By Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX
A U.S. District Judge in Arizona has ruled that the “community discharge” in
bankruptcy does not grant an in personam
discharge to a non-filing spouse, thus thwarting the FDCPA claim of a pro se litigant. The case is important because it shines
light on the parameters of a poorly understand aspect of bankruptcy law. The case is Parker v. First Step Group of
Minnesota, LLC, 2016 U.S. Dist. LEXIS 5372 (D. Ariz. 2016).
What Happened
John Parker was married to Regina Parker. Regina filed chapter 7 and received a
discharge. John did not file. Later the couple divorced.
On February 4, 2015, First Step Group of Minnesota, LLC, a
debt collector, sent a demand letter relating to a debt in the amount of
approximately $3,500. John responded by
filing a pro se action contending
that the debt had been discharged in his ex-wife’s bankruptcy and that the community
discharge protected him. Because he
claimed that the debt had been discharged, he filed a suit under the Fair Debt
Collection Practices Act.
The Defendants answered and file a motion for judgment on
the pleadings under Fed.R.Civ.P. 12(c).
Defendants asserted that the community discharge did not relief John of
his personal liability so that the FDCPA claim failed as a matter of law.
The District Court granted the motion.
The District Court’s
Ruling
The Court explained that a motion for judgment on the
pleadings was properly applied when taking all the facts alleged by the non-moving
party to be true, the other party is entitled to judgment as a matter of
law. However, the Court is not required
to accept the non-moving party’s assertions of law. The
standard for a motion for judgment on the pleadings is similar to that of a
motion to dismiss for failure to state a cause of action. The difference is that because it is filed
after the pleadings are closed (that is, there is a complaint and an answer),
it cuts off the plaintiff’s right to amend as a matter of right.
The Court offered a succinct explanation of how the
discharge works—and does not—when only one spouse files bankruptcy.
First, people who don’t file bankruptcy don’t get a
discharge.
When one spouse files for
bankruptcy, the other spouse is not discharged of liability. (citation omitted). "Pursuant to 11 U.S.C. § 524(a),
a discharge under (title) 11 releases the debtor from personal liability for
any debts. Section 524 does not, however, provide for the release of third
parties from liability." (citation omitted).
Section
524(e) provides
that "[e]xcept as provided in subsection (a)(3) of this section, discharge
of a debt of the debtor does not affect the liability of any other entity on,
or the property of any other entity for, such debt."
Opinion,
pp. 3-4.
There is
something called a community discharge but it only applies to property and only
continues during the duration of the marriage.
Subsection (a)(3), through reference to section
541(a)(2), provides that (with some exceptions) a creditor cannot recover
from the "interests of the debtor and the debtor's spouse in community
property that is under the . . . joint management and control of the
debtor." 11 U.S.C. § 524(a)(3); id. § 541(a)(2).
Under Arizona law, "spouses have equal management, control and disposition
rights over their community property." (citation omitted). Thus, "the effect of § 524(a)(3)
is that all community property acquired post-bankruptcy is protected by the
discharge." (citation omitted).
For the duration of the marriage,
"§ 524(a)(3) can operate to provide nondebtor spouses with a de
facto partial discharge of their separate debts by enjoining a creditor from
attaching community property in which the nondebtor spouse has an
interest." (citation omitted). Although the personal liability of a nondebtor
spouse survives the bankruptcy, this liability can only be enforced against separate
property, not community property: "a judgment creditor of the nondebtor spouse on a community claim
loses the ability to collect from anything other than the judgment debtor's
separate property." (citation omitted).
There is, however, a
"temporal aspect" to this protection--"it applies only so long
as there is community property." (citation omitted).
"Dissolution of the marriage . . . terminates the community, at which
point after-acquired community property loses its § 524(a)(3)
protection." (citation omitted).
Opinion, pp. 4-5.
Thus, John lost on two
counts. First, the “community discharge”
did not protect him from receiving a collection letter because he remained
personally liable on the debt. Second,
because he was divorced, there was no community property to be protected by the
“community discharge” so that he lost this protection as well.
Conclusion
This case makes two important
points. First, a motion for judgment on
the pleadings provides a better vehicle for resolving a case than a motion to
dismiss for failure to state a cause of action. If a rule 12(c) motion is granted, there is
a take-nothing judgment rendered against the plaintiff. An order dismissing a case for failure to
state a cause of action will generally be made without prejudice to replead or
to file a new suit with sufficient pleadings.
Thus, the motion for judgment on the pleadings provides more complete
relief.
Second, the “community discharge”
is not a true discharge. Rather, it is
an adjunct to the discharge granted to the filing spouse. By protecting after-acquired community
property, the community discharge protects the discharged spouse from an
indirect attempt to collect a discharged debt by taking a judgment against the
non-filing spouse and attaching community property in which the discharged
spouse has an interest. Thus, the non-filing
spouse gets limited protection of his interest in community property based on
the filing spouse’s discharge. However,
that protection does not wipe out personal liability and it does not last after
the dissolution of the marriage.
Disclosure: While my
name does not appear on the opinion, I provided drafting assistance to local
counsel.
In Smith v. SIPI, LLC (In re Smith), 811 F.3d 228 (7th Cir. 2016), the
United States Court of Appeals for the Seventh Circuit found that a lawfully
conducted sale of real estate under Illinois’ tax sale procedures can be
avoided if the sale was not for “reasonably equivalent value” for purposes of Section
548(a)(1)(B) of the Bankruptcy Code. This
decision is significant – particularly for attorneys in Illinois and other
states that employ a similar “interest rate method” for collecting delinquent
real estate taxes – in holding that, unlike with mortgage foreclosure sales, compliance
with the Illinois tax sale procedures does not insulate a property’s tax sale
to satisfy delinquent real estate taxes from avoidance actions. 