Interfirst Bank Clifton, Plaintiff-appellee, v. Julian E. Fernandez, Defendant-appellant, 853 F.2d 292 (5th Cir. 1988)

In response to appellant's motion for rehearing, Part III Choice of Law of the original opinion in this case 844 F.2d 279, 285-87, is withdrawn and the following revised Part III is substituted therefor. No other changes are made, and the holding remains the same. The motion for rehearing is denied.

The district court determined, based on the choice-of-law clause contained in the loan agreement, that Texas law governs this deficiency action. Fernandez attacks the district court's decision on several grounds.

First, he claims that because the choice-of-law clause was contained only in the loan agreement and not in the Louisiana security instrument, the clause does not control this action. We agree with the district court, however, that the choice-of-law clause contained in the loan agreement sufficiently shows the parties' intention to be bound by Texas law. We need not impose the additional requirement that a Texas choice-of-law clause be included in the Louisiana security agreement as well, particularly when Fernandez also signed a Texas security instrument in conjunction with the note and the loan agreement. Furthermore, the district court's finding that the parties intended Texas law to apply is bolstered by the letter in which Fernandez agreed to Texas foreclosure procedures.

Fernandez claims next that the Louisiana Deficiency Judgment Act, La.Rev.Stat.Ann. Sec. 13:4106 et seq., invalidates the Texas choice-of-law clause. He cites Sec. 4106 of the Act, which provides that a deficiency judgment must be based on a properly held judicial sale with appraisement,¹  and Sec. 4107, which bars the waiver of rights under Sec. 4106.²  Because the sale in this case was private, Fernandez claims a deficiency judgment is barred under Louisiana law.³ 

We find, however, that the Louisiana Deficiency Judgment Act does not come into play. A diversity court generally applies the choice-of-law rules of the state in which it sits. See Stuart v. Spademan, supra, 772 F.2d at 1195; Delhomme Industries, Inc. v. Houston Beechcraft, 669 F.2d 1049, 1052 (5th Cir. 1982). Texas choice-of-law rules recognize valid choice-of-law clauses. Id.; Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex.1984). Fernandez agreed to be bound by the law of Texas, which bears a reasonable relationship to the parties and to the transaction. See Stuart v. Spademan, supra, at 1195; Tex.Bus. & Com.Code Ann. Sec. 1.105 (Vernon Supp.1988) ("when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties."). Moreover, there is no evidence that the agreement resulted from sham, subterfuge, or coercion. Stuart v. Spademan, supra, at 1195. The choice-of-law clause thus satisfies the requirements for validity under Texas law. We see no obstacle to its enforcement presented by the Louisiana Deficiency Judgment Act. Louisiana law simply does not apply to this foreclosure sale insofar as state choice of law rules determine the applicable law.

Fernandez raises as his third contention a significant argument that Texas law cannot control this case because the Federal Aviation Act of 1958 (FAA), Section 506, 49 U.S.C.App. Sec. 1406, contains a federal choice-of-law provision requiring application of the law of the state where the security instrument was delivered. Section 506 states in part:

The validity of any instrument the recording of which is provided for by Sec. 1403 of this title shall be governed by the laws of the State, District of Columbia, or territory or possession of the United States in which such instrument is delivered.

It is Fernandez's argument that because the security interest in his plane was delivered and recorded in Louisiana, that state's law governs foreclosure.

Section 506 is a federal choice-of-law rule for determining the substantive validity of an aircraft security interest. Philko Aviation Inc. v. Shacket, 462 U.S. 406, 413 n. 7, 103 S. Ct. 2476, 2480 n. 7, 76 L. Ed. 2d 678 (1983). This Circuit has interpreted "validity" in Sec. 506 to include formal contractual requirements, such as consideration. Bank of Lexington v. Jack Adams Aircraft Sales, Inc., 570 F.2d 1220, 1224 (5th Cir. 1978). Unlike contract formalities, however, foreclosure procedures are separate from the inherent validity of a security instrument. Cf. Matter of Gary Aircraft Corp., 681 F.2d 365, 371 (5th Cir. 1982) (interpreting "validity" in Sec. 503 of the FAA to exclude enforceability and priority). See generally R. Weintraub, Commentary On the Conflict of Laws, 480-81 (3d ed. 1986) (discussing scope of "validity" in UCC Article 9). Moreover, we find nothing in the legislative history of Sec. 506 nor in the case law which indicates that Congress intended "validity" to include foreclosure procedures. Fernandez's contention that Sec. 506 preempts state choice-of-law rules for determining which law governs aircraft foreclosure sales, is rejected. The district court properly looked to Texas conflict-of-law rules, and to Texas foreclosure law. See Bank of Lexington, supra, 570 F.2d at 1225.