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Is Separate Property Liable for Community Debt in Arizona

Posted on : July 7, 2016, By:  Christopher Hildebrand
Is Community Property Liable for Separate Debt

Is Separate Property Liable for Community Debt in Arizona?

Under Arizona law, earnings of either spouse during a marriage are community property. In a divorce, the court divides the community property between the two. Creditors can recover community debt from community property, but not generally from the separate property of one spouse.

In Union Bank v. Pfeffer, 502 P.2d 535 (1972), a bank tried to recover debts against a widow’s separate property.

Facts of the Case

Mr. Pfeffer was married to Mrs. Pfeffer when he borrowed $75,000 from Union Bank. The debt was not paid in full by the time husband died. Union Bank presented the note to wife, as administratrix of his estate, for payment.

She allowed it as a separate obligation of husband, but disallowed it as a community debt. Union Bank had three months to challenge this in court, but it did not do so. The trial court ruled that the bank could not collect from community assets. Union Bank then sued wife personally. The trial court ruled for Mrs. Pfeffer on a summary judgment motion, and the bank brought this appeal.

The Impact of Ellsworth

The first issue on appeal is the impact of the case Ellsworth vs. Ellsworth, 423 P.2d 364 (1967). Under this ruling, community funds transferred to wife by husband before he took the loan can be used to recover the outstanding debt.

The general rule in Arizona is that a wife’s separate property is not liable for the debts of the community. However, Union Bank claims that the husband transferred community assets to his wife before he took out the loan. He used joint tenancy bank accounts, insurance policies and trusts.

Given that, it argues that Mrs. Pfeffer’s separate property should be used to pay the community debt to the bank. It claims recovery from her separate funds (at least to the extent that they came from the community property. The bank cited Mortensen v. Knight, 81 Ariz. 325, 305 P.2d 463 (1956) for that proposition. However, the Court found that this case could not be used to support their argument. There, a husband’s liability for a community debt was premised upon his statutory right to control community property.
Is Separate Property Liable for Community Debt in Arizona
Union Bank then relies on Ellsworth v. Ellsworth. In that case, the Court of Appeals ruled that a divorced wife was personally liable for half of the community debts. She was liable “at least” to the extent that she received community property from the dissolution of the marriage.

However, the Court of Appeals limited the impact of the Ellsworth case to divorce cases. It said that creditors can only recover community debt from separate property after a dissolution. Therefore, it ruled, Ellsworth did not apply in the case of a death.

The Court noted that no procedure exists for a creditor to reach community funds that become separate in a divorce. In a probate case, however, the law sets out a specific procedure to recover from community funds after death. The creditor can file a community property claim against the estate of the decedent.

Wife’s Liability under “Partnership” Theory

Next, Union Bank argues that a marriage is like a partnership. Since partners are separately liable for debts of the partnership, spouses should also be separately liable. The Court rejected this out of hand as incompatible with Arizona law.

Union Bank suggests that Mrs. Pfeffer was in partnership with her husband in the corporation that borrowed the money. Therefore, it claims, she should be liable as a partner. The Court rejected this since Union Bank offered no proof that the wife was more than an employee of the corporation.

Bank Did Not Plead Fraudulent Conveyance Elements

Union Bank also argues that the transfers constituted fraudulent conveyances of community assets. However, the bank did not allege one of the three elements of fraudulent conveyance in the pleadings. It did not claim that husband transferred assets to wife without consideration. Since Union Bank did not plead all the elements, it could not succeed on this theory on appeal.

Decision

The Court affirmed the lower court’s decision.


Hildeband Law, PC.


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