STATE EX REL. ICA v. Wright

• Decision Date: 02 April 2002
• Docket Number: No. 1 CA-CV 01-0160.,1 CA-CV 01-0160.
• Citation: 202 Ariz. 255,43 P.3d 203
• Parties: STATE of Arizona, ex rel. INDUSTRIAL COMMISSION OF ARIZONA, Plaintiff, Judgment Creditor-Appellee, v. Kevin WRIGHT and Annette Wright, husband and wife, dba Valleywide Underground, Defendants, Judgment Debtors-Appellants, Valleywide Underground, Inc., Garnishee-Appellant.
• Court: Arizona Court of Appeals

43 P.3d 203

202 Ariz. 255

STATE of Arizona, ex rel. INDUSTRIAL COMMISSION OF ARIZONA, Plaintiff, Judgment Creditor-Appellee, v. Kevin WRIGHT and Annette Wright, husband and wife, dba Valleywide Underground, Defendants, Judgment Debtors-Appellants, Valleywide Underground, Inc., Garnishee-Appellant.

No. -0160.

Court of Appeals of Arizona, Division 1, Department A.

April 2, 2002.

Janet Napolitano, Attorney General By David J. Dir, Assistant Attorney General, Phoenix, Attorneys for Plaintiff, Judgment Creditor-Appellee.

Sterling R. Threet, Mesa, Attorney for Defendants, Judgment Debtors-Appellants and Garnishee-Appellant.

OPINION

WEISBERG, Judge.

¶ 1 Kevin Wright ("Mr.Wright") and Annette Wright ("Mrs.Wright") (together, "appellants") appeal the trial court's ruling that a modification of a premarital agreement, which would have had the effect of protecting Mr. Wright's future earnings from garnishment, was a fraudulent conveyance under Arizona Revised Statutes ("A.R.S.") section 44-1004 (1994). For the following reasons, we affirm.

FACTS AND PROCEDURAL HISTORY

¶ 2 The parties do not dispute the facts of the case. Appellants were married on June 4, 1997. Prior to the marriage, they executed a premarital agreement that provided that "all earnings and income of the other party from his or her personal services after Marriage shall be the Separate Property of that person regardless of the Community Property Law." On October 3, 1997, an employee of Mr. Wright was injured on the jobsite and sought recovery from the Industrial Commission. On November 20, 1998, the Industrial Commission assessed damages and penalties against Mr. Wright for the worker's injuries and for failure to provide workers' compensation insurance.

¶ 3 On October 10, 1997, before the Industrial Commission's decision, Mr. Wright incorporated his business, naming Mrs. Wright as President/CEO and himself as Secretary, and issued 100 shares of stock to himself as sole shareholder. Then, on February 3, 2000, after the Industrial Commission's decision, appellants modified their premarital agreement, replacing the previously cited provision with one stating "[a]ny earnings and income resulting from personal services after the marriage will be Community Property under the law." On June 6, 2000, the State filed a Notice of Release of Judgment and Judgment Lien as to Mrs. Wright, and, on June 16, filed a Writ of Garnishment of Mr. Wright's earnings. Appellants filed an objection to the garnishment, arguing that Mr. Wright's wages were community property. After a hearing on the matter in superior court, the commissioner overruled appellants' objection to the garnishment, finding that the modification to the premarital agreement was a fraudulent conveyance under the Uniform Fraudulent Transfer Act (UFTA) (A.R.S. §§ 44-1001 to -1010 (1994)). This appeal ensued.

DISCUSSION

¶ 4 This case presents questions involving the interpretation and application of a statute. When the material facts are undisputed, this court determines whether the lower court correctly applied the substantive law to those facts. See Brink Elec. Constr. Co. v. Ariz. Dep't of Revenue, 184 Ariz. 354, 358, 909 P.2d 421, 425 (App.1995)

. We review questions of law and findings that combine fact and law de novo. Id.

¶ 5 Appellants begin by citing a number of cases supporting the premise that marital agreements are generally binding on creditors. See, e.g., Elia v. Pifer, 194 Ariz. 74, 84, 977 P.2d 796, 806 (App.1998)

; Schlaefer v. Fin. Mgmt. Serv., Inc., 196 Ariz. 336, 339, ¶ 10, 996 P.2d 745, 748 (App.2000); Bender v. Bender, 123 Ariz. 90, 93, 597 P.2d 993, 996 (App.1979). However, in each of the cases cited, the marital agreement had been entered into before the creditor acquired an interest. Appellants fail to cite, and we are unable to find in our case law, precedent in which a post-marital agreement entered into after an obligation is incurred has been held to be binding against the creditor.

¶ 6 As a general proposition, we agree that a creditor cannot reach marital community property to satisfy a separate obligation incurred by either spouse after marriage. See Schilling v. Embree, 118 Ariz. 236, 239, 575 P.2d 1262, 1265 (App.1977)

. The earnings of either spouse during marriage are presumed to be community property, absent a clear expression of an intent to the contrary. See A.R.S. § 25-211 (2000); Mitchell v. Mitchell, 152 Ariz. 317, 321, 732 P.2d 208, 212 (1987); cf. Schlaefer, 196 Ariz. at 339, ¶ 10, 996 P.2d at 748 (holding that presumption that debts incurred during marriage are community obligations may only be overcome by clear and convincing evidence). Appellants' initial premarital agreement clearly established their intent to keep post-marital earnings separate property. However, the subsequent modification negated that expression of intent in favor of conventional community property law. Consequently, if we find that the modification of the premarital agreement is valid, Mr. Wright's earnings are community property and are not subject to garnishment. Conversely, if the modification is invalid as a fraudulent conveyance, the original agreement would establish that Mr. Wright's future earnings are his separate property and subject to garnishment. See A.R.S. § 44-1007(A)(2); Heinig v. Hudman, 177 Ariz. 66, 75, 865 P.2d 110, 119 (App.1993) (holding that an appropriate remedy for an intentionally fraudulent conveyance is to set that conveyance aside).

¶ 7 Appellants put forth two arguments against the application of the UFTA to the modification of their marital agreement. Appellants first argue that there could not have been a fraudulent conveyance because there was no transfer of a property interest. Rather, appellants reason, the modification of the premarital agreement was a change in the character of their future earnings. We disagree.

¶ 8 A transfer is "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset ...." (emphasis added). A.R.S. § 44-1001(9). This broad statutory definition clearly includes any transaction in which a property interest was relinquished.

¶ 9 Appellants nevertheless cite Schlaefer, 196 Ariz. at 336, 996 P.2d at 745, for the proposition that a marital agreement only has the effect of "transmuting" property, as opposed to transferring a property interest. However, any distinction between a "transmutation" and a "transfer" was not at issue in Schlaefer, nor was it discussed. Consequently, we give no weight to Schlaefer's use of these terms.

¶ 10 Before the modification, Mr. Wright held a sole interest in the entirety of his future earnings. The effect of the modification was to transfer that entire interest to the community. Mrs. Wright would have a right to dispose of those earnings now dedicated to the community that she did not have when they were Mr. Wright's separate property. Additionally, upon dissolution of marriage, Mr. Wright would have surrendered all entitlement to half of those earnings. Hence, Mr. Wright has transferred an asset within the meaning of A.R.S. § 44-1001.

¶ 11 Moreover, it would run counter to the broad language of A.R.S. § 44-1001 to hold that, simply because there was a change in character of an asset, it cannot be characterized as a transfer as well. A party can transmute separate property to community property in a variety of ways. In many, if not most of these transactions, the change in character of the assets is effectuated in part by a transfer of those assets. See, e.g., Martin v. Martin, 156 Ariz. 440, 752 P.2d 1026 (App.1986)

(comingling of funds); Moser v. Moser, 117 Ariz. 312, 572 P.2d 446 (App.1977) (transfer of life insurance); In re Marriage of Barneson, 69 Cal.App.4th 583, 81 Cal. Rptr.2d 726 (1999) (transfer of stock). To hold that a "transmutation" cannot also represent a transfer of assets would eviscerate the UFTA by allowing a debtor to shelter assets of any type or value from a creditor simply by "gifting" them to the community. The terms "transmute" and "transfer," therefore, cannot be considered mutually exclusive.

¶ 12 Appellants further argue that, because they are simply returning the character of future earnings to the statutory presumption, the modification cannot be considered a transfer. But they provide no support for this proposition. By entering into the original premarital agreement, Mr. Wright acquired a property interest in his future income that he would not otherwise have had. He cannot relinquish that interest without entering into a subsequent agreement. See A.R.S. § 25-204 (2000). An agreement returning a property right previously acquired is no less a transfer than the original agreement through which that right was acquired. Accordingly, we conclude that marital transmutations are subject to the laws governing fraudulent transfers.

¶ 13 Appellants next argue that there was no fraudulent transfer because Mr. Wright's future earnings do not meet the definition of "property" set forth in A.R.S. § 44-1001. "Property" is defined under this section as "anything that may be the subject of ownership." A.R.S. § 44-1001(8). Appellants assert that future, yet unearned earnings are too speculative or ephemeral to be subject to ownership. We disagree.

¶ 14 Arizona adopted the UFTA in 1990 to replace the Uniform Fraudulent Conveyance Act adopted in 1956. Unif. Fraudulent Transfer Act, 7A Uniform Laws Annotated statutory notes (1984). The UFTA has been adopted by at least 40 states. Id. The drafters of the UFTA intended the definition of property to include "real and personal property, whether tangible or intangible, and any interest in property, whether legal or equitable." Id. at § 1, cmt. 10. An "asset" may include "an unliquidated claim for damages resulting from personal injury, or a contingent claim of a surety. . . ." Id. at cmt. 2. Thus, the drafters made it clear that both...