California Supreme Court Sheds Light on the Confusing Land of Community Property and Creditor's Rights
It is common for California married couples who buy a home or other real estate to take title as joint tenants (usually to avoid probate if one spouse dies), but to regard it as community property. What happens when one of the spouses declares bankruptcy? Can the bankruptcy trustee seize the jointly owned property to satisfy the bankrupt spouse’s debts, or can the trustee only reach the debtor spouse’s 50 percent share?
That was the question the U.S. Court of Appeals for the Ninth Circuit asked the Supreme Court of California to resolve (In re Brace).
The issue appeared to present a conflict between two areas of California law, requiring the state’s highest court to “untangle a snarl of conflicting presumptions” in the way the state has treated joint tenancies, on the one hand, and community property, on the other.
If a married couple uses funds that are community assets – that is, money belonging to both spouses – to buy real estate as joint tenants, does the joint tenancy deed transmute the assets from community property to the separate property of the spouses?
California’s Family Code section 852 says no, at least for property acquired after January 1, 1985. A transmutation is “not valid unless made in writing by an express declaration” that is consented to by the spouse whose interest in the property is adversely affected.
Property acquired at least a decade earlier, before January 1, 1975, is presumed under the law to be separate property.
“California’s treatment of joint tenancies has a long and tortuous history,” the justices acknowledge, “and is still the subject of considerable legal concern and disagreement.”
In this case, Clifford and Ahn Brace married in 1972. Around 1977 they bought a home in Redlands, and a few years later purchased a rental property in Redlands. They used community funds for both purchases, and took title to each property as “husband and wife as joint tenants.”
Clifford Brace subsequently declared Chapter 7 bankruptcy. Ahn Brace was not included in the bankruptcy petition. The court-appointed trustee in Clifford’s bankruptcy proceedings, asked the court to categorize the home and the apartment building as community property, which would mean both could be sold to satisfy Clifford’s debts though the wife did not file for bankruptcy.
While federal bankruptcy rules specify that community property is part of a bankrupt’s estate, they leave it to state law to determine what property counts as community property.
The trustee argued that according to California’s Family Code, the two assets were community property.
Attorneys for the Braces countered that, according to the state’s Evidence Code, they were not because title to the property said it was held in “joint tenancy.”
Family Code section 760 states: “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.”
There are exceptions, such as property acquired before marriage or by gift or bequest, or if the funds used for the purchase were one spouse’s separate property.
Evidence Code section 662 says: “The owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof.”
The question the California Supreme Court was asked to address is “whether the form of title presumption in Evidence Code section 662, and not the community property presumption in Family Code section 760, applies … in a dispute between a bankruptcy trustee and a debtor spouse.”
The way a property is held has important implications. A married couple may hold property as joint tenants, tenants in common, or as community property.
With joint tenancy, if one spouse dies, title passes to the surviving spouse without going through probate. Joint tenants also typically have separate interests in the property, so one tenant’s interest cannot be reached by creditors of the other.
Community real property has no automatic right of survivorship, and the community estate is liable for debt incurred by either spouse before or during the marriage.
It is not uncommon, the court noted, for couples to use community funds to purchase a home and take title as “husband and wife as joint tenants,” without specifying in the deed whether the property is community or separate. Their escrow officer may present them with a deed specifying joint tenancy, and they sign it without any thought.
“The result is that they don’t know what joint tenancy is, that they think it is community property, and then find out upon death or divorce that they didn’t have what they thought they had all along,” the justices wrote.
After an extensive analysis of the issues and complications that can result from taking title without careful analysis, the high court ruled that Evidence Code section 662 does not apply to property acquired during marriage when it conflicts with Family Code section 760.
For joint tenancy property acquired during marriage before 1975, each spouse’s interest is presumptively separate, they ruled. But joint tenancy assets acquired with community funds on or after January 1, 1975 – such as the two buildings owned by the Braces – are presumed to be community property.
If a property was acquired before 1985, a couple can change it from community property to separate property with an oral or written agreement. Joint tenancy property acquired after January 1, 1985 with community funds can be transmuted from community to separate property only with a written declaration expressly stating that the character or ownership of the property is being changed.
This community property and title issue is one of the most litigated issues in divorce proceedings. Married couples often write up and record “homespun” quitclaim deeds, only to learn later that the deeds created confusion regarding the character of the property. They end up spending tens of thousands of dollars to decide whether the property is his, hers or theirs. Having an attorney prepare a deed for a small sum of legal fees can save the parties money as well as anguish.
By Lynda I. Chung