A controlling question of California law dealing with the interplay between State law presumptions of community property and “form of title” on which there was no controlling California precedent has been certified to the California Supreme Court by the Ninth Circuit.

In Brace v. Speier (In re Brace), 908 F.3d 531 (9th Cir.), the Ninth Circuit certified the following questions to the California Supreme Court:

“Does the form of title presumption set forth in section 662 of the California Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?”

The case pitted California’s community property presumption, which presumes that property acquired by a married person during the marriage is community property, against the “form of title” presumption, which provides that the owner of the legal title to property is presumed to be the owner of the full beneficial title. In the context of a bankruptcy, if property is held in joint tenancy, only the debtor’s one-half interest is property of the bankruptcy estate. Conversely, if property is held as community property, the entire property becomes property of the bankruptcy estate, regardless of whether only one spouse files for bankruptcy protection.

Brace v. Speier

During the marriage, Mr. and Mrs. Brace acquired several parcels of real property in California in which they took title as “husband and wife as joint tenants.” In 2004, Mr. Brace formed an irrevocable trust naming himself as sole trustee and his wife as the sole beneficiary of the trust. The properties were transferred into the trust. In 2011, Mr. Brace filed a chapter 7 bankruptcy petition. The chapter 7 trustee filed an adversary proceeding against the Debtor (Mr. Brace) and the non-debtor spouse (Mrs. Brace) for turnover, avoidance and recovery of the properties as fraudulent transfers under California Civil Code section 3439.04(a). The bankruptcy court ruled in favor of the chapter 7 trustee, finding that the Debtor’s transfer of marital property into a trust for the benefit of his non-debtor spouse were avoidable fraudulent transfers. The bankruptcy court, relying on the California Supreme Court decision in Valli v. Valli (In re Marriage of Valli), 58 Cal.4th 1396, 171 Cal.Rptr.3d 454, 324 P.3d 274 (2014), further found that, while avoidance of the transfers restored title to Mr. and Mrs. Brace as joint tenants, based on the California community property presumption, both the interests of Mr. and Mrs. Brace in the properties were property of the bankruptcy estate.

Mr. and Mrs. Brace appealed the bankruptcy court’s decision to the United States Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”). On appeal, the trustee argued that the general presumption of community property should prevail over the “form of title” presumption, citing the decision in Valli. Mr. and Mrs. Brace argued that Valli doesn’t apply in bankruptcy cases involving spouses whose interests are aligned against a third party creditor and that the community property presumption only applies in the context of marital dissolution or separation. Accordingly, only the Debtor’s one-half joint tenancy interest in the properties should be property of the estate. The BAP affirmed the bankruptcy court’s decision and Mr. and Mrs. Brace appealed to the Ninth Circuit Court of Appeals. Instead of ruling on the issue, the Ninth Circuit certified the question to the California Supreme Court.

The decision of the California Supreme Court will be of great interest to debtors and creditors. Stay tuned for the decision.