Lenders: Beware Of The Arizona 'Two-Dollar Bankruptcy'

Recently, my partner, Matt Kenefick, obtained a large judgment here in California against an Arizona resident. The desert rat refused to pay up voluntarily, hiding behind Arizona's unique and highly protective community property laws. The problem Matt faced was that only one spouse had been involved in the nefarious scheme to separate our client from its money.

Matt ultimately collected from the Arizona judgment debtor, but the difficulties he faced are worth highlighting for those of us who normally do business in states other than Arizona.

Lenders: Beware of the Arizona "Two-Dollar Bankruptcy" by Matthew Kenefick

Lenders commonly rely upon form documentation when making a loan, often assuming that the form complies with the ever-changing law governing the deal. As we all know, a mistake in documentation can result in serious collection issues if the loan goes into default. If the defaulting obligation is secured by a personal guaranty given by an Arizona resident, or if the guaranty has to be enforced in Arizona, there may be enforcement problems.

For many years, an Arizona individual debtor could place his or her future wages and commingled community property assets outside of the reach of his or her creditors simply by getting married. Thus, getting married in Arizona has been colloquially referred to as a "two-dollar Bankruptcy." The term-of-art "two-dollar Bankruptcy" refers to initial cost of an Arizona marriage license, which was at one time two dollars. Although the scope of the "two-dollar Bankruptcy" has been significantly narrowed though legislative and case law developments, its protection continues in certain contexts. One of these contexts is personal guaranties. Under Arizona law, both spouses must execute a personal guaranty to bind the marital community. See Ariz. Rev. Stat. § 25-214(c)(2); Rackmaster Systems, Inc. v. Maderia, 193 P.3d 314 (Ariz. App. 2008). This limitation has been extended to non-Arizona resident debtors in the context of Arizona enforcement proceedings (see Phoenix Arbor Plaza Ltd. v. Dauderman, 785 P.2d 1215 (Ariz. App. 1989)) and Arizona debtors in the context of non-Arizona enforcement proceedings (see G.W. Equipment Leasing, Inc. v. Mt. McKinley Fence Co., 982 P.2d 114 (Wash. App.1999)). Thus, under Arizona law, if only one spouse executes a personal guaranty, only that spouse's separate marital property is subject to the claims arising under that guaranty. Since most assets acquired and income...