Gagan, James L. v. Monroe, James A. ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-2327
James L. Gagan,
Plaintiff-Appellee,
v.
James A. Monroe,
Defendant-Appellant.
Appeal from the United States District Court for the
Northern District of Indiana, Hammond Division.
No. 87 C 732--Andrew P. Rodovich, Magistrate Judge.
Argued March 1, 2001--Decided October 23, 2001
Before Harlington Wood, Jr., Manion, and
Diane P. Wood, Circuit Judges.
Diane P. Wood, Circuit Judge. In 1994,
James Gagan won a civil RICO verdict in
the Northern District of Indiana against
James Monroe and several other
defendants, and in 1996, we affirmed the
judgment in Gagan’s favor. That should
have been the end of things, but it was
not. Monroe has not paid his judgment
debt to Gagan, and Gagan has been forced
to turn to compulsory methods to collect.
He filed the present postjudgment action
in the district court as part of that
effort, seeking an order requiring Monroe
to turn over his interest in a cable
company located in Arizona, where Monroe
resides. The district court entered the
turnover order, and Monroe has appealed,
arguing that the order was improper for
reasons stemming from Arizona community
property law. We find no fault with the
turnover order and affirm the judgment of
the district court.
I
Gagan and Monroe were both participants
in the cable television industry. Gagan
invested in a cable television limited
partnership in which Monroe was the
general partner, but the partnership was
unsuccessful. This ultimately led to
Gagan’s RICO suit against fourteen
individual and corporate defendants,
Monroe among them. The details of the
underlying suit, which was commenced in
1987, are set out in our earlier decision
affirming a verdict in Gagan’s favor, see
Gagan v. American Cablevision, Inc., 77
F.3d 951 (7th Cir. 1996).
In addition to the limited partnership
with Gagan, Monroe has been involved in
at least one other cable television
endeavor. In 1982, he and a partner,
Victor Sharar (who was also a defendant
in Gagan’s RICO suit), formed an Arizona
general partnership, Apache Cablevision,
to provide cable service to the San
Carlos Apache Indian Reservation. As far
as appears from the record, substantially
all of Apache’s assets are located in
Arizona. Monroe and Sharar operated
Apache as a general partnership until
1992, when they converted it to a limited
partnership. At that time, Monroe and
Sharar created an Arizona corporation,
Gila River Cablevision, Inc., in which
they each owned 50% of the stock. Gila
River became the general partner in
Apache and owned 1% of that partnership.
The remaining interests in Apache were
held equally by Monroe, his wife LaJunta
Monroe, Sharar, and his wife Lois Sharar.
The Monroes, Arizona residents, have been
married since before the formation of
Apache.
Through his RICO suit, Gagan won
judgments against Monroe for $1.71
million and against Sharar for $1.76 mil
lion, but the defendants did not pay as
they should have done. Federal Rule of
Civil Procedure 69(a) allows a judgment
creditor in such a situation to return to
the district court where the judgment was
entered and seek the district court’s
assistance in enforcing the judgment.
Taking advantage of this provision, Gagan
returned to the Northern District of
Indiana and filed this action, seeking an
order requiring Monroe and Sharar to turn
over their and their wives’ interests in
Gila River and Apache. The district court
first determined that the transfers of
interests to Mrs. Monroe and Mrs. Sharar
were fraudulent transfers in anticipation
of the RICO judgment, and accordingly
voided those transfers. The court then
ordered Monroe and Sharar to turn over
all of their interests in Gila River and
Apache to Gagan. Sharar has not appealed,
and so we know nothing about the state of
his compliance with that order. Monroe,
however, has appealed the district
court’s order, arguing that it does not
comport with Arizona’s community property
law.
II
As an initial matter, we must review
choice of law principles to determine the
extent to which Arizona’s community
property law applies in this ancillary
proceeding in federal court in Indiana.
Federal Rule of Civil Procedure 69(a),
which governs this action, specifies that
"proceedings supplementary to and in aid
of a judgment . . . shall be in
accordance with the practice and
procedure of the state in which the
district court is held." The district
court here is the court for the Northern
District of Indiana, which means that the
first law to which we turn for
determining the procedures by which Gagan
may enforce his judgment is the state law
of Indiana. Indiana’s procedural rules
allow courts to issue orders requiring a
judgment debtor to turn over property, on
pain of contempt, if the judgment
creditor affirms that a levy of execution
is not likely to satisfy the judgment and
if the property the creditor seeks is not
exempt from execution. See Ind. Code sec.
34-55-8-7; Ind. R. Trial P. 69(E). Gagan
proved to the district court’s
satisfaction that a levy of execution was
unlikely to be successful in this case,
so the sole remaining question is whether
the property Gagan seeks would be exempt
from execution. In determining whether
personal property such as the Monroes’
interests in Gila River and Apache is
subject to execution, Indiana law looks
to the law of the state in which the
property was located at the time the debt
arose. Jackson v. Russell, 533 N.E.2d
153, 155 (Ind. Ct. App. 1989). The
properties involved in this case are
ownership interests in an Arizona
corporation and an Arizona partnership,
the assets of which, as far as the record
reveals, were located entirely in Arizona
at the time Monroe’s debt to Gagan arose
in 1994. As the district court
recognized, therefore, whether Monroe
could be ordered to turn over his
interests in Gila River and Apache turned
on whether those interests were exempt
from execution under Arizona law.
The district court concluded that they
were not exempt, and thus issued its
turnover order. The sole question on the
merits before us is whether this
conclusion was correct. Arizona is a
community property state, and because
Monroe acquired his interests in Apache
and Gila River after his marriage, the
interests were presumptively property of
the Monroes’ marital community. See Ariz.
Rev. Stat. sec. 25-211. Although the
district court found that Monroe’s 1992
transfer of half his interest in Apache
to Mrs. Monroe was void as a fraudulent
transfer, and the parties have spent con
siderable time addressing this issue,
that question is beside the point.
Because the property belonged to the
Monroes’ marital community before Monroe
transferred it into his wife’s name, and
it remained property of the marital
community after the transfer, the
transfer itself had no practical effect
on Mrs. Monroe’s claim. Under Arizona
community property law either Gagan would
be able to execute his judgment against
all of the Monroes’ marital property, or
he would be unable to execute the
judgment against any of it. Whether the
property happens to be titled in Mr. or
Mrs. Monroe’s name makes no difference.
Monroe’s primary argument on appeal is
that, by virtue of certain details of
Arizona’s community property law, Arizona
would not permit Gagan to execute his
judgment against any of the Monroes’
community property. Arizona law provides
generally that "[t]he community property
is liable for a spouse’s debts incurred
outside of this state during the marriage
which would have been community debts if
incurred in this state." Ariz. Rev. Stat.
sec. 25-215(C). Neither party has
specifically addressed the question
whether the judgment against Monroe can
be considered a community debt. However,
Monroe’s fraudulent conduct, if
successful, would have enriched the
marital community, and so under Arizona
law it would be treated as a community
debt. See Selby v. Savard, 655 P.2d 342,
349 (Ariz. 1982) ("The Arizona rule is
that the community is liable for the
intentional torts of either spouse if the
tortious act was committed with the
intent to benefit the community,
regardless of whether in fact the
community receives any benefit."). So
far, it would appear that Gagan could
reach the Monroes’ community property in
satisfaction of his judgment. But a
procedural quirk of Arizona law
complicates matters. Another statute,
Ariz. Rev. Stat. sec. 25-215(D), provides
that "[i]n an action on [a community]
debt or obligation the spouses shall be
sued jointly . . . ." Monroe argues that
this statute creates a substantive
protection for community property and
that, because Gagan did not join Mrs.
Monroe in the underlying RICO suit, he
cannot now reach the Monroes’ community
property.
Monroe’s position is not without support
in Arizona caselaw. In a 1983 decision,
the Arizona Court of Appeals held that a
judgment creditor could not reach the
community property of an Arizona couple
to satisfy a judgment rendered by the
Minnesota courts, even if the underlying
cause of action could have been
considered a community debt, because the
wife was not made a party to the
Minnesota suit. Vikse v. Johnson, 672
P.2d 193 (Ariz. Ct. App. 1983). In
reconciling what are now sec. 25-215(C)
and sec. 25-215(D), the court stated:
The reason for the statutory provision
making the community liable for community
obligations incurred outside the state is
to protect the rights of those creditors
regardless of the fact that the
obligation was not incurred in Arizona.
In order to have the advantage of this
provision, however, the creditor must
join both spouses and thereby have
personal jurisdiction over the community.
Id. at 195. The court of appeals
reaffirmed this position in 1989. C&J
Travel, Inc. v. Shumway, 775 P.2d 1097,
1100 (Ariz. Ct. App. 1989). Following
these cases, we held in 1996 that sec.
25-215(D) requires that both spouses be
joined in the underlying litigation in
order for a judgment creditor to reach
their Arizona community property,
Northwestern Nat’l Ins. Co. v. Schubach,
93 F.3d 386 (7th Cir. 1996), and
concluded that, "[i]n the end, creditors
who deal with debtors . . . from
community property states must take care
that they have brought the right parties
into the litigation." Id. at 390. These
cases suggest that sec. 25-215(D) creates
a substantive right for the community to
be sued jointly before any community
property can be reached to satisfy a
judgment. If Vikse and C&J Travel
represented the current state of Arizona
law on this question, we would be
compelled to hold for Monroe.
Three more recent Arizona Court of
Appeals cases, however, convince us that
the Arizona courts have revised their
interpretation of sec. 25-215(D)’s
applicability to judgments rendered out
of state. In Oyakawa v. Gillett, 854 P.2d
1212 (Ariz. Ct. App. 1993), the plaintiff
won a defamation judgment against the
defendant in California. When the
defendant moved to Arizona with his wife,
the plaintiff went back to the California
court and obtained a declaration that,
under California law, the judgment
against the husband was binding on the
marital community. The Arizona court
enforced the judgment against the
community on the grounds that it was
required to give full faith and credit to
the California declaration and that the
California procedures provided adequate
protection for the wife’s interest in the
property. Id. at 1214-15. Although the
case can be read narrowly as dealing only
with the interaction between California’s
community property laws and Arizona’s,
the decision would not have been possible
if the Arizona courts were not willing to
recognize out-of-state procedures as ade
quate to protect the spouse’s interest,
even if those procedures do not mirror
Arizona’s.
A more recent case, National Union Fire
Ins. Co. of Pittsburgh v. Greene, 985
P.2d 590 (Ariz. Ct. App. 1999),
substantially expands on this aspect of
Oyakawa. In that case, the Arizona Court
of Appeals enforced a New York judgment
in which only the husband was a named
defendant against a couple’s Arizona
community property. In reaching that
decision, the court of appeals held that
sec. 25-215(D) is merely a procedural
rule that has no relevance to judgments
in cases brought outside Arizona. As the
court explained, "[a]n Arizona court may
not impress Arizona procedural law upon a
foreign judgment and refuse to recognize
that judgment merely because Arizona law
was not followed in obtaining it." Id. at
593. In contrast to the Vikse approach,
in National Union the court reconciled
sec. 25-215(D) with sec. 25-215(C) by
holding that sec. 25-215(C) establishes a
substantive rule--debts incurred out-of-
state can be satisfied with community
property if they would have been
community debts if incurred in Arizona--
and that sec. 25-215(D) merely sets out
the procedure by which the Arizona courts
protect the spouse’s interest in the
community property in suits brought in
Arizona. Id. Indeed, the court recognized
that New York law would have prevented
the plaintiff from joining the
defendant’s wife in his earlier action,
and it therefore refused to use its state
procedural rules to prevent enforcement
of the judgment and make Arizona a "haven
for debtors." Id. at 595.
Earlier this year, the court of appeals
again affirmed that sec. 25-215(D) has
minimal application to judgments arising
outside of Arizona. Alberta Securities
Comm’n v. Ryckman, 30 P.3d 121 (Ariz. Ct.
App. 2001). This time enforcing a
Canadian judgment against community
property, the court found that both the
Full Faith and Credit Clause, U.S. Const.
art. IV, sec. 1, and Arizona common law
override sec. 25-215(D), precluding
Arizona courts from refusing to recognize
judgments from other jurisdictions on the
ground that one party was not a named
defendant. Id. at 130. Instead, such
judgments would be upheld as long as "the
obligation on which the foreign judgment
was based would have been a community
obligation if it had been incurred in
Arizona" and there is an opportunity for
the spouses to contest that finding. Id.
at 129-30.
We have already determined that the
judgment against Monroe was a community
obligation under Arizona law, a finding
the Monroes have had adequate opportunity
to contest. Furthermore, it would not
have been possible for Gagan to join Mrs.
Monroe in the original action, as there
are no allegations she has ever violated
the RICO laws. While we recognize that
the Arizona Supreme Court has yet to
weigh in on this issue, following the
recent trend in National Union and
Alberta Securities we believe the Arizona
courts would hold that Gagan can execute
his federal RICO judgment against the
Monroes’ community property, regardless
of the fact that Mrs. Monroe was not
joined in the underlying lawsuit.
Therefore, we conclude that the district
court’s turnover order against Monroe was
proper.
Before closing, we briefly address one
additional point. Monroe argues that,
even if it would be otherwise possible
for Gagan to reach the Monroes’ community
property, Mrs. Monroe has a due process
interest in protecting this property, and
that she therefore was entitled to notice
and an opportunity to be heard before the
district court could order the turnover.
Whether Mrs. Monroe has a due process
interest in protecting the community
property is, of course, a question of
federal constitutional law. Shegog v.
Board of Ed. of Chicago, 194 F.3d 836,
838-39 (7th Cir. 1999). Property
interests, however, are not created by
the Constitution; rather, "they are
created and their dimensions are defined
by existing rules . . . that stem from an
independent source such as state law."
Board of Regents v. Roth, 408 U.S. 564,
577 (1972). To determine whether Mrs.
Monroe had the kind of interest in the
Monroes’ community property that the Due
Process Clause protects, we must look at
how Arizona has defined the scope of Mrs.
Monroe’s interest in that property.
Turning once again to Arizona’s
community property statutes, we find that
Mrs. Monroe does not have the type of
interest in the community’s property that
would entitle her to notice and an
opportunity to be heard before Monroe can
be ordered to turn over the property. As
a general rule, Arizona allows either
spouse to alienate or dispose of
community property as he or she wishes,
without the consent of the other spouse.
See Ariz. Rev. Stat. sec. 25-215(D)
("Except as prohibited in sec. 25-214,
either spouse may contract debts . . .
."); sec. 25-214(C) ("Either spouse
separately may acquire, manage, control
or dispose of community property or bind
the community . . . ."). Section 25-
214(C) lists a few exceptions to this
general rule: the consent of both spouses
is required before the community can be
bound (1) in most transactions involving
real property, and (2) in transactions of
guaranty, indemnity or suretyship. The
Monroes’ interest in Gila River and
Apache does not fall into either of these
categories, which means that under
Arizona law, Monroe was free to dispose
of these assets as he chooses without his
wife’s consent.
The specific mechanism the trial court
employed in aid of Gagan’s judgment is of
some importance here. The court did not
issue a writ of execution against the
Monroes’ property; in fact, it most
likely could not have done so against
property located outside of Indiana. Cf.
28 U.S.C. sec. 1963 (providing for
registration of federal judgments in the
district where property sought to be
executed against is located). Instead,
the court ordered Monroe, on pain of
contempt, to turn the community’s
interests in the properties over to
Gagan. The court had jurisdiction over
Monroe and unquestionably had the
authority to enter such an order against
him. Nothing in the order runs directly
against Mrs. Monroe, and she will suffer
no consequences if her husband defies the
order. Further, under Arizona law, it is
clear that Monroe has it in his power to
comply with the order without notice to
or consent by his wife. Under these
circumstances, we hold that the district
court’s turnover order did not implicate
Mrs. Monroe’s due process rights.
Because we find that, under Arizona law,
Gagan would have been able to execute his
judgment against the Monroes’ interests
in Apache Cablevision and Gila River
Cablevision, the turnover order was
authorized. We therefore Affirm the
judgment of the district court.