by In Brace v. Speier (In re Brace), the Ninth Circuit certified the following question to the Supreme Court of California: “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?” No. 17-60032 (9th Cir. Nov. 8, 2018) (order certifying question).
During their marriage, Clifford and Ahn Brace took title to two California properties (the property) as joint tenants. Mr. Brace formed an irrevocable trust for which he was the trustee and Ms. Brace the sole beneficiary. Mr. Brace transferred his interest in the real property into the trust for no consideration. When Mr. Brace filed for chapter 7 bankruptcy, the trustee filed an adversary proceeding seeking turnover of the property as having been fraudulently transferred. Among other things, Mr. Brace argued that only his interest in the property was part of the bankruptcy estate. The bankruptcy court found in favor of the trustee, and the BAP for the Ninth Circuit affirmed. Brace v. Speier (In re Brace), 566 B.R. 13 (2017).
The case involved the interaction between California’s “community property” presumption, which presumes that property purchased by a married couple is community property, and the “form of title” presumption, which says that the holder of legal title to property is presumed to have all beneficial title to that property. In the bankruptcy context, the community property presumption causes the entirety of the property to enter the bankruptcy estate of either debtor/spouse. Also relevant to the court’s analysis was the transmutation statute, section 850 of the California Family Code, which permits a married couple to alter the nature of their community property to property owned separately by either spouse thereby subjecting only the debtor-spouse’s interest to bankruptcy creditors.
Here, where the Braces had not complied with the writing requirements of the transmutation statute, the bankruptcy court and the BAP relied on the community property presumption to find that the entire property value was part of the Mr. Brace’s bankruptcy estate.
On appeal, the trustee argued that the state court decision in In re Marriage of Valli, 58 Cal.4th 1396 (2014), governs this case. There, the property at issue was an insurance policy purchased with marital funds but listing the wife as the sole owner and beneficiary. When the couple divorced, the husband argued that the policy was community property. The court agreed finding that, in a dispute between spouses, the title presumption did not apply and, where the couple had not complied with the writing requirements of the transmutation provision, the community property presumption prevailed.
The appellants and NCBRC, as amicus on behalf of the NACBA membership, countered that Valli does not apply in bankruptcy cases involving spouses whose interests are aligned against a third-party creditor. Rather, appellants and amicus argued that In re Summers, 332 F.3d 1240, 1243 (9th Cir. 2003) governs this case. There, the Ninth Circuit found that the form of title presumption prevailed over the community property presumption as against a third party creditor.
The Ninth Circuit found that based on statutory text, the issue could be resolved in favor of either party, and that there was no clear California precedent offering resolution. Therefore, interests of comity compelled it to seek a definitive answer from the state supreme court.