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DIVORCE AND BANKRUPTCY

 

Liability for Debts of Spouse

John McKindles

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Table of Contents

A. Community Property

B. Separate Property

C. Liability for Debts of Spouse

D. Jurisdiction to Control and Dispose of Community and Separate Property Assets

E. Jurisdiction to Determine Separate Property Rights

F. Jurisdiction Over Allocation and Disposition of Debt

G. ERISA Retirement Plans and the Bankruptcy Estate

H. Community Property and the Bankruptcy Estate

I. Priority of Past Due Support Over Other Creditors

J. Protection of Dissolution and Lien Rights

K. Advisability of Joint Bankruptcy Filing and Conflict of Interest Problems

L. Impact on Future Community Property Interests

M. Impact of Discharge on Secured Debts

 

Mesa divorce and community property attorney John McKindlesThis discussion of debt liability is an excerpt from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners”

The liability of community property and separate property for community and separate debt is largely governed by A.R.S. § 25-215, which states as follows:

25-215. Liability of community property and separate property for community and separate debts

A. The separate property of a spouse shall not be liable for the separate debts or obligations of the other spouse, absent agreement of the property owner to the contrary.

B. The community property is liable for the premarital separate debts or other liabilities of a spouse, incurred after September 1, 1973, but only to the extent of the value of that spouse’s contribution to the community property which would have been such spouse’s separate property if single.

C. The community property is liable for a spouse’s debt in­curred outside of this state during the marriage that would have been community debts if incurred in this state.

D. Except as prohibited in section 25-214, either spouse may contract debts and otherwise act for the benefit of the community. In an action on such a debt or obliga­tion the spouses shall be sued jointly and the debt or ob­ligation shall be satisfied: first, from the community property, and second, from the separate property of the spouse contracting the debt or obligation.

Any debt incurred during the marriage intended to benefit the community will be consid­ered community debt and has uniformly been held such in Arizona. Donato v. Fishburn (1961) 90 Ariz. 210, 167 P.2d 245; In re Oliphant, Bkrtcy. D. Ariz. 1998. 221 B.R. 506.

1. Torts. Community property may be liable for negligent or intentional torts of one spouse if the activity constituting the tort was done for the benefit of the community or for family purpose. In re Oliphant, Bkrtcy. D. Ariz. 1998, 2001 B.R. 506. However, if the parties have a prenup­tial agreement, properly drafted and executed, there may be no community assets to go against in order to collect on a tort judgment. Elia v. Pifer (App. Div.1 1998) 194 Ariz. 74, 977 P.2d 796. But there is obvious risk in running afoul of the Uniform Fraudulent Transfer Act, should the couple decide to change the status of their property from or to community to or from separate after incurring the liability. See State v. Wright, supra.

2. Separate Property and Obligations. An obligation of an extinguished marital community can be collected from post decree separate property of each former spouse and also from post decree property of a new community to the extent of the former spouse’s contribution to that new community. See In re Oliphant, supra.

As a due diligence tip, it is important for the attorney to protect his or her client (and himself or herself) before acceding to language requiring the client to pay “all community debts” as an offset against assets, perhaps taken by that spouse. In the case of Wine v. Wine (App. Div.1 1971) 14 Ariz. App. 101480, P.2d 1020, the property settlement agreement incorporated in the Decree provided that the husband was to pay “all community debts.” Evidently, insufficient exculpatory language was used in the settlement agreement because when it was later learned that wife had incurred taxes, interest and penalties on her share of the community income earned prior to the divorce but not reported by her, the ex-husband was found to be liable for payment of these amounts under the encompassing language in the property settlement agreement.

Also relevant to community debt, please see A.R.S. § 25-214 regarding management and control of the community estate and separate property. The statute has certain specific exceptions relating to the ability of one spouse to commit the community assets. The statute reads as follows:

25-214. Management and Control

A. Each spouse has the sole management, control and dis­position rights of each spouse’s separate property.

B. The spouses have equal management, control and dispo­sition rights over their community property and have equal power to bind the community.

C. Either spouse separately may acquire, manage, control or dispose of community property or bind the commu­nity except that joinder of both spouses is required in any of the following cases:

1. Any transaction for the acquisition, disposition or encumbrance of an interest in real property other than an unpatented mining claim or a lease of less than one year.

2. Any transaction of guaranty, indemnity or suretyship.

3. To bind the community, irrespective of any person’s intent with respect to that binder, after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.

What this means essentially is that, with certain notable exceptions, either party to the community can bind the community. One shackled to a shopaholic may well consider insolating him or herself from further liability against the community by entering into a written agreement or minimizing the value of the community in some other practical fashion. Since the language of the statute is fairly clear, it is not surprising to find the case law developed thereunder fairly uniform in its application. King v. Uhlmann (1968) 103 Ariz. 136, 437 P.2d 928.

Further, in order to bind the community, the indebtedness incurred by one spouse must be for the benefit of the community. Otherwise, a debt incurred by a spouse during coverture will not be considered a community debt. Zork Hardware, Co. v. Gottlieb (App. Div. 2 1991) 170 Ariz. 5, 821 P.2d 272.

Also, the specific exceptions outlined under the statute which require the execution of both spouses in order to be assertable against the community prevail over the presumption of community liability even though the liability incurred was for a community purpose. Even though a guarantee is for a business that benefits the marital community, unless it is signed by both parties, it is not assessable against the community. Vance-Koepnick v. Koepnick (App. Div.1 1999) 3 P.3d 1082.

3. Post Nuptial Agreements. Married couples can freely contract to divide or allocate their property as they please, both presently and in the future by a post nuptial agreement, so long as the agreement is voluntary, fair and equitable and free from fraud. In re Harber’s Estate (1969) 104 Ariz. 79. 449 P.2d 7; Spector v. Spector (Ariz. App. Div.1 Jan, 30, 1975) 23 Ariz. App. I’ll. 531 P.2d 176.

However, an exception to the rule is that an increase in the value of separate property during marriage as a result of the work effort of the community is to be apportioned between the separate property of the owner and community property of the spouses, please see Roden v. Roden (Ariz. App. Div 1 1997) 190 Ariz. 407. 949 P.2d 67. Therein, the court held that any increase in the value of the husband’s separate property during the marriage as a result of community efforts was off­set by the amount of compensation (community property) that was received by the parties during the marriage.

Although either party to a marriage can incur indebtedness on behalf of the community, technically the marital relationship will not, in and of itself, make one spouse necessarily an agent for the other. Ferree v. City of Yuma (App. Div. 1 1979) 124 Ariz. 225, 603 P.2d 117.

Interestingly, the case of Alberta Secs. Comm’n. v. Ryckman (App. 2001) 200 Ariz. 540, 30 P.3d 121, allows a judgment from a non-community property state to be domesticated in Arizona and collected against the community assets, so long as the debt would have been a community obligation if incurred in Arizona. Specifically the court required that the non-defendant spouse have an opportunity to challenge the community status of the debt in the do­mestication proceedings. In other words the non-defendant spouse had an opportunity to contend that the judgment was based on an obligation of the other spouse that would have been separate if incurred in Arizona.

3. Interspousal Immunity/Indemnity. Interspousal immunity was clearly abolished for public policy reasons in the Arizona case of Fernandez v. Rome. 138 Ariz. 447, 646 P.2d 878 (1982). See also Lucero v. Valdez (Ariz. App. Div.1 1994) 180 Ariz. 313, 884 P.2d 199.

4. Fiduciary Duties between Spouses. Fiduciary relationship does exist between spouses with respect to community assets. Gerow v. Cobill (Ariz. App. Div.1 1998) 198 Ariz. 9, 960 P.2d 55. Removal of community assets without notice or approval by the other spouse can constitute a breach of that duty.