9th Circuit BAP Determines Community Property Presumption Overrides Title Presumption in Bankruptcy
The Bankruptcy Appellate Panel for the Ninth Circuit published In re Brace (BAP No. CC 16-1041) on March 15, 2017. A Chapter 7 trustee sought to recover transfers of real estate from one debtor to an irrevocable trust with the non-debtor spouse as the sole beneficiary of the trust. Prior to the transfers, the properties were owned by husband and wife as joint tenants. The trustee argued that despite title presumptions, California marital law determines the property is community, and the entire interests come into the bankruptcy estate.
The BAP determined that California's community property presumption overrides the title presumption in the bankruptcy context. This holding is contrary to the 9th Circuit's holding in In re Summers, 332 F.3d 1240 (2003), which held that under California law, the community property presumption is rebutted when a married couple acquires property from a third party as joint tenants. The California Supreme Court's recent decision In re Marriage of Valli 58 Cal. 4th 1396 (2014) explicitly rejected the 9th Circuit's analysis in Summers, but Valli was a family law case - until now, it was not entirely clear that Valli's reasoning would be applied in bankruptcy matters.
This is good news and bad news. The good news is that Chapter 7 Trustees have clear authority to take control of the entire interest in marital property, notwithstanding title. In these cases, the Trustee should make sure to evaluate the requirements of California Family Code 852 to determine whether there was an effective transmutation of property. There is also good news for those representing only one spouse in bankruptcy who want to effect a lien avoidance under sections 506 or 522(f). There has been a question whether the debtor can strip off as the entire property or only half the property when title is held as joint tenants. This opinion should make clear that the entire property is property of the estate and therefore the court is able to determine the amount of a secured creditor's lien under section 506.
The bad news is obvious - debtors can no longer rely on title presumptions to keep separately titled property acquired during marriage outside the bankruptcy estate of a single filing spouse absent effective transmutation of that property.
One final note - two of the Judges on this panel were the Honorable William J. Lafferty and the Honorable Charles Novack, both of the Oakland Dvision of the Northern District of California. Opinion.