Brace Yourself

community property

The 9th BAP’s Brace decision blew over everything we thought we knew about community property, joint tenancy titles, and the characterization of marital property.

The storm warning is up.   Until the 9th Circuit rules on the pending appeal, bankruptcy lawyers in community property states in the 9th need to reevaluate their advice to to clients about asset protection and single spouse filings.

What Brace held

When a married couple acquires real property during marriage, the presumption that assets acquired during marriage are community prevails over the presumption that the form of  title controls.

Put more distinctly:  when joint tenants are spouses, the property is community.

Prior to the husband’s bankruptcy, the Braces held record title to real property as joint tenants, a form of separate property.  Only Mr. Brace filed bankruptcy.

Looking to the California Supreme Court decision in Valli, the Bankruptcy Appellate Panel  held that the community property presumption trumped the Evidence Code 662 presumption by which the spouses had acquired title.

To get to this result, the BAP reasoned that Valli undercut the reasoning of the 9th Circuit’s  Hanf v. Summers decision.

End result:  the one half of the property Mrs. Brace thought was her separate property gets characterized as community property and becomes property of the estate of Mr. Brace’s bankruptcy.

The shadow of Valli

Valli, most importantly, is a family law case.  The California Supreme Court had to decide whether an insurance policy that husband bought, taking title in his wife’s name, was community property when they divorced.

Like the real property in Summers, the asset in question was acquired during marriage. Title, on the books of the insurance company, was held by one spouse.  In a twist on the usual facts, the spouse disadvantaged by the separate property title was the spouse directing how title was taken.

Nonetheless, the court held that the presumption of community was not overcome by acquisition from a third party in the name of a single spouse.  The requirements of California’s transmutation statutes were not met.

What Brace ignored

Where do I start?  Perhaps with full disclosure:  I worked on the NACBA amicus brief the 9th Circuit with Wayne Silver, arguing that this decision should be overturned.

Foremost in my mind is that California law has a fully developed system of property law, more than a century old.  Lynch pins are the recording system,giving the world public notice about the form of title, and the Civil Code that defines joint tenancy property.

Property owners, creditors, and lawyers know the characteristics of property held in joint tenancy.

With the stroke of a pen, the Brace court, and the BAP panel, tell us that all is not as it seems. It may look like separate property when the owners are spouses, but maybe it’s not.

The California Legislature knew about joint tenancy property as separate property of married folks.  The Legislature just created a new form of title:  community property with the right of survivorship.  If joint tenancies were not conclusively separate property, this new statute would be superfluous.

Secondly, family law concepts governing the division of property in a divorce need not, and should not, be exported to the world of debtor/creditor relations.

Spouses, after all, are fiduciaries for one another.  Family courts are tasked with dividing equally the acquisitions of the parties during marriage.

Over time, rules have developed to achieve fairness between spouses:  Family Code 2581 overrides the joint tenancy form of title when dividing the family home.  Community contributions to separate property assets trigger a right of reimbursement or a community property interest.

Those rules have been confined to family law up until now.  Summers and its predecessors held that the presumption that the family home was community didn’t apply in bankruptcy.  Mantle rejected the claim that a separate property contribution to title created an ownership interest, and said it was just a claim.  Fadel likewise rejected the debtor’s claim that, in a single spouse bankruptcy,  a community property interest was created when the community contributed to debt service on the non filer’s separate property real estate.

Sea changes in the law require notice

The result of Brace is unnecessary and extraordinarily disruptive of California property law as we’ve known it.

But if that is to be the way of community property law, it deserves a determination by the Legislature and notice to the world such that married couples who intend the result on the face of joint tenancy deeds can conform title to this extraordinary change.