673
Court’s Choice of Law Ruling Undermines Washington
Community Property Law: A Critique of Shanghai
Commercial Bank v. Chang
Brian D. Hulse*
CONTENTS
INTRODUCTION ..................................................................................... 674
I. WASHINGTON COMMUNITY PROPERTY LAW .................................... 676
A. Distinguishing Community Property from
Separate Property ............................................................................ 676
B. Distinguishing Community Obligations from
Separate Obligations ....................................................................... 677
II. WASHINGTON CHOICE OF LAW RULES ............................................ 679
A. Adoption of Second Restatement Approach ................................. 679
B. Second Restatement Provisions ................................................... 680
1. General Choice of Law Principles (§ 6) .................................. 680
2. Contracts with an Express Choice of Law (§ 187).................. 681
3. Contracts without an Express Choice of Law (§ 188) ............ 681
C. Issue-by-Issue Analysis ............................................................... 682
III. CASE LAW PRIOR TO SHANGHAI COMMERCIAL ............................... 683
A. Pacific States Cut Stone v. Goble ................................................ 683
B. Potlatch v. Kennedy ..................................................................... 684
C. Pacific Gamble Robinson v. Lapp ............................................... 687
* Brian D. Hulse is a partner with the Seattle office of Davis Wright Tremaine LLP. He focuses his
practice on real estate finance, construction finance, commercial lending and transactions, loan
workouts, and insolvency. He is a co-chair of the State Law Survey Task Force of the American Bar
Association’s Commercial Finance Committee, for which he acted as editor, and author of the
Washington chapter, of the books COMMERCIAL LENDING LAW: A JURISDICTION-BY-JURISDICTION
GUIDE TO U.S. AND CANADIAN LAW, and THE LAW OF GUARANTIES: A JURISDICTION-BY-
JURISDICTION GUIDE TO U.S. AND CANADIAN LAW, both published by the ABA. He is also a fellow
and former regent of the American College of Commercial Finance Lawyers, a fellow of the American
College of Mortgage Attorneys, and a member of the Legal Opinions Committee of the Washington
State Bar Association. He can be reached at [email protected]. The views expressed in this Article
are solely those of the author and not necessarily those of his law firm or any of its clients.
674 Seattle University Law Review [Vol. 46:673
D. Colorado National Bank v. Merlino ............................................ 689
E. G.W. Equipment v. Mt. McKinley Fence .................................... 690
IV. THE SHANGHAI COMMERCIAL CASE ................................................ 692
A. Factual and Procedural Background .......................................... 692
B. The Court’s Ruling and Reasoning and Some
Critiques Thereof ............................................................................. 694
1. Issue-by-Issue Conflicts Analysis ........................................... 694
2. Comparison of Washington and Hong Kong
Marital Property Laws ................................................................ 694
3. Relevant Provisions of Second Restatement ........................... 694
4. Expectations of the Parties ...................................................... 697
5. Potlatch ................................................................................... 698
6. Other Case Law ....................................................................... 699
7. Public Policy ........................................................................... 699
V. DEVELOPMENTS AFTER SHANGHAI COMMERCIAL—IN RE HALES .... 701
VI. FURTHER IMPLICATIONS IF SHANGHAI COMMERCIAL IS
FOLLOWED ............................................................................................ 704
VII. ARIZONA’S APPROACH .................................................................. 705
CONCLUSION ......................................................................................... 708
INTRODUCTION
This Article deals with the issues that arise when Washington courts
face the following scenario. One spouse enters into a contract without the
joinder (and perhaps without the knowledge) of the other spouse. Both
spouses are domiciled in Washington.
1
The contract has contacts with one
or more jurisdictions other than Washington and is generally governed as
to validity and interpretation by the law of another jurisdiction. The
contracting spouse defaults and the other party to the contract obtains a
judgment on the contract. The court confronts a question about the
property to which the plaintiff will have recourse to collect the judgment.
1. The common law concepts of “domicile” and “residence” are sometimes confused but are two
distinct concepts. In re Estate of Tolson, 89 Wash. App. 21, 36, 947 P.2d 1242 (1997). The Tolson
court, in describing the distinction, stated that “‘[r]esidence’ indicates where a person lives while
‘domicile’ signifies the place where a person intends a fixed and permanent home.” Id.; see also Ex
parte Mullins, 26 Wash. 2d 419, 445, 174 P.2d 790 (1946) (“Traditional formulas require conjunction
of physical presence and intention to remain permanently in the new location to bring about a
domiciliary change.”). This Article generally uses the terms “domicile” and “residence” without
distinguishing the concepts, but in both cases intending the technical meaning attached to the former
term.
2023] A Critique of Shanghai Commercial Bank v. Chang 675
Specifically, the question is whether the plaintiff will have recourse only
to the separate property of the contracting spouse or, in addition, recourse
to the spouses’ community property. This Article refers to this question as
the “property recourse issue.” The court must also decide whether the issue
is governed by Washington law or by the law of the other relevant
jurisdiction.
A court’s resolution of the property recourse issue can have dire
consequences for the parties. Many couples hold all or most of their
property as community property. If a creditor has recourse to their
community property for a large judgment, the effect can be financially
ruinous to both spouses, not just the one who incurred the debt. If the
creditor has recourse only to the incurring spouse’s separate property, it
may not be able to collect on its judgment.
Washington appellate courts have wrestled with the property
recourse issue repeatedly over the past half century and reached largely
consistent conclusions until the Washington Supreme Court’s 2017
decision in Shanghai Commercial Bank Limited v. Chang.
2
The facts in Shanghai Commercial are striking.
3
The spouses had
lived in Washington since before they were married, a period of more than
twenty years.
4
The husband and his father signed documents for a loan
from a Chinese bank.
5
The father lived in China, received the loan
documents in China, and mailed them to the husband in Washington for
signature.
6
The wife did not sign any of the documents and was unaware
that her husband entered into the loan.
7
The loan documents provided that
they were to be governed by Hong Kong law.
8
After default on the loan,
the bank obtained a multi-million-dollar judgment against the husband in
a Hong Kong court.
9
The wife was not a party to the Hong Kong lawsuit.
10
The bank domesticated the judgment in Washington and sought to enforce
it against the spouses’ community property.
11
The spouses defended on the
ground that the husband did not incur the debt for the benefit of the marital
community and, therefore under Washington community property law, the
judgment could not be enforced against their community property.
12
The
2. Shanghai Com. Bank Ltd. v. Chang, 189 Wash. 2d 474, 404 P.3d 62 (2017), aff’g 195 Wash.
App. 896, 381 P.3d 212 (2016).
3. See Section IV.A for a more complete description of the facts of the case.
4. Shanghai Com. Bank, 189 Wash. 2d at 478 n.3.
5. Id. at 477.
6. Id. at 477–78.
7. Id. at 477.
8. Id. at 477.
9. Id. at 479.
10. Id. at 478.
11. Id.
12. Id.
676 Seattle University Law Review [Vol. 46:673
court concluded, based on the documents’ choice of law clause, that Hong
Kong law governed both the interpretation of the contract and the property
recourse issue.
13
It held that Hong Kong marital property law would allow
recourse for the loan to all property that would be community property
under Washington law.
14
This Article will briefly describe the basics of Washington’s
community property laws as they relate to contract obligations incurred by
one spouse without the joinder of the other. It will then survey
Washington’s choice of law rules generally and its earlier cases dealing
with the choice of law for the property recourse issue. Finally, it will
discuss and critique the Shanghai Commercial case in more detail. It
respectfully concludes that Shanghai Commercial was wrongly decided
both as a policy matter and in its application of prior Washington law and
that the courts of Arizona, another community property state, have taken
a better approach to the property recourse issue.
I. WASHINGTON COMMUNITY PROPERTY LAW
Washington statutory law on community property is codified in
Revised Code of Washington Chapter 26.16
15
and is elaborated in
extensive case law. This Article includes only a basic outline of some
major provisions of Washington’s community property laws that are most
relevant to the choice of law issues that are the focus of the Article.
16
It
does not address the choice of law issues that arise when married couples
move from state to state during their marriage or acquire assets in multiple
states.
A. Distinguishing Community Property from Separate Property
“Property and pecuniary rights owned by a spouse before marriage
and that acquired by him or her afterwards by gift, bequest, devise,
descent, or inheritance, with the rents, issues and profits thereof . . . .” are
the separate property of the acquiring spouse.
17
All other property that
either spouse acquires during the marriage, including his or her earnings,
13. Id. at 489.
14. Id.
15. The community property laws apply to registered domestic partners under Revised Code of
Washington Chapter 26.60 as well as to spouses. For ease of reading, this Article will refer to spouses,
but the concepts apply equally to registered domestic partners.
16. For a more complete treatment of the community property laws, see generally Harry M.
Cross, The Community Property Law in Washington, 61 WASH. L. REV. 13 (1986) and WASHINGTON
STATE BAR ASSOCIATION, WASHINGTON COMMUNITY PROPERTY DESKBOOK (4th ed. 2014).
17. WASH. REV. CODE §§ 26.16.010, .020.
2023] A Critique of Shanghai Commercial Bank v. Chang 677
is community property.
18
Income produced by substantial labor in
managing separate assets is also community property.
19
“Although all property acquired during marriage is presumptively
community property, spouses may agree to change the character of their
property from separate to community or vice versa.”
20
The Diafos court
elaborated on that rule, stating:
Separate property agreements may be used to insulate one spouse
from the other spouse’s liabilities so long as the agreement does not
derogate from the rights of creditors. Thus, those with an existing
interest in property at the time a separate property agreement is
executed may challenge its validity, but no such protection is
available to postagreement creditors. . . . Separate property
agreements are held to a higher standard than community property
agreements because the law favors the creation of community
property.
21
Separate property can also be converted to community property by
commingling. “Where separate funds have been so commingled with
community funds that it is no longer possible to distinguish or apportion
them, all of the commingled fund, or the property acquired thereby, is
community property.”
22
B. Distinguishing Community Obligations from Separate Obligations
The basic statutory rule about what constitutes a community liability
as opposed to a separate liability of the spouse who incurs it, subject to
limited exceptions, is that,
Neither person in a marriage or state registered domestic partnership
is liable for the debts or liabilities of the other incurred before
marriage or state registered domestic partnership, nor for the separate
debts of each other, nor is the rent or income of the separate property
of either liable for the separate debts of the other.
23
If there is “any expectation of benefit to the community” from a
transaction at the time it is entered into, it is a community obligation, and
18. Id. § 26.16.030.
19. In re Marriage of Bernard, 165 Wash. 2d 895, 904, 204 P.3d 907 (2009).
20. In re Diafos, 110 Wash. App. 758, 766, 37 P.3d 304 (2001) (citing WASH. REV. CODE
§ 26.16.120).
21. Id. at 766–67.
22. In re Witte’s Estate, 21 Wash. 2d 112, 125, 150 P.2d 595 (1944), quoted in Schwarz v.
Schwarz, 192 Wash. App. 180, 190 n.3, 368 P.3d 173 (2016).
23. WASH. REV. CODE § 26.16.200.
678 Seattle University Law Review [Vol. 46:673
there is recourse to all the community property.
24
Community liability is
presumed, and the burden is on the party seeking to rebut that presumption
to produce evidence to do so.
25
Washington’s general rule is that if a contractual obligation is a
separate obligation, the creditor does not have recourse to any of the
community property.
26
Limited exceptions to this rule exist, including
exceptions for certain pre-marriage obligations, alimony, and child
support.
27
Washington has an equal management community property system
under which, subject to certain statutory exceptions, either spouse “acting
alone, may manage and control community property, with a like power of
disposition as the acting spouse or domestic partner has over his or her
separate property.”
28
The statutory exceptions include the following
limitations on one spouse’s ability, acting alone, to create community
liability by contract:
“Neither person shall give community property without the
express or implied consent of the other.”
29
“Neither person shall purchase or contract to purchase
community real property without the other spouse or other
domestic partner joining in the transaction of purchase or in the
execution of the contract to purchase.”
30
“Neither person shall acquire, purchase, sell, convey, or
encumber the assets, including real estate, or the good will of a
business where both spouses or both domestic partners
participate in its management without the consent of the other.”
31
Each of these exceptions has a slightly different formulation of the
participation required from the non-contracting spouse. The first requires
24. Beyers v. Moore, 45 Wash. 2d 68, 70, 272 P.2d 626 (1954); see also Trinity Universal Ins.
Co. of Kan. v. Cook, 168 Wash. App. 431, 437, 276 P.3d 372 (2012) (quoting Sunkidd Venture, Inc.
v. Snyder–Entel, 87 Wash. App. 211, 215, 941 P.2d 16 (1997)) (“The key test is whether, at the time
the obligation was entered into, there was a reasonable expectation the community would receive a
material benefit from it.”).
25. Bank of Wash. v. Hilltop Shakemill, Inc., 26 Wash. App. 943, 948, 614 P.2d 1319 (1980).
26. Pac. Gamble Robinson Co. v. Lapp, 95 Wash. 2d 341, 344, 622 P.2d 850 (1980).
27. See Cross, supra note 16, at 125–40. There is a different rule for tort liability that is separate
rather than community in nature. See generally de Elche v. Jacobsen, 95 Wash. 2d 237, 622 P.2d 835
(1980) (establishing rule that separate property of tortfeasor spouse is primarily liable, but if it is
insufficient, recourse can be had to the tortfeasor’s half interest in community property); Nichols Hills
Bank v. McCool, 104 Wash. 2d 78, 86–88, 701 P.2d 1114 (1985). The supreme court has declined to
extend the de Elche rule to contract obligations.
28. WASH. REV. CODE § 26.16.030.
29. Id. § 26.16.030(2).
30. Id. § 26.16.030(4).
31. Id. § 26.16.030(6).
2023] A Critique of Shanghai Commercial Bank v. Chang 679
“express or implied consent.” The second requires “joining in the
transaction.” The third requires “consent.” Washington courts have held
that the first exception applies where a spouse guarantees a loan or other
obligation as a favor to a family member if there is no reasonable
expectation of an economic benefit to the marital community.
32
II. WASHINGTON CHOICE OF LAW RULES
A. Adoption of Second Restatement Approach
The Washington Supreme Court made a major change in its choice
of law rules in the 1967 landmark decision Baffin Land Corp. v. Monticello
Motor Inn, Inc.
33
Prior to Baffin Land, Washington followed “what was
once considered the inexorable, but is now the largely discredited, theory
of vested rights.”
34
Under the vested rights theory, in the absence of a
contractual choice of law by the parties, the rule of lex loci contractus
applied, which provided that a contract was governed by the law of the
jurisdiction where the “last act necessary to form a binding contract
occurred.”
35
The Baffin Land court overruled prior cases that followed the
lex loci contractus approach and adopted the approach of the Restatement
(Second) of Conflict of Laws
36
(the “Second Restatement”), which was
then in tentative draft form. That draft provided that, in the absence of an
effective contractual choice of law, “the law of the state with which the
contract has the most significant relationship, except perhaps in the
unusual case of usury, will govern the validity and effect of a contract.”
37
Since the Baffin Land decision, Washington courts have consistently
looked to the Second Restatement for their choice of law rules in contract
32. See, e.g., Nichols Hills Bank, 104 Wash. 2d at 81–86 (finding that neither assisting the
signing spouse with typing a financial statement submitted to the lender nor failing to advise the lender
of disapproval of the guaranty constituted implied consent of the non-signing spouse to the guaranty
of a debt of the couple’s son). See also Zarbell v. Mantas, 32 Wash. 2d 920, 924, 204 P.2d 203 (1949)
(“It has long been well-settled law in this state that community property is liable for a suretyship debt
of one of the parties only if the community has been benefited by the suretyship obligation.”).
33. Baffin Land Corp. v. Monticello Mot. Inn, 70 Wash. 2d 893, 899, 425 P.2d 623 (1967).
34. Id. at 897.
35. Id. at 895.
36. See generally RESTATEMENT (SECOND) OF CONFLICT OF LAWS (1971). A third restatement
of conflict of laws is currently being drafted but has not yet progressed beyond draft form. See
Restatement of the Law Third, Conflict of Laws: Status Details, AM. L. INST.,
https://www.ali.org/projects/show/conflict-laws/ [https://perma.cc/SE79-PAY2].
37. Baffin Land Corp., 70 Wash. 2d at 899 (citing RESTATEMENT (SECOND) OF CONFLICT OF
LAWS (Tent. Draft No. 6), Introductory Note, § 2 (1961)). That rule is currently set forth in
RESTATEMENT (SECOND) OF CONFLICT OF LAWS, § 188(1) (1971).
680 Seattle University Law Review [Vol. 46:673
cases.
38
Because of the change made by Baffin Land, prior choice of law
cases are not reliable guides to the Washington courts’ current approach
to choice of law issues.
B. Second Restatement Provisions
The Second Restatement has three provisions that are particularly
relevant to the subject of this Article. Section 6 addresses general choice
of law principles. Section 187 deals with contracts in which the parties
expressly choose a governing law.
39
Section 188 deals with contracts in
which the parties do not expressly choose a governing law.
40
1. General Choice of Law Principles (§ 6)
Section 6 provides that, when there is no statutory directive of the
governing law, a court should consider the following factors:
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative
interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be
applied.
41
The comments to Section 6 say that in certain areas, “[a]t least some”
of these factors “will point in different directions in all but the simplest
case.”
42
Furthermore, “[a]ll that can presently be done in these areas is to
state a general principle, such as application of the local law ‘of the state
of most significant relationship,’ which provides some clue to the correct
approach but does not furnish precise answers.”
43
38. See, e.g., Shanghai Com. Bank v. Chang, 189 Wash. 2d 474, 482–86, 404 P.3d 62 (2017);
Erwin v. Cotter Health Ctrs., 161 Wash. 2d 676, 693, 167 P.3d 1112 (2007); Pac. Gamble Robinson
Co. v. Lapp, 95 Wash. 2d 341, 343–46, 622 P.2d 850 (1980).
39. RESTATEMENT (SECOND) OF CONFLICT OF LAWS, § 187 (1971).
40. Id. § 188.
41. Id. § 6(2).
42. Id. § 6(2) cmt. c.
43. Id.
2023] A Critique of Shanghai Commercial Bank v. Chang 681
2. Contracts with an Express Choice of Law (§ 187)
Section 187 provides:
(1) The law of the state chosen by the parties to govern their
contractual rights and duties will be applied if the particular issue is
one which the parties could have resolved by an explicit provision in
their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their
contractual rights and duties will be applied, even if the particular
issue is one which the parties could not have resolved by an explicit
provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or
the transaction and there is no other reasonable basis for the parties’
choice, or
(b) application of the law of the chosen state would be contrary to a
fundamental policy of a state which has a materially greater interest
than the chosen state in the determination of the particular issue and
which, under the rule of § 188, would be the state of the applicable
law in the absence of an effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference
is to the local law of the state of the chosen law.
44
In summary, Section 187 provides that courts should respect express
contractual choice of law provisions unless either: (a) the chosen
jurisdiction has no substantial relationship to the parties or the transaction
and there is no other reasonable basis for the choice, or (b) the application
of the chosen law would be contrary to a “fundamental policy” of another
jurisdiction with a materially greater interest than the chosen state in the
determination of the “particular issue”
45
and would be the governing law
in the absence of an effective contractual choice of law.
3. Contracts without an Express Choice of Law (§ 188)
Section 188 deals with contracts where parties have not expressed a
choice of governing law or where their expressed choice of law is not
“effective” under Section 187.
46
It provides:
(1) The rights and duties of the parties with respect to an issue in
contract are determined by the local law of the state which, with
44. Id. § 187.
45. This issue-by-issue determination is important, and this Article addresses it in more detail in
Section II.C.
46. Id.; see id. § 188.
682 Seattle University Law Review [Vol. 46:673
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.
47
Section 188 is the final version of the draft of the Second
Restatement provision adopted in Baffin Land and sets out the “most
significant relationship” test approved in that case.
48
C. Issue-by-Issue Analysis
An important aspect of the Second Restatement is its analysis of
conflicts of law on an issue-by-issue basis so that different issues in the
same case may be governed by the laws of different jurisdictions.
49
The
comments to Section 188 state that “courts have long recognized that they
are not bound to decide all issues under the local law of a single state.”
50
They further state that “[e]ach issue is to receive separate consideration if
it is one which would be resolved differently under the local law rule of
two or more of the potentially interested states.”
51
Washington courts have expressly adopted this issue-by-issue
approach and have decided different issues in the same case under the laws
of more than one jurisdiction. The supreme court, in Potlatch No. 1
Federal Credit Union v. Kennedy, stated that “the interest of a state in
47. Id. § 188.
48. Baffin Land Corp. v. Monticello Mot. Inn, 70 Wash. 2d 893, 899, 425 P.2d 623 (1967).
49. See § 187’s references to “the particular issue” and § 188’s references to “an issue,” “that
issue,” and “the particular issue.”
50. RESTATEMENT (SECOND) OF CONFLICT OF LAWS, § 188 cmt. d (1971).
51. Id.
2023] A Critique of Shanghai Commercial Bank v. Chang 683
having its contract rule applied in the determination of a particular issue
will depend upon the purpose sought to be achieved by that rule and upon
the relation of the state to the transaction and the parties.”
52
In G.W.
Equipment Leasing, Inc. v. Mt. McKinley Fence Co., Inc., the court of
appeals, citing Potlatch, applied Arizona law to the property recourse issue
in that case although the leasing contract involved provided that it would
be governed by Washington law.
53
The court of appeals in Colorado
National Bank v. Merlino
54
stated that Potlatch “provides the analytical
framework for deciding whether Colorado or Washington law should
apply to the question of whether the community is liable for a spouse’s
obligation to an out-of-state creditor.”
55
The Merlino court ultimately
applied Washington community property law to the property recourse
issue in connection with a contract entered into by one spouse with a
Colorado seller for the purchase of real property in Colorado.
56
This
Article will discuss the Potlatch, G.W. Equipment and Merlino cases in
greater detail in Part IV below.
III. CASE LAW PRIOR TO SHANGHAI COMMERCIAL
Washington appellate courts published five significant opinions on
the property recourse issue after Baffin Land and prior to Shanghai
Commercial. Although the opinions are quite fact-specific, they illustrate
the development of the law in the area and are, therefore, discussed in
some detail and in chronological order in this section.
A. Pacific States Cut Stone v. Goble
The supreme court decided Pacific States Cut Stone Co. v. Goble
57
the same day it decided Baffin Land.
The plaintiff, a Washington corporation, sold some quarry machinery
located in Oregon to two men who, with their wives, were Washington
residents.
58
The buyers immediately removed the equipment to
Washington.
59
All parties executed the contract in Oregon.
60
The buyers
defaulted on the deferred payments owed on the contract and the seller
sued them, their wives, and their marital communities in a Washington
52. 76 Wash. 2d 806, 810–11, 459 P.2d 32 (1969) (emphasis added) (applying Second
Restatement § 188).
53. 97 Wash. App. 191, 195–200, 982 P.2d 114 (1999).
54. 35 Wash. App. 610, 668 P.2d 1304 (1983), cert. denied., 100 Wash. 2d 1032 (1983).
55. Id. at 620.
56. Id. at 621.
57. 70 Wash. 2d 907, 908, 425 P.2d 631 (1967).
58. See id.
59. Id.
60. Id.
684 Seattle University Law Review [Vol. 46:673
court.
61
The trial court held that Oregon law applied to the contract,
including the property recourse issue, under the lex loci contractus rule,
which was later disavowed by the Baffin Land court.
62
It further held that,
under Oregon law, neither the wives nor the marital communities were
liable on the contract.
63
The supreme court held that Oregon law would apply to the contract
under the Second Restatement’s most significant contacts test just as it did
under the lex loci contractus rule.
64
It did not analyze the property recourse
issue separately from the issue of the interpretation and validity of the
contract itself. It ultimately held that, as to the property recourse issue, the
result would be the same under either Oregon or Washington law and that,
under either, all property of the spouses other than the separate property
of the wives would be available to satisfy the buyers’ obligations under
the contract.
65
Implicit in this ruling is the conclusion that, under
Washington law, the buyer’s obligations would be a community liability
of both couples, although the court did not actually analyze the issue and
expressly come to that conclusion.
B. Potlatch v. Kennedy
The supreme court next took up the property recourse issue in
Potlatch No. 1 Federal Credit Union v. Kennedy,
66
which is a key case in
the analysis presented in this Article.
In Potlatch, a credit union granted a consumer loan to its borrower
on the condition that the borrower’s brother co-sign the promissory note.
67
The borrower, a Washington resident, applied for the loan at the credit
union’s office in Idaho and was eligible to borrow from the credit union
by virtue of his employment at Potlatch Forests, Inc. in Idaho.
68
The
borrower took the note to his brother in Washington where his brother
signed it without the knowledge of his wife.
69
61. Id.
62. Id.
63. Id.
64. Id. at 909.
65. Id. Pacific States Cut Stone has been criticized on the ground that the results would, in fact,
be different under Washington and Oregon law on the property recourse issue and, therefore, the court
incorrectly found a “false conflict” (i.e., a situation where the result is the same under the laws of both
jurisdictions under consideration) on this point. See Philip A. Trautman, Choice of Law in
Washington—The Evolution Continues, 63 WASH. L. REV. 69, 71–72 (1988). A court needs to engage
in a choice of law analysis only when an actual, rather than a false, conflict exists between Washington
law and the law of another state. Rice v. Dow Chem. Co., 124 Wash. 2d 205, 210, 875 P.2d 1213
(1994).
66. 76 Wash. 2d 806, 459 P.2d 32 (1969).
67. Id. at 807.
68. Id.
69. Id.
2023] A Critique of Shanghai Commercial Bank v. Chang 685
After the borrower defaulted, the credit union sued both brothers,
their wives, and their marital communities in Washington.
70
The trial court
found that the contract’s most significant contacts were with Washington
and applied Washington law to it.
71
It ruled that the brother’s marital
community received no benefit from the loan and, under Washington law,
neither the brother’s wife nor their marital community was liable on the
note.
72
On appeal, the supreme court recognized both the need for an issue-
by-issue analysis of conflicts of law and the importance of the domicile of
the parties where a rule is designed to protect a party against the unfair use
of superior bargaining power by another party:
The purpose sought to be achieved by the contract rules of the
potentially interested states, and the relation of these states to the
transaction and the parties, are important factors to be considered in
determining the state of most significant relationship. This is because
the interest of a state in having its contract rule applied in the
determination of a particular issue will depend upon the purpose
sought to be achieved by that rule and upon the relation of the state
to the transaction and the parties. So the state where a party to the
contract is domiciled has an obvious interest in the application of
its contract rule designed to protect that party against the unfair use
of superior bargaining power. And a state where a contract provides
that a given business practice is to be pursued has an obvious interest
in the application of its rule designed to regulate or to deter that
business practice. On the other hand, the purpose of a rule and the
relation of a state to a transaction and the parties may indicate that
the state has little or no interest in the application of that rule in the
particular case. So a state may have little interest in the application of
a rule designed to protect a party against the unfair use of superior
bargaining power if the contract is to be performed in another state
which is the domicil of the person seeking the rule’s protection. And
a state may have little interest in the application of a statute designed
to regulate or to deter a certain business practice if the conduct
complained of is to take place in another state.
73
The court went on to say that the property recourse issue was the only
issue in the case on which Washington and Idaho law differed: “This case
presents a single issue on which the interests and policies of Idaho and
Washington collide, and that is whether the community of a cosigner of a
70. Id.
71. Id. at 808.
72. Id.
73. Id. at 810–11 (emphasis added).
686 Seattle University Law Review [Vol. 46:673
note may be held liable on the note although the community derived no
benefit therefrom.”
74
Further, the court recognized the fundamental importance of
Washington’s community property laws:
Washington has an equally vital interest in this transaction. It is the
domicile of the community of [the cosigner brother and his wife]. The
property which would be executed upon in the event of a judgment
against the community is located in Washington. The development
of the community property system in Washington was an outgrowth
of a larger movement toward improvement of the property rights of
married women. As it exists in this state, our system of community
property is intricately tied to our system of family law, and constitutes
the most important element of married women’s property rights.
75
On the same point, the court quoted with approval from a California
Supreme Court case:
We think that disabilities to sue and immunities from suit because of
a family relationship are more properly determined by reference to
the law of the state of the family domicile. That state has the primary
responsibility for establishing and regulating the incidents of the
family relationship and it is the only state in which the parties can, by
participation in the legislative processes, effect a change in those
incidents. Moreover, it is undesirable that the rights, duties,
disabilities, and immunities conferred or imposed by the family
relationship should constantly change as members of the family cross
state boundaries during temporary absences from their home.
76
Finally, the court summarized its conclusion that Washington law
should govern the property recourse issue by stating:
Turning to the expectations of the parties, it is difficult to determine
which law [the borrower, his wife and his brother] would have
believed they were operating under, even if we were to assume they
had even considered the matter and had discovered the difference
between Idaho and Washington law. However, the expectations of
[the brother’s wife] should also be considered. Under Washington
law, she has a present undivided one-half interest in and to
the community . . . . Although her husband is designated manager of
this property by statute, his management power does not include the
power to encumber community property for purposes not in the
community interest. . . . [The brother’s wife], if she had even known
of the transaction, could not have expected that her husband at his
74. Id. at 811.
75. Id. at 812 (internal citation omitted).
76. Id. (quoting Emery v. Emery, 45 Cal. 2d 421, 428, 289 P.2d 218, 223 (1955)).
2023] A Critique of Shanghai Commercial Bank v. Chang 687
place of employment in Clarkston, Washington, would suddenly
become vested with a new power under Idaho law to override these
Washington restrictions on his management power.
Plaintiff credit union, on the other hand, was aware that it was dealing
with Washington residents. It also knew that the property covered by
the chattel mortgage executed by [the borrower] and his wife was
located in Washington. It was also likely that most, if not all, of the
community property of [the cosigner brother and his wife] would be
situated in Washington. Therefore, if plaintiff had considered the
matter, it would have been fairly certain that any execution of a
judgment on the note or mortgage would have to be in Washington
court.
Courts have long recognized that they are not bound to decide all
issues under the local law of a single state. See Restatement (Second),
Conflict of Laws § 188, comment d (Proposed Official Draft, 1968).
Therefore, with respect to the issue now before us of whether the
community property of Washington residents is subject to the
suretyship obligation of the husband entered into with an Idaho
company with no benefit to the community, we hold that the law of
Washington has the most significant relationship to that portion of
the transaction.
The wife’s rights to her share of the community property, and the
concurrent restrictions on the husband’s power to manage that
property, are basic to Washington law. We do not believe that the
husband’s power to manage this property should be varied by the
laws of other states while the parties are resident in this state unless
the wife has some reason to expect this variation. We have
seriously considered the governmental interest of the state of Idaho
in protecting its creditors, but do not believe they are paramount in
this case.
77
Although the Shanghai Commercial court cited to Potlatch and
attempted to distinguish it, this Article will respectfully suggest that these
cases cannot properly be distinguished, and that Shanghai Commercial
should not be followed in future cases.
C. Pacific Gamble Robinson v. Lapp
Pacific Gamble Robinson Co. v. Lapp presented a variation on the
property recourse issue.
78
There, the Lapps were married in Colorado in
77. Id. at 812–14 (some citations omitted). The Potlatch case was prior to the statutory change
to give the spouses co-equal management power over community property.
78. 95 Wash. 2d 341, 622 P.2d 850 (1980).
688 Seattle University Law Review [Vol. 46:673
1975.
79
At the time of the marriage, the husband had owned a Colorado
corporation since 1962 and the stock in the corporation remained his
separate property.
80
In April 1977, while the corporation was in “severe
financial difficulty,” the husband and the corporation cosigned a
promissory note in which the husband would be personally liable along
with the corporation in favor of the petitioner, a supplier of goods,
continuing to supply produce to the corporation to enable the corporation
to remain in business.
81
The wife did not sign the note.
82
In July 1977, the
makers of the note defaulted on it; in September of that year the Lapps
moved to Washington, and in January 1978 the supplier sued the
corporation, the husband, and the marital community in a Washington
court.
83
The trial court entered a judgment against the corporation and the
husband, but not against the marital community.
84
The supplier appealed
the portion of the judgment dismissing the marital community and the
court of appeals affirmed.
85
The supreme court explained that, if Colorado marital property law
applied, the supplier would be entitled to recourse only against the
husband’s property including his earnings.
86
However, if Washington
community property law applied, depending on whether the note was a
community obligation, the supplier would be entitled to recourse against
the community property wages and earnings either of both spouses or of
neither.
87
The court then reviewed the various contacts with each state and
concluded that they all weighed in favor of applying Colorado law to the
property recourse issue except for the Lapps’ recent and post-default move
to Washington and it applied Colorado marital property law.
88
In doing so,
it stated:
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. 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-
79. Id. at 342.
80. Id.
81. Id. at 342–43.
82. Id. at 343.
83. Id.
84. Id.
85. Id.
86. Id. at 344.
87. Id.
88. Id. at 346–48.
2023] A Critique of Shanghai Commercial Bank v. Chang 689
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.
89
The Shanghai Commercial case picked up on Pacific Gamble’s
reference to “a sanctuary for fleeing debtors” in a very different context
and one in which this Article will argue it should not apply.
90
In a strong dissent from the majority opinion in Pacific Gamble,
Justice Horowitz, joined by Justice Utter, argued that the court should have
explicitly made the “distinction between choice of law in contractual
validity and in contractual damage recovery.”
91
The dissent argued for the
application of Washington law to the property recourse issue
notwithstanding the post-default timing of the spouses’ move, stating,
“Washington’s community property scheme reflects a policy which
should not be subjected to the vagaries of out-of-state debt accrual; all
marital communities in this state are afforded the protection and
predictability of our community property provisions.”
92
Pacific Gamble was the last time the supreme court took up the
property recourse issue before Shanghai Commercial, but in the
intervening twenty-seven years, Division One of the Court of Appeals
addressed it in two cases.
D. Colorado National Bank v. Merlino
Colorado National Bank v. Merlino involved spouses who had lived
in Washington throughout their marriage and all of whose property was
community property.
93
The husband, without the knowledge of his wife,
executed an agreement to buy land in Colorado and a note secured by a
deed of trust on the land for a portion of the purchase price.
94
He signed
89. Id. at 347–48 (citations omitted).
90. See infra Section IV.B.7.
91. 95 Wash. 2d at 354.
92. Id. at 355; see also Joseph William Singer, Property Law Conflicts, 54 WASHBURN L.J. 129
(2014). Singer discusses Pacific Gamble and its dissent in some detail. See generally id.
93. 35 Wash. App. 610, 611, 668 P.2d 1304 (1983).
94. Id. at 611–12.
690 Seattle University Law Review [Vol. 46:673
the documents in Washington and the seller executed the deed in
Colorado.
95
After the husband defaulted on the note, the assignee of the
note obtained a default judgment against him in a Colorado court and filed
it for execution in a Washington superior court, which concluded that,
under Washington community property law, the marital community was
not liable on the note and that the only assets the plaintiff could reach to
satisfy its judgment were the husband’s separate assets.
96
On appeal, the court of appeals looked to Potlatch as providing the
analytical framework for deciding whether Colorado or Washington law
should apply to the property recourse issue.
97
It then affirmed the lower
court’s holding that Washington community property law applied.
98
It
distinguished Pacific Gamble on the basis that the entire transaction in that
case took place in Colorado while the spouses lived in Colorado and that
Colorado had the most significant relationship to the property recourse
issue in that case, whereas in Merlino, Washington law had the most
significant relationship to that issue.
99
E. G.W. Equipment v. Mt. McKinley Fence
In G.W. Equipment Leasing, Inc. v. Mt. McKinley Fence Co., Inc., a
husband signed a guaranty of a leasing agreement.
100
The guaranty
reflected that the husband signed it in Arizona and his wife witnessed it in
Arizona, where they lived.
101
The leasing company sued on the guaranty
in a Washington court and the court held that Washington law governed
the guaranty that Washington had jurisdiction over the marital
community.
102
The spouses appealed, arguing that Arizona community property law
should govern the property recourse issue.
103
The court of appeals again
looked to Potlatch as precedent and quoted Potlatch’s statements that
Washington’s community property system “constitutes the most important
element of married women’s property rights” and that “[t]he wife’s rights
to her share of the community property, and the concurrent restrictions on
the husband’s power to manage that property, are basic to Washington
law.”
104
It noted that Arizona community property law required that both
95. Id. at 612.
96. Id. at 612–13.
97. Id. at 620.
98. Id. at 621.
99. Id. at 620–21.
100. 97 Wash. App. 191, 193, 982 P.2d 114 (1999).
101. Id.
102. Id. at 193–94.
103. Id. at 194.
104. Id. at 196.
2023] A Critique of Shanghai Commercial Bank v. Chang 691
spouses sign a guaranty in order to bind their community property.
105
The
court stated that Merlino held that Washington’s community property
laws’ protections “do not evaporate when a spouse crosses the border into
another state.”
106
It continued at some length on this theme:
As evidenced by Potlatch and Merlino, Washington courts apply
Washington law to determine the rights and authority of Washington
spouses to enter into contracts affecting their community property.
For Washington courts to conclude that residents of other community
property states are bound by Washington community property law as
well, rather than the law of their own state, would be illogical and
unjust. The Arizona Legislature has enacted a statute which prohibits
one spouse from entering into guaranty contracts without the other
spouse’s consent. Arizona spouses, therefore, may not alter the rights
and liabilities of their marital communities, irrespective of the
protective policies of their domiciliary states, by choosing to contract
in another forum and contractually consenting to the application of
that forum’s laws.
Although not controlling here, Arizona courts have adopted this
approach. In Lorenz–Auxier Financial Group, Inc. v. Bidewell, the
Arizona Court of Appeals considered the question of whether an
Oregon husband’s separate debt in Arizona could be charged to his
marital community when Oregon law does not permit community
obligation on separate debt. After observing that “the property rights
of a husband and wife are governed by the law of the couple’s
matrimonial domicile at the time of the acquisition of the
property[,]” the court held that Oregon law should apply. It found “no
authority in Arizona or Oregon that permits one spouse, acting
extraterritorially without the other spouse’s consent, to enlarge his
dispositional power over the other spouse’s property beyond the
limits imposed by the law of the domiciliary state.” It added that the
noncontracting spouse “obtained a measure of protection through
these statutes that her husband could not unilaterally sign away.”
Although “[h]er husband may have agreed that he would be bound
by Arizona law,[ ] he did not thereby bind his wife.” The court went
on to speculate about the issue presented in this case, noting that if
the reverse conclusion were true, one spouse “could defeat Arizona’s
protective requirement that both spouses must consent when binding
community property to guarantee a third party’s obligation, [ARIZ.
REV. STAT.] § 25–214(C)(2).”
107
105. Id. at 194–95.
106. Id. at 197.
107. Id. at 197–99 (footnotes omitted). For a discussion of Lorenz–Auxier and other Arizona
cases on the property recourse issue, see infra Part VII.
692 Seattle University Law Review [Vol. 46:673
In the unreported decision in Pacific Nutritional, Inc. v. Shannon, the
Arizona Court of Appeals addressed facts substantially similar to those in
G.W. Equipment involving a married couple who lived in Arizona both at
the time the husband guaranteed a debt to a Washington corporation and
at the time the creditor got a judgment on that guaranty in a Washington
court and sought to enforce it in Arizona.
108
The Arizona court came to the
same conclusion as the G.W. Equipment court and held that Arizona’s rule
requiring both spouses to join in a guaranty in order to create community
liability controlled the property recourse issue.
109
With the ruling in G.W. Equipment, Washington courts continued
their unbroken record of holding that the law of the domicile of spouses at
the time a contract is entered into determines the nature of their liability
on that contract.
110
Unfortunately, that changed when the supreme court
took up Shanghai Commercial in 2017.
IV. THE SHANGHAI COMMERCIAL CASE
A. Factual and Procedural Background
The facts of Shanghai Commercial Bank v. Chang are set out,
although somewhat differently, in the court of appeals opinion and in the
supreme court opinion affirming it.
111
Shanghai Commercial Bank is a large international bank based in
Hong Kong.
112
Kung Da Chang and Michelle Chen were husband and wife
and had resided in Washington since before they were married in 1994.
113
In 2008, the husband entered into a credit facility agreement with the bank
by executing five agreements.
114
The agreements contained a governing
law clause providing: “The validity, construction, interpretation, and
enforcement of the Agreement and/or the Relevant Terms and Conditions
108. No. 1 CA–CV 06–0627, 2010 WL 1609874 (Ariz. Ct. App. Apr. 20, 2010).
109. Id. at *5.
110. Admittedly, Pacific States Cut Stone purported to apply Oregon law after erroneously
finding a false conflict and incorrectly applying Oregon marital property law. In doing so, it gave the
spouses’ community property the same protection it would have had under the law of their domicile,
Washington.
111. 189 Wash. 2d 474, 404 P.3d 62 (2017), aff’g 195 Wash. App. 896 (2016).
112. See ABOUT US: PROFILE, SHANGHAI COM. BANK, https://www.shacombank.com.hk/eng/
about/profile.jsp [https://perma.cc/DZ9W-W27D]. According to its website:
Incorporated in November 1950, Shanghai Commercial Bank Limited (“the Bank”) has
been one of the most distinguished local Chinese banks in Hong Kong. At present, we have
over 50 branches across Hong Kong, mainland China and overseas, with a business
network reaching the United Kingdom, the United States of America, Shanghai and
Shenzhen, to offer our customers comprehensive banking services with convenience.
Id.
113. Shanghai Com. Bank, 189 Wash. 2d at 478 n.3.
114. Id. at 477.
2023] A Critique of Shanghai Commercial Bank v. Chang 693
shall be governed by the laws of HKSAR [Hong Kong Special
Administrative Region].”
115
Shortly before the bank prepared the
agreements, the husband and his father were in Hong Kong “meeting with
a bank executive and investment adviser about moving millions of dollars
of investment accounts to [the bank].”
116
The bank delivered the loan document for the husband’s signature
“to an address in Shanghai that was actually [the father’s] residence.”
117
The father sent the documents to the husband in Seattle, where the husband
signed and returned them to his father in Shanghai, and the father
forwarded them to the bank in Hong Kong.
118
In describing this process,
the court stated that “[t]here is no indication in the record that at this time
[the bank] knew that it was dealing with a person residing in Seattle.”
119
Apparently, the record also did not provide evidence suggesting that the
bank did not know the husband’s residence.
120
The court of appeals noted that the wife did not sign any of the loan
documents, was not aware that the husband entered into the transaction,
and was not a party to the Hong Kong lawsuit.
121
The supreme court did
not mention those facts in its opinion.
122
After default on the loan, the bank secured a $9 million judgment
against the husband in an action brought in a Hong Kong court.
123
The
Washington trial court ruled on summary judgment that the Hong Kong
judgment was enforceable in Washington and that Hong Kong law applied
to the property recourse issue.
124
“Hong Kong is a separate property
jurisdiction” with no concept of community property and, under Hong
Kong law, the judgment would be enforceable against all the husband’s
assets including those that would be community property under
Washington law.
125
The court of appeals affirmed the trial court’s ruling.
126
115. Id.
116. Id. at 488.
117. Id. at 477–78.
118. Id. at 478.
119. Id.
120. Id. at 488.
121. Shanghai Com. Bank Ltd. v. Chang, 195 Wash. App. 896, 900, 381 P.3d 212 (2016).
122. See generally Shanghai Com. Bank, 189 Wash. 2d 474.
123. Id. at 478.
124. Id. at 478–79.
125. Id. at 478 n.4.
126. Shanghai Com. Bank, 195 Wash. App. at 907.
694 Seattle University Law Review [Vol. 46:673
B. The Court’s Ruling and Reasoning and Some Critiques Thereof
1. Issue-by-Issue Conflicts Analysis
The supreme court began by analyzing whether the case presented an
actual conflict rather than a false conflict.
127
It stated, “[i]f the result for a
particular issue ‘is different under the law of the two states, there is a
“real” conflict.’”
128
The court determined that there was “an actual conflict
between Hong Kong law and Washington law on the issue of whether
Chang and his wife’s community property is reachable for satisfaction of
the [Hong Kong] judgment.”
129
Despite the quoted language referring to “the result for a particular
issue,” the court did not discuss the possibility that it would be appropriate
to apply Hong Kong law, the chosen law of the contract, to the
interpretation of the contract and to apply Washington law to the property
recourse issue.
130
2. Comparison of Washington and Hong Kong Marital Property Laws
The court quoted Potlatch for the proposition that “[u]nder the law
of this state [(Washington)], community property is liable for the
suretyship debt of one of the parties only if the community has been
benefited by the obligation.”
131
It noted that the arrangement with the bank
“provided moneys for [the father’s] investment activities in Hong Kong
and for servicing [the father’s] investment debts at another Hong Kong
bank” and that the marital “community received no money (benefits).”
132
Therefore, if Washington law applied to the property recourse issue, the
bank would have no recourse to the spouses’ community property because,
as discussed above, a gift of community property by one spouse, including
a suretyship obligation without economic benefit to the community,
requires the “express or implied consent” of the other spouse.
133
3. Relevant Provisions of Second Restatement
The court cited subsection 1 of § 187 of the Second Restatement for
the proposition that “[t]he law of the state chosen by the parties to govern
their contractual rights and duties will be applied if the particular issue is
127. Shanghai Com. Bank, 189 Wash. 2d at 480–81.
128. Id. at 481 (emphasis added) (quoting Erwin v. Cotter Health Ctrs., 161 Wash. 2d 676, 692,
167 P.3d 1112 (2007)).
129. Id.
130. See generally id.
131. Id. at 481.
132. Id. at 482 n.6.
133. See supra text accompanying note 22.
2023] A Critique of Shanghai Commercial Bank v. Chang 695
one which the parties could have resolved by an explicit provision in their
agreement directed to that issue.”
134
It went on to hold the following:
Here, subsection (1) applies. The parties could have (and did)
expressly provide in their agreement that “[t]he validity,
construction, interpretation and enforcement” of their agreement
“shall be governed by [Hong Kong law].” CP at 172 (emphasis
added). The specific inclusion of enforcement in context fulfills the
specificity requirement of subsection (1), encompassing the
enforcement action here and thereby making the parties’ choice of
law selection effective under subsection (1).
135
Here, the court seems to have made a serious error. The portion of
the Second Restatement cited by the court applies only “if the particular
issue is one which the parties could have resolved by an explicit provision
in their agreement directed to that issue.”
136
However, the parties to the
loan documents could not have validly agreed that the bank would have
recourse to the spouses’ community property for the simple reason that the
wife was not a party to the loan documents and was not even aware that
her husband was entering into them and, therefore could not have provided
her express or implied consent to the transaction.
137
The court appeared to
ignore the fact that § 187 deals only with a choice of law made by the
parties to the contract.
138
Other courts have focused on this point and have
held that a choice of law clause does not control where the rights of third
parties are implicated.
139
The court next turned to § 188 of the Second Restatement to
conclude that, even if the loan documents had not contained a contractual
choice of law, Hong Kong law would apply under the most significant
relationship test.
140
In its discussion on this point, the court seemed to look
only at the relationship of the contract itself to the relevant jurisdictions,
which would be fine if the court were selecting the appropriate governing
law for the interpretation and validity of the contract itself.
141
However,
the particular issue actually in question was what property the bank could
134. Shanghai Com. Bank, 189 Wash. 2d at 483 (quoting RESTATEMENT (SECOND) CONFLICT
OF LAWS, § 187(1) (1971)).
135. Id. at 483–84.
136. RESTATEMENT (SECOND) CONFLICT OF LAWS, § 187(1) (1971).
137. See Shanghai Com. Bank Ltd. v. Chang, 195 Wash. App. 896, 900, 381 P.3d 212 (2016).
138. See RESTATEMENT (SECOND) CONFLICT OF LAWS, § 187(1) (1971).
139. See for example, First-Citizens Bank & Trust Co. v. Morari, 242 Ariz. 562, 567, 399 P.3d
109 (Ariz. App. 2017) (“Restatement § 187 does not apply to a spouse that did not execute a guaranty
contract and is not party to that contract.”), discussed in greater detail in infra Part VII; Carlson v.
Tandy Comput. Leasing, 803 F.2d 391, 393–94 (8th Cir. 1986) (dealing with issue of whether a
putative lease was actually an installment sale contract).
140. Shanghai Com. Bank, 189 Wash. 2d at 484–88.
141. See id.
696 Seattle University Law Review [Vol. 46:673
have recourse to for a breach of the contract.
142
As to that issue, the wife’s
interests were vitally implicated and the wife was not a party to the
contract.
143
Therefore, looking at the Second Restatement’s provisions
about what law applies to a contract was inappropriate or at least
insufficient.
The court should have analyzed the conflict issue under § 6 of the
Second Restatement, which provides general choice of law principles
where no statutory directive or more specific provision of the Second
Restatement applies.
144
In similar contract cases, the Arizona courts have
analyzed the property recourse issue under § 6 and have declined to do so
under §§ 187 or 188.
145
A review of the seven § 6 factors leads to a
conclusion that the Washington court should have applied Washington law
to that issue in Shanghai Commercial:
(a) The needs of the interstate and international systems.
146
The
principal interest of these systems seems to be in having a predictable
system of selecting the applicable law so that, in making their credit
decisions, creditors can assess what jurisdiction’s law will apply to the
property recourse issue and, therefore, to what assets they will have
recourse.
(b) The relevant policies of the forum.
147
Washington has a strong
policy of requiring the participation of both spouses in certain transactions
in order to create community liability.
148
(c) The relevant policies of other interested states and the relative
interests of those states in the determination of the particular issue.
149
The
interest of the domiciliary state in protecting its residents should
predominate over the interest of other jurisdictions in enhancing the ability
of creditors to collect judgments from residents of the domiciliary state.
This is especially true when a non-contracting spouse has no control over
the contract creating the debt. As the Potlatch court stated, “[a]s it exists
in this state, our system of community property is intricately tied to our
system of family law, and constitutes the most important element of
married women’s property rights.”
150
142. See id. at 480.
143. See id. at 477–79.
144. See RESTATEMENT (SECOND), CONFLICT OF LAWS, § 6(2) (1971). The Washington
Supreme Court did a detailed analysis of the § 6 factors in a community property case not involving
the property recourse issue in Seizer v. Sessions, 132 Wash. 2d 642, 652–56, 940 P.2d 261 (1997).
145. See infra Part VII for a discussion of the Arizona cases.
146. RESTATEMENT (SECOND) CONFLICT OF LAWS, § 6(2)(a) (1971).
147. Id. § 6(2)(b).
148. See discussion infra Section IV.B.7.
149. RESTATEMENT (SECOND) CONFLICT OF LAWS, § 6(2)(c) (1971).
150. Potlatch No. 1 Fed. Credit Union v. Kennedy, 76 Wash. 2d 806, 812, 459 P.2d 32 (1969).
2023] A Critique of Shanghai Commercial Bank v. Chang 697
(d) The protection of justified expectations.
151
The Shanghai
Commercial opinion gave little to no attention to the justified expectations
of the non-contracting spouse. Those expectations seem far more
important than the expectation, if any, on the part of a foreign creditor
about being able to impose its local marital property system on a non-
contracting spouse in another jurisdiction without their knowledge or
consent.
(e) The basic policies underlying the particular field of law.
152
As
noted above, a basic policy of Washington’s community property law is
to protect Washington residents’ community property from debts incurred
by one spouse where no expectation exists of a benefit to the marital
community.
(f) Certainty, predictability and uniformity of result.
153
Applying the
marital property law of the spouses’ domicile at the time the debt is
contracted creates more certainty and predictability than applying the law
of whatever jurisdiction may be provided for in a contract entered into by
only one of the spouses. It also enhances uniformity of result by treating
all the spouses’ creditors the same way on the property recourse issue
regardless of the law governing their various underlying debts. Further, for
bankruptcy courts adjusting the rights of multiple creditors to a limited
pool of assets, applying the law of the spouses’ domicile treats all creditors
equally rather than enhancing the recovery of a creditor whose contract
provides for governing law of a jurisdiction with marital property laws
more favorable to the creditor.
(g) Ease in the determination and application of the law to be
applied.
154
A court will certainly find it easier to determine and apply its
own laws than the laws of another jurisdiction, which may not even be in
the United States and whose laws may not be in English.
155
4. Expectations of the Parties
The supreme court in Shanghai Commercial quoted prior
Washington Supreme Court authority to the effect that “the expectations
of the parties to the contract may significantly tip the scales in favor of
one jurisdiction’s laws being applied over another’s.”
156
However, the
court did not address that the wife was not a party to the contract and did
151. RESTATEMENT (SECOND) CONFLICT OF LAWS, § 6(2)(d) (1971).
152. Id. § 6(2)(e).
153. Id. § 6(2)(f).
154. Id. § 6(2)(g).
155. Notably, in determining what Hong Kong law provided, the court in Shanghai Commercial
relied on “a declaration from a purported expert regarding Hong Kong law.” 189 Wash. 2d at 478 n.4.
156. Id. at 486 (quoting Mulcahy v. Farmers Ins. Co. of Wash., 152 Wash. 2d 92, 101, 95 P.3d
313 (2004)) (emphasis added).
698 Seattle University Law Review [Vol. 46:673
not even know that her husband entered into it.
157
It completely ignored
her reasonable expectations.
The court discussed the Pacific Gamble case in some detail and noted
that in Pacific Gamble, the spouses had no connection with Washington
until they moved to the state a few months after the note in issue went into
default.
158
It quoted Pacific Gamble’s statement that “this state has no
policy interest in maintaining within its borders a sanctuary for fleeing
debtors.”
159
In discussing the question of the expectations of the parties in
Pacific Gamble, the Shanghai Commercial court stated that “[t]he husband
and wife could reasonably expect at the time the note was executed that
the transaction would be governed by Colorado law since they had long
been domiciled in Colorado, and remained there for a time after the note
was signed.”
160
The facts in Shanghai Commercial are starkly different
from those in Pacific Gamble because the spouses in Shanghai
Commercial had been domiciled in Washington their entire married lives,
a period of more than twenty years, whereas the spouses in Pacific Gamble
did not move to Washington until shortly after the relevant contract was
in default.
161
Unlike the spouses in Pacific Gamble, the spouses in
Shanghai Commercial could hardly be characterized as “fleeing
debtors.”
162
The wife could not have had a reasonable expectation that her
husband could engage in a transaction in a foreign country that would
allow a foreign creditor to have recourse to all the spouses’ community
property when a local creditor in a transaction governed by Washington
law would have recourse to none of it.
5. Potlatch
The court discussed the Potlatch case and distinguished it on the
basis that:
Key to the result in Potlatch was the fact that the Idaho creditor knew
it was dealing with Washington residents and knew that the property
covered in the chattel mortgage at issue was located in Washington,
and that it was likely that the debtors’ community property would be
situated in Washington.
163
157. Compare id. at 488, with Shanghai Com. Bank v. Chang, 195 Wash. App. 896, 904–07, 381
P.3d 212 (2016).
158. Shanghai Com. Bank, 189 Wash. 2d at 487 (discussing Pac. Gamble Robinson Co. v. Lapp,
95 Wash. 2d 341, 347, 622 P.2d 850 (1980)).
159. Id. (quoting Pac. Gamble, 95 Wash. 2d at 347).
160. Id.
161. Compare id. at 478 n.3, with Pac. Gamble, 95 Wash. 2d at 347.
162. Shanghai Com. Bank, 189 Wash. 2d at 487.
163. Id. at 488 (distinguishing Potlach No. 1 Fed. Credit Union v. Kennedy, 76 Wash. 2d 806,
813, 459 P.2d 32 (1969).
2023] A Critique of Shanghai Commercial Bank v. Chang 699
The court reiterated that there was no evidence in the record that the
bank knew that it was dealing with a Washington resident.
164
This
statement implies that the record also contained no evidence that the bank
did not know it was dealing with a Washington resident. Further, the court
did not discuss whether the bank should be the one to bear the
consequences if it relies on the credit of an individual without taking the
basic credit underwriting steps of determining where that person lives,
what his or her marital status is, what assets may be available to pay his or
her obligations, where those assets are located, and what legal principles
apply in that location.
6. Other Case Law
The court did not discuss or cite to Colorado National Bank v.
Merlino or G.W. Equipment Leasing, Inc. v. Mt. McKinley Fence Co.,
Inc.
165
In both of those cases, the court of appeals applied the law of the
spouses’ domicile to the property recourse issue.
166
In the former, that led
to the application of Washington law and in the latter, it led to the
application of Arizona law.
167
In both, it led to the result that the creditor
did not have recourse to the spouses’ community property.
168
7. Public Policy
The Shanghai Commercial court appeared to give short shrift to the
policies behind Washington’s community property laws. To the extent, if
any, that § 187 of the Second Restatement applies, those policies should
be considered a “fundamental policy” of the state within the meaning of §
187(2)(b), which should lead to choosing Washington law to govern the
property recourse issue as to spouses domiciled in Washington
notwithstanding a contrary contractual choice of law, especially where one
of the two spouses was not a party to the contract.
The court briefly addressed the interests and policies of the two
jurisdictions:
Hong Kong has an interest in ensuring the predictability of business
relations, including the payment of debt obligations. See Pac.
Gamble, 95 Wash.2d at 346–47, 622 P.2d 850. And while
164. Id.
165. Colo. Nat’l Bank of Denv. V. Merlino, 35 Wash. App. 610, 688 P.2d 1304 (1983); G.W.
Equip. Leasing, Inc. v. Mt. McKinley Fence Co., 97 Wash. App. 191, 982 P.2d 114 (1999).
166. See Colo. Nat’l Bank, 35 Wash. App. at 611, 621; G.W. Equip. Leasing, Inc., 97 Wash.
App. at 193, 199.
167. Colo. Nat’l Bank, 35 Wash. App. at 621; G.W. Equip. Leasing, Inc., 97 Wash. App. at 199.
168. See Colo. Nat’l Bank, 35 Wash. App. at 617; G.W. Equip. Leasing, Inc., 97 Wash. App. at
199–200.
700 Seattle University Law Review [Vol. 46:673
Washington has an interest in generally protecting the welfare of
community property interests of its residents, it would not serve those
interests to permit debtors to hide behind or misuse community
property status as a blanket protection of assets from legitimate
foreign debt collection in all circumstances.
169
The court ignored the interest of the non-contracting wife in this
discussion. In what sense can she be said to “hide behind or misuse
community property status”? Had her husband and his father entered into
an identical credit transaction governed by Washington law with a local
lender in Washington, the lender would have had no recourse to
community property.
The court did not address its prior statements about the importance
of the community property laws. The supreme court stated in Van Dyke v.
Thompson
170
that “[i]t has been a basic principle of our community
property law that community assets are not liable for the separate debts of
a spouse.”
171
In a somewhat different context, it had also noted that a
creditor’s “interpretation would enable one spouse to give away an entire
estate in derogation of the interest of the nonacting spouse who knew of
but felt powerless to halt the transfer.”
172
In Shanghai Commercial, the
non-contracting spouse did not even know of the existence of the
transaction.
173
Washington law treats certain other debtor protection laws as
fundamental policies for conflict of laws purposes even where they do not
implicate the interests of non-contracting parties.
174
For example, the
supreme court, in Detonics “.45” Associates v. The Bank of California,
175
stated that “[u]sury statutes and the allowance of attorney fees in usury
cases represent a ‘fundamental policy’ of this state.”
176
If Washington’s
usury statutes otherwise apply, they cannot be avoided based on the
location of the lender or a choice of law clause choosing the law of another
state.
177
169. Shanghai Com. Bank, 189 Wash. 2d at 488–89.
170. 95 Wash. 2d 726, 630 P.2d 420 (1981).
171. Id. at 730.
172. Nichols Hills Bank v. McCool, 104 Wash. 2d 78, 82–83, 701 P.2d 1114 (1985).
173. 195 Wash. App. 896, 900, 381 P.3d 212 (2016).
174. See Detonics .45 Assocs. v. Bank of Cal., 97 Wash. 2d 351, 354, 644 P.2d 1170 (1982).
175. Id.
176. Id. (citing O’Brien v. Shearson Hayden Stone, Inc., 90 Wash. 2d 680, 685–86, 586 P.2d
830 (1978); WASH. REV. CODE § 19.52.005).
177. Whitaker v. Spiegel Inc., 95 Wash. 2d 408, 623 P.2d 1147, 1151 (1981), amended, 95 Wash.
2d 661, 637 P.2d 235 (1981) (“The legislative mandate is clear: In an interstate loan transaction, the
Washington courts are not free to engage in conflict of law analysis to determine whether or not the
2023] A Critique of Shanghai Commercial Bank v. Chang 701
The Washington legislature has made a long-standing policy
judgment that, for the mutual protection of spouses, if one spouse takes on
a suretyship obligation that does not benefit the community without the
express or implied consent of the other, that obligation will be binding
only on the contracting spouse’s separate property and not on any of the
community property. Why should the law make it easy to evade that
restriction and destroy the protection given to the non-contracting spouse
by the simple expedient of having the loan documents governed by the law
of another jurisdiction? In the modern interconnected world, parties
commonly enter into financial arrangements with parties in other states or
countries, often governed by the laws of the lender’s home jurisdiction.
The Shanghai Commercial ruling makes it possible for lenders and other
parties from outside the state to avoid this important protection provided
by Washington law to Washington domiciled spouses. Further, it gives
unfair preference to such out-of-state parties over local creditors whose
transactions have no significant contacts with any other jurisdiction and,
therefore, are bound to be governed by Washington law.
A more just rule would hold that the property recourse issue is
governed by the law of the spouses’ domicile except in the situation, such
as that in Pacific Gamble, where the spouses take on the debt while
domiciled in another state and then move to Washington and try to use
Washington’s community property law to excuse themselves from the
liability they had in the state where they lived when they incurred the debt.
V. DEVELOPMENTS AFTER SHANGHAI COMMERCIAL—IN RE HALES
Little development of the law has occurred in the five years since the
supreme court decided Shanghai Commercial. The case’s outcome has
been questioned in commentary,
178
but there has been little additional case
law.
parties’ own choice of law provision should apply.”). This rule may be subject to the qualification of
RESTATEMENT (SECOND), CONFLICT OF LAWS § 203 (1971), which provides:
The validity of a contract will be sustained against the charge of usury if it provides for a
rate of interest that is permissible in a state to which the contract has a substantial
relationship and is not greatly in excess of the rate permitted by the general usury law of
the state of the otherwise applicable law under the rule of § 188.
See generally O’Brien v. Shearson Hayden Stone, Inc., 93 Wash. 2d 51, 605 P.2d 779 (1980).
However, the O’Brien case did not cite to or consider the effect of WASH. REV. CODE § 19.52.034,
which provides as follows:
Whenever a loan or forbearance is made outside Washington state to a person then residing
in this state the usury laws found in chapter 19.52 RCW, as now or hereafter amended,
shall be applicable in all courts of this state to the same extent such usury laws would be
applicable if the loan or forbearance was made in this state.
178. See James P. George, Facilitating Money Judgment Enforcement Between Canada and the
United States, 72 HASTINGS L.J. 99, 151 (2020).
702 Seattle University Law Review [Vol. 46:673
In an unreported 2019 case, In re Hales,
179
the Bankruptcy Court for
the Western District of Washington rendered a lengthy and thoughtful
opinion on the property recourse issue. It did not directly criticize
Shanghai Commercial, but also did not appear to follow its lead.
The debtor in Hales was a wife whose husband had a tort judgment
entered against him arising out of his management of his father’s estate in
Oregon.
180
Nothing in the court’s opinion indicated that the spouses had
ever lived in Oregon during their marriage. The judgment creditor argued
that, because the judgment was obtained under Oregon law, the assets
available to satisfy it should also be determined under Oregon law.
181
The
court concluded that an actual conflict existed and that Washington law
should apply to the issue of what property was available to satisfy the
judgment.
182
In applying the Second Restatement’s tests, the Hales court
recognized that different states’ laws can be applied to different issues in
the same case:
Different issues in a case can require different determinations about
what jurisdiction’s law applies. In this case, the fact that Oregon law
determines the existence and elements of a tort does not mean that it
applies to the question of what property of the tortfeasor is subject to
recovery of the Judgment. “These contacts are to be evaluated
according to their relative importance with respect to the particular
issue.” Id. “The courts have long recognized that they are not bound
to decide all issues under the local law of a single state.” Id. § 145
cmt. d; see also Potlach No. 1 Fed. Credit Union v. Kennedy, 76
Wn.2d 806, 813, 459 P.2d 32 (1969) (citing Restatement (Second) of
Conflict of Laws § 188 cmt. d (Proposed Official Draft, 1968)).
“Each issue is to receive separate consideration if it is one which
would be resolved differently under the local law rule of two or more
of the potentially interested states.” Restatement (Second) of Conflict
of Laws § 145 cmt. d.
183
After citing most of Washington’s post-Baffin Land cases involving
the property recourse issue, including Shanghai Commercial, the Hales
court was careful to note that “[e]ach such choice of law determination is
fact intensive and unique.”
184
It then stated as follows:
179. 18–40351–BDL, 2019 WL 1077271 (Bankr. W.D. Wash. Mar. 6, 2019).
180. Id. at *1–2.
181. Id. at *3.
182. Id. at *3–4.
183. Id. at *5. RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 145, cited by the Hales court,
deals with choice of law with respect to issues in tort.
184. Id.
2023] A Critique of Shanghai Commercial Bank v. Chang 703
In this case, the Court concludes that Washington has the most
significant relationship to the issue of what property is subject to
recovery to enforce the Judgment. First, the relevant policies of
Washington weigh in favor of applying Washington law.
Washington’s case law on community property liability expresses
policy preferences for what assets of a tortfeasor, the tortfeasor’s
spouse, and their marital community can be reached to satisfy a
judgment under certain circumstances. As the Washington Supreme
Court expressed,
We think that disabilities to sue and immunities from suit
because of a family relationship are more properly
determined by reference to the law of the state of the family
domicile. That state has the primary responsibility for
establishing and regulating the incidents of the family
relationship and it is the only state in which the parties can,
by participation in the legislative processes, effect a change
in those incidents. Moreover, it is undesirable that the rights,
duties, disabilities, and immunities conferred or imposed by
the family relationship should constantly change as members
of the family cross state boundaries during temporary
absences from their home.
Potlach No. 1 Fed. Credit Union, 76 Wn.2d at 36 (quoting Emery v.
Emery, 45 Cal.2d 421, 428, 289 P.2d 218 (1955)). Because the
community’s potential liability arises from the family relationship
and Washington is and at all relevant times was the family’s domicile,
Washington has a strong policy interest in determining the
enforceability of the Judgment consistently with its precedents.
The relevant policies of the other interested state, Oregon, and the
states’ relative interests in determination of this particular issue also
weigh in favor of applying Washington law. Oregon does not have a
strong policy interest with respect to the specific issue before the
Court. While Oregon likely has a policy interest in its judgments
being enforceable in Washington, general enforceability is not an
issue in this case. . . . The determination of what property can be
reached to satisfy the Judgment implicates greater policy concerns
for Washington, with its case law reflecting policy preferences on
community property, than Oregon, whose interests primarily extend
to the general enforceability of its judgments.
185
The Hales court distinguished Pacific Gamble on the basis that the
husband in that case incurred the debt in question while the spouses lived
in Colorado:
185. Id. at *5–6.
704 Seattle University Law Review [Vol. 46:673
This is not a case like Pacific Gamble Robinson Co. where a debtor
and spouse moved to a community property state to seek immunity
from a judgment. It is more similar to Merlino, where the married
couple were Washington residents and owned property as community
property, but one of the spouses incurred a liability in a common law
state. And like the Washington Court of Appeals in Merlino, this
Court concludes that Washington has the most significant
relationship to the issue of what law to apply to determine whether
Creditor can enforce the Judgment against community property.
186
The key facts in Hales are similar to those in Shanghai Commercial.
In both cases, the debt was incurred outside Washington by one of two
spouses domiciled in Washington, the debt itself was governed by the law
of another jurisdiction, the debt was reduced to judgment in the other
jurisdiction, and the creditor sought to enforce the judgment against
community property in Washington.
187
The Hales court identified the need
to evaluate the issue of what law would govern the property recourse issue
separately from the issue of what law would govern the liability of the
acting spouse for the underlying debt.
188
The Shanghai Commercial court
did not appear to make that distinction.
VI. FURTHER IMPLICATIONS IF SHANGHAI COMMERCIAL IS FOLLOWED
If the Shanghai Commercial rule prevails, one must wonder how far
it reaches. What other protections Washington law provides to debtors
domiciled in the state could fall before the collection efforts of an out-of-
state creditor whose underlying contract is governed by the law of another
jurisdiction? Unless the courts treat other-debtor protections as more
fundamental policies of Washington law than the Shanghai Commercial
court treated the community property laws, they could also be imperiled.
The Shanghai Commercial court focused on the fact that the choice
of law clause in the agreements before it specified that their “validity,
construction, interpretation, and enforcement” would be governed by
Hong Kong law.
189
Would the court consider that clause to allow the bank
to avoid Washington’s relatively generous homestead exemption
190
and its
personal property exemptions from execution,
191
and instead apply
186. Id. at *7 (citations omitted). Ultimately, the Hales court concluded that the torts committed
by the husband in that case benefitted the marital community and allowed recourse to all the
community property under Washington’s community property laws. Id. at *3.
187. Compare id. at *1–3, with Shanghai Com. Bank Ltd. v. Chang, 189 Wash. 2d 474, 476–78,
404 P.3d 62 (2017).
188. Hales, 2019 WL 1077271, at *5.
189. Shanghai Com. Bank, 189 Wash. 2d at 477.
190. See generally WASH. REV. CODE ch. 6.13 and specifically WASH. REV. CODE § 6.13.030.
191. WASH. REV. CODE ch. 6.15.
2023] A Critique of Shanghai Commercial Bank v. Chang 705
whatever exemptions, if any, are afforded under the laws of the applicable
foreign jurisdiction? Would the court allow a choice of law clause to avoid
application of the Washington Consumer Protection Act?
192
VII. ARIZONA’S APPROACH
The Arizona courts’ approach to the property recourse issue is more
aligned with the position taken in this Article than is Shanghai
Commercial’s approach. As between the law of the spouses’ domicile and
the law generally applicable to the contract, Arizona applies the law that
is most favorable to the non-contracting spouse.
193
In Lorenz-Auxier Financial Group, Inc. v. Bidewell,
194
the Arizona
Court of Appeals dealt with a situation in which a husband entered into
equipment leases in Arizona with a leasing company having its principal
place of business in Arizona.
195
His wife did not execute any of the leases
and did not approve them in any way.
196
The spouses “were never
domiciled in Arizona, but resided, at all times relevant to these
transactions, in Oregon, a non-community property state.”
197
Paragraph 21
of the leases contained the parties’ submission to Arizona’s jurisdiction
and their choice of Arizona law to govern the interpretation of the
documents.
198
The court found that, if Arizona law applied, the debt would
be considered a community obligation.
199
The wife argued that Oregon law
should apply to the property recourse issue.
200
The court cogently disposed
of the leasing company’s contention that the governing law clause of the
leases controlled that issue:
Lorenz–Auxier’s reliance on Paragraph 21 is misguided. It is
undisputed that the parties to the leases made a choice of law
pursuant to their contract and that they chose Arizona law. Mrs.
Bidewell correctly argues, however, that this provision does not bind
her, as she was not a party to the leases, made no personal choice of
law, and could not be bound by the terms, including the choice of law
terms, of contracts she did not sign.
We find no authority in Arizona or Oregon that permits one spouse,
acting extraterritorially without the other spouse’s consent, to enlarge
192. WASH. REV. CODE ch. 19.86.
193. See Lorenz-Auxier Fin. Grp., Inc. v. Bidewell, 160 Ariz. 218, 219–20, 772 P.2d 41 (Ariz.
Ct. App. 1989).
194. Id.
195. Id. at 219.
196. Id.
197. Id. at 220.
198. Id. at 219.
199. Id. at 220.
200. Id.
706 Seattle University Law Review [Vol. 46:673
his dispositional power over the other spouse’s property beyond the
limits imposed by the law of the domiciliary state. O.R.S. §
108.020 states that spouses “are not liable for the separate debts of
each other.” O.R.S. § 108.050 states that none of the wife’s “real or
personal property acquired by her own labor during coverture,
shall . . . be subject to the debts or contracts of her husband.” Mrs.
Bidewell obtained a measure of protection through these statutes that
her husband could not unilaterally sign away. Her husband may have
agreed that he would be bound by Arizona law, but he did not thereby
bind his wife.
Were we to accept Lorenz–Auxier’s position, one spouse could alter
the rights and liabilities of his marital community, irrespective of the
protective policies of the state of domicile, by simply choosing to
contract in another forum and by contractually consenting to the
application of that forum’s laws. One spouse, for example, could
defeat Arizona’s protective requirement that both spouses must
consent when binding community property to guarantee a third
party’s obligation, A.R.S. § 25–214(C)(2); the would-be guarantor
would need only to transact a guarantee in a state that lacked such
protection and to include a “Paragraph 21” submitting to the latter
state’s laws.
Lorenz–Auxier knew or should have known that it was dealing with
Oregon residents not subject to Arizona community property law. If
Lorenz–Auxier had intended to bind the Bidewell’s marital unit or
Mrs. Bidewell individually to Paragraph 21, it should have obtained
Mrs. Bidewell’s signature.
201
Consistent with Lorenz-Auxier, the Arizona courts have held that,
where a creditor obtains a judgment against Arizona-domiciled spouses in
another state, Arizona law on the property recourse issue applies to its
enforcement of that judgment in Arizona.
202
The Arizona courts further refined their position in Phoenix Arbor
Plaza, Ltd. v. Dauderman
203
and First-Citizens Bank & Trust Co. v.
Morarari.
204
Dauderman, which was decided several months after Lorenz-Auxier,
involved an issue about recourse to the community property of California-
domiciled spouses where only the husband signed a guaranty “executed in
201. Id. at 221.
202. See, e.g., Rackmaster Sys., Inc. v. Maderia, 219 Ariz. 60, 64–65, 193 P.3d 314 (2008)
(“[A]llowing the enforcement of a guaranty signed only by Patrick would render ineffective and
useless the explicit prohibition of A.R.S. § 25–214(C)(2),” which “the legislature clearly intended”
would “protect the substantive rights of the non-signing spouse, we conclude that it is a substantive
law that bars collection of the guaranteed debt from the community’s property.”).
203. 163 Ariz. 27, 785 P.2d 1215 (1989).
204. 242 Ariz. 562, 399 P.3d 109 (2017).
2023] A Critique of Shanghai Commercial Bank v. Chang 707
Arizona securing the performance of the terms of an Arizona lease of
Arizona property.”
205
If Arizona law applied to the property recourse issue,
the marital community would not be liable on the guaranty, but if
California law applied, it would.
206
Unlike many of these cases, in
Dauderman the creditor argued that the law of the spouses’ domicile
should govern the property recourse issue and “that when dealing with
community property in one state involving a transaction conducted in
another state the courts uniformly apply the law of the marital
domicile.”
207
It argued that Lorenz-Auxier was dispositive.
208
The court,
however, distinguished Lorenz-Auxier by pointing out that “[a]ll
that Lorenz–Auxier did was to refuse to enforce a unilateral promise by the
husband to bind his wife to a promise which would jeopardize property
rights provided by her state of domicile,” whereas in the case before it the
wife’s “California community property rights were not restricted,
reduced, or jeopardized by her husband’s unilateral guarantee.”
209
In a
footnote, it explained that “[i]t makes no sense to allow a spouse to
jeopardize the other spouse’s property rights by going to another state and
making a unilateral guarantee affecting that property.”
210
In Morari, the Arizona court dealt with a situation substantially
identical to that in Dauderman. One spouse of each of three California-
domiciled married couples signed a guaranty of a loan to purchase
property in Arizona.
211
As in Dauderman, if Arizona law applied to the
property recourse issue, the marital community would not be liable on the
guaranty, but if California law applied, it would.
212
The court held that
Arizona law applied to the guaranties generally.
213
It held that Second
Restatement § 187 was irrelevant because that section “does not apply to
a spouse that did not execute a guaranty contract and is not party to that
contract.”
214
It further stated that, under both Lorenz-Auxier and
Dauderman, “the spouses could not be bound by guaranty contracts they
had not signed, including any choice of law provisions therein.”
215
Under the Arizona cases, a non-contracting spouse is entitled to the
protection of the marital property laws of the spouses’ domicile; provided,
however, that if the law of the jurisdiction governing the contracting
205. Dauderman, 163 Ariz. at 27–28.
206. Id. at 28.
207. Id. at 30.
208. Id.
209. Id. at 31.
210. Id. at 31 n.1.
211. First-Citizens Bank & Tr. Co. v. Morari, 242 Ariz. 562, 564, 399 P.3d 109 (2017).
212. See id. at 563–64.
213. Id. at 566.
214. Id. at 567.
215. Id. at 568.
708 Seattle University Law Review [Vol. 46:673
spouse’s obligation is more protective of the non-contracting spouse, they
will be entitled to those greater protections.
CONCLUSION
The Shanghai Commercial decision seems to have erred in several
important respects and, in doing so, it undermined some of the
fundamental protection given to Washington residents under the state’s
community property laws. First, the court did not appear to recognize that
it should analyze the choice of law for the property recourse issue
separately from that for the interpretation and validity of the contract
generally. Second, the court did not recognize that §§ 187 and 188 of the
Second Restatement relate only to selecting the applicable law as it affects
the parties to a contract and do not govern choice of law as to issues that
affect third parties. Third, the court denied the non-contracting spouse the
protection against separate debts of the contracting spouse by means of a
contract to which she was not a party, to which she did not consent, and of
which she was not even aware.
The author respectfully submits that the Shanghai Commercial case
was wrongly decided and that the supreme court should overrule it at its
first opportunity. A better rule would hold that the property recourse issue
is governed by the law of the spouses’ domicile except where the spouses
take on the debt while domiciled in another state and then move to
Washington and try to use Washington’s community property law to avoid
the liability they had when they incurred the debt. The author takes no
position on whether the Washington courts should adopt Arizona’s
exception for situations where the law governing the contract generally is
more favorable to the non-contracting spouse than Washington law.
