For Californians, the CA Supreme Court’s decision in Brace this summer upended our understanding of joint tenancy and community property.
For decades, we “knew” that a property couldn’t be both joint tenancy and community property . Siberell. And for those of us in the 9th Circuit, we “knew” that when married folks acquired property with title taken as joint tenants, the property was characterized as the separate property of each spouse when either spouse filed bankruptcy. Summers.
Then, Brace tells us that a married couple taking title to real property as joint tenants is not sufficient, without something more, to transmute the property into the separate property of each spouse despite the clear expression of joint tenancy in the deed. Take a closer look at Brace from my colleague Wayne Silver.
So, where does that leave the hundreds of thousands of married couples who, to the extent they thought about it at close of escrow, believed they each held a separate property joint tenancy interest in the property.
The consequences of community property
While it’s easy to think about community property as an issue only in the dissolution of a marriage, the characterization of property drives issues of tax, probate, and, the focus here, debtor-creditor rights in and out of bankruptcy.
Two statutes, one federal and one state, lie at the heart of the issue . California Family Code 910 makes community property liable for debts incurred by either spouse before or during marriage. Separate property, such as we thought joint tenancies were, is liable only for the debts of the spouse who holds the property (and perhaps, for debts related to the necessities of life provided to the other spouse.)
The federal statute involved, Bankruptcy Code 541, brings all of the community property into the bankruptcy estate even when only one spouse files bankruptcy. Property of the estate gets administered for the benefit of creditors with claims on the community, even when only one spouse files bankruptcy.
So, treating joint tenancy property held by spouses as community property doubles the fraction of the property exposed to one spouse’s debts, and exposes all of a joint tenancy property to inclusion in a bankruptcy estate.
Why the form of title fails as a transmutation
Up until Brace, cases held that the act of taking title to real property during marriage as joint tenants was sufficient to overcome the presumption of Family Code 910. Even when the down payment and the debt service all came from community funds, the form of title as joint tenants effectively transmuted those funds into the separate property of the spouses, shared equally.
A wrinkle in the characterization analysis appeared in the 2014 California Supreme Court’s decision In re Marriage of Valli. Husband there had purchased a life insurance policy and denominated his wife as the sole named owner. In the subsequent dissolution, husband claimed the policy to be community. The Supreme Court held his act of taking title in his wife’s name was insufficient to transmute the insurance policy into the wife’s separate property, even though he was the disadvantaged spouse in the transaction.
The question after Valli was whether the transmutation requirements of Family Code 852 would apply outside of the dissolution setting , when a bankruptcy trustee succeeded to the assets of one spouse when that spouse filed bankruptcy alone.
To be effective, a transmutation, under Family Code 852 requires
- a writing
- containing an express declaration
- made by the spouse whose interest in the property is adversely affected Family Code § 852(a)
Brace applied the holding of Valli to the non-dissolution setting of debtor-creditors rights in bankruptcy and found the presumption of community property trumped the form of title, which lacked all of the elements of a transmutation.
Addressing the defective transmutation
All of this brings us to the 2020 California Court of Appeals case of Safarian v. Govgassian, decided a few months before Brace. Like most challenging cases, the facts are a bit convoluted.
Pared down, husband and wife filed a fraud action against multiple defendants. While that action was pending, husband filed for divorce and the spouses entered into a marital property agreement that characterized any recovery in the fraud action as the separate property of each spouse. Thereafter, the fraud action resulted in a judgment before husband filed bankruptcy.
The bankruptcy trustee settled with the judgment debtors and thereafter, the wife commenced collection action against the judgment debtors.
In proceedings in state court to bar collection, judgment debtors claimed that the judgment was community property and thus the settlement with the bankruptcy trustee precluded wife’s collection efforts. The marital property agreement, they argued, did not comply with Family Code 852’s requirements. Wife claimed that she held one half of the judgment as her separate property pursuant to the marital property agreement in the dissolution.
The trial court found the marital property agreement was vague and unenforceable.
The appeals court disagreed. A transmutation agreement, such as the marital property agreement, that doesn’t meet the statutory requirements of Section 852 is voidable, not void. Further, since the judgment debtors were not parties to the marital property agreement, they do not have standing to rely on 852 to invalidate the agreement.
The matter was remanded for further proceedings analyzing the marital property agreement under ordinary contract principles.
The questions that remain
Which brings us to the myriad of California properties currently held by married folks in joint tenancy. Are those deeds, accepted by the spouses at close of escrow pursuant to written escrow instructions, defective transmutations?
If so, there may be a way to preserve the characterization of property expressed by the form of title without executing a transmutation agreement now, that is subject to fraudulent transfer challenge. See Fam. C. 851.
The Safarian court grounded its standing decision on California CCP 367 which provides that “…California law does not give a party personal standing to assert rights or interests belonging solely to others.” Only the parties have the power to avoid the provisions of a contract; the parties can also ratify the contract, extinguishing the power of avoidance, citing the Restatement of Contracts 2nd.
Safarian suggests that a judgment creditor attempting to levy on joint tenancy real property of a married couple might, as a stranger to the transaction by which title was acquired, be precluded from challenging the characterization of the property as separate property.
The logic of Safarian also suggests that a written ratification of the couple’s intention to hold the property in joint tenancy as their separate property might confirm the previous understanding of joint tenancies between spouses.
One glaring question after Safarian is whether a bankruptcy trustee in the case of one spouse acquires the debtor’s right to void a defective transmutation, as in Brace? Query what happens in a Chapter 11, where the debtor acts as a debtor in possession, with the rights of a trustee?
Brace, having upset the apple cart as to property characterization, sets us up for an extended period of developing law as to spousal property currently held in joint tenancy.
My thanks to Wayne Silver who pointed me to the Safarian case and provided highly useful comments on my drafts.