In Brace v. Speier (In re Brace), Case No. 17-60032 (November 9, 2020), the Court of Appeals for the Ninth Circuit (“Ninth Circuit”) held that the Bankruptcy Appellate Panel’s (“BAP”) and the bankruptcy court’s determination that California’s community property presumption applied to the Appellants’ second property was vacated because the record was unclear regarding when the Appellants acquired the property.
This case arose because a Chapter 7 trustee brought an adversary proceeding against a Chapter 7 debtor and his non-debtor spouse concerning the characterization of two properties acquired by the couple during their marriage. The bankruptcy court and then the BAP determined the community property presumption applied to both properties. The BAP then certified the following question to the Supreme Court of California: whether the community property presumption provided for by Cal. Fam. Code § 760 trumped the form of title presumption under Cal. Evid. Code § 662.
The Supreme Court of California determined that Cal. Evid. Code § 662 does not apply when it conflicts with Cal. Fam. Code § 760. Additionally, the Supreme Court of California determined that 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 may rebut the presumption by showing 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 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, in order to rebut the community property presumption, 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.
Keeping the framework provided by the Supreme Court of California in mind, the Ninth Circuit examined the bankruptcy court’s and the BAP’s decision to apply the community property presumption to both properties. Upon further examination of the second property in question, the Ninth Circuit determined that the record is unclear regarding when the Appellants acquired the second property. The Appellants may have acquired the property as early as 1972 (shortly after they were married) or as recently as 2011 (prior to bankruptcy). Thus, because the bankruptcy court did not determine whether the Appellants acquired the second property before January 1, 1975, the Ninth Circuit found that the bankruptcy court and the BAP were not equipped to decide whether the community property presumption applied to the second property.
Thus, when determining whether the community property presumption applies, the court must first determine when the property in question was acquired. If the court is at all unclear about this specific date, it would be improper for the court to apply the community property presumption. This case is still 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. However, in order for bankruptcy trustees and creditors to reap this benefit, there must be a clear record of when the property was acquired.