Written by: Robert DeMarco

A recent Fifth Circuit opinion recently made it clear how important it is to understand the role community property plays in a bankruptcy setting. In Buescher v. First United Bank and Trust (In re Buescher) the Fifth Circuit discussed the role that in rem liability plays in the context of an objection to discharge under 11 U.S.C. § 727. Buescher v. First United Bank and Trust (In re Buescher), No. 14-40361, 2015 WL 1637632 (5th Cir. Apr. 13, 2015).

The Fifth Circuit, in Buescher, was asked to decide if First United Bank and Trust (the “Bank”) had standing to object to the discharge of Sherry Buescher (the “Debtor-Wife”). Dean Buescher (the “Debtor”) executed a personal guarantee in connection with a business loan he had obtained from the Bank. The Debtor-Wife did not execute a personal guaranty and was not personally liable to the Bank.

Judge Edith Brown Clement, writing for the Court, relied on section 3.202 of the Texas Family Code in concluding the Bank had standing. The liability of the community estate is governed by Tex. Fam. Code Ann. § 3.202 (successor statute to Tex.Fam.Code Ann. § 5.61), which provides as follows:

(a) A spouse’s separate property is not subject to liabilities of the other spouse unless both spouses are liable by other rules of law.

(b) Unless both spouses are personally liable as provided by this subchapter, the community property subject to a spouse’s sole management, control, and disposition is not subject to:

(1) any liabilities that the other spouse incurred before marriage; or

(2) any nontortious liabilities that the other spouse incurs during marriage.

(c) The community property subject to a spouse’s sole or joint management, control, and disposition is subject to the liabilities incurred by the spouse before or during marriage.

(d) All community property is subject to tortious liability of either spouse incurred during marriage.

(e) For purposes of this section, all retirement allowances, annuities, accumulated contributions, optional benefits, and money in the various public retirement system accounts of this state that are community property subject to the participating spouse’s sole management, control, and disposition are not subject to any claim for payment of a criminal restitution judgment entered against the nonparticipant spouse except to the extent of the nonparticipant spouse’s interest as determined in a qualified domestic relations order under Chapter 804, Government Code.

The Court reasoned that since the Debtor-Wife had an interest in the joint managed community property and the Debtor’s sole managed community property an in rem action could be commenced against the Debtor-Wife had the bankruptcy case not been filed.

Texas is a community property state, and under Texas law, First United has an in rem claim against any community property that Dean jointly holds with Sherry. See Tex. Fam.Code Ann. § 3.202(c) (providing that “[t]he community property subject to a spouse’s sole or joint management, control, and disposition is subject to the liabilities incurred by the spouse before or during marriage”); see also United States v. Loftis, 607 F.3d 173, 179 (5th Cir.2010) (explaining that “[§] 3.202(c) … renders all jointly managed community property subject to the nontortious liabilities incurred by [the debtor spouse]”). Because Dean and Sherry have jointly-held community property, First United could seek repayment in Texas court through an in rem suit against Sherry. See, e.g., Carlton v. Estate of Estes, 664 S.W.2d 322, 322–23 (Tex.1983) (per curiam) (holding that predecessor statute to § 3.202(c) authorized husband’s creditor to sue deceased wife’s estate to satisfy judgment against husband).

In re Buescher, 2015 WL 1637632, at *2. Because the Bank could satisfy its claim against the Debtor through an in rem suit against the Debtor-Wife, the Bank is the Debtor-Wife’s creditor and has standing to prosecute a section 727 action against the Debtor-Wife. Id.

The concept of “community claims”, as defined in 11 U.S.C. § 101(7), served as the foundation for the Buescher Court’s opinion. The same holds true when determining what types of community property come into the bankruptcy estate and what, if any impact the discharge injunction has upon post-petition collection efforts concerning after-acquired community property.

Community Claims [11U.S.C. § 101(7)]

Section 101 of the Bankruptcy Code defines “creditor” as follows:

The term “creditor” means—
(A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor;
(B) entity that has a claim against the estate of a kind specified in section 348 (d), 502 (f), 502 (g), 502 (h) or 502 (i) of this title; or
(C) entity that has a community claim.

11 U.S.C. § 101(10). As such, the holder of a “community claim” is a creditor under the Bankruptcy Code. “Community claim” is defined as a claim “for which property of the kind specified in section 541(a)(2) of this title is liable.” 11 U.S.C. § 101(7). Section 541(a)(2) provides that a bankruptcy estate includes “[a]ll interests of the debtor and the debtor’s spouse in community property” that is either “(A) under the sole, equal, or joint management and control of the debtor;” or “(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.” 11 U.S.C. § 541(a)(2). “Read together, these provisions show that “[a]n entity that holds a claim against the nondebtor spouse under state law but does not hold a claim against the debtor, may nonetheless be considered a ‘creditor’ of the debtor under section 101(10), so long as that claimant could, under state law, satisfy the claim from community property of the type which would have passed to the estate.” Collier on Bankruptcy ¶ 101.10 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2014).” In re Buescher, 2015 WL 1637632, at *2.

Community Property and Property of the Estate [11 U.S.C. § 541(a)(2)]

Community property affects bankruptcy cases in other ways as well. Key to understanding the role community property plays in a bankruptcy setting are subsections (b) and (c) of section 3.202. Under subsection (b), “[a] spouse’s solely managed community property is not subject to “any nontortious liabilities that the other spouse incurs during marriage.” (citations omitted)” United States v. Loftis, 607 F.3d 173, 178 (5th Cir. 2010). Under subsection (c), “either spouse can incur contractual liability that will bind the share of the noncontracting spouse’s community property subject to the sole or joint control of the contracting spouse, but the noncontracting spouse is not “personally liable” for the obligation. (citations omitted)” Nelson v. Citizens Bank & Trust Co. of Baytown, Tex., 881 S.W.2d 128, 131 (Tex. App. 1994).

The first take away is to understand section 3.202 speaks in terms of the community property being liable. Section 3.202 does not cause the other spouse to become personally liable. Section 3.202 creates in rem liability only. The second is to discern what community property is liable for what debts.

 Personal Liability  Property Liability
POST-Marital Tortious Conduct  ALL Community Property [§ 3.202(b)(2)]; Separate Property of the Tortfeasor [§ 3.202(a)]
PRE-Marital Tortious Conduct Joint Managed Community Property [§ 3.202(c)]; Tortfeasor’s Sole Managed Community Property [§ 3.202(c)]; Tortfeasror’s Separate Property [§ 3.202(a)]
POST-Marital Non-Tortious Obligation [Only one spouse liable] Joint Managed Community Property [§ 3.202(c)]; Liable Spouse’s Sole Managed Community Property [§ 3.202(c)]; Liable Spouse’s Separate Property [§ 3.202(a)]
PRE-Marital Non-Tortious Obligation [Only one spouse liable] Joint Managed Community Property [§ 3.202(c)]; Liable Spouse’s Sole Managed Community Property [§ 3.202(c)]; Liable Spouse’s Separate Property [§ 3.202(a)]
POST-Marital Non-Tortious Obligation [Both spouses liable] ALL Separate Property of each Spouse [§ 3.202(a)]; ALL Community Property [§ 3.202(c)]
PRE-Marital Non-Tortious Obligation [Both spouses liable] ALL Separate Property of each Spouse [§ 3.202(a)]; ALL Community Property [§§ 3.202(b)(1) and (c)]

This is nothing new. However, these principals must be properly applied in the context of a bankruptcy filing. First, as regards property of the estate, all community property comes into the bankruptcy estate under 11 U.S.C. § 541(a)(2)(A) unless the community property is the sole managed community property of a non-filing spouse. Additionally, any community property, including the sole managed community property of the non-filing spouse, that is liable for an allowable claim against the debtor or both the Debtor and the non-filing spouse (a “community claim” as defined in 11 U.S.C. § 101(a)(7)) comes into the bankruptcy estate under 11 U.S.C. § 541(a)(2)(B).

Section 541(a)(2)(A) is entirely consistent with section 3.202. Section 541(a)(2)(B), however, is another tale. Outside of bankruptcy, only the creditor which has a claim to the sole managed community property (because the spouse with the sole managed community property is liable to that creditor) can collect from that sole managed community property. Under section 541(a)(2)(B), however, the non-filing spouses’ sole managed community property comes into the bankruptcy estate for the benefit of ALL the Debtor’s creditors so long as there is just one creditor to which both the husband and wife are liable. Restated, if a husband and wife are co-obligors or on any single debt, secured or otherwise (i.e. a mortgage or car loan) ALL community property comes into the bankruptcy estate: joint managed community property and sole managed community property of both the debtor and the non-filing spouse.

After-Acquired Community Property and the Discharge Injunction [11 U.S.C. § 524(a)(3)]

Section 524(a)(3) of the Bankruptcy Code is not an easy read at first blush and is perhaps more easily read when broke into two separate components. The first part of section 524(a)(3) reads as follows:

(a) A discharge in a case under this title—
(3) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect or recover from, or offset against, property of the debtor of the kind specified in section 541 (a)(2) of this title that is acquired after the commencement of the case, on account of any allowable community claim….

11 U.S.C. § 524(a)(3). The second half of section 524(a)(3) provides that the foregoing discharge injunction language does not apply to any:

community claim that is excepted from discharge under section 523, 1228 (a)(1), or 1328 (a)(1), or that would be so excepted, determined in accordance with the provisions of sections 523 (c) and 523 (d) of this title, in a case concerning the debtor’s spouse commenced on the date of the filing of the petition in the case concerning the debtor, whether or not discharge of the debt based on such community claim is waived.

11 U.S.C. § 524(a)(3). “[Section] 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition.” In re Karber, 25 B.R. 9, 12 (Bankr. N.D. Tex. 1982). In summary, all actions to collect a “community claim” from section 541(a)(2) property acquired after the petition date is permanently enjoined unless timely objected to. That is, if one spouse in a community property state has commenced a bankruptcy case where … no claim is excepted from the debtor’s discharge and is not otherwise found to be nondischargeable, and if the nondebtor spouse would not have had a claim excepted from her discharge in a hypothetical case commenced on the same day as the commencement of the debtor’s case, then the creditors of either spouse holding community claims on the date of bankruptcy are thereafter barred from asserting claims against after acquired community property.” Id. In re Williams, 226 F. App’x 384, 387 (5th Cir. 2007) (“A creditor can preserve his right to collect on after-acquired community property by bringing suit against the non-debtor spouse to determine if the debt is hypothetically non-dischargeable as to that spouse.” ).

The effectiveness of section 524(a)(3), however, like all injunctive language, is dependent upon notice. If a “community claim” is not listed nor scheduled as a creditor so as to allow the timely filing of an objection to discharge under section 523(a)(2), (4), or (6), such “community claim” is not subject to the discharge injunction of section 524(a)(3). 11 U.S.C. §§ 523(a)(3) and (c)(1); In re Karber, 25 B.R. at 12.

A Parting Quote

“Ignorance is the curse of God; knowledge the wing wherewith we fly to heaven.” Shakespeare, William, Henry VI, Part 2, Act 4, Scene 7.