In re Brace

In re Brace was decided this morning by the California Supreme Court and it is favorable to bankruptcy trustees and creditors.

The case concerns whether the community property presumption provided for by Cal. Fam. Code § 760 trumps the form of title presumption under Cal. Evid. Code § 662. For example, if a married couple uses community funds to acquire property as joint tenants during their marriage, is the entire property held as community property per CFC § 760, or are two separate property interests in the property held by the spouses per CEC § 662? Previously, in In re Valli, the Court decided that, in the context of dissolution actions, as between the two presumptions, the community property presumption applies, absent a valid transmutation of the character of property from community to separate property. Since then, there has been confusion (1) over whether the community property presumption applies in actions other than dissolution actions, such as actions by a bankruptcy trustee or creditors and (2) over whether the act of taking title in joint tenancy is itself a transmutation from community to separate property, thereby creating separate property interests.

Today, the Court decided as follows:

For joint tenancy property acquired with community funds on or after January 1, 1975, the property is presumptively community in character.

If such property was acquired before 1985, the parties can show a transmutation from community property to separate property by oral or written agreement or a common understanding. Although a joint tenancy deed is insufficient to effect a transmutation, a court may consider the form of title in determining whether the parties had a common agreement or understanding under the pre-1985 rules.

For joint tenancy property acquired with community funds on or after January 1, 1985, a valid transmutation from community property to separate property requires a written declaration that expressly states that the character or ownership of the property is being changed. A joint tenancy deed, by itself, does not suffice.

(Internal citations omitted.) This case is favorable to bankruptcy trustees and creditors because community property is normally liable to the payment of debts incurred by one or both spouses. See 11 U.S.C. § 541(a)(2); Cal. Fam. Code § 910.

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