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