Pacific Gamble Robinson Co. v. Lapp
| Decision Date | 31 December 1980 |
| Docket Number | No. 46837,46837 |
| Citation | 622 P.2d 850,95 Wn.2d 341 |
| Parties | PACIFIC GAMBLE ROBINSON CO., a Delaware Corporation, whose principal place of business is the State of Washington, Petitioner, v. Conrad C. LAPP and Laura D. Lapp, his wife, and the marital community composed thereof, Respondents. |
| Court | Washington Supreme Court |
Ryan, Swanson, Hendel & Cleveland, Morey G. Priest, Seattle, for petitioner.
Bruce G. Hand, Bellevue, for respondents.
In 1962, Conrad C. Lapp acquired 100 percent of the stock of the Joslyn Fruit Company (Joslyn), a Colorado corporation. In 1975, Conrad Lapp married his present wife, Laura D. Lapp, in Colorado, where both were residents. Under Colorado law, the stock of Joslyn remained Mr. Lapp's sole property, which he could encumber or convey without the consent of his wife. Goldberg v. Musim, 162 Colo. 461, 427 P.2d 698 (1967); Bostron v. Bostron, 128 Colo. 535, 265 P.2d 230 (1953).
By the Spring of 1977, Joslyn was in severe financial difficulty and indebted to petitioner Pacific Gamble Robinson Company in the amount of $34,710.70. In an effort to assist Lapp and to enable Joslyn to remain in business, petitioner agreed to continue to supply produce if Lapp signed a promissory note on which he would be personally liable along with Joslyn. On April 14, 1977, the promissory note for $34,710.70 was executed in Colorado by Lapp individually and on behalf of Joslyn. Mrs. Lapp did not sign the note. Under Colorado law, Mr. Lapp's earnings and property alone were subject to that debt, and his wife could not object to the encumbrance. In re Questions Submitted by United States District Court, 184 Colo. 1, 8, 517 P.2d 1331 (1974).
In July of 1977, Joslyn and Mr. Lapp defaulted on the note. In September, the Lapps moved to Washington. On January 31, 1978, petitioner brought this action in Washington against Joslyn, Conrad Lapp individually, and the Lapp marital community to recover the balance due and owing on the note.
The trial court granted summary judgment against Conrad Lapp individually but refused to hold that the community had incurred any legal obligation. Petitioner appealed from that portion of the judgment dismissing the marital community. In a split decision, the Court of Appeals affirmed the trial court. Pacific Gamble Robinson Co. v. Lapp, 24 Wash.App. 795, 604 P.2d 1300 (1979). We reverse.
This case presents the following issue: Is the creditor on an obligation incurred by one spouse in a foreign, noncommunity property state where both spouses were domiciled, restricted in its recovery to the separate property of the obligor spouse, as the term "separate property" is defined by Washington law, after the couple moves to Washington?
Washington has adopted the so-called "center of gravity" or "most significant relationship" approach to contract choice of law problems. In the absence of an effective choice of law by the parties, the validity and effect of a contract are governed by the law of the state having the most significant relationship with the contract. Potlatch No. 1 Fed. Credit Union v. Kennedy, 76 Wash.2d 806, 459 P.2d 32 (1969); Baffin Land Corp. v. Monticello Motor Inn, Inc., 70 Wash.2d 893, 425 P.2d 623 (1967); Restatement (Second) Conflict of Laws § 188 (1971).
Under the law of this state, a debt is presumed to be a community obligation. Oregon Improvement Co. v. Sagmeister, 4 Wash. 710, 30 P. 1058 (1892). The burden of proving that a debt is not a community obligation rests on the community. Beyers v. Moore, 45 Wash.2d 68, 70, 272 P.2d 626 (1954). If the obligation is incurred by the community, then community property, including the earnings of both spouses, is liable for the debt. Beyers, at 70, 272 P.2d 626; RCW 26.16.030. On the other hand, if a debt is characterized under Washington law as separate, or for the benefit of the husband's separate property, then it may not be satisfied from the earnings of either spouse, because earnings during coverture are community property. RCW 26.16.030; RCW 26.16.200.
In Colorado, however, as we explain more fully below, the law subjects only the husband's property, including earnings, to payment of a debt incurred by him alone. In re Questions Submitted by United States District Court, 184 Colo. at 8, 517 P.2d 1331. This is a result not possible under Washington law. But see deElche v. Jacobsen, --- Wash.2d ---, 622 P.2d 835 (1980).
Accordingly, if this transaction had taken place entirely in Colorado, with the Lapps remaining there as domiciliaries, petitioner would have been entitled to judgment against only Conrad Lapp's property, including his earnings. If the transaction had occurred entirely in Washington, however, regardless of whether the debt were characterized as a community or a separate obligation, petitioner would not be entitled to have its judgment satisfied from Conrad Lapp's wages alone. Depending on how the obligation was characterized, petitioner could alternatively reach the wages and earnings of both spouses, or of neither spouse.
Since the result is different under the law of the two states, we are not faced with a "false conflict", as was found by the court in Pacific States Cut Stone Co. v. Goble, 70 Wash.2d 907, 425 P.2d 631 (1967). 1 Rather, there is a "real" conflict of laws, making this situation analogous to that faced by this court in Potlatch No. 1 Fed. Credit Union, where we said:
This case presents a single issue ..., and that is whether the community of a cosigner of a note may be held liable on the note although the community derived no benefit therefrom.
Potlatch No. 1 Fed. Credit Union, 76 Wash.2d at 811, 459 P.2d 32.
The legislatures and courts of the two states have made conflicting policy decisions with respect to this question. Idaho has chosen to recognize the interests of creditors over the interests of marital property in these situations. Washington has taken the opposite view. These two policy decisions come into direct conflict where, as here, the controversy involves an Idaho creditor and a Washington marital community.
(Italics ours.) Potlatch No. 1 Fed. Credit Union, at 808-09, 459 P.2d 32.
In such a case, we apply the most significant relationship test, which is summarized in the Restatement, supra at § 188, p. 575.
(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.
(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(d) the location of the subject matter of the contract, and
(e) the domicil, residence, nationality, place of incorporation and place of business of the parties.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.
(3) If the place of negotiating the contract and the place of performance are in the same state, the local law of this state will usually be applied, except as otherwise provided in §§ 189-199 and 203.
As we observed in Potlatch No. 1 Fed. Credit Union, in applying this test we do not merely count the contacts between each state and the transaction at issue. "Rather, these contacts are guidelines indicating where the interests of particular states may touch the transaction". Potlatch No. 1 Fed. Credit Union, 76 Wash.2d at 810, 459 P.2d 32. Moreover, "(t)hese competing policies must also be weighed against the justified expectations of the parties." Potlatch No. 1 Fed. Credit Union, at 810, 459 P.2d 32. See Restatement, supra at § 188, comment c, p. 578. See also W. Powers, Formalism and Nonformalism in Choice of Law Methodology, 52 Wash.L.Rev. 27, 60-62 (1976); R. Sedler, The Contracts Provisions of the Restatement (Second): An Analysis and a Critique, 72 Colum.L.Rev. 279, 311 (1972).
Applying these principles to the present case, we think it plain that Colorado has numerous governmental interest in this transaction. The entire transaction occurred in Colorado. Petitioner was doing business in Colorado, and the Lapps were domiciled in Colorado at the time of the execution of the note, which was signed in Colorado by Mr. Lapp individually and on behalf of a Colorado corporation. Moreover, both parties apparently contemplated that all performance was to be in Colorado. We may assume that Colorado's interest is to ensure the predictability of business relations and to prevent the flight of debtors to other states to avoid payment of otherwise legitimate debts.
What is Washington's interest in the note at issue? Clearly, Washington has a general interest in protection of marital communities from the entirely separate debts of one spouse. RCW 26.16.010, .020. 2 But Washington had no connection whatever with the present transaction until the Lapps established their domicile here just 2 months after the note went into default. While the record demonstrates no cause-and-effect relationship between the default and the parties' move to Washington, we may safely assume that this state has no policy interest in maintaining within its borders a sanctuary for fleeing debtors.
Turning to the expectations of the parties, we think that both spouses could reasonably expect at the time the note was executed that the transaction would be governed by Colorado law. Since the Lapps had long been domiciled in Colorado, and remained there some months after the note was signed, they could not justifiably believe that the obligation could be fairly avoided by the device of removing to a state where a husband's wages would not be subject to the debt. See Pacific States Cut Stone Co., 70...
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