Arizona Community Liability for a Debt Guaranteed by the Other Spouse
When a marriage ends in Arizona, both the community assets and the community debts are divided between the spouses. As part of the process, a court must determine which debts belong to each individual spouse.
In Vance-Koepnick v. Koepnick, 3 P.3d 1082 (1999), the appellate court considered a promissory note signed only by one spouse.
Facts and Procedure
Mrs. Vance-Koepnick and Mr. Koepnick married in February 1996. Before the marriage, Mr. Koepnick owned a corporate business called Phoenix Biomedical. During the marriage, the business had problems and Mr. Koepnick could not draw a salary from it.
Six months into the marriage, the corporation borrowed $40,000 from an individual to keep the business going. Mr. Koepnick signed a promissory note on behalf of the corporation and personally guaranteed it. Mrs. Vance-Koepnick did not sign it.
In the divorce case, the judge ruled that the loan was Mr. Koepnick’s separate debt and not a community debt. From that, Mr. Koepnick appealed.
Both Spouses Must Sign Guarantees to Bind the Community
Mr. Koepnick argued on appeal that the loan guarantee was a community debt. He relies on Hofmann Co. v. Meisner, 497 P.2d 83 (1972). In that case, a husband personally guaranteed a corporate debt and the creditor sued both spouses on the guarantee. The creditor claimed that the marital community was liable.
It argued that the husband was acting for the benefit of the community when he signed the guarantee. The court in that case agreed and allowed a recovery from community assets.
Since that holding, however, the legislature revised the statutes. It removed the language making a husband the sole manager of the marital community. The new law provides that each spouse can manage community property or bind the community in most cases. However, it specifically states that both spouses must join in any community guarantees.
This means that a community is not bound by a guarantee signed by only one spouse. That is the case even when the guarantee is for a business that benefitted the marital community.
The Statute Applies to Disputes between Divorcing Spouses
Mr. Koepnick next argued that the statute about community guarantees applies only to creditors. However, the Court of Appeals rejected this argument, ruling that it also applies to divorcing spouses.
The Court noted that the statute is part of a section dealing with marital and domestic relations. These statutes are intended to protect one spouse against obligations undertaken by the other spouse. That purpose would be frustrated if Mr. Koepnick could charge Mrs. Vance-Koepnick’s interest in the community with debts he alone guaranteed.
Separate Obligation to Pay Legal Fees
During the marriage, lawsuits were filed against the corporation and Mr. Koepnick personally. He hired a law firm to defend the suits and signed a fee agreement. Mrs. Vance-Koepnick did not know about the agreement and did not sign it. Mr. Koepnick argued that the legal fee debt is a community debt.
The fee agreement stated:
As we have discussed, Phoenix Biomedical, Inc. (dba Phoenix Keratek, Inc.), and you personally, agree to be responsible, jointly and severally, for payment of all attorney’s fees and disbursements incurred with Fennemore Craig. Your ownership of stock in Phoenix Keratek and PBLC Company (PBLC being the holder of the patents) predates your February 1996 marriage toMrs. Vance-Koepnick. You own 80% of PBLC Company.
You have maintained your personal assets as separate property, except only for 3% of the stock in Phoenix Keretek which you have given to your wife Mrs. Vance-Koepnick. She has no interest in PBLC Company. You do not intend to and will not give Mrs. Vance-Koepnick any interest in PBLC Company or any additional interest in Phoenix Keratek. She does have her own separate assets from a prior marriage. Your signature will bind your separate assets as well as your share of community property assets.
The trial judge ruled that this obligation was the sole responsibility of the husband. The Court of Appeals said that the same analysis applied to the debt as to the guarantee.
The debt agreement also contained a provision for attorney fees in case of litigation brought against him personally .Mr. Koepnick claimed that his defense benefitted the community.
However, the Court of Appeals upheld the trial court’s decision that the debt was solely Mr. Koepnick’s. He did not divide up the fees between work done for the corporation and work done on his own behalf.
In addition, the Court assumed that the lawsuit arose out of the facts that gave rise to the suits against the corporation. The legal agreement showed the parties’ clear intent to preserve Mr. Koepnick’s separate interest in the corporation. Under these circumstances, the Court found it fair to allocate the debt incurred to Mr. Koepnick alone.
The orders of the trial court assigning liability for the debt and the legal fees to the husband are affirmed.
Chris Hildebrand wrote this article to ensure everyone has access to information about family law in Arizona. Chris is a divorce and family law attorney at Hildebrand Law, PC. He has over 24 years of Arizona family law experience and has received multiple awards, including US News and World Report “Top Arizona Divorce Attorneys”, Phoenix Magazine “Top Divorce Law Firms”, and Arizona Foothills Magazine “Best of the Valley” award. He believes the policies and procedures he uses to get his clients through a divorce should all be guided by the principles of honesty, integrity, and, quite frankly, actually caring about what his clients are going through in a divorce or family law case. In short, his practice is defined by the success of his clients. He also manages all of the other attorneys at his firm to make sure the outcomes in their clients’ cases are successful as well.
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