Claims Against Spouse under Community Property Obligation No Longer Permissible

In the not yet final decision in 11601 Wilshire Associates v. Helen Grebow, 98 Daily Journal D.A.R. 5789 (1998), the California Court of Appeal, Second Appellate District, has ruled that a landlord had no cause of action against a wife simply because the husband guaranteed the tenant's performance under a lease. As most creditors' rights lawyers are aware, spouses are typically sued under the community property obligation in order to assist in the collection of a debt against the spouse. Although the spouse is not directly liable to the creditor, he or she is sued to facilitate enforcement of the judgment. This procedure was previously thought to be authorized by a California appellate decision. The second appellate district has now ruled that suing a spouse merely to facilitate collection of a judgment is impermissible.

11601 Wilshire Blvd. ("landlord") leased office space to the law firm of Grebow & Barish. Arthur Grebow and Kenneth Barish each signed personal guarantees of the lease. Several years later, the law firm defaulted under the lease, and the landlord sued the guarantors. The landlord amended its complaint to include the spouse of each guarantor pursuant to the community property obligations set forth in California's Family Code section 910. This section provides:

Except as otherwise expressly provided by statute, the community estate is liable for debt incurred by either spouse before or during marriage, regardless of which spouse has the management control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.

This statute was generally used to support the naming of a spouse in a lawsuit in order to facilitate collection of the judgment against the obligor spouse.

In the cited case, the wife of Arthur Grebow moved for summary judgment on the ground that she could not be personally liable for any damages to the landlord because she did not sign the lease or the personal guarantee, she was neither a member of the law firm nor employed by it, and she did not maintain an office in the leased space. The landlord argued that she was liable on her husband's personal guarantee because she was married and, as such, was responsible for his obligations to the extent of their community property under Family Code section 910. The trial court granted the motion for summary judgment.

On appeal, the landlord admitted that it only brought the spouse into the case, not because she was personally liable on the guarantee, but merely to facilitate its postjudgment recovery of money damages should it succeed on its claim against the husband guarantor. The landlord made several arguments, including the fact that the husband, who was an experienced attorney, might attempt to hide assets or the parties may move to another state where enforcement against the community property of a spouse could not be obtained unless the spouse was named in the judgment. The appellate court rejected all of these arguments. The landlord relied on the case of Oyakawa v. Gillette (1992) 8 Cal.App.4th 628, in which the plaintiff obtained a judgment solely against the husband, and when the creditor sought to enforce it against community property assets of the parties in Arizona, they were rejected because the judgment did not name both spouses. The plaintiff in that case returned to California and persuaded the trial court to amend the judgment by entering the wife as a judgment debtor. The wife in the Oyakawa case appealed. The appellate court reversed the amended judgment, stating in part, "Although community property is liable for the debt incurred by either spouse during marriage . . . it does not follow that a wife can be added to a judgment rendered against her husband in an action in which she was not named and had no opportunity to defend."

Creditors have previously reasoned that the Oyakawa case impliedly authorized the naming of a community property spouse solely to facilitate the enforcement of a judgment against the community property. Therefore, the landlord named the spouse in the complaint and gave her an opportunity to defend. The court distinguished Oyakawa from the instant case by finding there was no issue on appeal as to whether the creditor could state a cause of action against a spouse. The appeal related solely to the amended judgment.

The court also cited Reynolds and Reynolds v. Universal Forms, Labels (C.D. Cal. 1997) 965 F.Supp. 1392, in which the court dismissed a creditor's complaint against spouses for failure to state a cause of action. The Reynolds case involved various tort and contract theories stemming from alleged unfair competition and violation of confidentiality agreements. The spouses were sued for their community property obligations. There were no allegations that the spouses committed any of the wrongful acts. The Reynolds creditor relied upon Family Code section 1000(b), which essentially holds that if a defendant spouse was performing an activity for the benefit of the community when a tortious act or omission occurred, the creditor must look first to the community assets to satisfy the judgment and then to the separate property of the defendant spouse. The 11601 Wilshire court opined that Family Code section 1000(b) provides for a stronger claim for relief against the defendant spouse because at least there would be a finding that the defendant spouse was acting for the community.

The community property spouse's motion to dismiss was granted. The court held that where both spouses are named in litigation and where one spouse is included solely in the capacity as a community representative, that spouse has no personal liability and that spouse's separate property cannot be reached for the type of debt alleged. When such spouse does not desire to participate in the litigation, there appears to be no legitimate advantage to plaintiff in forcing an unwilling spouse to participate in the litigation. Accordingly, the court found that under Family Code section 910, the landlord cannot state a cause of action.

This case has far reaching effects for creditor lawyers. In essence, creditors will no longer be able to seek an attachment lien against community property assets of a nondebtor spouse in order to tie up the property pending the completion of litigation. Although this may not be detrimental to the collection effort, it does provide for a loss of a very important psychological advantage over debtors and their spouses.

Mr. Ludwig is a Director in the firm's Banking and Financial Institutions, and Bankruptcy and Insolvency Departments, specializing in creditors' rights related litigation. Email: mbl@kpclegal.com

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