In re Brace – California Supreme Court holds “form of title” presumption in Evidence Code does not apply when it conflicts with Family Code’s community property presumption.

Dear constituency list members of the Insolvency Law Committee, the following is a recent case update.

SUMMARY

On July 23, 2020, in Speier v. Brace, __ P.3d __, __, 2020 WL 4211750, 2020 Cal. LEXIS 4642 (July 23, 2020), the California Supreme Court issued an opinion answering questions posed by the Ninth Circuit Court of Appeals in Brace v. Speier (In re Brace), 908 F.3d 531 (9th Cir. 2018).  In sum, the Court held that:

• The “form of title” presumption in California Evidence Code § 662 does not apply when it conflicts with the community property presumption in California Family Code § 760.
• Property acquired by spouses as joint tenants, with community funds, before January 1, 1975, is presumed to be separate property.
• Property acquired by spouses as joint tenants, with community funds, on or after January 1, 1975, is presumed to be community property.
• A grant deed from a third party, in itself, is not sufficient to overcome the community property presumption.  What is required depends on whether the property was acquired before or after January 1, 1985. 
• If the property was acquired before January 1, 1985, the community property presumption may be rebutted by substantial evidence of an oral or written agreement or a common understanding between the spouses.  A court may consider the fact that title was taken as joint tenants as part of its determination as to whether such an agreement or understanding existed.
• If the property was acquired on or after January 1, 1985, there must be a written transmutation that satisfies the requirements of Family Code § 852.  A grant deed, in itself, is not sufficient to transmute community property into separate property.

To read the California Supreme Court’s decision, click here.

Background

Clifford and Ahn Brace were married in 1972.  In the late 1970s, they purchased a home in Redlands.  At some point, although it is not clear when, they also acquired a rental property in San Bernardino.  They took title to each property as “husband and wife as joint tenants.”

In 2011, Mr. Brace filed a chapter 7 petition.  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.  The bankruptcy court determined 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.  Mr. Davis’s e-Bulletin may be found here.

The Braces appealed to the Ninth Circuit.  In a published order, the Ninth Circuit requested that the California Supreme Court decide the following certified question:

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?

Brace v. Speier (In re Brace), 908 F.3d 531 (9th Cir. 2018).  The Ninth Circuit’s request was the subject of an ILC e-Bulletin authored by John N. Tedford, IV, and published on March 18, 2019.  Mr. Tedford’s e-Bulletin may be found here.

The California Supreme Court reformulated the question as follows:

[W]hether the form of title presumption set forth in Evidence Code section 662 applies to the characterization of property in disputes between a married couple and a bankruptcy trustee when it conflicts with the community property presumption set forth in Family Code section 760.

The Court’s answer – a thorough 45-page majority opinion and a 12-page concurring and dissenting opinion by Justice Kruger – examines a “snarl of conflicting presumptions” going back to the 1800s.  In the end, for property acquired after January 1, 1975, the Court adopted a bright-line rule that the California Legislature declined to expressly adopt in the 1980s.

The Court’s Reasoning

1850–1930: The Community Property Presumption and the Married Woman’s Presumption

The California Legislature first enacted a general community property presumption in 1850.  In 1872, it enacted former Civil Code § 164: “All other property acquired after marriage, by either husband or wife, or both, is community property.”  However, the early community property system afforded a wife no management or control over community property.

In 1889, the Legislature enacted the so-called “married woman’s presumption.”  First, if property was conveyed to a married woman by an instrument in writing, it was presumed to be her separate property.  Second, if property was conveyed to a married woman and to her husband, the portion conveyed to her was presumed to be taken as a tenant in common unless a different intention was expressed in the instrument.

The fact that the phrase “unless a different intention is expressed in the instrument” appeared only as part of the married woman’s presumption is key.  According to the majority, the married woman’s presumption is the only place in which the form of title, in itself, determined whether jointly titled property was characterized as community or separate property.  As discussed below, the married woman’s presumption does not apply to property acquired on and after January 1, 1975.  Therefore, according to the majority, neither does the rule that allowed the form of title to determine the character of the property.

1931–1932: The Siberell Rule

In some cases, former Civil Code § 164 led courts to determine that the wife owned 75% of property jointly deeded to a husband and wife.  One such case was Dunn v. Mullan, 211 Cal. 583 (1931).  After both spouses died, the Court determined that the wife had a separate interest in half of the property as a tenant in common, but that did not mean that the husband had a separate interest in the other half.  Rather, under the general community property presumption, the other half of the property was community property.  The wife’s 75% interest was probated to her heirs, and the husband’s 25% interest was probated to his.

The following year, the Court decided a key case called Siberell v. Siberell, 214 Cal. 767 (1932).  Siberell was a dissolution action in which the wife argued that she had a 75% interest in a house titled in joint tenancy.  In rather sweeping terms, for two reasons, the Siberell Court declined to extend Dunn’s rule to joint tenancy deeds in the context of divorce.

First, the Siberell Court stated that “from the very nature of the estate, as between husband and wife, a community estate and a joint tenancy cannot exist at the same time in the same property.  The use of community funds to purchase the property and the taking of title thereto in the name of the spouses as joint tenants is tantamount to a binding agreement between them that the same shall not thereafter be held as community property but instead as a joint tenancy with all the characteristics of such an estate.”

Second, the Siberell Court said that, on its face, Civil Code § 164 had no application to a case where a different intention was expressed in the instrument.  The Siberell Court concluded that the deed conveying title to the spouses as joint tenants was “an expression of the intention to hold the property otherwise than as community property and that the equal interest of the spouses must therefore be classed as their separate but joint estate in the property.”

As formulated by Justice Kruger in her concurring and dissenting opinion, the “Siberell rule” is as follows: “[S]pouses who take title to property as joint tenants are presumed to have intended to transmute their community property to separate property.”

In Brace, the majority interpreted Siberell narrowly.  According to the majority, Siberell addressed a peculiar circumstance arising from the tension between the married woman’s presumption and fundamental concepts of joint tenancy.  Also according to the majority, the decision in Siberell was limited to dissolution actions between spouses.  The majority noted that less than one year earlier, in Hulse v. Lawson, 212 Cal. 614 (1931), the Court had held that one spouse’s creditor could reach the entirety of a couple’s property held in joint tenancy because it was community property.  To the Brace majority, the fact that Siberell reached a different result in the dissolution context without disavowing Hulse indicates that the scope of Siberell’s holding is limited.

Justice Kruger, on the other hand, argued that Siberell’s holding was not limited to dissolution actions.  She cited cases that applied the Siberell rule outside the dissolution context, including to claims made by third party creditors.  She also noted that the Legislature understood Siberell to apply outside of the dissolution context in 1965 when it abrogated the Siberell rule for certain types of property held in joint tenancy, but solely for purposes of dissolution proceedings.  According to Justice Kruger, there would not have been any need to limit the 1965 legislation (discussed below) to dissolution proceedings if the Siberell rule did not apply outside of the dissolution context.

1933–1974: Legislature’s Adoption of the Siberell Rule Where the Deed Identified the Spouses as Husband and Wife, and Extension of the Community Property Presumption to Certain Property Held As Joint Tenants (But Only When Dividing Property in a Dissolution Proceeding)

In 1935, the Legislature amended the married woman’s presumption in former Civil Code § 164 to add that a conveyance to spouses describing them as husband and wife created a presumption of community property “unless a different intention is expressed in the instrument.”  According to the Brace majority, this phrase suggests that the Legislature approved of the Siberell view that an instrument that vests title as a joint tenancy expresses a “different intention” of the parties.

Over the years, courts applied the Siberell rule and the statutory presumption in the context of both divorce proceedings and disputes involving third-party creditors.  Doing so was particularly difficult in the divorce context, because courts were often unable to award the family home to one of the spouses.

The Legislature recognized that most spouses took title to their homes as joint tenants without really realizing what it meant to own property as joint tenants.  Therefore, in 1965, the Legislature amended Civil Code § 164 to provide that when spouses acquired a single family residence as joint tenants, for purposes of division of the property upon divorce, the property was presumed to be community property.

1975–1984: Landmark Reforms Giving Spouses Equal Management over Community Property, and Prospective Abolition of the Married Woman’s Presumption

In 1973, the Legislature enacted landmark reforms to the community property system.  Among other things, wives were allocated equal management rights over community property.  The Brace majority observed that this “eroded the original impetus for” the married woman’s presumption, which was prospectively eliminated as of January 1, 1975.  According to the majority, the Legislature also prospectively eliminated the 1935 language in former Civil Code § 164 (property jointly deeded to “husband and wife” is presumptively community property “unless a different intention is expressed in the instrument”).

According to the majority, the 1973 legislation eliminated (prospectively) the basis for the Siberell rule privileging the form of title.  Thus, “as a result of the 1973 legislation, the form of title in property jointly held by a married couple can defeat the general community property presumption only for property acquired before 1975.”  For property acquired on or after January 1, 1975, the general community property presumption applies.

Justice Kruger disagreed.  She argued that Siberell remained good law after the 1973 amendments went into effect.  She pointed out that, at the time, courts and the Legislature treated the Siberell form of title presumption as if it survived the 1973 amendments.  According to Justice Kruger, it was the 1984 amendments (discussed below), not the 1973 amendments, that changed this aspect of the law.

During this time period, a transmutation could be shown by an oral or written agreement or a common understanding between the spouses.

1985-Present: Adoption of Strict Transmutation Requirements

In 1984, the Legislature enacted California’s present-day transmutation statutes.  Under those statutes, for property acquired on or after January 1, 1985, a transmutation “is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.”  This strict requirement was enacted to curb the risk of fraud, undue influence, and litigation arising from informal agreements between the spouses.

In 1992, the Legislature created the Family Code.  Today:

• The general community property presumption is found in Family Code § 760.  Unlike the former Civil Code provisions which also contained the married woman’s presumption, Family Code § 760 does not permit the community property presumption to be rebutted simply by the manner in which a married couple takes title.
• The married woman’s presumption and the post-Siberell rule allowing form of title to rebut the community property presumption are found in Family Code § 803 and apply only to property acquired before 1975.
• The transmutation requirements are found in Family Code §§ 850-853.  Although a deed may expressly declare that title is vested as joint tenants, it does not contain language which expressly states that the characterization or ownership of the property is being changed between the spouses.  Therefore, the form of the deed does not constitute an express declaration that transmutes community funds into separate property.
• The community property presumption applicable at divorce is found in Family Code § 2581 and extends to all property acquired by the parties during marriage in joint form, including joint tenancy.  Section 2581 limits the type of evidence that may be used to rebut the presumption.

The Court rejected the notion that Evidence Code § 662 trumps Family Code § 760.  The Court stated that ruling otherwise would carve a major hole in the community property system and would run counter to the intent of the 1973 legislation that prospectively eliminated separate property inferences from form of title.

The Court also rejected the Braces’ argument that because Family Code § 2581 establishes a community property presumption in the context of divorce, spouses hold property as joint tenants in their dealings with third parties.  According to the Court, the general community property presumption may be rebutted by tracing.  However, the community property presumption in Family Code § 2581 can only be rebutted by (1) a clear statement in the title document that the property is separate property and not community property, or (2) proof that the parties made a written agreement that the property is separate property.  “Thus, the import of Family Code section 2581 is that it establishes a stronger presumption of community property at dissolution when title is held in joint form, while the general community property presumption, rebuttable by tracing, applies at dissolution to property not held in joint form.”

Finally, the Court said that its approach does not undermine the stability of title in the context of probate.  The Court noted that courts have consistently held that, for property titled in joint tenancy, the form of title controls at death.  The Court also found support for this proposition in Family Code § 2040 (requiring certain language in a divorce summons) and Civil Code § 682.1 (creating “community property with a right of survivorship” as a new form of title).  The Court stated that its decision “does not alter the well-established default rule that form of title controls at death.”

In sum: “The particular manner in which property is acquired, titled, or held by a married couple is conceptually and legally distinct from the underlying character of the spouses’ ownership of the property as separate or community.”

Author’s Commentary

First, 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.  Brace brings things back in line with spouses’ expectations.

Second, for at least one of the properties in Brace, the Court’s answer to the seemingly academic question of what presumption applies for property acquired from 1975 through 1984 will make a difference.  The Braces purchased their Redlands residence in the late 1970s.  Under the majority rule, because the residence was acquired after January 1, 1975, it is presumed to be community property.  But because it was acquired before 1985, the Braces can theoretically rebut the presumption by providing substantial evidence of an oral or written agreement or a common understanding between the spouses.  (I say “theoretically” because it appears that the bankruptcy court may have already found that no such agreement or understanding existed.)  In contrast, if Justice Kruger’s minority view had prevailed, each of the Braces would be presumed to have a separate property joint tenancy interest in the residence; it would then be the Trustee’s burden to rebut that presumption.

Third, 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)).  Brace effectively overrules Summers.  So under Brace’s ruling, money that used to go to non-debtor spouses will go to pay costs of administration and creditors.

Fourth, when the California Law Revision Commission recommended in 1983 that the Legislature enact transmutation requirements now found in Family Code §§ 850-853, it also recommended the following new statute:

Except as otherwise provided by statute, the form of title to property acquired by a married person during marriage does not create a presumption or inference as to the character of the property, and is not in itself evidence sufficient to rebut the presumptions established by this article.

The perceived need for such a provision bolsters Justice Kruger’s conclusion that the Siberell rule survived the 1973 amendments.  Notably, the Estate Planning, Trust and Probate Law Section of the California State Bar opposed it on the grounds that “the form of title should create a presumption as to the character of the property.”  See In re Marriage of Brooks, 169 Cal.App.4th 176, 189 (2008).  To allow for additional time to consider the proposed presumptions and their effect, this provision was deleted from a then-pending bill.  Id.  The Court arguably has now adopted a rule that the Legislature declined to enact.

Finally, while in my view the Court reached the right conclusion, I struggle to reconcile it with Family Code § 2581.  Brace effectively holds that property acquired by spouses in joint form is presumed to be community property.  If that has been the law all along since 1975 or 1985, there seems to be no reason for § 2581 to establish that rule specifically for the purpose of division of property in divorce proceedings.

These materials were written by John N. Tedford, IV, of Danning, Gill, Israel & Krasnoff, LLP, in Los Angeles (jtedford@DanningGill.com).  Editorial contributions were provided by the Hon. Meredith A. Jury (United States Bankruptcy Judge, C.D. Cal., Ret.).