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Determining Community Versus Sole Property in Arizona | Hildebrand Law, PC

There are many situations that arise when a person may be asked to sign a personal guarantee, so it is important for a married person to understand the impact of community property on personal guarantees in Arizona.

A small business owner may be requested to sign a personal guarantee by his or her bank to secure a line of credit for the business.

A spouse may be asked to sign a personal guarantee on behalf of his or her child for the purpose of a creditor providing credit to his or her child.

Generally, a personal guarantee is an agreement between the debtor and the creditor allowing the creditor to come after the debtor’s personal property in the event the loan is not repaid.

The existence of a personal guarantee can, however, create concerns when the person signing the personal guarantee is married and does not want to place their spouse’s assets at risk as a result of the personal guarantee.

Arizona is a community property state. In Arizona, both spouses are required to sign a personal guarantee before their community property can be used to satisfy a debt under a personal guarantee.

If only one spouse signs a personal guarantee, that creditor cannot come after the community property that was acquired during marriage. However, a creditor can come after community property to satisfy a debt if both spouses sign a personal guarantee.

Community property, likewise, consists of all property acquired during the marriage by either spouse except property that was acquired by one of the spouses by gift or through an inheritance.

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The Rule Pertaining to Personal Guarantees for Judgments Registered in a Non-Community Property State

So, what happens if only one spouse signs a personal guarantee but the spouses own property in a non-community property state that does not require both spouses to sign a personal guarantee to be able to go after marital assets to satisfy a debt?

Well, the Arizona Federal Bankruptcy court addressed that issue in the case of Gaughan vs. First Community Bank. The court discussed what happens when a judgment against one spouse is transferred to a state where the law permits marital property to be used to satisfy a debt owed pursuant to a personal guarantee signed by only one of the spouses.

In the Gaughan case, the husband and wife lived in Arizona. However, they owned property in California. The husband signed a personal guarantee to secure a loan for his business. Wife did not sign the personal guarantee.

The businesses defaulted on the loan and the bank obtained a judgment against the husband when the husband allegedly defaulted on the loan payments.

Since the bank could not go after the spouses’ community property in Arizona because the wife did not also sign the personal guarantee, the bank chose to register that judgment in a California federal court with the intention of going after the parties marital property located in California which state does not require both spouse’s sign a personal guarantee before a creditor can go after marital property to satisfy a debt.

The husband filed bankruptcy. The bank argued in the bankruptcy court that California law provides that a personal guarantee signed by only one of the spouses may be enforced against marital property located in California.

In analyzing the bank’s argument, the federal appellate court noted that when the husband filed for bankruptcy, his assets were a part of the bankruptcy estate.

In both California and Arizona, courts look to the law of the state a couple lives in to determine their property interests, including the power to incur debts payable from community property.

Therefore, California courts must apply Arizona law to define those rights and powers concerning the California condominium.

In Arizona, one spouse cannot bind community property by guaranteeing a debt without the other spouse’s signature.

This rule gives important rights to each spouse and represents a significant policy concerning marriage and spousal equality in any decision to risk the family’s financial past and future for the benefit of another. One spouse cannot forfeit these rights for the other.

The rule is very different in California. California law does not provide this kind of protection to spouses. Rather, in California community property can be used for debts incurred by either spouse for his or her own benefit. However, that rule did not apply in this case as the spouses were residents of Arizona, not California, when the personal guarantee was signed by the husband.

Effect of Sister State Money Judgments Act on Personal Guarantees and Community Property

Community Property and Personal Guarantees in Arizona.

The bank argued that by moving the Arizona judgment to California, California’s community property laws applied to the couples California property, allowing it to be used to satisfy the husband’s separate debt.

California’s Sister State Money Judgments Act made it easier to bring an action in California on a judgment from another state by applying “forum law” (e.g. California law) to the enforcement of the judgment.

However, the District Court noted that the Act only applies forum law for enforcing the judgment, not to change the rights described in the judgment.

Under California law respecting judgments from other states, forum rules cannot create duties different than the judgment itself or change Arizona community property into California community property.

The Court noted that this Arizona judgment against the husband cannot be satisfied with community property in Arizona.

Therefore, it ruled, the judgment cannot be executed against the couple’s California property that is located in California.

Federal Rules for Registration and Enforcement

Community Property Laws About Personal Guarantees.

The bank argued that when the bank registered the Arizona judgment in the California federal court, it ousted Arizona marital law and replaced it with California marital law.

Under California’s marital law, the couples marital property located in California can be taken for a judgment against a personal guarantee signed by the husband alone.

The District Court disagreed and stated that “registering a federal judgment works no such alchemy, turning base metal into gold by crossing a state line. What starts out base or gold stays base or gold, wherever it moves in the federal courts.”

The effect of registering a federal judgment in a new district is the same as domesticating a sister state judgment directly in the state court.

The federal system of enforcing out-of-state federal judgments is very much the same as the California and Arizona systems for enforcing sister-state judgments.

Like the state systems, the federal scheme applies the state law of the new district to determine how the judgment can be enforced and which assets of the judgment debtor can be taken. However, this does not alter who is liable for the judgment. The underlying judgment determines that.

If you have questions about community property and personal guarantees in Arizona, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona community property and family law attorneys have decades of combined experience successfully representing clients in community property and family law cases.

Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.

Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your community property or family law case around today.

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Determining Community Versus Sole Property in Arizona | Hildebrand Law, PC