Friday, April 8, 2016

FDCPA Claim Based on "Community Discharge" Fails

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.

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