Effect of Postnuptial Agreements
ICA/Wright Marital Agreement Application
Under Arizona’s community property law, all earnings by either spouse during marriage are presumed to belong to the community (the two spouses). If a spouse incurs a separate debt during marriage, the creditor cannot try to collect from the couple’s community property. What happens when a couple changes their marital property agreement after one of them has incurred a separate debt in order to avoid having his wages taken in payment? This was the question raised in the case of Industrial Commission of Arizona v. Wright, 43 P.3d 203, 202 Ariz. 255, (2002).
Facts of the Case
Mr. and Mrs. Wright married in June, 1997. Before they married, they signed a prenuptial agreement that all earnings of each spouse during marriage were to be the separate property of the spouse earning them, not community property. Four months after the marriage, an employee of Kevin was injured on the job. Kevin did not have workers compensation insurance, so the employee brought a case before the Industrial Commission. The Industrial Commission ruled against Mr. Wright, assessing damages and penalties against Kevin for the worker’s injuries and for failure to provide insurance.
It dismissed his wife from the case. Soon after the judgment against Husband, he and his wife changed their premarital agreement. The new version provided that all earnings from personal services by either spouse after marriage would be community property. A few months later, the State tried to collect the judgment against Husband by garnishing his wages. Husband and Wife objected to the garnishment, claiming that the wages were community property under the revised agreement and could not be seized for a separate debt. The commissioner hearing the case found that the change to the premarital agreement was a fraudulent conveyance under the Uniform Fraudulent Transfer Act. Husband and Wife appealed.
In Arizona, Marital Agreements Generally Bind Creditors
When a couple makes a valid agreement specifying that their earnings will remain separate property after marriage, this agreement generally binds creditors in Arizona, so long as a the Prenuptial Agreement or an Abstract of the Prenuptial Agreement is recorded in the County Recorder’s Office.
This is important since, under Arizona law, a creditor cannot collect a separate debt of one spouse from the couple’s community property. However, when the Court of Appeals reviewed the law in this case, it noted that — in every case it reviewed — the marital agreement was made before the debt was incurred. Not one case had been decided where – as here — the agreement was made after the debt was incurred.
Husband argued it didn’t matter if the debt was incurred before the agreement was modified, that the new agreement was valid and his wages were community property that could not be taken to pay the separate judgment against him. The State argued that the transfer was a fraudulent conveyance, intended to keep a valid judgment creditor from getting paid.
The Court noted that, under the fraudulent conveyance law, a transfer is fraudulent if it is made in order to hinder or defraud a creditor. The change in the agreement was a transfer under the broad definition of that term in the law. Therefore, the Court found that Husband’s and Wife’s attempt to transfer Husband’s separate property to the community by revising their marital property agreement was a fraudulent conveyance under the law.