By Jones Osborn II

Arizona is a community property state. This means that most property acquired during marriage is owned jointly by the husband and wife, regardless of who actually earned or produced it. The only exceptions are property acquired by gift or inheritance, or income derived from property that is sole and separate property. And even if property is sole and separate property when acquired, it can become community property if it is commingled, or mixed up, with community property. This often happens, so that after a long marriage there is usually very little sole and separate property.

With a few exceptions, each spouse has full right of control over community property, meaning that if one spouse signs a contract, borrows money, or sells community property, all of the community property owned by the marital community is subject to any liability created by such act. This gives each spouse life-or-death control over the community property, because either spouse alone can bind the entire marital community.

Exceptions. There are a couple of important statutory exceptions:

1. Both spouses must join to purchase, sell or encumber an interest in real property (including leases of a year or more), and

2. Both spouses must join in the execution of a guarantee.

If only one spouse signs for these kinds of obligations, only his or her own sole and separate property is liable. None of the community property is liable.

Partnerships. Suppose one spouse is in a general partnership, and the partnership signs a note secured by a deed of trust. Is the partner's community property liable for a deficiency if the note is not paid?

Until recently, it was generally thought that the partner's community property was liable. The reasoning was that the marital community hadn't encumbered real estate, the partnership had. The liability of the marital community was considered to have been a liability arising out of a partnership interest, not out of an interest in real estate; and since an interest in a partnership is personal property, the obligation was not covered by the statutory exception requiring the spouse's signature. The result was that the community property of both spouses was thought to be liable for the obligation even though one spouse didn't sign, and even though it arose out of an encumbrance of real property.

Two recent Arizona cases have turned that theory on its head. In one case, the Federal District Court for the District of Arizona held that the community property of a partner was not liable for a deficiency judgment against the partnership. In the other case, the Arizona Court of Appeals held that a guarantee executed by a partnership did not bind the community property of the partners. Although the decisions dealt only with encumbrances and guarantees, not purchases, sales or conveyances of real property, the same theory would seem to apply in either case. This would mean that the spouses of all partners would have to sign whenever a partnership bought, sold, leased or conveyed real property.

The Lesson. Most people have very little sole and separate property. Therefore, if you are relying on the assets of the general partners when doing a real estate deal with a partnership, be sure to require the spouses of the partners to sign. The same is true if you buy property from a partnership or accept a secured note or guarantee from a partnership. Otherwise you may be left with an empty remedy; or worse, with defective title to your real property.

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The cases cited above are Meritor Savings Bank v. Camelback Canyon Investors, No. CIV 91-843 PHX WPC (Filed Nov. 13, 1991, reconsideration denied Jan. 29, 1992); and First Interstate Bank v. Tatum and Bell Center Associates, 98 Ariz. Adv. Rp. 38 (Filed Oct. 22, 1991).