Opinion 05-1

STATE OF IDAHO OFFICE OF THE ATTORNEY GENERAL LAWRENCE G WASDEN ATTORNEY GENERAL OPINION NO. 05-1 M x Gavin M Gee, Director Idaho Department of Finance Statehouse Mail Per Request for Attorney General's Opinion BACKGROUND The Equal Credit Opportunity Act, 15 U S C 5 1691, et seq , and its implementing regulation, Regulation B, 12 CFR 5 202 1, et seq , limit the cucumstances under which creditors may requi~e a loan applicant's spouse or another person to sign the promissory note or contract in a credit transaction In view of Regulation B's spousal signature prohibitions, the basic question arising is whether creditors making loans to individual married loan applicants and strictly complying with Regulation B's spousal signature rules in the process, run the risk of not being able to collect on a loan in default if the marlied couple divorces and only the applicant spouse signed the promissory note or loan contract Specifically, you requested an Attorney General Opinion regarding the following questions QUESTIONS PRESENTED 1 If a creditor receives an individual application for a loan from a married person residing in Idaho, in determining whether to require the signature of the non-applicant spouse on the promissory note or loan contract, does the creditor risk not being able to collect on the loan in the event of default if the creditor does not consider the possibility that the spouses may divorce? 2 If a creditor receives an individual application for a loan from a married person residing in Idaho, if the creditor will rely on both spouses' income to satisfy the loan in the event of default, can the creditor reach the income of the non-applicant spouse PO. Box 83720, Boise, Idaho 83720-0010 Telephone: (208) 334-2400 FAX: (208) 334-2530 Located at 700 W Jefferson Street Suite 210 Mr Gavin M Gee Page - 2 upon default of the loan after the parties divorce, if the non-applicant spouse has not signed the promissory note or loan contract? 3 If a creditor receives an individual application for a real property-secured loan from a mar~ied person residing in Idaho, will the creditor be able to reach the real property of the marital estate to satisfy the loan in the event of default if the non-applicant spouse signs a deed of trust or mortgage as to the subject real property but not the promissory note or loan contract? 4. If a creditor receives an individual application for an unsecured loan from a mar~ied person residing in Idaho, and if the creditor relies on community pe~sonal property to satisfy the loan in the event of default, will the creditor. be able to reach the community personal property to satisfy the loan after the borrower. divorces, if the non- applicant spouse has not signed the piomissory note or. loan contract? 5 Are other risks piesented to creditors attempting to collect on loans in default, due to Idaho law's effect on spousal signatures on loan documents by married persons residing in Idaho? CONCLUSIONS 1. In the case of an individual application for a loan by a marlied person residing in Idaho, in determining which signatures should be required on the promissory note or loan contract, a creditor will incur significant risk in collecting on the loan in the event of default if the creditor does not consider the possibility of' divorce,, 2 In the case of an individual application for a loan by a marlied person residing in Idaho, even if a creditor relies on both spouses' income to satisfy the loan in the event of default, the creditor will not be able to reach the non-applicant spouse's income following divorce if that person has not signed the promissory note or loan contract 3 In the case of an individual application for a community real property-secmed loan by a married person residing in Idaho, the creditor should be able to reach the real property securing the loan following divorce, if the non-applicant spouse signs a deed of t~ust or mortgage to the subject property, but not the promissory note 4 In the case of an individual application for an unsecured loan by a married person residing in Idaho, when the creditor relies on community personal property to satisfy the loan in the event of default, upon the bor~ower's divorce, the creditor may not be able to reach the non-applicant spouse's awarded share of community personal property, if the non-applicant spouse does not sign the promissory note or loan contract Mr Gavin M Gee Page - 3 5.. A creditor may be unable to collect on a loan in default in the event of the death of the signing spouse if. the creditor ~elies on personal property of the spouses to satisfy an unsecured loan and the surviving spouse has not signed the promissory note or loan contract,, ANALYSIS A. Statutory Authority 1 ,, Regulation B. 12 C.F.R. Part 202 The Equal Credit Opportunity Act (E C 0 A ), 15 U S C 5 1691, et seq, and its implementing regulation, Regulation B, 12 CFR § 202 1, et seq, significantly limit the circumstances under which c~edito~s may require a loan applicant's spouse 01 another person to sign the promissor y note or loan contract in a credit transaction Regulation B's signatwe rules are found at 12 C l 3 3 202 7(d) The general rule for signatures on loan documents appears in 12 CFR 5 202 7(d)(l), which p~ovides: Rule for qualified applicant. Except as p~ovided in this paragraph, a creditor shall not require the signature of an applicant's spouse or othe~ person, othw than a joint applicant, on any credit instrument if the applicant qualifies under the creditor's standards of creditwor~thiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application f o ~ joint credit,, Regulation B has special rules pe~taining to unsecured credit, unsecured credit in community property states, and secued credit Unsecured credit in community property states is governed by 12 CFR 5 202 7(d)(3), whichprovides: Unsecured credzt-community property states If a mar~ied applicant requests unsecured credit and resides in a community property state, or if the applicant is relying on property located in such a state, a creditor may requi~e the signatue of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the community property available to satisfy the debt in the event of default if: (i) Applicable state law denies the applicant power to manage or control sufficient community property to qualify f o ~ the credit requested under the creditor's standards of creditwor.thiness; and Mr. Gavin M Gee Page - 4 (ii) The applicant does not have sufficient separate property to qualify for the credit requested without regard to the community property In the case of' secured credit, 12 CFR 5 202 7(d)(4) provides: Secured credit If' an applicant requests secured credit, a creditor may require the signature of the applicant's spouse or other person on any instrument necessary or reasonably believed by the creditor to be necessary, under applicable state law to make the property being offered as security available to satisfy the debt in the event of default, for example, an instrument to create a valid lien, pass cleat title, waive inchoate rights, or assign earnings As will be noted from the discussion of relevant Idaho law appearing below, complying with Regulation B's signature rules in applications for unsecured credit by an individual married applicant is a difficult task for creditors in Idaho To add to that difficulty, adherence to Regulation B's signature rules and the Official Staff Interpretations of the rules may reduce an Idaho creditor's p~ospects of successfully collecting on a loan in default 2 Idaho-Code Certain Idaho statutes and case law construing those statutes affect a creditor's ability to pursue a debtor's former spouse or his or her property to satisfy a debt following divorce The threshold issue in such circumstances is the characterization of property of the spouses as either separate property or community property.. For example, Idaho Code 5 32-903 provides: Separate property of husband and wife.-All property of either the husband or the wife owned by him or her before mar~iage, and that acquired afterward by either gift, bequest, devise, or descent, or that which either he or she shall acquire with the proceeds of his or her separate property, by way of moneys or other property, shall remain his or her sole and separate property Idaho Code $5 32-910 and 32-911 provide that a spouse's sepsuate property is not subject to the individual or separate debts of the other spouse Idaho Code 5 32-912 provides that either spouse has the ability to manage and con&ol community property and to bind and encumber community property, with the MI. Gavin M Gee Page - 5 exception of community real property This statute further provides that "any community obligation incurred by either the husband or the wife without the consent in writing of the other shall not obligate the separate property ofthe spouse who did not so consent ,, , , " These statutes suggest that one spouse can obligate the community property of the marital estate and make that property available to a creditor desiring to execute on that ploperty in the event of loan default, in the case of an unsecured loan incurred without the signature of the other spouse to the promissory note or loan obligation Cases construing these statutes, however, attach significant qualifications to this conclusion B. CaseLaw One of the more recent court decisions conside~ing the liability of spouses and the availability of their propelty to c~editors is In re Hicks, 300 B R 372 (Bank D Idaho 2002) In Hicks, the Idaho Bankruptcy Court reviewed many of the Idaho community property ~ules pertaining to the debtor-creditor relationship As to c~editors' rights against separate and community p~operty, the court noted: The characterization of pioperty as separate or community is important in determining creditors' rights of recouse against each type of property As explained in Twzn Falls Bank & Trust Co v Holley, 111 Idaho 349, 723 P 2d 893 (1986), "unde~ the community property system when either member of the community incu~s a debt for the benefit of the community, the property held by the marital community becomes liable for such a debt and the creditor may seek satisfaction of his unpaid debt from such property" In addition, the separate property of the spouse who incurs an obligation, whether that obligation benefits the marital community or only the individual, is subject to the creditor's claim Id at 897; Williams v Paxton, 98 Idaho 155,559 P 2d 1123, 1132 (1976) Following its discussion of the ability of creditors to look to separate or community property to satisfjr debts, the cowt noted limitations on that ability: [A] spouse's separate property is not subject to seizure to satisfy a debt incurred by the other spouse acting alone Specifically, Idaho Code 5 32- 910 provides that "[tlhe separate property of the husband is not liable for the debts of the wife conhacted before marriage" So, too, Idaho Code # 32-911 provides that "[tlhe separate property of the wife is not liable fot the debts of her husband, but is liable for her own debts contracted before M r Gavin M Gee Page - 6 or after marriage" Finally, Idaho Code 3 32-912 states that "any community obligation incurred by either the husband or the wife without the consent in writing of the other shall not obligate the separate property of the spouse who d ~ d not so consent " See also Holley, 723 P 2d at 897 (noting a bank would have a claim against a husband's separate property and any community property when borrowed funds benefited the marital community but only the husband signed a note) The Bankruptcy Court's survey of Idaho community property statutes and cases affecting creditors' rights in was not intended as an exhaustive listing of the limitations placed on those rights There is a rebuttable presumption in Idaho law that property acquired during the marriage is community property Simvlot v. Simvlot, 96 Idaho 239, 246; 526 P 2d 844, 851 (1974) Determining whether property acquired on credit is community or separate is more difficult than in other forms of property acquisition Winn v. Winn, 105 Idaho 81 1, 813, 673 P 2d 41 1, 413 (1983) Factors such as the character of any property given in exchange, the procurement of the loan, and the use of the loan proceeds are part of the inquiry id, 673 P2dat413,414 A cout analyzing whether the community is liable for a loan will consider factors such as the source of repayment and the basis of credit relied upon by the lender m, 673 P 2d at 415 The intent of the spouses is a key factor in dete~mining whether a loan is a separate or community obligation Under the California Rule, the intent of the lender conclusively determines the nature of the loan id The Idaho Supreme Court has rejected that approach and instead looks to the intent of the spouses Factors such as the natu~e of the down payment, the names on the deed, and the pzty who signed the documents of indebtedness are considered by Idaho courts to be probative of intent id From a creditor's perspective, proving the intent of the borrowers at the time the loan was made may be difficult The intent of the married borrowe~s as to the character of the loan might not be shared with the lender at the time the loan is made Borrowers could very well change their view of whether an obligation was community or separate in the event of an action by a creditor to collect on a debt following divorce or the death of one of the spouses In First Idaho Corporation v. Davis, 867 F 2d 1241 (9th Cir 1988), the creditor was not able to obtain a judgment against a surviving spouse for a loan in default, or reach the couple's community p~operty to satisfy the loan, because only the deceased Mr. Gavin M Gee Page - 7 husband had signed the note, and the creditor did not allege in the suit that the loan was for the benefit of the community The surviving spouse also claimed that the real property securing the loan belonged to her deceased husband w, 867 F 2d at 1243 ['I Under the authorities discussed above, even if it were proven that a loan obligation benefited the community, a credit01 would not be able to collect from a spouse or his or her separate property in the event of loan default, if the spouse did not sign the promissory note m, 300 B R at 376 (citing Twin Falls Bank & Trust v. Holley, 723 P 2d at 897) The question then presented is whether a creditor can look to community assets distributed to a non-signing spouse in a divorce In Twin Falls Bank & Trust v. Holley, 11 1 Idaho 349, 723 P 2d 893 (1986), the husband, John Holley, was the only signer on a promissory note to the bank The note was signed on June 26, 1981 At some point after the note was signed, the bank became aware of the fact that John and his wife Joan had filed for divorce The divorce was granted on August 28, 1981 After the loan became due on Septembe~ 28,1981, the bank and MI Holley executed an "extension agreement" in which the bank agreed to extend the due date of the note until Novembe~ 22, 1981 As with the promissory note, only John Holley signed the extension agreement w y , 723 P 2d at 895 John Eiolley ultimately defaulted on the loan and filed for bankruptcy After the bank liquidated some equipment that secured the loan, $65,000 of the original principal balance of $125,000 remained due and owing, along with more than $50,000 in inte~est Id, 723 P 2d at 895 In an attempt to collect the loan balance, the bank brought suit against Joan Holley The disQict cowt granted summary judgment in favor of Joan Holley, and the bank appealed On appeal, the Idaho Supreme Court noted that Joan Holley was not contractually liable for the debt The Gout set forth some principles giving clarification to the rights of creditors and borrowers when the borrowe~s divorce The Court pointed out that the phrase "community debt" is imprecise and misleading: The marital community is not a legal entity such as a business partnership or corporation (citations omitted) To the extent a lending institution enters into a c~editor-debtor relationship with either member of the marital community or with both members, it does so on a puely "' In Davis, the Ninth Circuit did not discuss the presumption that property acquired du~ing the mar~iage is community Possibly, the surviving spouse's statement that the properZy belonged to her deceased husband, with nothing in the ~ecord to refute that assertion, overcame the presumption Mi. Gavin M Gee Page - 8 individual basis Thus, the lending institution may have a creditor-debtor relationship with either spouse separately or with both jointly The Idaho Court held in m y that there is no such thing as a community obligation in the contractual sense Spouses are liable to a creditor individually or jointly, depending on which spouse or spouses have signed the p~omissory note or loan contract As to the effect of spouses' co-equal management powers over community assets, the cowt stated: [Wlhen either member of the community incu~s a debt for the benefit of the community, the property held by the marital community becomes liable for such a debt and the creditor may seek satisfaction of his unpaid debt from such property 723 P2d, at 897 (citations omitted) The court then discussed the ability of creditors to look to community assets awarded to a non-signing spouse in a divorce, holding as follows: Absent allegations of such contractual liability, a creditor may not, with one exception, proceed against community assets distributed to Mrs Holley pursuant to a divorce decree The sole exception to this rule was set forth in our case of Spokane Merchants Ass'n v Olmstead, 80 Idaho 166, 327 P 2d 385 (1958) In that case we held that where, pwsuant to divorce proceedings, one member of the marital community is responsible for a community obligation but is not awarded sufficient assets to satisfy such a debt, a creditor may properly seek satisfaction for the debt from community property distributed to the other spouse The court noted that under the facts presented in Holley, for the bank "to avail itself of the exception set forth in the Olmstead case, it must allege and prove that MI Holley was not awarded sufficient community assets which would enable him to satisfy the community debt which he assumed pwsuant to the ploperty settlement ageement " 723 P 2d at 897,898 Mr. Gavin M Gee Page - 9 It has been noted that the Idaho Supreme Court in "significantly restricted creditors' rights unde~ a property settlement agreement by choosing not to follow the gene~al rule adopted in other community propelty states " Mont E Tanner, Twin Falls Bank & Trust v Holley Restrictzng Credztors' Rzghts Under A Property Settlement Agreement-A Departure That Sets Idaho Apart, 26 Idaho L Rev 595,595 (198911990) Case law in other community property jurisdictions clearly states that prope~ty acquired from community assets pursuant to a ploperty settlement, contract, or gift becomes the spouse's separate property and remains subject to the appropriate liability for debts of the community and of the other spouse which were incurxed during marriage The basis for the rule that spouses may not alter ownership rights between themselves in a manner which prejudices the rights of pre-existing creditors may have derived in part from the common law theory that "a divorce action cannot adjudicate the rights of creditors who are not parties to the action " Id., at 600 (citations omitted) From the foregoing ~eview of Idaho case law, one may conclude that a creditor may not normally look to community assets distributed to a non-signing spouse in a divorce, to satisfy a community obligation incur~ed by the signing spouse The only exception is when the signing spouse was not awarded sufficient community assets to satisfy the obligation In such event, the creditor must allege and prove the insufficient award in order to reach community assets in the hands of the non-signing divo~ced spouse m, 723 P 2d at 897,898 The result would not be changed if the community property disaibuted to the debtor spouse is no longer available or resalable by the creditor to satisfy the debt Additionally, the creditor will need to allege and prove that the obligation was incw~ed for the benefit of the community First Idaho Cor~oration v. m, 867 F 2d at 1243 C. Application of Authority to Questions Presented 1. Spousal Loan Obligations and the Prospect of Divorce Idaho cowts have made it clea that if only one spouse signs a promissory note or loan obligation, the non-signing spouse is not pe~sonally liable f o ~ an obligation, even if the obligation benefited the community Hickq 300 B R at 376; Holley, 723 P 2d at 896 The non-signing spouse's sepaate property may not be looked to in satisfaction of the debt Hicks. 300 B R at 376 Fwther, a c~editor may not be able to look to community ploperty awarded to a non-signing spouse in a divorce, unless the creditor alleges and Mr Gavin M. Gee Page - 10 proves that the obligated spouse was awarded insufficient community property to satisfy the debt m y , 723 P 2d at 897 It has been recognized that Idaho law imposes a unique consequence upon creditors dealing with married borrowers: Idaho case law and statutes have been construed by the Idaho Supreme Court to produce an anomaly within the community property ju~isdictions The anomaly specifically is that Idaho takes a strict contractual approach and will not allow a creditor to pursue a nondebtor spouse's separate property, including the nondebtor spouse's separate property that was formerly community propeIty before the divorce With the exception of California, all other community property states provide some protection f o ~ the creditor upon divorce, possibly more than the creditor bargained for, by allowing the recently transmuted separate property to still be subject to execution and attachment Lamont C. Loo, Contractual Creditor Rights Upon Dissolution oj'Marriage: Revisiting Twin Falls Bank & Trust v Holley, Proposal: A Tripartite Analysis, 30 Idaho L Rev. 777,782 (1994) In view of'the authorities discussed above, when a married person in Idaho applies individually f o ~ credit, a prudent creditor should consider the possibility of divorce in deciding whether to require both spouses to sign the promissory note or loan conoact Even though spouses in Idaho have co-management powers as to community property and the ability to bind and encumber community personal pIoperty (Idaho Code 5 32- 912), in attempting to satisfy a debt, a creditor might not be able to reach community property awarded to a non-signing spouse in a divorce, even if the debt benefited the community m, 723 P 2d at 897 Regulation B prohibits a creditor from considering the possibility of divorce when an applicant requests unsecued credit in a non-community property state and relies upon property owned jointly with another person to satisfy credit standards The Official Staff Interp~etation of Regulation B, Paragraph 7(d)(2)(l)(i), requires that the creditor's determination of the value of the applicant's interest in the jointly owned property be based on the existing form of ownership, and not on the possibility of subsequent change, including divorce It is not clear from the language of Paragraph 7(d)(2)(l)(i) if the prohibition on considering divorce applies to the remainder of Regulation B In Idaho, therefore, in evaluating an individual loan application made by a marlied person, a prudent lender should consider the possibility that community property may be transmuted into separate property of the non-applicant spouse following divorce MI Gavin M Gee Page - 11 2 . Reliance on Spouse's Income When a creditor is relying on both spouses' income in granting credit to a loan applicant, or the income of the non-applicant spouse, a prudent creditor would require both spouses to sign the promissory note or loan obligation Non-signing spouses are not personally liable for a debt, even if the loan benefited the community Hicks, 300 B R at 376; m y , 723 P 2d at 896 Similarly, the separate property of a non-signing spouse cannot be reached to satisfy a debt, including a debt benefiting the community M, 300 B R at 376 The income of a formerly married person is that person's separate property following the date of entry of a divorce decree Shill v. Shill, 115 Idaho 115, 765 P 2d 140,143-46 (1988) In view of the fact that income of a married person residing in Idaho becomes separate property following a divorce, a creditor should require each person whose income is relied upon in making the loan to sign the promissory note or loan obligation Failure to do so in the event of the borrower's divorce likely places the income of the non-signing spouse beyond the creditor's reach This result is contemplated in the commentary to Regulation B: Relzance on zncome oj another person-individual credzt An applicant who requests individual credit relying on the income of another person (including a spouse in a non-community property state) may be required to provide the signature of the other person to make the income available to pay the debt In community property states, the signature of a spouse may be required if the applicant relies on the spouse's separate income If the applicant relies on the spouse's future earnings that as a matter of state law cannot be characterized as community propert- earned. the creditor may require the spouse's signature, but need not do s w v e n if it is the creditor's practice to require the signature when an applicant relies on the future earnings of a person other than a spouse (See S202 6(c) on consideration of state property Iaws ) Official Staff Interpretations to Regulation B, Paragraph 202,7(d)(5) (emphasis added) 3 Signatures of Spouses on Promissory Notes, Deeds of Trust, and Mortgages Federal Reserve Board Regulation B contains a signature rnle pertaining to applications for secured credit. 12 CFR § 202 7(d)(4) provides: MI. Gavin M . Gee Page - 12 Secured credit. If an applicant requests secused credit, a creditor may require the signature of the applicant's spouse or. other person on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the property offered as secu~ity available to satisll the debt in the event of default, t b ~ example, an instrument to create a valid lien, pass clear title, waive inchoate rights, or assign earnings,, The Idaho statute relevant to 12 CFR 5 202 7(d)(4) is Idaho Code 5 32-912 It provides in pertinent part: [Nleither the husband nor wife may sell, convey or encumber the community real estate unless the other joins in executing the sale ageement, deed or other instrument of conveyance by which the real estate is sold, conveyed, or encumbered , , ,, , The Idaho Supreme Court has considered the effect of a non-applicant spouse's signature on a mortgage or deed of trust but not the p~ornisso~y note. In Pocatello Railroad Emulovees Federal Credit Union v. Galloway, 117 Idaho 739, 791 P.2d 1318 (1990), both spouses signed a deed of ttust to their residence but only Mr. Galloway signed the promissory note On appeal of a judgment of fbreclosure on the property following the Galloways' default on the promissory note, the Galloways argued that MIS,, Galloway's lack of signatme on the promissory note failed to meet the requirement of' Idaho Code 5 32-912 that both spouses join in encumbering community real property. The Idaho Supreme Court found that Mr Galloway's signatuse on the note, accompanied by both spouses' signatures on the deed of trust, was sufficient to give fbrce to the note and encumber the property Pocatello Railroad Emulovees Federal C~edit Union, 791 P2d at 132 1 . A martied person's homestead claim under Idaho law cannot be posed as a bar to a real property foreclosute, if the person claiming the homestead has executed a deed of trust or mortgage, thereby giving a credit01 a consensual lien on the proper.ty Idaho's homestead law provides in pertinent part: 55-1005. To what judgments subject-The homestead is subject to execution or forced sale in satisfaction of judgments obtained: Mr , Gavin M . Gee Page - 13 (3) On debts secured by mortgages, deeds of trust or other consensual liens upon the premises, executed and acknowledged by the husband and wife or by an unmarried claimant In view of the foregoing authority, a non-applicant spouse would likely not be able to prevent a foreclosure on real property in the event of default, if the non-applicant spouse has signed the mor.tgage or deed of trust in the loan transaction, but not the promissory note or loan obligation One exception to the above general rules applies when a creditor acts in collusion with one spouse to hide an obligation fIom the other spouse In that instance, the creditor's conbact may not be enforceable against the innocent spouse Smith v. Idaho State University Federal Credit Union, 114 Idaho 680, 760 P 2d 19 (1988) Although possible, it is unlikely that a non-applicant spouse was unaware of a loan if that spouse signed a mortgage or deed of bust to secure the loan with community real property In summary, absent collusion between the c~editor and a spouse who is the sole signer on a promissory note, the non-obligated spouse's signature on a deed of trust 01 mortgage should be sufficient to make the real property available to satisfy a secured loan in the event of default 4 Unsecured Loans and Communitv Personal Property As indicated previously, Regulation B has specific rules governing unsecured credit applications in community property states 12 CFR 9 202 7(d)(3) provides: Unsecured credit-community property states If a married applicant requests unsecured credit and resides in a community property state, or if the applicant is relying on property located in such a state, a cr.editor may require the signature of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the community property available to satisfy the debt in the event of default if: (i) Applicable state law denies the applicant power to manage or control sufficient community property to qualify for the credit requested under the creditor's standards of' creditworthiness; and (ii) The applicant does not have sufficient separate property to qualify for the credit requested without regard to the community property Mr Gavin M . Gee Page - 14 At first blush, Idaho Code # 32-912 appears to give each spouse the unfettered ability to manage, control, bind, and encumber community personal property However, some of the cases discussed above, including Hicks, Hollev, Davis, Olmstead, and u, suggest the conclusion that an individual spouse applying for unsecured credit may not have the power to manage or control all community property, due to the possibility of divorce As noted above, Idaho and California depart from the general rule that creditors can attach and execute upon community personal property that transmuted into separate property following divorce The rule followed by Idaho c0ur.t~ is that creditors may not normally look to community personal property awarded to a spouse in a divorce if the spouse receiving that property did not sign the promissory note or loan contract m, 723 P 2d at 897 This is true, even if the debt benefited the community The only exception is when the creditor alleges and proves that the signing spouse was awarded insufficient community property to satisfy the debt and the spouses intended for the debt to be a community obligation id, and Davis, 867 F 2d at 1243 In light of the above-discussed c0ur.t decisions, in Idaho, state law in effect denies an individual married loan applicant the power to manage and control sufficient community personal proper.ty to satisfy a creditor's standards of creditworthiness, within the meaning of 12 CFR 5 202 7(d)(3)(i) This is the case when the creditor will rely on community personal property to satisfy an unsecured loan in the event of default If an Idaho applicant does not have sufficient separate property to qualify for the credit requested, a creditor may reasonably believe that the signatu~e of the applicant's spouse is necessary on the promissory note or loan contract 5 Risks Presented Under Idaho Probate Law In the case of an individual application for an unsecured loan by a mar~ied person in Idaho, if the creditor relies on personal property belonging to the spouses to satisfy the loan in the event of default, and if the signing spouse dies, some or all of the personal property may be beyond the creditor's reach, due to provisions in Idaho probate law Idaho Code # 15-2-403 provides: Exempt property.-In addition to any homestead allowance, the decedent's surviving spouse is entitled from the estate to value, not exceeding ten thousand dollars ($10,000) in excess of any security interests therein, in household furniture, automobiles, furnishings, appliances and personal effects If there is no suxviving spouse, the decedent's children are entitled jointly to the same value unless the decedent's will provides M I Gavin M Gee Page - 15 otherwise If encumbered chattels are selected and if the value in excess of secwity interests, plus that of other exempt property, is less than ten thousand dollars ($10,000), or if the~e is not ten thousand dollas ($10,000) worth of exempt property in the estate, the spouse or children are entitled to other assets of the estate, if any, to the extent necessary to make up the ten thousand dollar ($10,000) vaIue Rights to exempt property and assets needed to make up a deficiencv of exempt p r o p e ~ t ~ have prioritv over all claims against the estate (Emphasis added) Under Idaho Code 3 15-2-403, personal property belonging to the decedent at the time of death, up to the value of $10,000, will be beyond the leach of a c~editor if the surviving spouse did not sign the promissory note or loan contxact and either the surviving spouse or the decedent's children assert their claim under this statute In addition to the exempt property claim given to a decedent's swviving spouse and children under Idaho Code 5 15-2-403, Idaho Code 5 15-2-404 gives the decedent's surviving spouse and minor children a reasonable allowance (family allowance) in money out of the estate for their maintenance, during the administration of the estate or for a period of one yea if the estate is inadequate to discharge allowed claims This allowance is in addition to the survivor's homestead allowance under Idaho Code 5 15-2-402 and the exempt property allowance under Idaho Code 5 15-2-403 In determining the amount of the family allowance under Idaho Code 5 15-2-404, pursuant to Idaho Code 5 15-2- 405, the personal representative may pay the smvivors a lump sum not exceeding eighteen thousand dollars ($18,000) or periodic payments of one thousand five hundred dollars ($1,500) monthly f o ~ a period of one year The combined effect of Idaho Code $5 15-2-403, 15-2-404, and 15-2-405 likely puts personal prope~ty belonging to the signing spouse at the time of death, with a value of up to $28,000, beyond a creditor's reach in the event of the death of the sole spouse who signed the promissory note or loan obligation SUMMARY In summary, credito~s evaluating individual loan applications from married borrowe~s residing in Idaho diminish their prospects of collecting on the loan in the event of default if they do not consider the possibility that the bortower may divorce If the non-applicant's spouse does not sign the promissory note or loan contract, the non- applicant spouse's income will be beyond the creditor's reach if the bortower divorces In the case of an unsecured loan application by an individual married applicant in Idaho, if the creditor relies on community personal property to satisfy the loan in the event of default, some of that personal propelty may be beyond the creditor's reach in the case of Mr Gavin M. Gee Page - 16 divorce if the non-applicant spouse did not sign the promissory note or loan contract. In the event of' the death of the signing spouse, if' the creditor relies on personal property to satisfy an unsecured loan in the event of' dehult, and the surviving spouse has not signed the pr.omissory note or loan obligation, in attempting to satisfy the loan in default, the borrower's personal property may be beyond the credito1's reach,, AUTHORITIES CONSIDERED 1. Idaho Statutes: Idaho Code 5 15-2-402 Idaho Code 5 15-2-403 Idaho Code 3 15-2-404 Idaho Code 5 15-2-405 Idaho Code 5 32-903 Idaho Code 3 32-910 Idaho Code 5 32-91 1 Idaho Code 3 32-912 Idaho Code 5 55-1005 2. Federal Cases: First Idaho Corp. v. Davis, 867 F 2d 1241 (9th Cir 1988) In re Hicks, 300 B R 372 (Bank D Idaho 2003) 3. Idaho Cases: Pocatello Railroad Employees Federal Credit Union v. Galloway, 117 Idaho 739, 791 P 2d 1318 (1990) Shill v. Shill, 115 Idaho 115,765 P 2d 140 (1988) Smith v. Idaho State University Federal Credit Union, 114 Idaho 680,760 P 2d 19 (1988) Twin Falls Bank & Trust Co. v. Hollev, 11 1 Idaho 349,723 P 2d 893 (1986) Winnv. Winn, 105 Idaho 811,673 P2d411 (1983) Williams v. Paxton, 98 Idaho 155,559 P 2d 1123 (1976) Simplot v. Simplot, 96 Idaho 239,526 P 2d 844 (1974) 4. Federal Regulation: 12 C F R 202 7 (2005) Federal Reserve Boxd Regulation B 12 C F R 202, Supp I Mr Gavin M Gee Page - 17 5. Idaho Law Review: Lamont C Loo, Contractual Creditor Rights Upon Dissolution oj Marriage: Revisiting Twin Falls Bank & Trust v Holley, Proposal: A Tripartite Analysis, 30 Idaho L Rev 777 (1994) Mont E Tanner, Twin Falls Bank & Trust v Holley Restricting Creditors' Rights Under A proper& Settlement Agreement - A Departure That Sets Idaho Apart, 26 Idaho L Rev 595 (1989/1990), DATED this 20th day of May, 2005 - LAWRENCE G WASDEN Attorney General Analysis by: JOSEPH B JONES Deputy Attorney General Intergovernmental & Fiscal Law Division