Courts-State Substantive Law Applies in Non-Diversity Actions When Local Interests Predominate-United States v. Yazell

Respondent and her husband received an authorization for a Small Business Administration (SBA) disaster loan and were referred by the SBA Disaster Loan Office to a local counsel employed by the SBA to aid them in complying with the terms of the loan. After personal negotiations with the counsel, a promissory note was signed by the couple on SBA forms specifically tailored to conform to the requirements of state law. This contract was then submitted to the SBA along with a signed chattel mortgage on the Yazell’s store fixtures and inventory and a certification by the local counsel that all state law requirements necessary to insure enforceability had been met. However, under the Texas law of coverture, respondent was unable to bind her separate property by contract without first having obtained a court decree removing the disability. She had satisfied the statutory requirement with respect to the chattel mortgage, attaching a notarized acknowledgment to this effect to the transferred security instrument, but had failed to remove the disability to negotiate the note. In an action by the United States upon the respondent’s default in payment of the loan, both the federal district court and the Fifth Circuit Court of Appeals held that the state law limiting the respondent’s capacity to enter binding agreements barred recovery against her on the note. On appeal to the Supreme Court, held, affirmed, three justices dissenting. Absent a sufficient federal interest to the contrary, the United States’ rights under contracts which contain specific reference to state law and which are “custom-tailored” through personal negotiations to the particular circumstances involved are subject to state laws dealing with familial-property rights.