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COMMUNITY PROPERTY & COMMUNITY DISCHARGE
(SOME LAWS SPECIFIC TO ARIZONA)
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO. WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
The law: See 11 USC §524(a)(3), which provides for the so-called “community discharge” with respect to the non-filer’s interest in all community property.
Filing bankruptcy for one spouse and not the other:
Discharge of the marital community and discharge of the non-filing spouse assuming that they are both married at the time of incurring of the debt and the filing the petition. Note – the community discharge ends upon the death of the filing spouse, the dissolution of the marriage or the non-filing spouse moves to a non-community state.
Example one: A Debtor incurs debt as a separate and community obligation. If Debtor files bankruptcy and the non-debtor is not included, the Discharge will discharge the obligation for the Debtor and the marital community; because the non-debtor did not incur the debt, there is no obligation for non-debtor and his separate property.
Example two: If the Non-Debtor incurs the debt, the community is obliged as is the Non-Debtor. Debtor files a Bankruptcy, the 524 Community Discharge discharges the community obligation. Non-Debtor’s separate obligation is not discharged. However, the Creditor can pursue only the non-debtor’s separate property. The non-debtor’s contribution to the community is not subject to collection because that portion is only subject to collection if the debt is from prior to the marriage under ARS 25-215 (B). In general, see ARS 25-215.
Warning: If the event that the divorce happens, the debts are no longer community debts but joint debts and the Section 524(a)(3) Community Discharge is not applicable. See Frazier v. Goldberg (Ariz. Ct App) See 11 USC §524(a)(3), which provides for the so-called “community discharge” with respect to the non-filer’s interest in all community property.
Here are some helpful articles from a great bankruptcy attorney – Cathy Moran:
1)The Secret Bankruptcy Discharge for Community Property
2) When the Marital Community Doesn’t Get a Bankruptcy Discharge
Community Discharge:
Subsection (a) of 11 U.S.C. §524 addresses the split discharge, when only one spouse attains a discharge in bankruptcy, in community property states. The legislative history of this section says that “if community property was in the [bankruptcy] estate and community claims were discharged, the discharge is effective against the community creditors of the nondebtor spouse as well as of the debtor spouse. House Report No. 95-595, 95th Cong., 1st Sess. 365-6 (1977), Senate Report No. 95-989, 95th Cong., 2d Sess. 80 (1978). § 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition.
That is, if one spouse in a community property state has commenced a bankruptcy case where, as here, no claim is excepted from the debtor’s discharge and is not otherwise found to be nondischargeable, and if the nondebtor spouse would not have had a claim excepted from her discharge in a hypothetical case commenced on the same day as the commencement of the debtor’s case, then the creditors of either spouse holding community claims on the date of bankruptcy are thereafter barred from asserting claims against after acquired community property. It was the duty of the scheduled creditors in the Braden Jay Karber bankruptcy proceedings to object to the hypothetical discharge of Valerie Karber, as the nondebtor spouse, within the same time limits as their objections to the discharge of Braden Jay Karber. 11 U.S.C. § 524(b). No such objections were filed and thus all community creditors before the Court in that case are now barred from seeking to collect their deficiencies from the after acquired community property of either Braden Jay Karber or Valerie Karber. In re Karber 25 B.R. 9, 12 (Bkrtcy.Tex.,1982) See also In re Dyson 277 B.R. 84 (Bkrtcy.M.D.La.,2002) – note not 9th Circuit decisions.
VERY IMPORTANT: The community discharge terminates upon divorce, among other reasons.
The marital community continues as long as the husband and wife remain married, neither dies, and they live in a community property state. In re Kimmel, 378 B.R. 630 (9th Cir. BAP 2007); Burman v. Homan (In re Homan), 112 B.R. 356, 360 (9th Cir. BAP 1989). Under Arizona law, the marital community ends upon divorce and the community debts become joint debts – Community Guardian Bank v. Hamlin, 182 Ariz. 627, 898 P.2d 1005 (App. 1995)(This case did not involve bankruptcy.)
As commentators have stated: …the Devil himself could effectively receive a discharge in bankruptcy if he were married to Snow White. If [the Devil] does not treat her better than his creditors, [Snow White] will, by divorcing him, deny his discharge. In re Kimmel, 378 B.R. 630 (9th Cir. BAP 2007)
It was the duty of the scheduled creditors in the Braden Jay Karber bankruptcy proceedings to object to the hypothetical discharge of Valerie Karber, as the nondebtor spouse, within the same time limits as their objections to the discharge of Braden Jay Karber. 11 U.S.C. § 524(b).
No such objections were filed and thus all community creditors before the Court in that case are now barred from seeking to collect their deficiencies from the after acquired community property of either Braden Jay Karber or Valerie Karber. In re Karber 25 B.R. 9, 12 (Bkrtcy.Tex.,1982) See also In re Dyson 277 B.R. 84 (Bkrtcy.M.D.La.,2002)
Community Guardian Bank v. Hamlin, 182 Ariz. at 629, 898 P.2d at 1007. A creditor obtained a default judgment against the wife for unjust enrichment based on her husband’s unauthorized use of funds for the benefit of the community. In determining whether the creditor could garnish the wife’s post-dissolution earnings, we found that the default judgment established a community obligation for which the wife was jointly liable. Id.at 630-32, 898 P.2d at 1008-10. Applying Arizona law, the court held that the former spouses remained jointly liable for the community debt after their divorce, and therefore the creditor could garnish the wife’s post-dissolution wages.Id. at 631, 898 P.2d at 1009.
Some attorneys say “yes” and others “no” – only a judge can decide, unless the law is clear.
25-215. Liability of community property and separate property for community and separate debts
A. The separate property of a spouse shall not be liable for the separate debts or obligations of the other spouse, absent agreement of the property owner to the contrary.
B. The community property is liable for the premarital separate debts or other liabilities of a spouse, incurred after September 1, 1973 but only to the extent of the value of that spouse’s contribution to the community property which would have been such spouse’s separate property if single.
C. The community property is liable for a spouse’s debts incurred outside of this state during the marriage which would have been community debts if incurred in this state.
D. Except as prohibited in section 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.
In Schilling v. Embree , 118 Ariz 236, 575 P2d 1262 (App. 1977), the court of Appeals held that this language subjects community property only to pre-marital separate debts, not separate debts incurred during marriage.
25-214. Management and control
A. Each spouse has the sole management, control and disposition rights of each spouse’s 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 than one year.
2. Any transaction of guaranty, indemnity or suretyship.
3. To bind the community, irrespective of any person’s intent with respect to that binder, after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.
Both spouses must be named in an Arizona lawsuit to obtain a judgment which is collectable from any portion of the community property. The non-liable spouse is entitled to litigate two issues: 1. The whether the other spouse is in fact liable, and 2. The other spouse’s contribution to the community. Flexmaster Aluminum Awning Co. v. Hirschbert, 173 Ariz. 83, 839 P.2d 1128 (App. 1992). Flexmaster involved a premarital debt.
Beware that, as with many areas of law, lawyers will disagree about the applicability of these statutes to certain factual situations.
Question: Creditor has a judgment against a debtor. The judgment does not name debtor’s wife. Creditor is trying to go after the wife’s separate property. Is there a statute or case that says that even if the debt is a community debt (again, not clear if it is or not), the creditor can’t go after the separate property of the spouse who is not named in the judgment?
Answer: Yes. See ARS 25-215(A) and (D). In fact, the judgment creditor cannot even go after the community property. Both spouses must be joined as defendants in the lawsuit before a creditor can obtain and execute on a judgment against the marital community and community property. ARS 25-215(D)
25-215. Liability of community property and separate property for community and separate debts
D. Except as prohibited in section 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.
Additionally, see Flexmaster v. Hirschberg, 173 Ariz. 83 (1992) and the law cited therein. Similarly, the non-debtor spouse is a necessary and proper party in a suit to establish the limited liability of the marital community for the separate, premarital debt of the other spouse. Flexmaster v. Hirschberg, supra.
“Married joint tenants hold their respective interests as separate property. Russo v. Russo, 80 Ariz. 365, 367, 298 P.2d 174, 175 (1956); Collier v. Collier, 73 Ariz. 405, 411, 242 P.2d 537, 541 (1952); Ferree v. City of Yuma, 124 Ariz. 225, 227, 603 P.2d 117, 119 (App. 1979).
Married Individual Guarantor: Collecting from Property Subject to a Spouse’s Interest Can Be “Iffy”
First Community Bank v. Gaughan (In re Miller), 853 F.3d 508 (9th Cir. 2017) – The panel reversed the district court’s reversal of the bankruptcy court’s summary judgment in favor of a creditor that brought an adversary proceeding against a chapter 7 trustee, seeking a declaration that the creditor had an enforceable judgment lien on real property, thereby granting it priority over the proceeds of the trustee’s sale of the property. The judgment on which the lien was based arose from a guaranty signed by the debtor but not by his wife.
The couple were Arizona domiciles. The panel held that while the real property, a San Francisco co-op apartment owned by both spouses, was not community property under California law, it was a tenancy-in-common. Under California law, the interests of a co-tenant-in-common are subject to the enforcement of a judgment lien. Applying California’s choice-of-law rules, the panel held that California law, rather than Arizona law, governed.
Therefore, the debtor’s interest in the co-op was subject to enforcement of the judgment lien. The panel rejected the argument that the creditor’s registration of the judgment in the Northern District of California was sufficient, by itself, to create an enforceable lien against the co-op.
Arizona law classifies a pre-marriage debt as a sole and separate debt. Prior to the enactment of A.R.S. 25-211, pre-marriage debts could not be collected from any community property/income. Prior to the enactment of A.R.S. 25-211 a person with pre-marital debts could get married and stop creditors from collecting from the person’s post-marriage community income. This was comically described as “$3 bankruptcy” because the cost of a marriage license was $3.
A.R.S. 25-211 put a stop to the $3 bankruptcy. A.R.S. 25-211 allows the pre-marriage debt to be collected from the post-marriage community income of the spouse that incurred the pre-marriage debt. Under bankruptcy law this pre-marriage debt is a ‘community claim’ because it may be collected under Arizona law from some of the community property under the joint control of the filing spouse.
25-211. Property acquired during marriage as community property; exceptions; effect of service of a petition
25-215. Liability of community property and separate property for community and separate debts
Summary: Arizona is a community property state. When a couple marries the pre-marriage separate property of a spouse is not liable for the pre-marriage debts of the other spouse, unless there is an agreement by the non-debtor spouse to the contrary. The spouses’ community property is liable for the premarital separate debts of the spouse but only to the extent of the value of that spouse’s contributions to the community property, which would have been that debtor-spouse’s separate property if that debtor-spouse were single. Creditors do have the ability to go after assets, but are limited by what and how much they can take.
Under A.R.S. § 25- 215(D), in general either spouse in a marriage “may contract debts and otherwise act for the benefit of the community.” To sue on “such a debt or obligation, the spouses shall be sued jointly.” This provision means that a party seeking damages from community assets for an unpaid debt or breach of an obligation must join both spouses when asserting the cause of action.
Question: If a creditor files a non-dischargeability complaint against a debtor couple under 523(a)(2),(4),(6), but only the husband-debtor’s alleged wrongful conduct is at issue (the wife-debtor had nothing to do with the debt), can you dismiss the non-dischargeability complaint with respect to the wife? Or does the wife still inherit liability from the husband’s potential fraud because of community property laws?
Judgment Enforceable Against Marital Community
In re Neal Jones and Amy Jones BAP No. AZ-21-1203-FLS, BAP N0. AZ-22-1104-FLS (9th Circuit, Mar 14,2023) Not Published Dr. Jones and his wife, Amy Jones, filed for chapter 71 bankruptcy protection in Arizona, and Dr. Patel sought to have the Illinois judgment declared nondischargeable. After a trial, the bankruptcy court denied discharge of the judgment debt under § 523(a)(6). It held that the judgment was enforceable against the Joneses’ community property and that the Illinois state interest rate, rather than the federal rate, applied to the judgment.
In these related appeals, Dr. Jones argues that the bankruptcy court erred by finding that he intended to injure Dr. Patel and did so without just cause or excuse. The Joneses also argue that the court erred in holding that the Illinois judgment is enforceable against the marital community and accrues interest at the Illinois state rate. All of the Joneses’ arguments are meritless. We AFFIRM.
Answers: “The Arizona rule is that the community is liable for the intentional torts of either spouse if the tortious act was committed with the intent to benefit the community, regardless of whether in fact the community receives any benefit” Selby v. Savard, 134 Ariz. 222, 655 P.2d (1982). Cited by J. Nielsen in In re LeSueur, 53 B.R. 414 (1985) and J. Case In re Oliphant, 221 B.R. 506 (1998). See also In re Rollinson, 322 B.R. 879 (2004) issued by Judge Haines.
Fraud cannot be imputed to an individual spouse based on a theory of community liability. See In re LeSueur, 53 B.R. 414 (1985). Rather, fraudulent conduct must be shown from an individual’s actions for the debt to be rendered non-dischargeable as to that individual. Id. In LeSueur, the court stated:
Fraud for purposes of a bankruptcy dischargeability complaint cannot be imputed to a spouse based on a theory of Arizona community property law. In re Norton, 34 B.R. 666, 668 (Bankr.Ariz.1983); In re Bursh, 14 B.R. 702, 705-06 (Bankr.Ariz.1981) (dismissing complaint and cause of action as to spouse).
…
“(F)raud, which is never presumed, was not shown as to her.” Id, citing Matter of Benedict, 15 B.R. 671, 675 (Bankr.W.D.Mo.1981) (finding fraud as to husband, dismissing as to wife); Matter of Curry, 12 B.R. 421, 424-25 (Bankr. M.D. Fla.1981).
…
In re LeSueur, 53 B.R. at 415.
A nondischargeability judgment should only be entered against a marital community’s community property where the evidence presented proves that both the husband and wife were involved in the transactions or occurences which lead to the nondischargeability judgment. See In re Clark, 179 B.R. 898, 902 (Bankr.D.Ariz. 1995); see also In re Bursh, 14 B.R. 702 (Bankr.D.Ariz 1981) (granting summary judgment where there was no evidence that wife participated in or had knowledge of husband’s fraud); In re Norton, 34 B.R. 666 (Bankr.D.Ariz. 1983) (dismissing nondischargeability complaint as to wife in absence of showing that she made misrepresentations to plaintiff).
In Clark, the court found that no evidence was presented to demonstrate that the wife took part in the acts which gave rise to the nondischargeability complaint. In re Clark, 179 B.R. at 902. Accordingly, the court found that the wife was an innocent spouse and that the debtors’ community property was not liable for the nondischargeabilty judgment entered against the husband. Id.
The Ninth Circuit has held that the proper test is a partnership or business relationship, not a spousal relationship. See In re Tsurukawa I, 258 B.R. 192, 198 (9th Cir. BAP 2001) (“we hold that a marital union alone, without a finding of a partnership or other agency relationship between spouses, cannot serve as a basis for imputing fraud from one spouse to the other.”); see also In re Carbray, 2006 WL 2559849 (Bankr.D.Ariz. 2006) (“Where no agency relationship exists, courts do not generally impute the wrongdoing of one spouse to an ‘innocent’ spouse in holding a debt nondischargeable. The marital status alone does not create an agency relationship.”).
Cohen v. Chernushin (In re Chernushin), 18-1068 (10th Cir. Dec. 21, 2018) At least when joint tenancies with right of survivorship are involved, the common conception of the snapshot test does not apply to fix an interest in property as of the filing date, according to the Tenth Circuit.
Gregory and Andrea Chernushin owned a second home in Colorado in joint tenancy with right of survivorship. Eventually, Mr. Chernushin (but not Ms. Chernushin) filed for bankruptcy. During the bankruptcy proceedings, Mr. Chernushin died. The bankruptcy trustee, Robertson B. Cohen, then filed an adversary complaint against Ms. Chernushin, seeking to sell the home. Ms. Chernushin argued the bankruptcy estate no longer included any interest in the home because Mr. Chernushin’s joint tenancy interest ended at his death. The bankruptcy court agreed with Ms. Chernushin, as did the district court on appeal. Mr. Cohen now appeals to this court. Because the bankruptcy estate had no more interest in the home than Mr. Chernushin and Mr. Chernushin’s interest extinguished when he died, we affirm.
“Consequently, Section 363(h) confers no power on [the trustee] to sell the second home,” Judge McHugh said. In sum, she said, the estate had “no interest in the second home that extends beyond [the debtor’s] death.”
Scenario: Husband and wife married for a number of years. Husband has a criminal restitution order against him for previous illegal conduct, which was assessed while he was married. Wife had nothing to do with conduct that is the subject of the restitution order, and community did not benefit from any fruits of the illegal conduct. Restitution order is just against husband.
Question: Is such debt community debt or the husband’s separate debt?
Whether the debt was a result of acting for the marital community’s benefit (therefore community obligation) depends upon the facts; i.e., collusion, co-thieves, etc.? Absent such type of scenario, generally, it may be a stretch under A.R.S. 25-215 to say that a criminal restitution lien by one is recoverable against the marital community. But there is a distinction in case law. Lorenz-Auxier Fin.Group v. Bidewell, 160 Ariz 218 (App.1989); Heinig v. Hudman, 177 66 (App.Crt. 1993). See also on the debt not being dischargeable against the community in a BK but dischargeable as to the innocent spouse, In re Rollinson, 322 B.R. 879, 2005 Bankr. Lexis 645 (Bankr. D.AZ 2005).
Hammett v. Hammett, 1 CA-CV 18-0632 FC, October 29, 2019. The Arizona Court of Appeals, Div. One, held that parties acquire community property and debt even during a marriage that results in an annulment; when terminating the marriage, the court must dispose of such assets and debt under A.R.S. § 25-318, to the extent applicable. Property acquired by either spouse during a marriage is community property, and the Court of Appeals held that an annulment does not change the status of the community property, and, in such a case, the court must allocate the community property and debt just as it would in a dissolution proceeding. It vacated the superior court decree’s property disposition and remanded. The case facts included allegations of: mutual fraud committed by both parties; a claim that Wife was still married to her first husband in the Philippines; and a conspiracy of both parties to produce a fake death certificate so Wife could enter the United States with a fiancé visa.
ASSET RECEIVED AFTER PETITION FOR DISSOLUTION SERVED – MAY BE SEPARATE PROPERTY
DeFrancesco v. DeFrancesco December 5, 2019. The Arizona Court of Appeals, Div. One, held that a workplace bonus received after a petition for dissolution is served is separate property. Here, the manager of a Houston Astros minor-league baseball team received a bonus after the Astros won the World Series. Although not every item of value a spouse receives after service of a dissolution petition is that spouse’s separate property, there is no suggestion in the record that the Astros’ decision to share their playoff proceeds with Husband was anything but a gift. Husband was salaried and did not know he would receive a bonus, and there was no evidence the bonus represented compensation for services performed before termination of the community.
In re Cowser, 2020 Bankr. LEXIS 534(Bankr. C.D. Cal. 2/28/2020); 6:19-bk-21008WJ Married debtor, residing in California, filed Chapter 13 without his wife. The couple had been married just a couple of years, and the wife had her own debts incurred from before the marriage. Debtor did not list these debts, but somehow the trustee found out about them, and moved for dismissal. The court granted the motion.
Under California community property law (Family Code Section 910), the community property is liable for all debts of a spouse, whether incurred before or during marriage. The claims of the wife constituted “community claims”(Section 101(7)), and the community claimants were entitled to notice (Section 342(a)). As the claims bar date had passed, these claimants had been deprived of their opportunity to participate in the case. Dismissal would be without prejudice to debtor re-filing in order to provide proper notice.
Note: compare to: See ARS 25-213 (separate property) and ARS 25-212 (community property) Debts incurred before marriage, or after service of dissolution (assuming completed) are sole and separate.
Section 541(a) draws various community property interests into the estate which are then protected by the automatic stay’s in rem provisions.
- Under 11 USC 541(a)(2), all community property comes into the estate, regardless of whether both spouses file. Also see 11 USC §524(a)(3), which provides for the so-called “community discharge” with respect to the non-filer’s interest in all community property.
- Sole control community property’ of the non-filing spouse is not property of the bankruptcy estate of the filing spouse, per section 541(a)(2)(A).
Question: To what extent is the surviving spouse “liable” for their deceased spouse’s debts, specifically medical bills?
“…we start with the premise acknowledged by all parties that the provision of medical care to Patricia was a community obligation. The necessary medical care of a spouse would normally be “intended to benefit the community,” which is the test of whether an obligation is a community debt. See Donato v. Fishburn, 90 Ariz. 210, 367 P.2d 245 (1961).”
Next, A.R.S. section 25-215(D) provides that a community obligation shall be satisfied first from community property and second from the separate property of the spouse contracting the debt or obligation. A community obligation is not to be satisfied from property of the spouse who did not contract the debt or obligation. See Fox v. Weissbach, 76 Ariz. 91, 93, 259 P.2d 258, 259 (1953).”
Phoenix Baptist Hospital & Medical Center, Inc. v. Aiken, 877 P. 2d 1345 (Ariz. Ct. App. 1994)
Question – Prospective debtor (husband) has 200K in unsecured personal debt. He later marries a high-earning spouse (wife). Under Washington community property law, the wife’s assets and income are never liable for the premarital debts of her new debt-ridden husband. Yet a means-test calculation puts the husband well above median (wife has no debts subject to the marital adjustment). Husband would be below median if wife’s income is excluded, but my understanding is that the wife’s income cannot be omitted from the means test form (or for that matter Schedule I).
Possible answer: In re Whitus, 240 B.R. 705 (Bankr. W.D. Tex 1999). It goes through this complicated analysis that has always confused me, but it seems relevant in your situation. In a nutshell, 726(c) creates four sub-estates to be used to pay claims. I THINK a spouse’s separate debts can only be paid from the the third tier (726(c)(2)(C)), but only with separate property, not community property. Yet, you only get to this third tier for distribution if all community claims are paid in full from community property in sub-estates tier 1 and 2. I am assuming that will not happen in your case.
Although Chapter 13 doesn’t have the equivalent of 726(c), I think this case says that the plan can place all community claims into a separate class for treatment consistent with the best interest of the creditors class under 1325(a)(4), and that in a hypothetical Chapter 7, such separate debt would not be paid from the community property pursuant to 726(c).
SIDE NOTE: The attached case involves an IRS debt against the non-filing spouse due to pre-marital conduct, can be collected from community property pursuant to the IRC that trumps any state community property law. The spouse that was liable for the IRS’s debt was a non-filing spouse.
If I am wrong, someone please respond, as I always have been confused about 726(c).
NOTE – THIS IS A CALIFORNIA CASE, DEALING WITH CALIFORNIA LAW AND MAY NOT APPLY IN YOUR STATE.
Brace v. Speier (In re Brace), 17-60032 (9th Cir. Nov 9, 2020); and Brace v. Speier, 470 P.3d 15 (Cal. Sup. Ct. July 23, 2020). The Ninth Circuit held that property purchased as joint tenants by a husband and wife after 1975 is nonetheless treated as community property in bankruptcy. If only one spouse has filed bankruptcy, the trustee may therefore sell the entire property and distribute all of the proceeds to creditors of the bankrupt spouse. This comes from a question certified from the California Supreme Court to the 9th Cir.Panel’s order affirming the bankruptcy court’s judgment against a Chapter 7 debtor and his non-debtor spouse in an adversary proceeding brought by the Chapter 7 trustee concerning the characterization of two properties acquired by the couple during their marriage. The panel held that if a debtor holds property in joint tenancy, only his one-half joint interest becomes part of the bankruptcy estate, and the Chapter 7 trustee may sell the jointly held property and apportion the proceeds. If property is community property, it becomes part of the bankruptcy estate in its entirety, and the trustee may sell the property and distribute all proceeds to the debtor’s creditors, rather than apportioning some of the proceeds to the non-debtor spouse.
COMMUNITY DISCHARGE: In a community property state, the fresh start afforded to a debtor extends to the marital community and prevents collection against all afteracquired community property, including the postpetition wages of both spouses. Thus, it has been said that “the Devil himself could effectively receive a discharge in bankruptcy if he were married to Snow White.” Alan Pedlar, Community Property and the Bankruptcy Reform Act of 1978, 11 St. Mary’s L.J. 349 (1979). This case requires us to confront the question of what a creditor must to do to avoid the consequence of the community property discharge where the debt is allegedly caused by the fraudulent conduct of a nondebtor spouse.
In re Sherrie Nicole-Lockhart Johnson 20-1161 (9th Cir, July 28, 2021) Appellant Sharlene Willard (“Willard”) holds a state court judgment against Steve Johnson arising from a contract for home repairs. After Steve’s wife Sherrie Lockhart-Johnson (“Debtor”) filed a chapter 7 bankruptcy petition, Willard filed a complaint to except the debt from discharge under § 523(a)(2)(A) based on Steve’s conduct. But Willard made no allegations of any fraudulent conduct by Debtor, and she did not allege that the debt was a community debt. BAP found that the CR’s non-dischargeability complaint had been insufficiently pled, as the BC had, but that an amendment could credibly undercut the community property discharge exception’s application, thus leading it to vacate the BC’s denial of the CR’s motion for leave to amend on futility’s basis. More broadly, the BAP limned the procedure to follow when a nondebtor, wrongdoing spouse’s creditor aims to preclude a community property discharge in the spouse’s case.
