Northwestern Nat. Ins. Co. v. Schubach
| Citation | 93 F.3d 386 |
| Decision Date | 21 August 1996 |
| Docket Number | No. 95-3730,95-3730 |
| Parties | NORTHWESTERN NATIONAL INSURANCE COMPANY, Plaintiff-Appellant, v. LaDawn SCHUBACH and Dorothy K. Wales, Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (7th Circuit) |
John A. Rothstein, Richard C. Ninneman (argued), Quarles & Brady, Milwaukee, WI, for Northwestern Nat. Ins. Co. of Milwaukee, WI.
Daniel W. Hildebrand (argued), DeWitt, Ross & Stevens, Madison, WI, Alex B. Vakula, Jon A. Titus, Titus, Brueckner & Berry, Scottsdale, AZ, for LaDawn Schubach, Dorothy K. Wales.
Before POSNER, Chief Judge, and ROVNER and DIANE P. WOOD, Circuit Judges.
For the third time, this court has before it an appeal arising out of the unsuccessful Arizona limited partnerships backed by Northwestern National Insurance Company (NNIC) during the 1980s. See Northwestern National Insurance Company v. Maggio, 976 F.2d 320 (7th Cir.1992); Northwestern National Insurance Company v. Baltes, 15 F.3d 660 (7th Cir.1994). See also Northwestern National Insurance Co. v. Donovan, 916 F.2d 372 (7th Cir.1990). On this round, we must consider the effect of Arizona community property law on the judgment NNIC obtained against certain investors in the partnerships, which we affirmed in Baltes. NNIC's problem is simple: its judgment against two of the partners, Stanley D. Schubach and Harold W. Wales, is uncollectible. Schubach and Wales are both married residents of Arizona, a community property state, and they have only community property. Realizing that, NNIC tried to sue the two men's wives in this case, to enable it to reach the community's assets. Although we appreciate the frustration NNIC must feel, having become ensnared in the intricacies of community property law, we conclude that the district court correctly dismissed the action.
Our review of the facts can be brief. In 1989, NNIC sued five investors in a limited partnership for breach of contract. This partnership, back in 1984, had sought additional funds, which it had obtained through some promissory notes. The lender required it to secure those notes with a financial obligation bond from NNIC, and NNIC for its part required the investors in the limited partnership to agree to indemnify it, should it be required to make good on the bond. In time, the enterprise defaulted on the notes, and NNIC sued in the federal court for the Eastern District of Wisconsin, as we described in more detail in Baltes. NNIC obtained a judgment against the investors, which we affirmed.
Schubach and Wales were two of the partners against whom the judgment had been entered. Each one had executed a note with a principal amount of $56,571; each had obtained a financial guarantee bond from NNIC for the note; and each had promised to indemnify NNIC in that amount if he defaulted on the note. Neither man's wife signed either the note, the bond application, or the indemnity agreement. After things went sour and NNIC tried to enforce its judgment against Schubach and Wales (while the Baltes appeal was pending), both men claimed that all assets they owned were community property with their wives. NNIC initially responded by filing a motion under Fed.R.Civ.P. 60(b) with the district court, asking it to add the wives as defendants to the original action. The district court denied the motion, and NNIC took no separate appeal from that order.
NNIC then filed the present action against LaDawn Schubach and Dorothy K. Wales, the two wives, again in the federal district court for the Eastern District of Wisconsin. It alleged that Messrs. Schubach and Wales had acted as agents for the wives with respect to their Arizona community property in the various transactions concerning the limited partnerships. It sought a declaration from the district court that the wives were jointly liable with their respective husbands for the judgments previously entered against the husbands, or, in the alternative, that the wives were jointly liable with their husbands directly under the notes or indemnity agreements in NNIC's favor. After a trial to the court, the district court ruled against NNIC. It concluded that Arizona law requires a creditor to sue the husband and wife together, in the same lawsuit, if it wishes to collect from the community. Since NNIC had sued them seriatim, it rejected both claims for declaratory judgment that NNIC presented.
Because all parties agree that Arizona law controls this case, we turn immediately to the governing provisions of Arizona community property law, which we find in A.R.S. §§ 25-214 and 25-215. Section 25-214 deals with the management and control of the community property, and § 25-215 elaborates on those rules and adds a provision about actions brought to enforce community obligations. We set forth both statutes, in pertinent part.
§ 25-214. Management and Control.
A. Each spouse has the sole management, control and disposition rights of his or her 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 then one year.
2. Any transaction of guaranty, indemnity or suretyship.
§ 25-215. Liability of community property and separate property for community and separate debts.
* * * * * *
D. Except as prohibited in § 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.
These statutes, taken together, show that Arizona follows two general rules: first, either spouse may incur obligations that bind the community (with the exceptions noted in § 25-214(C), to which we return), and second, notwithstanding the right of each spouse to act as the other's agent in the business world, when it comes to litigation relating to the community property the spouses must be sued jointly. These two rules are not necessarily contradictory. When it comes to ordinary commercial transactions, the right to equal management of the community property would be worth little if each spouse were not entitled to bind the community. Otherwise, in effect, every contract or transaction would de facto need both signatures. Litigation is a different matter, for several reasons. First, the non-signing spouse has an interest in making sure that the property that was purportedly obligated was properly characterized as community property. The non-signing spouse may be able to show in some cases that it was the signer's separate property, and thus that the non-signer's interests were not adversely affected by the deal. Second, the non-signing spouse is the one with the incentive to enforce the exceptions found in § 25-214(C) to the general rule. Requiring joinder in litigation gives the nonsigner the opportunity to raise arguments under that provision, even when the property is clearly community. In the end, of course, it matters not at all whether we think the system a sensible one or not; it is our duty to follow Arizona law as authoritatively provided by the legislature and courts of that state. Our observations go only to suggest some of the purposes that may lie behind the Arizona statutes that may be pertinent to this case.
Nothing from the Arizona courts supports anything but a straightforward reading of these statutes. In Eng v. Stein, 123 Ariz. 343, 599 P.2d 796 (1979), the Arizona Supreme Court had before it a case in which contractors brought a suit for breach of contract and to enforce a materialman's lien against only the husband, Larry Eng. The trial court awarded damages, attorney's fees, and foreclosure of the lien, but its judgment named both Mr. and...
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