Amos v. Swagerty

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NOTICE: THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED EXCEPT AS AUTHORIZED BY APPLICABLE RULES. See Ariz. R. Supreme Court 111(c); ARCAP 28(c); Ariz. R. Crim. P. 31.24 IN THE COURT OF APPEALS STATE OF ARIZONA DIVISION ONE BARRY AMOS, an individual; RUSSELL BROCK, an individual; M. RICHARD VAIL, an individual; and RICHARD DAVIS, an individual, ) ) ) ) ) Plaintiffs/Appellees, ) ) v. ) ) KATHI SWAGERTY, ) ) Defendant/Appellant, ) ) DIVISION ONE FILED: 07-29-2010 PHILIP G. URRY,CLERK BY: DN 1 CA-CV 09-0498 DEPARTMENT B MEMORANDUM DECISION (Not for Publication Rule 28, Arizona Rules of Civil Appellate Procedure) Appeal from the Superior Court in Maricopa County Cause No. CV2004-016064 Commissioner Lindsay Best Ellis, Retired REVERSED AND REMANDED Warner Angle Hallam Jackson & Formanek, PLC By Jack D. Klausner J. Brent Welker Attorneys for Plaintiffs/Appellees Phoenix Jaburg & Wilk, PC By Roger L. Cohen Kathi M. Sandweiss Attorneys for Defendant/Appellant Phoenix S W A N N, Judge ¶1 Kathi Swagerty appeals from the superior court s order denying her motion to quash a writ of garnishment against her wages. be She contends that her sole and separate property may not garnished to collect on a domesticated North Carolina bankruptcy judgment entered against Robert Swagerty, from whom she is legally separated. underlying debt, the Despite Kathi s discharge from the superior court determined that Robert s creditors could garnish Kathi s post-separation wages to collect on the judgment. For the reasons that follow, we reverse the court s order and remand for further proceedings. FACTS AND PROCEDURAL BACKGROUND ¶2 In January 2002, Robert and Kathi Swagerty, then married and residents of North Carolina, filed for Chapter 7 Bankruptcy in the United District of North Carolina. States Bankruptcy Court, Eastern The Swagertys listed Barry Amos, Russell Brock, M. Richard Vail, and Richard Davis (collectively, Appellees ) as creditors. court discharged filed an the adversary On July 26, 2002, the bankruptcy Swagertys proceeding declared non-dischargeable. debts. seeking Appellees, to have however, their claims After a trial, the bankruptcy court declared Appellees claims non-dischargeable against Robert only pursuant to 11 U.S.C. § 523(a)(2)(A) 2 and (a)(4) based on Robert s fraudulent actions against Appellees.1 The bankruptcy court issued a judgment in favor of Appellees and against Robert for over judgment Appellees $1,700,000 ran ( bankruptcy against request Robert to grant judgment ). only, an and exception The bankruptcy expressly to denied discharge with proceeding, the respect to claims against Kathi. ¶3 Swagertys At some moved point to during Arizona. the adversary Appellees bankruptcy judgment in Arizona. domesticated the See Revised Uniform Enforcement of Foreign Judgments Act, A.R.S. §§ 12-1701 to -1708 (2003). ¶4 On June 7, 2007, Appellees filed applications for writ of garnishment seeking to garnish stock the Swagertys owned as well as Robert s wages. The Swagertys objected and argued that their community property could not be garnished. overruled the Swagertys community property could objection be and garnished found because The court that the their tort committed by Robert Swagerty was done for the benefit of the marital community and . . . the debt would be community if 1 Since the relevant time, 11 U.S.C. § 523 has not changed in a manner material to this decision. Section 523(a)(2)(A) (2006) provides that a debt may not be discharged if money or property was obtained by false pretenses, false representations, or fraud. Similarly, section 523(a)(4) precludes discharge of a debt obtained by fraud while acting in a fiduciary capacity. Here, the bankruptcy court determined that Robert committed fraud and breached his fiduciary duties to Appellees in connection with Appellees investments in limited liability companies Robert managed and controlled. 3 incurred in Arizona. The Swagertys filed an appeal, but later abandoned the appeal. ¶5 Thereafter, the Swagertys filed a motion for relief from the garnishment order pursuant to Ariz. R. Civ. P. 60(c)(4) or (6), arguing that the order was void because Kathi was discharged from the bankruptcy judgment and, therefore, the debt was not property. enforceable against her after-acquired community The court denied the motion, finding: [S]ubsequently acquired community property of Kathi Swagerty is properly subject to garnishment under Arizona Law and that this is consistent with current bankruptcy law as it relates to the innocent spouse s community property being subject to garnishment while her separate property remains protected. The Swagertys appealed from this order, but later withdrew the appeal. ¶6 On September 11, 2008, Appellees filed an application for writ of garnishment seeking to garnish Kathi s wages. Swagertys objected, and the court ultimately determined The that Kathi s wages were subject to garnishment. ¶7 In February 2009, Robert consent decree of legal separation. and Kathi entered into a Thereafter, Kathi moved to quash the writ of garnishment against her wages. She argued that her wages were now her separate property, and therefore were not subject to garnishment 4 to satisfy the bankruptcy judgment. After oral argument, the court denied the motion to quash, explaining: [U]nder Hamlin v. Community Garden Bank, 182 Ariz. 627, 898 P.2d 1005 (App. 1995), [the Swagertys ] legal separation agreement does not affect [Appellees ] rights to pursue collection of the North Carolina Bankruptcy Judgment ( Debt ). This Court has already ruled on September 15, 2008 . . . and it is law of the case, that the post-petition community property of Defendant Kathi A. Swagerty is properly subject to garnishment for payment of the Debt. Thus, despite the Legal Separation Agreement, the separate property wages of Kathi A. Swagerty are subject to continuing garnishment until the Debt is satisfied. Kathi timely appeals. We have jurisdiction pursuant to A.R.S. § 12-2101(F)(3). DISCUSSION ¶8 Kathi contends that the superior court erred as a matter of law by permitting Appellees to garnish her sole and separate wages. bankruptcy Specifically, judgment is Kathi Robert s contends: separate (1) (2) debt; the the garnishment order conflicts with the United States Bankruptcy Code ( Code ) violates the and the doctrine bankruptcy of federal judgment, preemption; superior court erred by applying Hamlin. law that we review de novo. Ariz. 627, 630, 898 P.2d and therefore and (3) the These are issues of Cmty. Guardian Bank v. Hamlin, 182 1005, 1008 (App. 1995) (we review issues of law de novo); In re Marriage of Pownall, 197 Ariz. 577, 581, ¶ 15, 5 P.3d 911, 5 915 (App. 2000) (property characterization is an issue of law that we review de novo); Hutto v. Francisco, 210 Ariz. 88, 90, ¶ 7, 107 P.3d 934, 936 (App. 2005) (we review federal preemption issues de novo); Paczosa v. Cartwright Elementary Sch. Dist. No. 83, 222 Ariz. 73, 77, ¶ 14, 213 P.3d 222, 226 (App. 2009) (we review the court s application of law to facts de novo). A. Nature of the Debt ¶9 First, Kathi contends that the bankruptcy judgment constitutes Robert s separate debt. Based on its prior rulings, the bankruptcy superior court community debt. ¶10 the judgment was a There was no error in this finding. Pursuant community determined to property is A.R.S. liable § for 25-215(C) a (2007), spouse s debts [t]he incurred outside of this state during the marriage which would have been community debts if incurred in this state. Similarly, the community is liable for intentional torts of either spouse if the act was intended to benefit the community. Selby v. Savard, 134 Ariz. 222, 229, 655 P.2d 342, 349 (1982). ¶11 would In its earlier rulings, the court had found the debt have Arizona. been a community Additionally, the debt court had found it been that incurred the in Swagertys community property was liable for the debt because Robert s tort benefitted the community. the debt was community. Therefore, the court determined that See Wine v. Wine, 14 Ariz. App. 103, 6 105, 480 P.2d 1020, 1022 (1971) (defining community debt as obligations incurred during a marriage for the community or by virtue of the community property or income ). rulings are consistent with Arizona law. The court s See, e.g., Nat l Union Fire Ins. Co. of Pittsburgh v. Greene, 195 Ariz. 105, 108, ¶ 12, 985 P.2d 590, 593 (App. 1999) (holding that a domesticated foreign judgment against one spouse could be enforced against community ¶12 property). Similarly, the characterization of a debt as community in nature under Arizona law does not conflict with the Code or the bankruptcy judgment. Under the Code, community property is liable for a debt if a debt constitutes a community claim. In re Maready, 122 B.R. 378, 381 (B.A.P. 9th Cir. 1991); see also 11 U.S.C. § 101(7) (2006) (a community claim is one that arises prior to the commencement of a bankruptcy proceeding for which community property is liable). Generally, [i]f the debtor s property is liable for a claim against either [the debtor or claim. 1990) the debtor s spouse], that claim is a community In re Sweitzer, 111 B.R. 792, 793 (Bankr. W.D. Wis. (citation omitted). State creditor holds a community claim. law determines whether a In re Soderling, 998 F.2d 730, 733 (9th Cir. 1993) (citing Sweitzer, 111 B.R. at 793); In re Rollinson, 322 B.R. 879, 882 (Bankr. D. Ariz. 2005). Further, subsequently acquired community property may be used to 7 satisfy a debt from which one spouse is discharged and the other spouse is not. See In re LeSueur, 53 B.R. 414, 416 (Bankr. D. Ariz. 1985) ( [T]he Code s clear policy is that the economic sins of either spouse shall be visited upon the community when a discharge is denied. ). ¶13 Here, the superior court, applying Arizona law, appropriately determined that Appellees hold a community claim. There was no error in the court s previous rulings allowing Appellees to garnish the Swagertys community property to satisfy the bankruptcy judgment.2 B. Federal Preemption ¶14 Next, Kathi contends that the court s order allowing garnishment of her sole and separate wages conflicts with the bankruptcy judgment and the Code, and therefore violates the doctrine of federal preemption. Appellees contend that this argument is waived. 2 Kathi contends that the debt cannot be community because it was incurred while the parties resided in North Carolina -- a state that does not recognize community property law. Appellees take a position at the other extreme end of the spectrum -- they contend that once the parties took up residence in Arizona, the claim became a community debt and even after termination of the community by legal separation, Kathi remains permanently liable on the debt because the family court s orders are not binding upon creditors. We view both positions as incorrect. Married couples may move to Arizona with existing debts, and these are to be characterized according to Arizona law. But once the community terminated, Kathi s income became her separate property. The force of a federal judgment holding her personally immune from collection then inured to her benefit and acts to protect her separate property. 8 ¶15 Addressing Appellees argument first, we decline to find this argument waived. Generally, arguments not raised in the superior court are waived on appeal. Sobol v. Marsh, 212 Ariz. 301, 303, ¶ 7, 130 P.3d 1000, 1002 (App. 2006). is procedural, not jurisdictional. Id. at ¶ 8. This rule Here, although Kathi did not raise the federal preemption issue in her motion to quash, she discussed preemption at oral argument on that motion. Moreover, in her motion to quash, Kathi asserted that she was discharged from the bankruptcy judgment. In view of the obvious preemption implications of any bankruptcy judgment, we find this sufficient to put the issue before the superior court and to preserve the issue for appeal. Glendale, 208 Ariz. 319, 330 n.7, ¶ See Long v. City of 36, 93 P.3d 519, 530 n.7 (App. 2004); Alano Club 12, Inc. v. Hibbs, 150 Ariz. 428, 434-35, 724 P.2d 47, 53-54 (App. 1986). ¶16 Pursuant supersedes to conflicting the state preemption law. doctrine, Defenders federal of Wildlife law v. Hull, 199 Ariz. 411, 426, ¶ 57, 18 P.3d 722, 737 (App. 2001); see also City of Phoenix v. Ariz. Dep t of Envtl. Quality, 205 Ariz. 576, 580, ¶ 13, 74 P.3d 250, 254 (App. 2003) (noting that the goal in preemption cases is to determine whether state law is consistent statute). with Federal bankruptcy cases. the purpose courts have and structure plenary power of a federal to administer In re McGhan, 288 F.3d 1172, 1179 (9th Cir. 9 2002); 28 U.S.C. § 1334(a) ( [T]he district courts shall have original and exclusive jurisdiction of all cases under title 11. ). It is well settled that state courts have no authority to modify discharge orders. McGhan, 288 F.3d at 1179-80; see also Miller v. Nat l Franchise Servs., Inc., 167 Ariz. 403, 405, 807 P.2d 1139, 1141 (App. 1991) ( State laws and actions which are inconsistent with federal bankruptcy law are preempted by the Code. ). ¶17 A Chapter 7 bankruptcy discharge releases the debtor from personal liability for her pre-bankruptcy debts. In re Ybarra, 424 F.3d 1018, 1022 (9th Cir. 2005) (citation omitted); accord 11 U.S.C. § 727(b). A discharge is the legal embodiment of the idea of the fresh start; it is the barrier that keeps the creditors of old from reaching the wages and other income of the new. omitted). creditors debtor. Ybarra, 424 F.3d at 1022 (citation Once a debtor receives a discharge, pre-bankruptcy are precluded from 11 U.S.C. § 524(a). collecting property from the Therefore, a debtor is entitled to injunctive relief under the Code if a creditor seeks recovery of a discharged debt. Flexmaster Aluminum Awning Co. v. Hirschberg, 173 Ariz. 83, 87, 839 P.2d 1128, 1132 (App. 1992). ¶18 Here, Kathi received a discharge of all debts listed in her bankruptcy petition. This included Appellees claims. Further, issued the district court 10 the bankruptcy judgment against Robert only, and expressly provided that Appellees have and recover nothing from Kathi A. Swagerty. The superior court s garnishment order, however, allows Appellees to recover on the bankruptcy property. judgment This order from Kathi s directly sole conflicts and with separate both the bankruptcy court s discharge order and the bankruptcy judgment. Pursuant to the preemption doctrine, the garnishment order cannot be upheld.3 C. Application of Hamlin ¶19 Appellees contend controlling. Hamlin, Hamlin is on point and We disagree. ¶20 that In a creditor obtained a default judgment against the wife for unjust enrichment based on her husband s unauthorized use of funds for the benefit of the community. Ariz. at 629, 898 P.2d at 1007. 182 In determining whether the creditor could garnish the wife s post-dissolution earnings, we found that the default judgment established obligation for which the wife was jointly liable. 32, 898 P.2d at 1008-10. a community Id. at 630- Applying Arizona law, we held that the former spouses remained jointly liable for the community debt 3 Further, the bankruptcy judgment is res judicata as to Kathi s liability on the debt and Appellees ability to collect on the debt from Kathi. See Forty-Four Hundred E. Broadway Co. v. 4400 E. Broadway, 135 Ariz. 265, 267, 660 P.2d 866, 868 (App. 1982) (bankruptcy judgments are entitled to full faith and credit, and res judicata prevents re-adjudication of issues litigated in bankruptcy proceedings). 11 after their divorce, and therefore the creditor could garnish the wife s post-dissolution wages. Id. at 631, 898 P.2d at 1009. ¶21 Hamlin is distinguishable from the present case for the simple reason that it did not involve bankruptcy. See In re Oliphant, 221 B.R. 506, 509 (Bankr. D. Ariz. 1998) (addressing Hamlin in a bankruptcy case concerning dischargeability of a debt incurred by one spouse during marriage and stating, [i]f this case did not involve a bankruptcy, [the creditor] would be able to collect on its judgment from [the innocent spouse s] post divorce separate property ). Moreover, in Hamlin, creditor actually obtained a judgment against the wife. Ariz. at received 629, a 898 P.2d discharge at of 1007. Here, Appellees by claims contrast, and was the 182 Kathi expressly excluded from the bankruptcy judgment on which Appellees are now trying to collect. To apply the holding in Hamlin under these circumstances would be to elevate state community property law over federal bankruptcy law and violate the doctrine of federal preemption. Further, inconsistent separate Comm n with case property from v. Ryckman, 200 application law of protecting liability. Ariz. an See, 540, 30 Hamlin innocent e.g., P.3d would spouse s Alberta 121 be (App. Secs. 2001) (modifying a foreign judgment obtained against the husband based on his securities violations in 12 order to preclude recovery against the wife s sole and separate property); LeSueur, 53 B.R. 414 (concluding that the wife s separate property was not liable for a debt from which she but not her husband was discharged in bankruptcy proceedings). ¶22 We therefore conclude that the court erred as a matter of law by refusing to reverse the order allowing Appellees to garnish Kathi s sole and separate property. D. Attorney s Fees ¶23 Appellees request attorney s fees on appeal pursuant to A.R.S. § 12-349. award attorney s That statute gives a court discretion to fees if a party or attorney [b]rings or defends a claim without substantial justification or brings or defends a claim solely or primarily for delay or harassment. A.R.S. § 12-349(A)(1)-(2). As our resolution of this appeal demonstrates, we do not find that Kathi defended against the garnishment harassment. without justification or primarily for delay or Accordingly, we deny Appellees request for fees. As the prevailing party, we award Kathi her costs on appeal. A.R.S. § 12-341. 13 CONCLUSION ¶24 For superior court s garnishment the reasons order against set forth declining Kathi s wages, above, to and we quash remand reverse the for writ the of further proceedings as appropriate. /s/ ___________________________________ PETER B. SWANN, Judge CONCURRING: /s/ ____________________________________ PATRICIA K. NORRIS, Presiding Judge /s/ ____________________________________ DANIEL A. BARKER, Judge 14

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