The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, analyzing a recent decision of interest:

SUMMARY

In Speier v. Brace (In re Brace), ___ Cal. 4^th ___, 2020 WL 4211750 (No. S252473, July 23, 2020) (“Brace”), a case certified to it by the United States Ninth Circuit Court of Appeals (the “Ninth Circuit”), the California Supreme Court (the “Court”), held that the community property presumption of California Family Code section 760 (“FC 760”) applies not only in disputes between the spouses, such as divorces, but also overrides the form of title presumption of California Evidence Code section 662 (“EC 662”) in a dispute between the spouses and a bankruptcy trustee in the husband’s Chapter 7 case. The Brace opinion can be found here.

FACTS

Clifford (“Clifford”) and Ahn (“Ahn”) Brace (together, the “Braces”) bought two parcels of property with community funds, taking title to each as “husband and wife as joint tenants.” Many years later, Clifford filed a solo Chapter 7 petition. Although under California law community property is liable for both the separate pre-marriage and the marriage community debts of a couple, the separate property of each, if any, is not liable for community debts or the separate debts of the other spouse.

The appointed Chapter 7 trustee argued that the properties were community assets and thus subject to the claims of the Brace’s community creditors and Clifford’s separate debts in Clifford’s bankruptcy. The trustee relied on FC 760, which provides that property acquired with community assets curing the marriage is presumed to be community property, arguing that FC 760 overrides a joint tenant title not only in a purely intra-spousal dispute such as a divorce, but also in a dispute between a spouse and a third party such as the trustee. The Braces countered that EC 662’s presumption in favor of the form title controlled, freeing Ahn’s joint tenancy interest in the properties from creditors in Clifford’s case. The bankruptcy court and the 9^th Circuit Bankruptcy Appellate Panel agreed with the trustee. The Braces appealed to the Ninth Circuit, which certified the question of which statute applies to the Court. Accepting the referral, the Court affirmed.

REASONING

The 45-page opinion includes an illuminating lengthy discussion of the history of community property and property title in California, stopping to characterize the state of the law as various statutes and decisions intervened. Boiled down to its essentials, however, the Supreme Court’s core reasoning is fairly simple.

The Legal Backdrop. The key statutes referenced in the opinion are as follows. FC 760 states that except as otherwise provided by statute, property acquired by a spouse during marriage is community property. There are a number of statutory exceptions that specifically mention FC 760 but none are relevant here. Family Code (“FC”) sections 852(a) and (e) (“FC 852”) provide that a spouse can transmute property from community to separate by an express declaration in writing made, joined in, consented to or accepted by the affected spouse, a very technical, exacting standard. Finally, under EC 662 the holder of legal title to property is presumed is to be owner of the corresponding beneficial interest absent contrary clear and convincing evidence.

The central question in Brace is whether FC 760 or EC 662 governed the fate of the properties in Clifford’s bankruptcy case. The two statutes on their faces do not expressly apply to or exclude either specifically or generically the situation before the Court. For example, EC 662 does not override FC 760 by specific reference or by general language such as “not withstanding any other statute.” And FC 760 is silent on whether it applies only to intra spousal disputes or also determines spousal disputes with third parties. Nor does either statue on its face differentiate between transactions or disputes involving third parties.

Initially, the Court noted that it already had determined that FC 760 applies in a marriage dissolution dispute involving a transaction by one spouse with a third party using community property. Marriage of Valli, 58 Cal. 4^th 1936 (2014) (FC 760 determines whether life insurance policy husband bought with community funds in wife’s name only is community property or wife’s separate property; transmutation of property rules of FC 852, which were not satisfied, apply to transactions with third party as well to intra-spousal transactions, and EC 662 would govern only if it did not conflict with FC 852). In Brace, the Court then took the next obvious step to hold that the same analysis applies to disputes with third parties and outside the context of a marriage dissolution proceeding.

Given that the statutes at issue do no directly address the situation, the Court resorted to historical tracing of the development of marriage and community property law and to the policy considerations that review entailed. The historical review highlighted the trend toward giving each spouse equal control and management over community property, primarily as protection to the wife because previously community property law had given the wife little more than a naked right to half of the community property (or whatever was left of it due to transactions by the controlling husband) upon divorce. This trend butted up against traditional common law rules (latter codified) designed to protect the stability and clarity of title to property. Thus, one concern before the Court was protection of the expectations of the equal rights and powers of spouses regarding community property, as reflected in such provisions as FC 760 and FC 852. The other was the importance of stability of title, as embodied in such statutes as EC 662.

With this legal saga in mind, it was easy for the Court to extend Valli to disputes between the couple and third parties such as the trustee. The more specific concern of protecting spouses’ expectations and welfare expressed in FC 760 outweighs the general concern about stability of title in EC 662. The latter is ameliorated in part by the fact that spousal joint tenancy deeds often say just what the Braces’ said: “husband and wife as joint tenants.” (Emphasis added.) This puts creditors on notice of the possibility that the joint tenancy is really community property. By the same token, FC 852 no doubt more closely aligns with this practice by ensuring that the spouses do not in advertently convert community to separate property; they must comply with its stringent provisions so that transmutation in this important arena does not occur by accident or ignorance. Moreover, other provisions of law support stability of title of spousal property: e.g., FC 852 (requiring very specific steps to transmute property from community to separate); FC 1102(c)(2) (protecting third party transactions with one spouse with record title other than as community property in what would be by law community property when the third party acts in good faith without knowledge of the community nature of the property).

AUTHOR’S COMMENT

Given the absence of clear statutory directives for the situation that confronted the Court, it is hard to argue with its resolution of the case in favor of the modern trend and commitment to protecting both spouses. And while stability of title is a venerable important concern, it is not paramount in all situations. In that regard, as the Court explains, the shadow on this policy that Brace may represent is not large or dark, and there usually are ways for prudent parties to mitigate the risk.

A few other points bear noting. First, Brace and FC 760 only apply to property acquired after 1975. Second, the opinion is not a mere reaction to perceived abusive liability planning by the Braces. The 15 page concurring and dissenting opinion begins with the observation that the purchases at issue were made “decades” before Clifford’s bankruptcy case. This fact underscores Court’s reliance on policy considerations protecting spouses to decide the case, foreshadowing it was not just groping for a way to reach a preferred result. Thus, those considerations likely will inform future cases where similar kinds of issues are at stake. Finally, the dissent/concurrence’s concern is not with the basic analysis of the Court or the result, but a disagreement as to whether the regime the opinion establishes should begin in 1985 rather than 1975 because the former date is when FC 852 (with its strict requirements for transmutation of property from community to separate) became effective. Though no dates for the purchases are stated, it appears the result in Brace would have been the same either way.

These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.