Speier v. Brace (In re Brace)

• Decision Date: 23 July 2020
• Docket Number: S252473
• Citation: 470 P.3d 15,9 Cal.5th 903,266 Cal.Rptr.3d 298
• Court: California Supreme Court
• Parties: IN RE Clifford Allen BRACE, Jr., Debtor Steven M. Speier, as Trustee in Bankruptcy, etc., Plaintiff and Respondent, v. Clifford Allen Brace, Jr., individually and as Trustee, etc., et al., Defendants and Appellants.

9 Cal.5th 903

470 P.3d 15

266 Cal.Rptr.3d 298

IN RE Clifford Allen BRACE, Jr., DebtorSteven M. Speier, as Trustee in Bankruptcy, etc., Plaintiff and Respondent,

v.Clifford Allen Brace, Jr., individually and as Trustee, etc., et al., Defendants and Appellants.

S252473

Supreme Court of California.

July 23, 2020

Law Offices of Stephen R. Wade, Stephen R. Wade ; Law Office of W. Derek May and W. Derek May for Defendants and Appellants.

Grace Ganz Blumberg, Los Angeles, as Amicus Curiae on behalf of Defendants and Appellants.

Tara Twomey for National Association of Consumer Bankruptcy Attorneys and National Consumer Bankruptcy Rights Center as Amici Curiae on behalf of Defendants and Appellants.

Marshack Hays, D. Edward Hays, Irvine, Matthew W. Grimshaw and Judith E. Marshack for Plaintiff and Respondent.

Walzer Melcher and Christopher C. Melcher, Woodland Hills, as Amicus Curiae on behalf of Plaintiff and Respondent.

Opinion of the Court by LIU, J.

Many married couples in our state use community funds to acquire real estate and take title in joint tenancy. Does that property presumptively belong to the community because the couple acquired the property during marriage with community funds? Or is the property presumptively the separate property of the spouses because they took title in joint tenancy? The Legislature has enacted a presumption that characterizes this property as community in a divorce. The United States Court of Appeals for the Ninth Circuit has asked us to determine which presumption governs the characterization of joint tenancy property in a dispute between a couple and the bankruptcy trustee of one of the spouses.

More precisely, the question here is whether 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. (See Cal. Rules of Court, rule 8.548(f)(5) [this court may restate a question posed to it by a court of another jurisdiction]; see also Peabody v. Time Warner Cable, Inc. (2014) 59 Cal.4th 662, 665, fn. 1, 174 Cal.Rptr.3d 287, 328 P.3d 1028 ( Peabody ) [example and explanation of rule 8.548(f)(5) in context].) The answer determines how much property a bankruptcy trustee can reach to satisfy a spouse's debts. If the property is separate, then the trustee can only reach the debtor spouse's 50 percent share. If the property is community, then the trustee can reach all the property, including the non-debtor spouse's share.

The issue in this case requires us to untangle a "snarl of conflicting presumptions" ( Estate of Luke (1987) 194 Cal.App.3d 1006, 1010, 240 Cal.Rptr. 84 ) in the evolution of California's treatment of joint tenancies alongside the development of our community property system. Ultimately, we hold 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. For property purchased before January 1, 1975, the Legislature left intact a presumption that separate property interests arise from joint tenancy title.

Because these presumptions are default rules, they are not always conclusive. Just as the presumptions themselves have evolved over time, the cognizable ways of rebutting the presumptions have also evolved. We thus answer a further question: When a married couple uses community funds to acquire property as joint tenants, is the joint tenancy deed alone sufficient to transmute the community character of the property into the separate property of the spouses? Family Code section 852 provides that 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." ( Fam. Code, § 852, subd. (a) ; see id. , subd. (e).) We hold that under this rule, joint tenancy titling of property acquired by spouses using community funds on or after January 1, 1985 is not sufficient by itself to transmute community property into separate property. For joint tenancy property acquired between January 1, 1975 and December 31, 1984, the act of taking title as joint tenants is, in itself, insufficient to prove a transmutation; however, a court may consider the manner of taking title in determining whether the spouses had an oral agreement or common understanding. Finally, as noted, joint tenancy property acquired with community funds before January 1, 1975 is presumptively separate property.

As we elucidate below, "California's treatment of joint tenancies has a long and tortuous history and is still the subject of considerable legal concern and disagreement." (Blumberg, Community Property in California (1987) p. 157.) The Legislature may wish to examine whether current statutes are aligned with the expectations of married couples and third parties when spouses use community funds to acquire property as joint tenants. That said, we emphasize that nothing in our decision today precludes spouses from holding separate property as joint tenants or from transmuting community property into separate property held in joint tenancy as long as the applicable transmutation requirements are met. Nor does our opinion disturb the operation of the right of survivorship that typically accompanies joint tenancy title at death.

I.

This case arises from a petition under Chapter 7 of the United States Bankruptcy Code filed by Clifford Brace in 2011. Clifford and Ahn Brace married in 1972. Around 1977 or 1978, the couple acquired a residence in Redlands. At some point before Clifford Brace declared bankruptcy, the couple acquired a rental property in San Bernardino. The Braces acquired both properties with community funds and took title to each property as " ‘husband and wife as joint tenants.’ " ( In re Brace (9th Cir. 2018) 908 F.3d 531, 534.)

A Chapter 7 bankruptcy petition creates an estate to satisfy creditors’ claims. The estate generally includes "[a]ll interests of the debtor and the debtor's spouse in community property" at the time the bankruptcy case is filed. ( 11 U.S.C. § 541(a)(2).) The Bankruptcy Code specifies that community property is part of the estate; bankruptcy courts look to state law to determine what property counts as community property. (See Butner v. United States (1979) 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136.)

The bankruptcy trustee in this case sought a declaration that the Redlands and San Bernardino properties are community property under Family Code section 760. The distinction between community and separate property matters because Ahn Brace has not joined in her husband's bankruptcy petition. If the properties are community, then the entirety of the Braces’ interests in the properties becomes part of Clifford Brace's bankruptcy estate. If the properties are separate, then only Clifford Brace's one-half property interest becomes part of the estate. ( In re Reed (9th Cir. 1991) 940 F.2d 1317, 1332 ; see Code Civ. Proc., § 704.820.)

The bankruptcy court found that " ‘the properties were acquired by [Clifford and Ahn] Brace during the marriage with community assets and they presumptively constitute community property under applicable law. Defendants failed to establish that the ... [p]ropert[ies] were not community in nature and, therefore, they constitute property of the Estate. ...’ " ( In re Brace (Bankr. 9th Cir. 2017) 566 B.R. 13, 17.)

The Ninth Circuit Bankruptcy Appellate Panel affirmed. ( Id. at p. 16.) Citing In re Marriage of Valli (2014) 58 Cal.4th 1396, 171 Cal.Rptr.3d 454, 324 P.3d 274 ( Valli ), which held that property acquired during marriage from a third party with community funds is community property upon divorce unless the statutory transmutation requirements have been met, the panel reasoned that public policy and statutory construction support the extension of Valli ’s holding to the bankruptcy context. ( In re Brace , supra , 566 B.R. at pp. 21–27.) The Braces appealed to the Ninth Circuit, which certified the question to this court. ( In re Brace , supra , 908 F.3d at p. 535.)

II.

A central point of disagreement between the parties concerns the applicability of two statutes: Family Code section 760 and Evidence Code section 662. Beginning with the text of these statutes, we explain the nature of the dispute.

Family Code section 760 provides: "Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property." As Justice Chin explained in Valli , "[t]he presumption, ... that property acquired during the marriage is community, is perhaps the most fundamental principle of California's community property law," reflecting the " ‘general theory ... that the husband and wife form a sort of partnership, and that property acquired during the marriage by the labor or skill of either belongs to both.’ " ( Valli , supra , 58 Cal.4th at pp. 1408–1409, 171 Cal.Rptr.3d 454, 324 P.3d 274 (conc. opn. of Chin, J.).)

Statutory exceptions to the community property presumption explicitly provide for separate property treatment. For example, property that a person acquired before marriage is that person's separate property. ( Fam. Code, § 770, subd. (a)(1).) All property acquired by a person after marriage by gift, bequest, devise, or descent is that person's separate property. ( Id. , § 770, subd. (a)(2).) Property that is earned or accumulated after the spouses are separated is also separate. (Id. , § 771, subd. (a).) And a spouse...