Gaughan v. First Cmty. Bank (In re Miller)

• Decision Date: 26 August 2014
• Docket Number: Bankruptcy No. 11–10746 EPB.,Adversary No. 13–ap–00436 EBP.,No. CV–13–02050–PHX–NVW.,CV–13–02050–PHX–NVW.
• Citation: 517 B.R. 145
• Parties: In re Larry L. MILLER, Debtor. Maureen Gaughan, Appellant, v. First Community Bank, Appellee.
• Court: U.S. District Court — District of Arizona

517 B.R. 145

In re Larry L. MILLER, Debtor.Maureen Gaughan, Appellant

v.First Community Bank, Appellee.

No. CV–13–02050–PHX–NVW.

Bankruptcy No. 11–10746 EPB.

Adversary No. 13–ap–00436 EBP.

United States District Court, D. Arizona.

Signed Aug. 26, 2014.

Steven Joseph Brown, Steve Brown & Associates LLC, Phoenix, AZ, Steven Douglas Nemecek, Steve Brown & Associates LLC, Phoenix, AZ, for Appellant.

Joseph Eldon Cotterman, Jaclyn Dale Foutz, Fay Marie Waldo, Andante Law Group of Daniel E. Garrison PLLC, Scottsdale, AZ, for Appellee.

ORDER

NEIL V. WAKE, District Judge.

This bankruptcy appeal poses the question whether an Arizona judgment against a husband on his sole and separate debt may be executed against the Arizona couple's community property in California. The answer is no, even if the original judgment had been rendered in California.

Specifically, the Arizona federal judgment against the husband alone, later registered in a California federal court and recorded in California, does not lien their community real property in California. This is the rule by Arizona statute, and California choice of law principles yield to the Arizona rule concerning Arizona domiciliaries. California has no interest in ousting Arizona marital law concerning obligations between husband and wife and of persons contracting with one spouse, and the California community property statute by its terms does not purport to do so.

In play here is a vital rule of Arizona marital law that community property cannot be reached to satisfy a guarantee of a debt of another unless both spouses sign. This is an exception to the general rule that either spouse may obligate community property by acts for a community purpose without the approval or even knowledge of the other spouse. This forty-year-old protection of the other spouse from unconsented guarantees is basic knowledge to all Arizona transaction lawyers.

Registering the judgment in California does not defeat that protection. Although applications have sometimes diverged in apparent attempts to do equity, the general principle is clear: The substantive law of the rendering jurisdiction shapes the judgment; forum law governs enforcement consistent with the judgment.

It does not change the question or the answer that this was a federal judgment, registered in a California federal court. The federal registration statute treats the federal court judgment the same as state court judgments are treated between sister states. The federal judgment registration scheme does not transmogrify the Arizona federal judgment into exactly what the rendering court said it was not.

Under California law, which applies Arizona law as to who owes the judgment, the creditor bank has no judgment lien on the Arizona couple's community property in California. The summary judgment for the bank must be reversed with directions to enter summary judgment for the Trustee.

I. FACTS

The facts are undisputed. Larry and Kari Miller are married and were domiciled in Arizona at all relevant times. Larry Miller (“Miller”) personally guaranteed a loan First Community Bank extended to his businesses. Kari Miller did not sign the guarantee. The bank sued Miller in this Court when the businesses defaulted and obtained judgment against Miller alone for approximately $6 million.

The bank later registered the judgment in the Northern District of California pursuant to 28 U.S.C. § 1963 and recorded it in San Francisco County where the Millers own a condominium as community property. Miller filed for bankruptcy in Arizona. The Chapter 7 Trustee, Maureen Gaughan, has sold the condominium. The bank filed this adversary proceeding for a declaration that the recordation in California created a judgment lien on the condominium. That would give the bank priority in the $600,000 net proceeds ahead of the unsecured creditors. Under California law, unlike Arizona law, a guarantee signed by one spouse may be enforced against community property. That is not because California law has a specific rule concerning unilateral guarantees but because it subjects the community estate to payment of all sole and separate debts incurred by either spouse.

The Bankruptcy Court held for the bank, stating, “Because the Miller Judgment was registered in California, California law governs the enforceability of the Miller Judgment against Debtors' community property located in California, and under California law, Debtors' community property located in California is liable for satisfaction of the Miller Judgment.” Designation of Record [hereinafter “DR”] at 289. The Trustee timely appealed.

II. APPELLATE JURISDICTION AND STANDARD OF REVIEW

The District Court has jurisdiction pursuant to 28 U.S.C. § 158(a) of appeals from “final judgments, orders, and decrees” of the bankruptcy court. Grants of summary judgment, which turn on conclusions of law, are reviewed de novo. See In re United Energy Corp., 102 B.R. 757, 760 (9th Cir. BAP 1989), aff'd, 944 F.2d 589 (9th Cir.1991).

III. LEGAL ANALYSIS

A. Duties and powers of the Trustee

The Trustee is empowered “to manage the assets in a manner that will satisfy the creditors' claims.” In re Taylor, 599 F.3d 880, 886 (9th Cir.2010) (citing 11 U.S.C. §§ 701, 704 ). This includes a “fiduciary obligation to conserve the assets of the estate and to maximize distribution to creditors.” In re Rigden, 795 F.2d 727, 730 (9th Cir.1986).

The bankruptcy estate is comprised of “interests of the debtor in property,” including community property over which the debtor spouse has “sole, equal, or joint management and control.” 11 U.S.C. § 541(a) ; see also In re Homan, 112 B.R. 356, 359 (9th Cir. BAP 1989) (“The filing by a spouse of an individual bankruptcy petition creates an estate which encompasses community property that is under the spouse's joint management and control as of the date of the petition.”). Whether the Millers' community property is an “interest[ ] of the debtor” turns on state law. See In re Summers, 332 F.3d 1240, 1242 (9th Cir.2003) (“It is well established that state law determines the nature and extent of a debtor's interest in property.”) (quoting Abele v. Modern Fin. Plans Svcs., Inc., (In re Cohen), 300 F.3d 1097, 1104 (9th Cir.2002) ).

In both California and Arizona the law of the matrimonial domicile governs spouses' property interests. See Sigmund v. Rea, 226 Ariz. 373, 376, 248 P.3d 703, 706 (2011) (“[T]he property rights of a husband and wife are governed by the law of the couple's matrimonial domicile at the time of the acquisition of the property.”) (quoting Lorenz–Auxier Fin. Group, Inc. v. Bidewell, 160 Ariz. 218, 220, 772 P.2d 41, 43 (1989) ); Grappo v. Coventry Fin. Corp., 235 Cal.App.3d 496, 505, 286 Cal.Rptr. 714 (1991) (“As a rule, marital interests in money and property acquired during a marriage are governed by the law of the domicile at the time of their acquisition, even when such money and property is used to purchase real property in another state.”). Under Arizona law, spouses have “equal management, control and disposition rights over their community property.” A.R.S. § 25–214(B). Therefore, the community property condominium is an interest of the debtor within the meaning of 11 U.S.C. § 541(a)(2) and comes within the bankruptcy estate.

B. Arizona and California marital property law

Because the law of the matrimonial domicile governs the Millers' respective rights and powers concerning their community property, including the power to incur debts payable from that property, California law applies Arizona law to define those rights and powers concerning the California condominium.¹ See Grappo, 235 Cal.App.3d 496, 505, 286 Cal.Rptr. 714. One of those Arizona rights controls here. By statute, one spouse cannot bind community property by unilaterally guaranteeing a debt:

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:

....

2. Any transaction of guaranty, indemnity or suretyship.

A.R.S. § 25–214 ; see also Consol. Roofing & Supply Co. v. Grimm, 140 Ariz. 452, 458, 682 P.2d 457, 463 (1984) (“[T]he plain meaning of A.R.S. § 25–214(C)(2) requires that both spouses must execute a guaranty in order to bind the community.”).

General principles of Arizona choice of law also defer to the marital policy of other states for Arizona-located property of their domiciliaries, with an exception that would not aid the bank here.² See Lorenz–Auxier Fin. Grp., Inc. v. Bidewell, 160 Ariz. 218, 220, 772 P.2d 41, 43 (1989).

The rights between spouses and as against creditors dealing with a spouse are substantive rights. See Rackmaster Sys., Inc. v. Maderia, 219 Ariz. 60, 65, 193 P.3d 314, 315 (2008) (noting A.R.S. § 25–214(C)(2) “confers substantive rights on each Arizona spouse”). They effectuate critical substantive policies concerning marriage and spousal equality in any decision to risk the family's financial past and future for the benefit of another. See id. at 63, 193 P.3d at 317 (explaining the purpose of A.R.S. § 25–214(C)(2) is “to protect one spouse against obligations undertaken by the other spouse without the first spouse's knowledge and consent,” and “this purpose would be frustrated if the husband ... were able to charge the wife's interest in the community with the debts he guaranteed”) (quotation marks omitted).

Those substantive rights cannot be forfeited by one spouse acting alone. See Lorenz–Auxier, 160 Ariz. at 221, 772 P.2d at 44 (rejecting the power of one spouse to “alter the rights and liabilities of his marital community, irrespective of the protective policies of the state of domicile, by simply choosing to contract in another forum and by contractually consenting to the application of that forum's laws”); accord G.W. Equip. Leasing, Inc. v. Mt. McKinley Fence Co., Inc., 97 Wash.App. 191, 198, 982 P.2d 114, 118 (1999) (applying A.R.S. § 25–214(C)(2) despite the signing...