tit. 20, § 1602 historical and statutory notes (2011).

56

See, e.g., In re D’Ellena, 640 A.2d 530, 531(R.I. 1994) (accepting a certified question directly from a bankruptcy court based on the authority to “answer questions of law certified to it by any federal court, including the United States Bankruptcy Court”); In re West Side Prop. Assocs., 13 P.3d 168, 170 (Utah 2000) (basing ability to answer certified question on statutory reformulation of Utah code, which gave the Utah Supreme Court “original jurisdiction to answer questions of state law certified from federal courts”). An earlier version of Maryland’s statute was interpreted not to include certification from bankruptcy courts. See In re Chapman, 68 B.R. 745, 747 (Bankr. D. Md. 1986). However, a more recent case allowed direct certification based on an act expanded to all courts “of the United States.” See Scotch Bonnett Realty Corp. v. Matthews (In re Matthews), No. 07-21117-RAG, 2010 WL 2197687, at *7 n.14 (Bankr. D. Md. May 25, 2010); Scotch Bonnett Realty Corp. v. Matthews, 11 A.3d 801, 811 (Md.

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2011) (answering certified question).

57

Williams v. McGreevey (In re Touch Am. Holdings, Inc.), 401 B.R. 107, 119 n.21 (Bankr. D. Del. 2009) (citing cases and noting that, “[d]epending on the statute being analyzed, courts have taken different views on whether a bankruptcy court falls within the definition of ‘court of the United States”’).

58

Unif. Certification of Questions of Law Act § 3 cmt., 12 U.L.A. 53 (1995).

59

28 U.S.C. § 151 (2012) (calling bankruptcy courts a “unit of the district court” and bankruptcy judges “judicial officer[s] of the district court”); Colonial Tavern, Inc. v. Boston Licensing Bd., 425 N.E.2d 284, 285 n.3 (Mass. 1981) (“Although the rule does not expressly authorize the certification of questions from the Bankruptcy Court, we interpret our rule [[which included federal district courts] as broad enough to include certification of questions from that court.”); PricewaterhouseCoopers, Inc. v. Decca Design Build, Inc. (In re Price Waterhouse Ltd.), 46 P.3d 408, 409 (Ariz. 2002) (basing the power to respond to a question by a bankruptcy court on statutory intent, a court rule that allowed the court to hear questions from federal courts, and 28 U.S.C. § 151).

60

See Letter from Norman Krivosha to Lawrence J. Bugge (June 26, 1990), supra note 51 (noting this route to bankruptcy certification: “I believe that the need to get the matter before the State Supreme Courts can efficiently be handled through the United States District Courts and will avoid a controversy that need not be created.”); see also Letter from Norman Krivosha to Edward I. Cutler (May 24, 1989) (“Both Arlen [Beam] and I are of the opinion that the Act does cover the Bankruptcy Court due to the fact that the Bankruptcy Court really is a part of the United States District Court and permitting certification from the United States District Court permits certification from the Bankruptcy Court.”).

61

Alaska R. App. P. 407(a) (including “a United States bankruptcy court or United States bankruptcy appellate panel”); Mo. Rev. Stat. § 477.004(1) (2009) (including “a United States Bankruptcy Court”); Nev. R. App. P. 5(a) (including “a United States Bankruptcy Court”); Tenn. Sup. Ct. R. 23, § 1 (including “a United States Bankruptcy Court in Tennessee”).

62

See Grantham v. Mo. Dept. of Corrections, No. 72576, 1990 WL 602159, at *1 (Mo. July 13, 1990) (per curiam order finding the statute that authorized certification unconstitutional under the state constitution). The Missouri legislature reenacted the certification statute in 2000.

63

See, e g., Jackman v. Nance, 857 P.2d 7 (Nev. 1993) (answering question certified by a bankruptcy court).

64

See Nev. Sup. Court, Order Amending the Nevada Rules of Appellate Procedure, ADKT No. 381, Ex. A., at 34 (Dec. 31, 2008), available at http:// www.sterlinglaw.us/uploads/ADKT381Order_text_searchable_.pdf.

65

Del. Const. art. IV, § 11(8). The second legislative approval necessary to adopt this change was completed in July 2013. See 78 Del. Laws 316 (2012) (formerly S. 221, 146th Gen. Assemb.); S. 10, 147th Gen. Assemb. (Del. 2013) (readopting the bill). A corresponding rule change went into effect on October 15, 2013. See Del. S. Ct. R. 41(a)(ii); Order Amending Rule 41 of the Rules of the Delaware Supreme Court (Oct. 15, 2013), available at http:// courts.delaware.gov/rules/.

66

See Winship, supra note 5, at 195-98 (detailing the development and scope of Delaware’s expansion of certification).

67

See, e.g., Seminar, Delaware Bench, Bar Try to Clear Jams at Intersection of State, Federal Law, 9 Westlaw Journal Bankruptcy, no. 1, May 10, 2012 at 2; Lawrence Hamermesh, Certifying Questions of Law from Bankruptcy Courts to the Delaware Supreme Court (May 6, 2012), Widener Law, http:// blogs.law.widener.edu/delcorp/2012/06/05/certifying-questions-of-law-from-bankruptcy-courts-to-the-delaware-supreme-court/.

68 M. Bryan Schneider, ‘‘But Answer Came There None”: The Michigan Supreme Court and the Certified Question of State Law, 41 Wayne L. Rev. 273, 315-21 (1995) (examining the Michigan judiciary’s reluctance to answer certified questions); see also

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v. Nationwide Mut. Fire Ins. Co., 676 F. Supp. 2d 602, 622 (W.D. Mich. 2009) (noting that “the likelihood of receiving an answer from the Michigan Supreme Court on the question presented in this case is virtually nil, and it makes no sense to put the parties to the expense and delay of proceedings before the state Supreme Court that are almost certainly destined to be futile”).

69

Gold v. Interstate Fin. Corp. (In re Certified Question from U.S. Bankr. Court for E. Dist. of Mich.), 722 N.W.2d 423, 424 (Mich. 2006) (declining to answer a certified question concerning the validity of deeds where state recorders of deeds failed to maintain certain records); Lighthouse Neurological Rehab. Ctr., Inc. v. Allstate Ins. Co. (In re Certified Question from U.S. Dist. Court for E. Dist. of Mich.), 805 N.W.2d 449, 451 (Mich. 2011) (Markham, J., dissenting) (lamenting the Michigan Supreme Court’s reluctance to respond to certified questions).

70

Alaska R. App. P. 407(a); Or. Rev. Stat. § 28.200 (2007). Six states have accepted certified questions from BAPs. See infra Table 2 (identifying answers to questions certified by BAPs to the highest state courts in Alabama, Massachusetts, Ohio, Rhode Island, South Carolina, and Utah).

71

Malfatti v. Bank of Am., 99 So.3d 1221, 1222 (Ala. 2012) (relying, without discussion, on Ala. R. App. P. 18, to hear a certified question from a BAP); Smith v. Mosier (In re Smith), 201 P.3d 1001, 1002 (Utah 2009) (hearing case certified by a BAP).

72

In re Gibbons, 459 A.2d 938, 939 n.1 (R.I. 1983).

73

Treglia v. MacDonald, 717 N.E.2d 249, 252 (Mass. 1999) (reasoning that, although BAPs were “not listed among the courts from which [the highest state court] accept[ed] certified questions,” it could answer questions from it because the BAP was the “‘functional equivalent’ of a United States District Court in hearing bankruptcy appeals”); see 28 U.S.C. § 158(b)(1) (giving BAPs the power to hear the bankruptcy appeals that would otherwise be within the jurisdiction of the district courts).

74

The only explicit authorization in the bankruptcy context is the Bankruptcy Appellate Panel of the Tenth Circuit Local Rule 8018-7, which specifies that the BAP may certify when “state law permits” in accordance with the rules of that state’s highest court. 10th Cir. Bankr. App. Panel R. 8018-7(a).

75

See, e.g., 2d Cir. R. 27.2; 3d Cir. R. 110.1; 3d Cir. Internal Operating P. 10.9; 7th Cir. R. 52; 10th Cir. R. 27.1; E.D. Mich. R. 83.40.

76

Clay v. Sun Ins. Office, Ltd., 363 U.S. 207, 212 (1960) (praising Florida for having adopted-though not yet used at the time-a statute permitting federal courts to certify “doubtful question[s] of state law” to the state’s highest court); Lehman Bros. v. Schein, 416 U.S. 386, 391 (1974).

77

28 U.S.C. § 151 (2012).

78

See, e.g., JP Morgan Chase Bank N.A. v. Cougar Crest Lodge, LLC (In re Weddle), No. 05-21089, 2006 WL 3692425, at *2 n.8 (Bankr. D. Idaho Dec. 12, 2006) (concluding that the bankruptcy court could decide whether to certify a question without action by the district court because of this relationship between the bankruptcy court and the district court); In re Matthews, No. 07-21117-RAG, 2010 WL 2197687, at *7 (Bankr. D. Md. May 25, 2010) (noting federal courts’ discretion to certify).

79

28 U.S.C. § 1334; 28 U.S.C. § 1452.

80

Previously, under the 1987 version of the Bankruptcy Rules, bankruptcy courts made a recommendation to the district court, which would enter a final order after de novo review. Fed. R. Bankr. P. 5011(b) (1987); In re Pac. Gas & Elec. Co., 279 B.R. 561, 567-68 (Bankr. N.D. Cal. 2002) (discussing the 1991 changes in abstention procedure).

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81

See also 11 U.S.C. § 105(a) (permitting the bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title,” which may include the power to certify questions of law).

82

3d Cir. R. 110.1 (“[T]his court, sua sponte or on motion of a party, may certify....”); 7th Cir. R. 52 (same); 10th Cir. R. 27.1(B) (“The court may certify on its own or on a party’s motion.”); 10th Cir. Bankr. App. Panel R. 8018-7(b) (“Certification may be raised on motion of a party or on this court’s own motion.”); cf. Fed. R. Bankr. P. 8001(f)(2)(A) (permitting certification of appeals “by court on request or court’s own initiative”).

83

See, e.g., Nev. R. App. P. 5(b) (“This Rule may be invoked by an order of any of the courts referred to in Rule 5(a) upon the court’s own motion or upon the motion of any party to the cause.”); Colo. App. R. 21.1(b) (same); Del. Sup. Ct. R. 41(a)(i) (permitting certification “on motion or sua sponte”).

84

Unif. Certification of Questions of Law Act § 2, 12 U.L.A. 53 (1995) (defining state courts’ power to certify and providing that the court may certify “on the motion of a party to pending litigation or its own motion”).

85

Goldschmidt, supra note 30, at 14 (reporting that 87% of the circuit judges surveyed indicated that certification could be by motion of the court).

86

It is worth noting that state enabling language often requires that an opinion answering a certified question be written, as proposed in the 1995 Uniform Act. See, e.g., Okla. Stat. tit. 20, § 1604.3 (2011) (“The Supreme Court... of this state shall state in a written opinion the law answering the certified question....”); Alaska R. App. P. 407(f) (“The written opinion of the supreme court stating the law governing the questions certified....”); Unif. Certification of Questions of Law Act § 9, 12 U.L.A. 53 (1995). This requirement may make it more likely that searching the body of available opinions captures a significant proportion of state court responses.

87

In re Elliott, 446 P.2d 347 (Wash. 1968) (responding to a question certified by the U.S. District Court for the Western District of Washington during a bankruptcy proceeding).

88

The 1967 Uniform Act marked the beginning of state adoption of certification procedures. See Unif. Certification of Questions of Law Act § 1 (1967).

89

These opinions were identified through searches of state court and bankruptcy opinions on Westlaw and Lexis, as well as bankruptcy dockets on Bloomberg Law. The results of these searches were supplemented by looking at the annotated state statutes and rules, as well as citing references to the relevant statutes and rules. On Westlaw, a search was conducted in the ALLSTATES database using the search terms: “certif! of question” “certif! question” & bankruptcy & CO(HIGH) & da(aft 1960 & bef 2013). The search was modeled on the search conducted for a study of certification by the American Judicature Society. See Goldschmidt, supra note 30, at 33 n.101 (describing the search used to identify responses to certified questions).

90

See Frankel v. Assoc. Fin. Serv. Co., 377 A.2d 1166 (Md. 1977); In re Application of Jones, 246 N.W.2d 578 (Minn. 1976); In re Shepard Co., 342 A.2d 918 (R.I. 1975); In re Elliott, 446 P.2d 347 (Wash. 1968).

91

See, e.g., Shamban v. Masidlover, 705 N.E.2d 1136, 1137 (Mass. 1999) (noting that the district court certified on request of the bankruptcy court); Am. W. Airlines, Inc. v. Dept. of Rev. (In re Am. W. Airlines, Inc.), 880 P.2d 1074, 1075-76 (Ariz. 1994) (same); Bisbee v. Sec. Nat’l Bank & Trust Co. (In re Bisbee), 754 P.2d 1135, 1135 (Ariz. 1988) (same); Brazier Forest Indus., Inc., v. N. Transp., Inc. (In re Brazier Forest Prod., Inc.), 724 P.2d 970, 971 (Wash. 1986) (same); In re Zumbrun, No. 1:92-cv-00219-WCL, 626 N.E.2d 452 (Ind. 1993) (docket specified that the “case [[was] partially withdrawn [from bankruptcy court to district court] for purpose of certifying a question of law to the Indiana Supreme Court”); cf. Dart & Bogue Co., Inc. v. Slosberg, 522 A.2d 763, 764-65 (Conn. 1987) (answering question certified by district court, where the bankruptcy court had initially said it would abstain, but would hear from parties about how to make sure the question went to state court).

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92

The remaining three opinions responded to questions from federal district courts, but it was unclear whether they were acting in initial bankruptcy proceedings or appeals.

93

When bankruptcy courts and the district court within the same district each certified questions (for instance, Nevada’s federal district court and Nevada’s bankruptcy court), they were counted as a single district. Two districts within a state, however, were counted as two districts (for instance, bankruptcy courts from the Western District of Oklahoma and the Northern District of Oklahoma).

94

The study identified the certifying judge in sixty-seven of the ninety cases.

95

See Advisory Group to the New York State and Federal Judicial Council, Practice Handbook on Certification of State Law Questions by the United States Court of Appeals for the Second Circuit to the New York State Court of Appeals 2 (2d ed. 2006), http:// www.nycourts.gov/ctapps/forms/certhandbk.pdf. This number varies: the highest New York court answered between one and ten per year between the time certification was first authorized in 1986 and the end of 2005. Id. New York’s highest state court answered nine certified questions during 2009. See Stuart M. Cohen, Annual Report of the Clerk of the Court to the Judges of the Court of Appeals of the State of New York 9 (2009), http:// www.nycourts.gov/ctapps/news/annrpt/AnnRpt2009.pdf. Four certified questions were declined in 2009. Id. at 9.

96

Goldschmidt, supra note 30, at 34. Because the search specifically included the terms “united states court of appeals” or “united states district court,” it may not have identified the certifications from bankruptcy courts. Id. at 33 n.101.

97

While the raw number of certifications are comparable (ninety and eighty-two), there are many more bankruptcy filings than bankruptcy appeals. For the twelve months before September 30, 2012, there were 1,261,140 bankruptcy filings, in comparison to 2,168 bankruptcy appeals to district courts, 1,051 bankruptcy appeals to BAPs, and 811 bankruptcy appeals to federal appellate courts. See Administrative Office of the U.S. Courts, Judicial Business of the U.S. Courts, 2012 Annual Report, Table F, http:// www.uscourts.gov/uscourts/Statistics/JudicialBusiness/2012/appendices/F00Sep12.pdf, Table C-2, http:// www.uscourts.gov/uscourts/Statistics/JudicialBusiness/2012/appendices/C02Sep12.pdf, Table B-10, http:// www.uscourts.gov/uscourts/Statistics/JudicialBusiness/2012/appendices/B10Sep12.pdf, Table 2, http://www.uscourts.gov/Statistics/JudicialBusiness/2012/us-courts-of-appeals.aspx.

98

The highest state courts in thirty-three states responded to these questions and the questions came from thirty-seven different certifying courts. The certifying courts that had the most certifications on appeal over the full period were the U.S. Courts of Appeals for the Eleventh Circuit (eleven cases), Tenth Circuit (seven cases), Fifth Circuit (seven cases), and Second Circuit (five cases). Each certifying court certified from zero to two times per year in bankruptcy appeals.

99

See, e.g., Shepard, supra note 12, at 339; Corr & Robbins, supra note 11, at 458 (advocating the use of certification state-to-state and noting the lack of cross-jurisdictional certifications).

100

No certifications from district courts hearing bankruptcy appeals crossed state lines.

101

The bankruptcy chapter was identified for sixty-nine of ninety direct certifications and fifty-seven of eighty-two certifications on appeal.

102

The debtor types were individual debtors, individual debtors who owned a business that was involved in the bankruptcy, and legal entities, including business organizations. The debtor type was identified for all of the ninety direct certifications and seventy-eight of eighty-two certifications on appeal.

103

The legal issue was identified for eighty-nine of ninety direct certifications and eighty-one of eighty-two certifications on appeal.

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104

Goldschmidt, supra note 30, at 54 (noting that delay was the problem most frequently mentioned by federal judges who responded to a questionnaire concerning certification); see also Old Cutters, Inc. v. City of Hailey (In re Old Cutters, Inc.), 488 B.R. 130, 143 n.14 (Bankr. D. Idaho 2012) (considering certifying a question, but deciding against it because “in the context of this bankruptcy case, there is considerable financial benefit to a prompt resolution of the issues”).

105

See, e.g., In re Sullivan, 200 B.R. 682, 684 (Bankr. D. Nev. 1996) (declining to certify because “[i]n the Court’s experience, and pursuant to published articles regarding the Nevada Supreme Court’s backlog of cases, 18 to 24 months would be required before that court could enter a decision if this matter were certified to it”).

106

The study was able to identify the response time for only thirty-two of the ninety opinions.

107

The study identified the response time for fifty of the eighty-two opinions responding to questions certified during bankruptcy appeals. These numbers can be broken down further into appeals to BAPs (average of 304 and median of 302), district courts hearing bankruptcy appeals (average of 290 and median of 287), and federal appellate courts hearing bankruptcy appeals (average of 373 and median of 318).

108

Conn. Gen. Stat. § 51-199b(h) (2013) (“The Supreme Court... shall notify the certifying court of acceptance or rejection of the question....”).

109

The information was identified for only eleven of the ninety direct certifications.

110

Information was identified for twelve of eighty-two certifications on appeal.

111

Unif. Certification of Questions of Law Act § 3 cmt., 12 U.L.A. 53 (1995); Goldschmidt, supra note 30, at Table 4 (finding that every state’s enabling language included an “explicit right of refusal”).

112

Goldschmidt, supra note 30, at Table 6.

113

See Practice Handbook on Certification, supra note 94, at 2.

114

In re Franz, 761 N.E.2d 43 (Table) (Ohio 2002) (declining to answer a question certified from the bankruptcy court without giving reasons); Calif. State Bd. of Equalization v. Renovizor’s Inc. (In re Renovizor’s, Inc.), 282 F.3d 1233, 1237 (9th Cir. 2002) (noting that the state court declined to answer the certified question from the Ninth Circuit that originated in the bankruptcy court).

115

See, e.g., In re Kimmel, No. BK-S-05-51099-GWZ,(Bankr. D. Nev. filed April 17, 2005).

116

See Winship, supra note 5, 63 Vand. L. Rev. 181, 187 n.13 (2010).

117

An even higher percentage of certifications on bankruptcy appeal (74%) asked a single question.

118

Overall, the number of responses (90) is lower than the total number of questions asked (155) and answered (129).

119

This reason was given in ten of the eighteen opinions. See, e.g., Waldschmidt v. Reassure Am. Life Ins. Co., 271 S.W.3d 173, 178 (Tenn. 2008); Am. W. Airlines v. Dept. of Revenue (In re Am. W. Airlines), 880 P.2d 1074, 1081 (Ariz. 1994).

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120

Vasquez v. Saxon Mortg. Services Inc. (In re Vasquez), 266 P.3d 1053, 1057 (Ariz. 2011).

121

Wilmington Trust FSB v. A1 Concrete Cutting & Demolition, LLC (In re Fontainebleau Las Vegas Holdings, LLC), 289 P.3d 1199, 1208 (Nev. 2012).

122

Jackson Brook Inst., Inc., v. Maine Ins. Guar. Assoc., 861 A.2d 652, 654 (Me. 2004) (answering a certified question about the interaction between settlement of certain insurance claims and claims against the Maine Insurance Guaranty Association, but rejecting three others about the directors’ and officers’ liability insurance policy).

123

Heatherwood Holdings, LLC v. First Commercial Bank, 61 So.3d 1012, 1026 (Ala. 2010); see also In re Vasquez, 266 P.3d at 1057 (answering one question but declining to answer another as it was not determinative of the cause in the bankruptcy court); Hartford-Carlisle Sav. Bank v. Shivers, 566 N.W.2d 877, 884 (Iowa 1997) (rejecting two of six questions because one was moot and the other “does not involve any issue that needs to be addressed in this appeal”).

124

Generally in its communication with the state court, the certifying court formally requests a response without specifying whether the parties made a motion or not. These were not counted as sua sponte. In the eleven instances where the court acted on its own motion for certification, the opinions or dockets expressly specified that the court had done so.

125

Bankruptcy trustees made six of these motions. Governmental parties such as intervening state attorneys general, a city or state that is a party or intervenor, a state licensing board, or a state commissioner of securities made another six.

126

See, e.g., Williams v. McGreevey (In re Touch America Holdings, Inc.), 401 B.R. 107, 119 (Bankr. D. Del. 2009) (denying a motion for certification because “there is sufficient statutory and decisional law available to determine capably how the issues would be resolved by a Montana court”); In re Bechtel, No. 08-31895, 2008 WL 4348691, *6 (Bankr. N.D. Ohio Sept. 22, 2008) (denying a motion for certification because no novel issue of state law was at stake); Willcox v. Stroup (In re Willcox), 329 B.R. 554, 579 (Bankr. D.S.C. 2005) (“[T]he issues presented before this Court, while unique factually, do not appear to present an issue to which there is no controlling precedent under South Carolina law.”), rev’d, 358 B.R. 824 (D.S.C. 2006), aff’d, 467 F.3d 409 (4th Cir. 2006); In re Rose, 314 B.R. 663, 702 (Bankr. E.D. Tenn. 2004) (refusing to certify because it “found ample case law defining the unauthorized practice of law in the State of Tennessee”).

127

In re Eagle-Picher Indus., Inc., 185 B.R. 42, 45 (Bankr. S.D. Ohio 1995) (denying certification because even though the precise issue had not been addressed by the state’s highest court, “‘well-established principles’... could be applied to reach a reasoned conclusion as to what might be expected from that court”); Zimmerman v. Mozer (In re Mozer), 10 B.R. 1002, 1004 (Bankr. D. Colo. 1981) (“I do not believe that state law on the point to be decided here is so murky as to obstruct a federal court from finding a solution to the state question presented. But even where there is doubt as to local law, resort to certification is not obligatory, but rather ‘rests in the sound discretion of the federal court.”’); Cello Energy, LLC v. Parsons & Whittemore Enter. Corp. (In re Cello Energy, LLC), No. 10-04877, 2011 WL 1332292, *6 (Bankr. S.D. Ala. April 7, 2011) (noting that, although the particular question had not been decided, the court was sufficiently guided by “the general and widely accepted principles that govern alter ego claims”).

128

In re Carter, 343 B.R. 270, 273 (Bankr. W.D. Okla. 2006) (“[T]he effect of the Trustee’s exercise of her avoidance powers is determined solely by Bankruptcy Code § 522(g) and presents no question of applicable state law....”).

129

Nickless v. HSBC Bank USA (In re Marron), No. 4:11-cv-40191-NMG, slip op. at 5 (D. Mass. Sept. 26, 2011) (denying a motion to certify a question because it was “reasonably clear how Massachusetts courts would resolve” the question and “resolution of the proposed questions is not necessary to decide this appeal”).

130

Jones v. Production Serv., Inc. (In re Jones), 18 B.R. 161, 163-64 (Bankr. Okla. 1982) (denying certification because it was bound by the Tenth Circuit’s ruling on state law).

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131

In re Sullivan, 200 B.R. 682, 685 (Bankr. D. Nev. 1996).

132

See, e.g., Williams v. McGreevey (In re Touch America Holdings, Inc.), 401 B.R. 107, 119 n.21 (Bankr. D. Del. 2009) (noting that it was unclear whether a Montana state court would interpret “court of the United States” to include the bankruptcy court as a permissible certifying entity); In re Bailey 84 B.R. 608, 610 (Bankr. D. Minn. 1988) (noting uncertainty at the time about the Minnesota Supreme Court’s authority to address questions certified by a bankruptcy court).

133

See, e.g., 2d Cir. R. 27.2; 3d Cir. R. 110.1; 3d Cir. Internal Operating P. 10.9; 10th Cir. R. 27.1(A).

134

10th Cir. Bankr. App. Panel R. 8018-7 (“(a) Certification and Stay. When state law permits, this court may certify a state law question to that state’s highest court in accordance with that court’s rules and may stay the case to await the state court’s decision. (b) Motion. Certification may be raised on motion of a party or on this court’s own motion. A party seeking certification must file a separate motion no later than with its first brief.”). Although rules governing certification by the federal district courts might be more closely related, currently the rules enabling certification exist primarily at the appellate level. The U.S. District Court for the Eastern District of Michigan is unusual in having a local rule governing certification. See E.D. Mich. R. 83.40. However, as noted above, Michigan’s highest court has been reluctant to accept certified questions.

135

Some of the rules governing certifying courts provide that the court may certify when the “rules of the highest state court” or similar allows, but this broader language (“state law”) accounts for variation in the source of state enabling language.

136

The certifying court rules vary on whether a separate motion is required. See, e.g., 10th Cir. Bankr. App. Panel R. 8018-7(b) (requiring a separate motion, no later than the party’s first brief); 2d Cir. R. 27.2(b) (giving parties the option to file a separate motion or include it in the brief); 3d Cir. R. 110.1 (providing that a “motion for certification must be included in the moving party’s brief”); 3d Cir. Standing Order (Oct. 15, 2012) (adding that the motion should be separately filed on CM/ECF because “[s] eparately filing the motion allows the court and parties to better track pending motions”).

137

Pope v. Gordon (In re Camp), 310 B.R. 634, 649 (Bankr. N.D. Ala. 2004); see also Tawes v. Barnes (In re Moose Oil & Gas Co.), 613 F.3d 521, 531 (5th Cir. 2010) (“We disclaim any intention or desire that the Supreme Court of Texas confine its reply to the precise form or scope of the questions certified.”); In re Badger Lines, Inc., 140 F.3d 691, 699 (7th Cir. 1998) (“We invite the Justices of the Wisconsin Supreme Court to reformulate our question if they feel that course is appropriate. We do not intend anything in this certification, including our statement of the question, to limit the scope of their inquiry.”).

138

See, e.g., Okla. Stat. tit. 20, § 1604(3) (2011) (requiring that a certification order contain “[a] statement acknowledging that the... receiving court, may reformulate the question”).

139

Szczepanski v. Gen. Motors Acceptance Corp. (In re McClintock), 558 F.2d 732, 735 (5th Cir. 1977) (“[W]e have learned that the state courts often prefer to rephrase the questions certified, to answer corollary questions or to decline to answer at all when they have thought that our statement of the issues was inflexible. This is our universal practice born of our abortive experience in Green v. American Tobacco Co..... After years of delay and much fruitless labor, we saw in our final decision that undertaking to do this on our own without needed help from counsel we had certified the wrong question which the Supreme Court of Florida thought was exclusive.”); In re West Side Prop. Assoc., 13 P.3d 168, 170-71 (Utah 2000) (citing cases to support its decision to reformulate the question posed by the bankruptcy court); see also Goldschmidt, supra note 30, at 112 (recommending that state supreme courts be allowed to reformulate questions based on the results of an empirical study of certification undertaken by the American Judicature Society in 1993).

140

Corr & Robbins, supra note 11, at 455 (finding based on a 1985 survey that state-court judges “overwhelmingly agreed that only issues determinative of the case should be certified”).

141

See, e.g., Am. Sports Radio Network, Inc. v. Krause (In re Krause), 546 F.3d 1070, 1077-78 (9th Cir. 2008). In Krause, the Ninth Circuit noted that “[a]lthough the issues in this appeal largely revolve around Nevada law, Krause raises one argument of federal law which, if correct, would moot the state-law inquiry. In a memorandum disposition filed simultaneously with this order,

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however, we reject that federal-law argument. Therefore, the Nevada Supreme Court’s interpretation of Nevada law will be determinative of this appeal.” Id. at 1077. The court went on to state that “[w]e agree that ‘[t]he written opinion of the [Nevada] Supreme Court stating the law governing the questions certified... shall be res judicata as to the parties.”’ Id. at 1077-78 (citing Nev. R. App. P. 5(g)).

142

See, e.g., Pope v. Gordon (In re Camp), 310 B.R. 634, 649 (Bankr. N.D. Ala. 2004) (“The record in this case and the memorandum of each of the parties shall be sent to the Supreme Court of Alabama for its assistance in answering the question certified.”).

143

See, e.g., In re McClintock, 558 F.2d at 735.

144

See, e.g., In re Krause, 546 F.3d at 1072 (“The parties shall notify the Clerk of this court within one week after the Nevada Supreme Court accepts or rejects the certified question, and again within one week after the Nevada Supreme Court renders its answer.”).

145

See 7th Cir. R. 52(b).

146

Okla. Stat. tit. 20, § 1606 (2011) (“Costs of Certification. Fees and costs shall be the same as in civil appeals docketed before the Supreme Court and shall be equally divided between the parties unless otherwise ordered by the certifying court.”); Colo. App. R. 21.1(e) (same).

147

Also includes B.A.P.s.

148

Oregon also permits the highest court to hear certified questions from B.A.P.s, but not bankruptcy courts.

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© 2014 Thomson Reuters. No claim to original U.S. Government Works.