Jointly Owned Property Is Presumptively Community Property in California

Armed with an answer from the California Supreme Court to a certified question, the Ninth Circuit held that property purchased as joint tenants by a husband and wife after 1975 is nonetheless treated as community property in bankruptcy. If only one spouse has filed bankruptcy, the trustee may therefore sell the entire property and distribute all of the proceeds to creditors of the bankrupt spouse.

Property Purchased as Joint Tenants

A couple married in 1972 and purchased a home in 1977 or 1978 with community property. The year unknown, they later purchased a second property, again using community property. They held title to both properties as joint tenants. The husband alone filed a chapter 7 petition in 2011.

The trustee sought a declaration that both properties were community property, even though the deeds showed the couple to be joint tenants. If the properties were indeed community property under California law, Section 541(a)(2) would make the properties part of the husband’s bankrupt estate, which the trustee could sell, distributing all net proceeds to creditors of the husband.

If the properties were owned jointly, the trustee could sell the properties, but the trustee would apportion the net proceeds between the estate and the nonfiled wife under Sections 363(h) and (j).

Upheld by the Bankruptcy Appellate Panel, the bankruptcy judge ruled that the properties were community property, cutting the nonfiled wife out of the sale proceeds. The couple appealed.

The Certified Question

The appeal raised an unresolved question involving two provisions in California law. Section 760 of the California Family Code creates a presumption that all property acquired during marriage is community property, regardless of how the title reads. In a matrimonial setting, the section was designed to protect a spouse from waiving his or her interest in community property by failing to understand the significance of taking title jointly.

On the other hand, Section 662 of the California Evidence Code provides that the “owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof.”

Under Section 662, the couple argued that taking title jointly was “clear and convincing proof” of intent to own the property jointly, thus defeating the community property claim.

There being no precedent from California courts, the Ninth Circuit certified a question in November 2018, asking the California Supreme Court to decide whether the presumption of community property in the Family Code governs the characterization of joint tenancy property in a dispute between a bankruptcy trustee and one of the spouses.

The California Supreme Court Sides with Community Property

The California Supreme Court answered the question in July, coming down on the side of the bankruptcy trustee. Brace v. Speier, 470 P.3d 15 (Cal. Sup. Ct. July 23, 2020).

The 45-page opinion by Justice Goodwin H. Liu meticulously traces the evolution of California law regarding jointly held and community property. Tellingly, he said that “our community property system has gradually evolved toward one that affords both spouses equal interests and control over community assets.”

More granularly, Justice Liu held “that Evidence Code section 662 does not apply when it conflicts with the Family Code section 760 community property presumption. Further, we hold that when a married couple uses community funds to acquire property with joint tenancy title on or after January 1, 1975, the property is presumptively community property under Family Code section 760 in a dispute between the couple and a bankruptcy trustee.”

Justice Liu was careful to explain how the rule is not absolute.

For instance, a spouse can rebut the presumption by showing that the property was acquired with separate property. In addition, another provision in the Family Code, Section 852(a), allows the parties to “transmute,” or change, the ownership of property from separate to community, or vice versa, “by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.” However, Section 852(a) does not apply to a transmutation made before 1985.

For property acquired before 1985, Justice Liu explained that the parties could “show a transmutation from community property to separate property by oral or written agreement or a common understanding.” He held that a “joint tenancy deed, by itself, does not suffice.” In the case on appeal, the couple claimed they had made an oral transmutation sometime in the 1970s.

Justice Leondra R. Kruger dissented in part. She disagreed only as to timing.

Justice Kruger would have found that the transmutation rule in Section 852 came into effect in 1985, not 1975. She therefore would have held that the property acquired before 1985 was presumptively separate property.

The Final Answer from the Ninth Circuit

The answer to the certified question in hand, District Judge David A. Ezra ruled for the Ninth Circuit by affirming in part and remanding. Judge Ezra was sitting by designation from the District of Hawaii.

Judge Ezra interpreted the state high court’s ruling to mean that a joint tenancy acquired after 1975 is presumptively community property. Consequently, the trustee is entitled to distribute the net proceeds to creditors from the home purchased in 1977 or 1978.

However, the bankruptcy court had not determined when the second home was acquired. He therefore remanded and directed the bankruptcy court to decide whether the second property was acquired before 1975.

The bankruptcy court had found the couple’s contention about an oral transmutation in the 1970s to be “unpersuasive.” Judge Ezra saw “no clear error” in finding there had been no transmutation of either property. In other words, the wife lost the proceeds to the home purchased in 1977 or 1978 and will lose on the other home absent proof it was acquired before 1975.

Observations

Financial planners in community property states should take the opinion into consideration. If one spouse anticipates incurring debts in a risky enterprise, the couple should consider transmuting ownership of community property. However, the financial planner should remember that a transmutation might be a fraudulent transfer if done when insolvency is on the horizon.

In a community property state, a creditor of one spouse can attach community property, even though the other spouse is not liable on the debt. Section 541(a)(2) carries the result over into bankruptcy.

In a community property state, Section 541(a)(2) puts a solvent spouse at a disadvantage compared to a similarly situated spouse in a non-community property state. Although states can do whatever they wish with their own residents, a solvent non-filed spouse in a community property state might consider attacking Section 541(a)(2) under the Uniformity Clause.

The opinions are Brace v. Speier (In re Brace), 17-60032 (9th Cir. Nov 9, 2020); and Brace v. Speier, 470 P.3d 15 (Cal. Sup. Ct. July 23, 2020).