California Clarifies Marital Property Presumptions

Posted by NCBRC - November 24, 2020

Relying on the answer to a certified question propounded to the California Supreme Court regarding presumptions attached to marital property, the Ninth Circuit found that one of two properties owned by the individual debtor and his wife was community property despite its being designated a joint tenancy. Brace v. Speier (In re Brace), No. 17-60032 (9th Cir. Nov. 9, 2020).

The debtor and his wife acquired the San Bernardino property sometime after they married in 1972, and the Redlands property in 1977 or 1978. When the husband filed for chapter 7 bankruptcy, the trustee sought to sell both properties and distribute the proceeds to the debtor’s creditors. Even though both deeds characterized the properties as joint tenancies, the bankruptcy court found that, under the California Family Code, they were community property and could be sold to satisfy the husband’s debts. The BAP affirmed. In re Brace, 566 B.R. 13 (B.A.P. 9th Cir. 2017).

On appeal to the Ninth Circuit, the court observed that community property may be sold in bankruptcy and all the proceeds go to satisfy the debts of only one of the owners. In In re Reed, 940 F.2d 1317, 1332 (9th Cir. 1991), however, the court established that when one party to a joint tenancy files for bankruptcy, only his portion of the property goes into the bankruptcy estate. In addition, In re Summers, 332 F.3d 1240 (9th Cir. 2003), held that when property was purchased using marital assets but was designated as joint tenancy, the state law presumption of community property fell away.

With this in mind, the court turned to state law to determine the nature of the debtor’s property interest. It found that the case hinged on application of presumptions created by California law. Cal. Evid. Code § 662, creates a presumption based on the property’s form of title—in this case, joint tenancy—while Cal. Fam. Code § 760, applies a presumption in favor of community property where property is purchased during the marriage using marital funds. Finding that the presumptions appeared to be in conflict with each other, the court certified the following question to the state supreme court:

“Does the form of title presumption set forth in section 662 of the California Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?”

The California Supreme Court explained that the answer depended on when the property was purchased. If it was purchased prior to January, 1975, a presumption of separateness applied, whereas for property purchased after that date, a presumption of community property applied. The court further explained that the presumptions are not immutable. Prior to 1985, married couples could change the nature of ownership of property from community to separate “by oral or written agreement or a common understanding.” In 1985, the California Family Code codified the “transmutation” requirements by requiring a written declaration expressly changing the character or ownership of the property.

The circuit court began by noting that, in light of the California Supreme Court’s clarification, its holding in Summers was properly limited to cases where property was purchased prior to 1975. It turned to the two properties at issue here and found that the Redlands property, which was purchased after 1975, was properly treated as community property by the bankruptcy court.

With respect to the San Bernardino property, the record showed only that the debtor and his wife purchased the property sometime “shortly after they were married.” The court found that it could not determine from the record whether the property was purchased before 1975, subjecting it to the presumption of separateness. It therefore remanded to the bankruptcy court to make that factual determination.

The debtor argued that even if the properties were originally community property, he and his wife had transmuted them to joint tenancies sometime prior to his filing for bankruptcy. The court rejected this argument based on the bankruptcy court’s factual finding that the debtor failed to establish even the more relaxed pre-1985 requirements of an oral understanding for showing transmutation of either of the properties.

The court affirmed in part, and vacated and remanded in part.

NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor.

Brace 9th Cir Nov 2020


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