Family Code § 760 provides that “[e]xcept as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in [California] is community property.” This statute codifies a presumption that property acquired by a spouse during marriage is community property.
Family Code §§ 850-853 allow spouses to “transmute” community property to separate property of either spouse. The requirements for a transmutation are strictly enforced. Among other things, a transmutation of real property “is not valid unless made in writing by an express declaration that is made in, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.”
California’s Evidence Code contains a series of presumptions which dictate which party has the initial burden of providing evidence or proving certain facts. A presumption affecting the burden of proof is not evidence; it simply reflects a policy decision made by the Legislature, “such as the policy in favor of . . . the stability of titles to property.” Evidence Code § 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 commonly referred to as the “title presumption.”
When spouses purchase a home in California, they usually don’t give much thought 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.
What most people don’t realize is that when two people take title as joint tenants, each person separately owns a one-half interest in the property. In fact, each person has the right to transfer his or her one-half interest to a third party without the other joint tenant’s approval or consent. Obviously, this is not what most spouses intend when they buy their family home.
This has been an issue for decades. In 1965, California’s Legislature observed that “husbands and wives take property in joint tenancy without legal counsel but primarily because deeds prepared by real estate brokers, escrow companies and by title companies are usually presented to the parties in joint tenancy form. The result is that they don’t know what joint tenancy is, that they think it is community property, and then find out upon death or divorce that they didn’t have what they thought they had all along and instead have something else which isn’t what they had intended.”
The Legislature expressly addressed this issue in the context of divorce and legal separation. Today, Family Code § 2581 provides that “[f]or the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in . . . joint tenancy . . . or as community property, is presumed to be community property. This presumption . . . may be rebutted by . . . [a] clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property.” It may also be rebutted by proof that the parties “made a written agreement that the property is separate property.” The Law Revision Commission comments state that “[t]he community property presumptions created by [§ 2581] are applicable only in dissolution and legal separation proceedings.”
Family Code §§ 760 and 850-853, and Evidence Code § 662, present some difficult questions when spouses acquire real property as joint tenants. Family Code § 2581 eliminates some of those questions in the context of divorce and legal separation proceedings. However, they continue to arise in bankruptcy cases when one spouse files for bankruptcy.
Does the “title presumption” in Evidence Code § 662 rebut the “community presumption” in Family Code § 760? If the answer is yes, each spouse should be presumed to separately own a one-half interest. If this presumption cannot be rebutted by “clear and convincing proof,” a bankruptcy trustee will be able to sell only the debtor’s one-half interest to generate funds to pay creditors. (The other half of the net sale proceeds will be paid to the non-debtor spouse.)
If the “title presumption” does not rebut the “community presumption,” does the act of taking title as joint tenants transmute the property from community property to separate property? If the answer is yes, each spouse owns a one-half interest and, again, a bankruptcy trustee will be able to sell only the debtor’s one-half interest.
If the “title presumption” does not rebut the “community presumption,” and if the act of taking title as joint tenants does not transmute the property from community property to separate property, what’s the point of Family Code § 2581? At least as to real property that spouses acquire as joint tenants, is that section superfluous?
In 2003, although it did not cite to Evidence Code § 662, the Ninth Circuit answered “Yes” to the first question. In re Summers, 332 F.3d 1240 (9th Cir. 2003). First, relying on California appellate court and lower federal court decisions, the Ninth Circuit concluded that the community presumption is rebutted when spouses acquire real property from a third party as joint tenants. Second, the court held that California’s transmutation statutes do not apply to transactions in which spouses acquire property from third parties.
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 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.
In bankruptcy cases, Valli reopened the door previously shut by Summers. Not only did the California Supreme Court reject Summers’ second holding, it expressly stated that the title presumption “does not apply when it conflicts with the transmutation statutes.” This latter statement was expanded on by Justice Chin in a concurrence in which he stated that the title presumption “plays no role” in an action between spouses in which the community presumption controls.
That brings us to In re Brace.
Clifford and Ahn Brace were married in 1972. In the late 1970s, they purchased a home in Redlands and 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 determining that the properties were community property and, therefore, entirely property of the bankruptcy estate. The Ninth Circuit’s Bankruptcy Appellate Panel affirmed, and the matter was appealed further to the Ninth Circuit Court of Appeals.
On November 8, 2018, the Court of Appeals certified a question to the Supreme Court of California. Although the California court is not bound by the Ninth Circuit’s formulation of the question, the question is as follows:
Does the form of title presumption set forth in section 662 of the 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?
If it accepts the question, the California Supreme Court’s answer will have a significant impact on cases in which only one spouse files for bankruptcy. In many such cases, the answer will determine whether creditors receive anything at all.