Lazar v. Kroncke

Decision Date14 July 2017
Docket NumberNo. 15-15078,15-15078
Citation862 F.3d 1186
Parties Carolyn LAZAR, a citizen of Arizona, Plaintiff-Counter-Defendant-Cross-Defendant-Appellant, v. Mark G. KRONCKE, in his capacity as Administrator of the Estate of George Thomas Kroncke, a citizen of California, Defendant-Counter-Defendant-Appellee, and Charles Schwab & Co., Inc., a California corporation, Defendant-Counter-Claimant-Cross-Claimant.
CourtU.S. Court of Appeals — Ninth Circuit

Josh A. Lazar (argued), The Geraci Law Firm, Irvine, California, for Plaintiff-Counter-Defendant-Cross-Defendant-Appellant.

Timothy James Ryan (argued), Frazer Ryan Goldberg & Arnold LLP, Phoenix, Arizona; Jared M. Toffer, Finlayson Toffer Roosevelt & Lilly LLP, Irvine, California; Charles W. Wirken, Gust Rosenfeld PLC, Phoenix, Arizona; for Defendant-Counter-Defendant-Appellee.

Before: Eugene E. Siler, Jr.,* A. Wallace Tashima, and Andrew D. Hurwitz, Circuit Judges.

OPINION

SILER, Senior Circuit Judge:

Plaintiff Carolyn Lazar appeals the district court's grant of Defendant Mark G. Kroncke's motion to dismiss her second amended answer and cross-claim ("SAACC"). For the reasons set forth below, we reverse the district court's ruling that Lazar lacks standing to bring her constitutional challenge under the Contracts Clause, but nonetheless affirm the judgment finding that Lazar's constitutional challenge fails and affirming the district court's other rulings.

FACTUAL AND PROCEDURAL BACKGROUND

Lazar was married to George Thomas Kroncke ("Decedent") when he established an individual retirement account ("IRA") in 1992 with Charles Schwab & Co., Inc. ("Schwab"). The Decedent named Lazar as the IRA beneficiary. Lazar and the Decedent divorced in 2008 while domiciled in Arizona. Before Decedent's death in 2012, he neither removed nor reaffirmed Lazar as the IRA beneficiary. After the Decedent's death, Kroncke, as administrator of his father's estate (the "Estate"), made a demand on Schwab for the IRA proceeds on the basis of Arizona's revocation-on-divorce ("ROD") statute, A.R.S. § 14-2804. Schwab froze the IRA pending judicial resolution.

Lazar filed this action in the Central District of California against Schwab for breach of contract and against the Estate for declaratory relief. In her first amended complaint ("FAC"), Lazar challenged the constitutionality under the Contracts Clause of applying Arizona's ROD statute retroactively because the IRA was established in 1992 and the ROD statute was enacted in 1995.

Schwab filed a counterclaim against both parties under Federal Rule of Civil Procedure 22 seeking to liquidate the securities held by the IRA and interplead those funds into the district court. The California district court granted Schwab's motion to be dismissed as an interpleader but ordered it to continue to hold and not liquidate the securities in the IRA.

The district court dismissed Lazar's FAC on the basis that it did not state a claim under the Contracts Clause because Lazar had no vested interest in the IRA. The district court permitted Lazar to file her SAACC. The SAACC added a claim that the IRA statute and the regulations promulgated thereunder preempted Arizona's ROD statute to the extent it retroactively revokes IRA beneficiary designations. The district court dismissed Lazar's SAACC on the grounds that it lacked personal jurisdiction over the Estate and ordered the case transferred to the District of Arizona pursuant to 28 U.S.C. § 1406(a).

After the case was transferred to the District of Arizona, the district court granted the Estate's renewed motion to dismiss, holding that the pertinent IRA statutes and regulations did not preempt the operation of Arizona's ROD statute, that the prior decision on the Contracts Clause was the law of the case and the court would have reached the same outcome for the same reasons, and that the Commerce Clause argument need not be considered since it was not included in the SAACC. The district court stayed the distribution of IRA proceeds pending appeal.

STANDARD OF REVIEW

We review the dismissal of the SAACC de novo. See Syed v. M-I, LLC , 853 F.3d 492, 499 (9th Cir. 2017). A dismissal for lack of personal jurisdiction is reviewed de novo. Harris Rutsky & Co. Ins. Servs. v. Bell & Clements Ltd. , 328 F.3d 1122, 1128 (9th Cir. 2003). Transfer orders pursuant to 28 U.S.C. § 1406(a) are reviewed for an abuse of discretion. King v. Russell , 963 F.2d 1301, 1304 (9th Cir.1992). Stays of discovery pending resolution of the motion to dismiss are also reviewed for an abuse of discretion. Alaska Cargo Transp., Inc. v. Alaska R.R. Corp. , 5 F.3d 378, 383 (9th Cir. 1993).

DISCUSSION
I. Enforceability of the IRA's Choice of Law Provision under Arizona Law

Two documents govern the IRA: the Schwab Individual Retirement Plan ("the Plan") and the Schwab IRA Application ("the Adoption Agreement"). The Plan sets forth the rights and responsibilities of the account holder and Schwab, and the Adoption Agreement designates beneficiaries. The Plan contains a choice-of-law provision specifying that:

The Plan is intended to qualify as an individual retirement account plan under [Internal Revenue] Code Section 408. Accordingly, the Plan shall be governed by and interpreted under the laws of the United States, and, to the extent such laws do not apply, shall be governed by and interpreted under the laws of the State of California.

The Adoption Agreement does not itself contain a choice-of-law provision but does state "I hereby adopt the Charles Schwab & Co., Inc., INDIVIDUAL RETIREMENT PLAN (‘the Plan’) which is made part of this Agreement...." The district court did not resolve whether the choice-of-law provision governed both the Plan and the Adoption Agreement, instead concluding that the choice-of-law provision was unenforceable under Arizona law.

The district court began from the proposition that "[a] federal court sitting in diversity must look to the forum state's choice of law rules to determine the controlling substantive law." Zinser v. Accufix Research Inst. , Inc. , 253 F.3d 1180, 1187 (9th Cir. 2001). Arizona generally follows the Restatement (Second) of Conflict of Laws ("Restatement") to assess the validity of choice-of-law provisions. See Swanson v. Image Bank, Inc. , 206 Ariz. 264, 77 P.3d 439, 441 (2003). The relevant Restatement section provides that the choice-of-law provision in a contract governs "if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue." Restatement (Second) of Conflict of Laws § 187 (1971). But, the same section also provides a caveat—the law of the state chosen by the contracting parties will not be applied if "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which ... would be the state of the applicable law in the absence of an effective choice of law by the parties." Ibid .

For instruments governing donative transfers, Arizona has deviated from the Restatement's choice-of-law analysis as set forth at Arizona Revised Statute § 14-2703 : "The meaning and legal effect of a governing instrument is determined by the local law of the state selected in the governing instrument unless the application of that law ... is contrary to any other public policy of this state otherwise applicable to the disposition." An IRA is a "governing instrument" under the statute. A.R.S. § 14-1201(22).

Lazar contends that the district court erred by not conducting a Swanson Restatement analysis and instead basing its decision on the Arizona statute. She argues that because the parties could have resolved this issue by contract, subsection 187(1) of the Restatement is satisfied and that concludes the analysis. But the Restatement expressly recognizes that "[t]he chosen law should not be applied without regard for the interests of the state which would be the state of the applicable law with respect to the particular issue involved in the absence of an effective choice by the parties." § 187 cmt. g. We cannot conclude that an Arizona court would ignore an Arizona statute directly on point in favor of a Restatement analysis, so Lazar's argument to that effect is unavailing.

The purpose of Arizona's ROD statute is to "achiev[e] the social goal of implementing [a person's] probable intention in the wake of a divorce." In re Estate of Dobert , 192 Ariz. 248, 963 P.2d 327, 333 (Ariz. Ct. App. 1998). To effectuate this purpose, Arizona automatically revokes all dispositions to a former spouse upon divorce and requires a person intending to retain such dispositions to re-designate the former spouse in writing and in compliance with the instrument's formalities. A.R.S. § 14-2804 ; In re Estate of Lamparella , 210 Ariz. 246, 109 P.3d 959, 965–66 (Ariz. Ct. App. 2005). This contrasts with California's approach, under which divorce establishes a presumption of intent to revoke which can be rebutted by clear and convincing evidence. Cal. Prob. Code § 5600. Thus, California allows inquiry into the very extrinsic manifestations of contrary intent which Arizona seeks to foreclose. Arizona's interest in its ROD statute is not merely to effectuate a donor's probable intent, but also to provide clarity and avoid litigation. Even the statutory exception demonstrates this desire for clarity, because doing so requires either an express provision ex-ante that the designation will apply in the event of divorce or an ex-post reaffirmation. A.R.S. § 14-2804(A).

Lazar challenges the strength of Arizona's interest because a donor can override the operation of Arizona's ROD statute. She draws an analogy to Cardon v. Cotton Lane Holdings, Inc. , where the Arizona Supreme Court allowed California law to govern a deed of trust and preclude a deficiency judgment which would have been...

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