Dear constituency list members of the Insolvency Law Committee, the following is a recent case update.
On January 16, 2019, the California Supreme Court granted the request of the U.S. Court of Appeals for the Ninth Circuit to decide questions of California law relevant to the Ninth Circuit’s determination of Brace v. Speier (In re Brace), No. 17-60032 (9th Cir.). The question presented by the Ninth Circuit is whether the “form of title” presumption in California Evidence Code section 662 overcomes the presumption in California Family Code section 760 that all property acquired by a married person during marriage is community property.
To read the Ninth Circuit’s Order Certifying Question to the Supreme Court of California, click here.
Clifford and Ahn Brace were married in 1972. In the late 1970s, they purchased a home in Redlands. At some point they also purchased a rental property in San Bernardino. They took title to each property as “husband and wife as joint tenants.”
In 2011, Mr. Brace filed for bankruptcy. After some preliminary legal issues were resolved, the bankruptcy court needed to decide whether the bankruptcy estate owned 100%, or just 50%, of each property. In 2015, the bankruptcy court entered a judgment in favor of the chapter 7 trustee determining that the properties were community property and, therefore, entirely property of the bankruptcy estate. See 11 U.S.C. § 541(a)(2). In a published decision, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit affirmed. Brace v. Speier (In re Brace), 566 B.R. 13 (9th Cir. BAP 2017). The BAP’s decision was the subject of an ILC e-Bulletin authored by Michael W. Davis and published on October 16, 2017.
QUESTIONS PRESENTED TO THE CALIFORNIA SUPREME COURT
In California, there is a statutory presumption that property acquired by a married person during the marriage while domiciled in California is community property. See Cal. Fam. Code § 760. By written agreement, spouses can “transmute” community property into separate property of either spouse. See Cal. Fam. Code §§ 850-853.
Separately, California’s Evidence Code contains a series of presumptions which dictate which party has the initial burden of providing evidence or proving certain facts. Evidence Code section 662 provides that “[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title.” This is sometimes referred to as the “title presumption.”
In 2003, the Ninth Circuit held that the community property presumption is rebutted when spouses acquire real property from a third party as joint tenants, and that there is a rebuttable presumption that “‘where the deed names the spouses as joint tenants . . . the property [is] in fact held in joint tenancy.’” Hanf v. Summers (In re Summers), 332 F.3d 1240, 1243-44 (9th Cir. 2003) (quoting Hansen v. Hansen, 233 Cal.App.2d 575, 594 (1965)). The Ninth Circuit also held that California’s transmutation statutes do not apply to transactions in which spouses acquire property from third parties because there is “no interspousal transaction requiring satisfaction of the statutory formalities.” Id. at 1245.
The second holding of Summers was expressly rejected by the California Supreme Court in Marriage of Valli, 58 Cal.4th 1396 (2014). In that case, a husband used community property funds to purchase an insurance policy on his life, naming his wife as the policy’s owner and beneficiary. Later, in divorce proceedings, the husband asserted that the policy was community property. The California Supreme Court agreed, because the husband had not made, joined in, consented to, or accepted a written, express declaration that the character or ownership of the insurance policy was being changed from community property to the wife’s separate property. The court expressly stated that the title presumption “does not apply when it conflicts with the transmutation statutes.” Valli, 58 Cal.4th at 1406.
The ultimate issue in Brace is whether the debtor’s act of taking title to the real properties as a joint tenant with his spouse rebuts the community property presumption or qualifies as an effective transmutation. To assist in addressing this issue, the Ninth Circuit certified the following question to the California 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?On January 16, 2019, the California Supreme Court granted the Ninth Circuit’s request to decide the question presented. (The Ninth Circuit’s phrasing of the question does not restrict the California Supreme Court’s consideration of the issues involved; the court may restate the question. Cal. R. Ct. 8.548(f)(5).) Briefing in the California Supreme Court is ongoing.
When spouses purchase a home in California, they usually don’t give much thought as to how title should be held. Historically, spouses have taken title as joint tenants so that, when one spouse dies, the ownership interest of the deceased spouse automatically transfers to the surviving spouse. This “right of survivorship” is convenient because it avoids the need for a probate. But most people don’t realize that if the joint tenancy is given full effect each spouse separately owns a one-half interest in the property and has the power to transfer his or her one-half interest without the other spouse’s consent. Obviously, this is not what most spouses intend when they buy a family home. The Ninth Circuit’s certification reflects how difficult it is to apply Valli in this context.
Assuming that the California Supreme Court does not modify the question presented, I believe that it will rule that the “form of title presumption” does not overcome the “community property presumption.” Family Code section 760 provides that “[e]xcept otherwise provided by statute,” all property acquired by a married person during marriage while domiciled in California is community property. Sections 770 through 853 contain various exceptions to this rule.
Evidence Code section 662 establishes only an evidentiary presumption. “A presumption is not evidence.” Cal. Evid. Code § 660. A presumption affecting the burden of proof (such as section 662) imposes “upon the party against whom it operates the burden of proof as to the nonexistence of the presumed fact.” Cal. Evid. Code § 606. It does this to implement “some public policy other than to facilitate the determination of the particular action in which the presumption is applied . . . such as the policy in favor of . . . the stability of titles to property.” Cal. Evid. Code § 605. Evidence that property was acquired by spouses during marriage, thus implicating Family Code section 760, should be sufficient to overcome the evidentiary presumption. Also, in Valli, the California Supreme Court confirmed that the form of title presumption “does not apply when it conflicts with the transmutation statutes” in Family Code sections 850-853.
The fact that the interests of the debtor and non-debtor spouse are aligned against the trustee should not have any bearing on the outcome. The Ninth Circuit included this fact within the certified question because the appellants seized on a comment in Justice Chin’s concurrence in Valli that language in Family Code section 2581 (which applies in the context of divorce and separate proceedings) “suggests that rules that apply to an action between the spouses to characterize property acquired during the marriage do not necessarily apply to a dispute between a spouse and a third party.” However, since the estate’s rights in property derive directly from the rights held by the debtor on the petition date, the trustee is not truly a third party. See 11 U.S.C. § 541(a). Further, query whether the debtor even has standing to appeal (and thus align himself with his wife against the trustee) given his argument that he has no legal or beneficial interest in his wife’s allegedly separate ownership interest in the property. Indeed, by involving himself in the dispute, the debtor is arguably violating his duty to cooperate with the trustee to enable the trustee to expeditiously administer property of the estate. See 11 U.S.C. §§ 521(a)(3), 704(a).
Regardless of how it answers the Ninth Circuit’s question, the California Supreme Court’s answer will have a significant impact on cases in which only one spouse files for bankruptcy. If the California Supreme Court’s decision formally abrogates the Ninth Circuit’s first holding in Summers, it will confirm that trustees may sell properties held by spouses as joint tenants and, subject to debtors’ exemptions, distribute all of the sale proceeds to creditors. In some cases, the answer will determine whether creditors receive anything at all.
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles (firstname.lastname@example.org). Editorial contributions were provided by the Hon. Judge Meredith A. Jury (ret.).
Insolvency Law Committee
Marcus O. Colabianchi
Duane Morris LLP
Rebecca J. Winthrop
Norton Rose Fulbright US LLP
Kyra E. Andrassy
Smiley Wang-Ekvall, LLP
Gary B. Rudolph
Sullivan Hill Rez & Engel, APLC