In re: Los Robles Care Center, Inc.

Filing 14

ORDER AFFIRMING BANKRUPTCY COURTS DISMISSAL OF PLAINTIFFSCOMPLAINT by Judge Dean D. Pregerson (Made JS-6. Case Terminated.) (lc)

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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IN RE DEBTOR: LOS ROBLES
CARE CENTER, INC.
CASITAS EUBANKS GROUP, INC.,
formerly Los Robles Care
Center, Inc.,

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Plaintiffs,
v.
SECRETARY OF U.S. DEPARTMENT
OF HEALTH AND HUMAN SERVICES
on behalf of Centers for
Medicare and Medicaid
Services; U.S. SMALL
BUSINESS ADMINISTRATION;
SECRETARY OF U.S. DEPARTMENT
OF TREASURE,

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Defendants.
___________________________

) Case No. CV 14-00786 DDP
)
) ORDER AFFIRMING BANKRUPTCY
) COURT’S DISMISSAL OF PLAINTIFF’S
) COMPLAINT
)
) [Dkt. No. 8]
)
)
) USBC Central District of California - Northern Div,
) 9:09-bk-13125-RR
)
) Adversary Case: 9:13-ap-1143-RR
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)
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)
)

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Presently before the Court is Plaintiff’s appeal from a

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dismissal by the Bankruptcy Court of its complaint for lien

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determination.

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submissions, the Court adopts the following order.

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cc: US Bankruptcy Court & US Trustee's Office

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(Dkt. Nos. 1, 8.)

Having considered the parties’

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I.

BACKGROUND

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Defendant United State Small Business Administration (“SBA”)

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is a federal government entity that held, as security for certain

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small business loans, liens against some of Plaintiff’s commercial

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property.

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generally Bankruptcy Case No. 9:09-bk-13125-RR.)

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bankruptcy was pending, in August 2013 the United States Treasury

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Department applied certain Medicare receivables owed to Plaintiff

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to offset Plaintiff’s debt to SBA.

Plaintiff filed for Chapter 11 bankruptcy in 2009.

(See

While that

(Appellant’s Opening Br. at 4.)

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Plaintiff argues that this direct action on the debt

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constitutes an “election of remedies” under Cal. Code Civ. P. §

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726.

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(“[W]here the creditor sues on the obligation and seeks a personal

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money judgment against the debtor . . . he makes an election of

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remedies, electing the single remedy of a personal action, and

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thereby waives his right to foreclose . . . .”).

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in a complaint to the Bankruptcy Court that because SBA elected to

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recover via the application of Medicare receivables, it could not

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also assert its security interest in the sale of the property.

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(Appellant’s Opening Br. at 4; Appellant’s App’x, Tab 1.)

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See, e.g., Walker v. Cmty. Bank, 10 Cal. 3d 729, 733 (1974)

Plaintiff argued

Defendants filed a motion to dismiss the complaint, arguing

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that the exercise of the setoff was inadvertent and that in any

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event federal law preempts § 726.1

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Accompanying the motion were declarations by SBA employees

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indicating that the referral of the case to the Treasury for setoff

(Appellant’s App’x, Tab 2.)

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Although other claims were initially presented, by the time
the Bankruptcy Court ruled on the motion to dismiss, only the § 726
issue remained. (Appellant’s App’x, Tab 3 at 2:6-8.)
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was inadvertent, that the SBA never intended to use or elect

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setoffs prior to enforcing its liens, and that the setoffs were

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refunded when the error was discovered.

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On January 16, 2014 the Bankruptcy Court granted the motion to

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dismiss.

(Appellant’s App’x, Tab 5.)

Although the order did not

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state the bankruptcy judge’s reasoning, during a hearing on the

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motion the judge entered into the record several “findings of fact

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and conclusions of law.”

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First, the bankruptcy judge cited to 13 C.F.R. 101.106 as “a

(Appellant’s App’x, Tab 6 at 15:6-7.)

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congressional statement that no state law will contravene any

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attempt by the SBA to collect or no state law can defeat an

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obligation to the SBA.”

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“Congress has determined that the ability of the United States to

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have a functional SBA program for small business loans is of such

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national importance that 726 of the California Code of Civil

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Procedure would not be applicable.”

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noted that one of the purposes of § 726 was to prevent “a

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multiplicity of lawsuits,” and that applying § 726 in this case

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would not “reduce litigation.”

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concluded that even in § 726 were technically available, the

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violation was “inadvertent” and “of negligible duration,” and

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therefore not actionable even under state law.

(Id. at 8:13-16.)

She found that

(Id. at 14:18-22.)

(Id. at 13.)

She also

Finally, she

(Id. at 14.)

Plaintiff now appeals the Bankruptcy Court’s decision to

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dismiss its complaint.

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II.

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LEGAL STANDARD
The district court acts as an appellate court in an appeal

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from a bankruptcy decision and may affirm the bankruptcy judge’s

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order “on any ground supported by the record,” even if that ground
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is not the one relied upon by the bankruptcy judge.

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Properties, Ltd., L.P., 268 F.3d 743, 755 (9th Cir. 2001).

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district court reviews conclusions of law de novo but reviews

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findings of fact for clear error.

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Library Asset Acquisition Co., 510 B.R. 266, 271 (C.D. Cal. 2014).

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III. DISCUSSION

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A.

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In re Crystal
The

Screen Capital Int'l Corp. v.

Federal Preemption Under DCIA
SBA argues, and the Bankruptcy Court concluded, that the

operation of § 726 is preempted by federal law.

SBA bases its

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argument on two bodies of law – first, the federal regulations

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propagated by the administrator of the SBA and a series of cases

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dealing with choice of law where contracts with federal agencies

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are concerned, and second, the Debt Collection Improvement Act

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(“DCIA”), which authorizes the Treasury setoff program.

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the first argument implicates a long, conflicted line of federal

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common law,2 as well as difficult questions of deference to agency

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regulations, the Court starts with the second argument, which

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presents a cleaner case of statutory federal preemption.

Because

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Preemption occurs in one of three ways: “(1) Congress enacts a

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statute that explicitly pre-empts state law; (2) state law actually

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Compare, e.g., United States v. Yazell, 382 U.S. 341 (1966)
(applying state law to a contract with SBA), United States v.
MacKenzie, 510 F.2d 39 (9th Cir. 1975), United States v. Pastos,
781 F.2d 747 (9th Cir. 1986) (same), and In re Alcock, 50 F.3d 1456
(9th Cir. 1995) (same), with United States v. Kimbell Foods, Inc.,
440 U.S. 715 (1979) (applying federal rather than state law to
determine priority of liens where federal agency was lienholder),
United States v. Stadium Apartments, Inc., 425 F.2d 358 (9th Cir.
1970) (denying use of state redemption statute in foreclosure by
Federal Housing Authority), and Mineta v. Bd. of Cnty. Comm'rs of
the Cnty. of Delaware, No. 05-CV-0297CVE-PJC, 2006 WL 2711559, at
*12 (N.D. Okla. Sept. 19, 2006) (“Yazell has been confined to the
state's overriding interest in domestic relations law, and does not
apply in any other context.”).
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conflicts with federal law; or (3) federal law occupies a

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legislative field to such an extent that it is reasonable to

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conclude that Congress left no room for state regulation in that

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field.”

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Chae v. SLM Corp., 593 F.3d 936, 941 (9th Cir. 2010).

The DCIA creates a uniform method by which federal agencies

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are required to collect on nontax debts owed them.

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31 U.S.C. § 3701 et seq.

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provision.

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debt collection.

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See generally

It does not contain an express preemption

It also does not appear to occupy the entire field of
Therefore, it only preempts state law to the

extent that the state law actually conflicts with it.
The Ninth Circuit has articulated certain considerations
governing the conflict preemption analysis:

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A state law, whether arising from statute or common law, is

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preempted if it creates an obstacle to the accomplishment and

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execution of the full purposes and objectives of Congress . .

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. .

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We must be cautious about conflict preemption where a federal

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statute is urged to conflict with state law regulations within

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the traditional scope of the state's police powers. When we

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deal with an area in which states have traditionally acted,

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the Supreme Court has told us to start with the assumption

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that a state's historic police powers will not be superseded

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absent a clear and manifest purpose of Congress.

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consumer protection laws have traditionally been in state law

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enforcement hands . . . . Accordingly, we would not lightly

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decide that . . . contract and consumer protection claims

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under California law are preempted by conflict preemption . .

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. .
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Contract and

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Chae v. SLM Corp., 593 F.3d 936, 943-44 (9th Cir. 2010) (internal

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quotation marks and citations omitted).

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Cal. Code Civ. P. § 726 embodies two rules.

Gates v. LPP

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Mortgage, Inc., No. CV 13-8737 DSF PLAX, 2013 WL 6978834, at *3

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(C.D. Cal. Dec. 30, 2013).

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secured creditor to proceed against the security before enforcing

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the underlying debt”; the penalty for failing to do so is waiver of

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the security.

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to either a foreclosure suit or a suit directly on the debt.

Id. at *4.

The “security-first” rule requires “a

The “one-action rule” limits a creditor
Id.

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at *3.

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taking a setoff – that is, acting directly to enforce the debt –

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rather than foreclosing on the security.

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SBA is alleged to have violated the security-first rule by

Because § 726 is essentially a consumer protection law (in

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that it protects the interests of debtors), and because it

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implicates contract (because promissory notes are contracts), it is

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operating in an area of traditional state regulation.

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will not be preempted absent findings both that it presents an

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obstacle to the accomplishment of the purpose of the statute and

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that the statute presents a “clear and manifest purpose of

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Congress” to preempt state law.

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As such, it

Here, however, the Court finds that those requirements are
met.

The DCIA was passed, inter alia,

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(1) To maximize collections of delinquent debts owed to

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the Government by ensuring quick action to enforce recovery

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of debts and the use of all appropriate collection tools.

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(2) To minimize the costs of debt collection by consolidating

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related functions and activities and utilizing interagency

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teams.
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(3) To reduce losses arising from debt management activities

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by requiring proper screening of potential borrowers,

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aggressive monitoring of all accounts, and sharing of

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information within and among Federal agencies.

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(4) To ensure that the public is fully informed of the Federal

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Government’s debt collection policies and that debtors are

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cognizant of their financial obligations to repay amounts owed

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to the Federal Government.

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Debt Collection Improvement Act of 1996, Pub. L. No. 104-134, 110
Stat. 1321, § 31001(b) (Apr. 26, 1996) (statement of purpose).
The statute requires federal agencies to collect debts, 31

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U.S.C. § 3711(a)(1), 3711(g)(9).

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going through normal collection procedures, to collect via

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administrative offset.

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or more delinquent, the agency must refer the debt to Treasury for

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offset.

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year the Treasury Department must be notified of all past due

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debts; Treasury, in turn, must offset those debts against any tax

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refund owed the debtor.

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offset, however, if there is an automatic stay in a bankruptcy

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proceeding.

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It authorizes agencies, after

31 U.S.C. § 3716(a).

31 U.S.C. § 3716(c)(6)(A).

If a debt is 120 days

In any event, at least once a

31 U.S.C. § 3720A(a)-(c).

Debts are not

11 U.S.C. § 362(a)(7).

The statement of purpose accompanying the statute evinces

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Congress’s intent to set forth uniform debt collection procedures

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for federal agencies; to make the public aware of those uniform

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procedures; to centrally monitor collections; and to reduce costs

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by, among other things, centralizing collections through the offset

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process.

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debt collection of federal agencies under a single federal scheme,

That intent reflects the will of Congress to regulate the

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which necessarily carries with it the purpose of preempting state

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law to the degree that it presents an obstacle to the operation of

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such a federal scheme.

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These purposes of the statute would be thwarted if its

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mandatory debt collection procedures resulted in the loss of an

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agency’s security interest under state election-of-remedies rules.

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As applied to federal agencies required to pursue offsets by the

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DCIA, therefore, Cal. Code Civ. P. § 726 is preempted.

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In this case, the use of the offset may have been improper

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under the Bankruptcy Code, as SBA acknowledges.

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provide Plaintiff with other remedies to recover consequential

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damages arising from the offset, such as a motion for contempt in

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the Bankruptcy Court or a federal civil rights claim.

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expresses no opinion about the availability or merits of any such

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claim.

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under DCIA waives an agency’s security interest under state law;

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that function of § 726 is preempted.

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B.

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That fact may

The Court

What Plaintiff may not do, however, is claim that an offset

Federal Common Law Choice of Law Rules and SBA Regulations
Because the Court finds that the operation of § 726 to waive

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SBA’s security interest is preempted under the DCIA, the Court does

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not address SBA’s other arguments.

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C.

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State Law Arguments
Because the Court finds the operation of § 726 to waive SBA’s

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security interest is preempted under the DCIA, the Court does not

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address whether Plaintiff could state a claim under state law.

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IV.

CONCLUSION
The Bankruptcy Court’s dismissal of Plaintiff’s complaint is

AFFIRMED.

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IT IS SO ORDERED.

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Dated: May 14, 2015
DEAN D. PREGERSON
United States District Judge

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