Pacific Gamble Robinson Co. v. Lapp

622 P.2d 850, 95 Wash. 2d 341, 1980 Wash. LEXIS 1457

• Court: Washington Supreme Court
• Decided: December 31, 1980
• Docket: 46837
• Status: Published

Opinions

Williams, J. —

In 1962, Conrad C. Lapp acquired 100 percent of the.stock of the Joslyn Fruit Company (Joslyn), a Colorado corporation. In 1975, Conrad Lapp married his present wife, Laura D. Lapp, in Colorado, where both were residents. Under Colorado law, the stock of Joslyn remained Mr. Lapp's sole property, which he could encumber or convey without the consent of his wife. Goldberg v. Musim, 162 Colo. 461, 427 P.2d 698 (1967); Bostron v. Bos-tron, 128 Colo. 535, 265 P.2d 230 (1953).

By the spring of 1977, Joslyn was in severe financial difficulty and indebted to petitioner Pacific Gamble Robinson Company in the amount of $34,710.70. In an effort to assist Lapp and to enable Joslyn to remain in business, petitioner agreed to continue to supply produce if Lapp signed a promissory note on which he would be personally liable along with Joslyn. On April 14, 1977, the promissory note for $34,710.70 was executed in Colorado by Lapp individually and on behalf of Joslyn. Mrs. Lapp did not sign the note. Under Colorado law, Mr. Lapp's earnings and property alone were subject to that debt, and his wife could not object to the encumbrance. Imel v. United States, 184 Colo. 1, 8, 517 P.2d 1331 (1974).

In July of 1977, Joslyn and Mr. Lapp defaulted on the note. In September, the Lapps moved to Washington. On January 31, 1978, petitioner brought this action in Washington against Joslyn, Conrad Lapp individually, and the Lapp marital community to recover the balance due and owing on the note.

The trial court granted summary judgment against Conrad Lapp individually but refused to hold that the community had incurred any legal obligation. Petitioner appealed from that portion of the judgment dismissing the marital community. In a split decision, the Court of Appeals affirmed the trial court. Pacific Gamble Robinson Co. v. Lapp, 24 Wn. App. 795, 604 P.2d 1300 (1979). We reverse.

This case presents the following issue: Is the creditor on an obligation incurred by one spouse in a foreign, noncom-munity property state where both spouses were domiciled, restricted in its recovery to the separate property of the obligor spouse, as the term "separate property" is defined by Washington law, after the couple moves to Washington?

Washington has adopted the so-called "center of gravity" or "most significant relationship" approach to contract choice of law problems. In the absence of an effective choice of law by the parties, the validity and effect of á contract are governed by the law of the state having the most significant relationship with the contract. Potlatch No. 1 Fed. Credit Union v. Kennedy, 76 Wn.2d 806, 459 P.2d 32 (1969); Baffin Land Corp. v. Monticello Motor Inn, Inc., 70 Wn.2d 893, 425 P.2d 623 (1967); Restatement (Second) of Conflict of Laws § 188 (1971).

Under the law of this state, a debt is presumed to be a community obligation. Oregon Improvement Co. v. Sagmeister, 4 Wash. 710, 30 P. 1058 (1892). The burden of proving that a debt is not a community obligation rests on the community. Beyers v. Moore, 45 Wn.2d 68, 70, 272 P.2d 626 (1954). If the obligation is incurred by the community, then community property, including the earnings of both spouses, is liable for the debt. Beyers, at 70; RCW 26.16-.030. On the other hand, if a debt is characterized under Washington law as separate, or for the benefit of the husband's separate property, then it may not be satisfied from the earnings of either spouse, because earnings during coverture are community property. RCW 26.16.030; RCW 26.16.200.

In Colorado, however, as we explain more fully below, the law subjects only the husband's property, including earnings, to payment of a debt incurred by him alone. Imel v. United States, at 8. This is a result not possible under Washington law. But see deElche v. Jacobsen, 95 Wn.2d 237, 622 P.2d 835 (1980).

Accordingly, if this transaction had taken place entirely in Colorado, with the Lapps remaining there as domiciliar-ies, petitioner would have been entitled to judgment against only Conrad Lapp's property, including his earnings. If the transaction had occurred entirely in Washington, however, regardless of whether the debt were characterized as a community or a separate obligation, petitioner would not be entitled to have its judgment satisfied from Conrad Lapp's wages alone. Depending on how the obligation was characterized, petitioner could alternatively reach the wages and earnings of both spouses, or of neither spouse.

Since the result is different under the law of the two states, we are not faced with a "false conflict", as was found by the court in Pacific States Cut Stone Co. v. Goble, 70 , 425 P.2d 631 (1967).¹ Rather, there is a "real" conflict of laws, making this situation analogous to that faced by this court in Potlatch No. 1 Fed. Credit Union, where we said:

This case presents a single issue . . ., and that is whether the community of a cosigner of a note may be held liable on the note although the community derived no benefit therefrom.

Potlatch No. 1 Fed. Credit Union, at 811.

The legislatures and courts of the two states have made conflicting policy decisions with respect to this question. Idaho has chosen to recognize the interests of creditors over the interests of marital property in these situations. Washington has taken the opposite view. These two policy decisions come into direct conflict where, as here, the controversy involves an Idaho creditor and a Washington marital community.

(Italics ours.) Potlatch No. 1 Fed. Credit Union, at 808-09.

In such a case, we apply the most significant relationship test, which is summarized in the Restatement, supra at § 188, p. 575.

(1) The rights and duties of the parties with respect to an issue in contract sire determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.

(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the contract, and

(e) the domicil, residence, nationality, place of incorporation and place of business of the parties.

These contacts are to be evaluated according to their relative importance with respect to the particular issue.

(3) If the place of negotiating the contract and the place of performance are in the same state, the local law of this state will usually be applied, except as otherwise provided in §§ 189-199 and 203.

As we observed in Potlatch No. 1 Fed. Credit Union, in applying this test we do not merely count the contacts between each state and the transaction at issue. "Rather, these contacts are guidelines indicating where the interests of particular states may touch the transaction". Potlatch No. 1 Fed. Credit Union, at 810. Moreover, " [tjhese competing policies must also be weighed against the justified expectations of the parties." Potlatch No. 1 Fed. Credit Union, at 810. See Restatement, supra at § 188, comment c, p. 578. See also Powers, Formalism and Nonformalism in Choice of Law Methodology, 52 Wash. L. Rev. 27, 60-62 (1976); Sedler, The Contracts Provisions of the Restatement (Second): An Analysis and a Critique, 72 Colum. L. Rev. 279, 311 (1972).

Applying these principles to the present case, we think it plain that Colorado has numerous governmental interests in this transaction. The entire transaction occurred in Colorado. Petitioner was doing business in Colorado, and the Lapps were domiciled in Colorado at the time of the execution of the note, which was signed in Colorado by Mr. Lapp individually and on behalf of a Colorado corporation. Moreover, both parties apparently contemplated that all performance was to be in Colorado. We may assume that Colorado's interest is to ensure the predictability of business relations and to prevent the flight of debtors to other states to avoid payment of otherwise legitimate debts.

What is Washington's interest in the note at issue? Clearly, Washington has a general interest in protection of marital communities from the entirely separate debts of one spouse. RCW 26.16.010, .020.² But Washington had no connection whatever with the present transaction until the Lapps established their domicile here just 2 months after the note went into default. While the record demonstrates no cause and effect relationship between the default and the parties' move to Washington, we may safely assume that this state has no policy interest in maintaining within its borders a sanctuary for fleeing debtors.

Turning to the expectations of the parties, we think that both spouses could reasonably expect at the time the note was executed that the transaction would be governed by Colorado law. Since the Lapps had long been domiciled in Colorado, and remained there some months after the note was signed, they could not justifiably believe that the obligation could be fairly avoided by the device of removing to a state where a husband's wages would not be subject to the debt. See Pacific States Cut Stone Co., at 913.

Petitioner was aware that Joslyn was a Colorado corporation, and had been so at least since 1962 when Conrad Lapp acquired all its stock. Petitioner knew that the Lapps had been Colorado domiciliaries from the time of their marriage up to and including the time the note was signed. As between Colorado, the state of the debtor's domicile, and a later possible domicile, a creditor would reasonably expect that Colorado law would apply. Although petitioner's principle place of business is in Washington, petitioner was doing business in Colorado and had willingly subjected itself to Colorado law by entering into a contract with a Colorado resident and could justifiably assume that the Colorado law would likewise apply to petitioner's business debtor. A creditor need not anticipate that a debtor may avoid a debt merely by moving to any of 49 other states.

It is thus plain that all parties to the contract would undoubtedly have assumed Colorado law to apply, if they had considered the matter. Moreover, it is clear to us that the numerous contacts, competing policies, and justifiable expectations of the parties show Colorado's interest in the contract to be far more significant than Washington's, Potlatch No. 1 Fed. Credit Union v. Kennedy, 76 Wn.2d 806, 811-13, 459 P.2d 32 (1969), and we accordingly apply Colorado law. This conclusion is consistent with the Restatement view, which states:

(3) If the place of negotiating the contract and the place of performance are in the same state, the local law of this state will usually be applied, except as otherwise provided in §§ 189-199 and 203 [not relevant here].

Restatement (Second) Conflict of Laws § 188, at 575 (1971). Moreover, the parties agree that Colorado law applies to determine the validity of the debt; indeed, the debtor pleaded Colorado law.

Our analysis of Colorado law discloses the following: Unlike Washington, Colorado is not a community property state and does not use the term "separate property" when referring to a husband's sole property. Rather, "separate property" is a statutory concept designed to relieve married women of the historic disabilities of coverture under the common law. Hedlund v. Hedlund, 87 Colo. 607, 290 P. 285 (1930); Tuttle v. Shutts, 43 Colo. 534, 96 P. 260 (1908); Palmer v. Hanna, 6 Colo. 55 (1881). All other property not jointly owned is the husband's whether acquired in such a way as to make it either separate or community property under Washington law. A debt incurred by the husband in Colorado without the consent of the wife may not be satisfied from the wife's property, including her wages. Colo. Rev. Stat. 14-2-201, 14-2-203, 14-10-113. It is not accurate, therefore, to state that the husband's "separate property" under Colorado law is subject to the claims of creditors on his separate obligations. Rather, only the wife may own separate property as that term is understood in Colorado. Since application of community property concepts is unknown in Colorado, we do not speak in terms of these concepts when we apply Colorado law.

It follows that, in Colorado, all property of the Lapps would be subject to Mr. Lapp's debt to petitioner except Mrs. Lapp's separate property, including her earnings. Imel v. United States, 184 Colo. 1, 8, 517 P.2d 1331 (1974). Thus, a fair application of Colorado law to this debt in an action brought in Washington is that the same property subject to payment of a debt in Colorado, including Mr. Lapp's wages and acquisitions, is likewise subject to payment of the debt in Washington, notwithstanding such property is characterized as "community" under Washington law.³

The judgment of the Court of Appeals is reversed.

Rosellini, Stafford, Brachtenbach, Dolliver, and Hicks, JJ., concur.

1 The usual meaning of "false conflict" is that there is no conflict between the laws of two states. That is, ” [i]f the laws of both states relevant to the set of facts are the same, or would produce the same decision in the law suit, there is no real conflict between them and the case ought to be decided under the law that is common to both states." R. Leflar, American Conflicts Law § 93, at 188 (3d ed. 1977).

In fact, Pacific States Cut Stone Co. v. Goble, 70 Wn.2d 907, 425 P.2d 631 (1967), was in error in finding a false conflict. The case involved a debt incurred in Oregon by two husbands who were Washington residents. The result under Oregon law would not subject the wives' earnings to the debt, because their wages were separate property, as that term is defined in Oregon. Ore. Rev. Stat. 108.050. The result under Washington law would subject the wives' earnings to the debt, because (1) the debt was a community obligation, (2) community property was reachable to satisfy it, and (3) the wives' earnings were community property in Washington. Thus, a real, not false, conflict was presented in the Pacific States Cut Stone Co. case, although the court failed to recognize it.

In spite of the confusion in the Pacific States Cut Stone Co. opinion, it has been widely heralded, apparently because of its salutary overruling of a long line of precedent which had prevented out-of-state creditors from reaching assets that would have been available to Washington creditors. See Cross, The Community Property Law in Washington, 49 Wash. L. Rev. 729, 843 (1974); Trautman, Evolution in Washington Choice of Law — A Beginning, 43 Wash. L. Rev. 309, 312-13 (1967); R. Weintraub, Commentary on the Conflict of Laws 367 n.57 (2d ed. 1980); R. Leflar, American Conflicts Law § 233, at 474 (3d ed. 1977).

2 It may be noted, however, that the Washington policy in favor of the protection and predictability of the marital property provisions is not always followed strictly, but has been modified by this court and the legislature in some circumstances. In the case of deElche v. Jacobsen, 95 Wn.2d 237, 622 P.2d 835 (1980), for example, the court has decided that a tort-feasor's share of community property, including wages, may be available for a judgment on a separate tort. This is so, even though (1) the debt was incurred during the marriage, (2) the debt was characterized as "separate", because it was not incurred for the benefit of the community, and (3) this type of community property has not heretofore been available to a plaintiff in such an action. Moreover, RCW 26.16.200, the so-called "marital bankruptcy" statute, provides that the earnings and accumulations of a spouse shall be available to creditors for the satisfaction of debts incurred by that spouse prior to marriage for a period of 3 years from the date of the marriage. Thus, although neither of these incursions on the traditional community property rule as to separate debts of a spouse applies to the facts of this case, it is clear that neither this court nor the legislature currently adheres to the rule that the marital property, including the wages of a debtor spouse, are under all circumstances to be insulated from the claims of a creditor on a separate debt.

3 This result is consistent with the reasoning we employed in Potlatch No. 1 Fed. Credit Union v. Kennedy, 76 Wn.2d 806, 459 P.2d 32 (1969). Although we there concluded that Washington law should apply to the question whether the community was liable for the husband's suretyship obligation to an Idaho creditor, the result was reached through a careful analysis of all the factors. Had we found that Idaho had the most significant relationship to the transaction, it is clear we would have applied Idaho law and accordingly imposed liability on the Washington marital community.

Potlatch No. 1 Fed. Credit Union thus provides the analytical framework for deciding this case, although our conclusion requires us to apply foreign law. There is no persuasive authority for the view that the property liable on a debt is a question of remedy which must always be decided by the law of the forum.