By Ryan C. Wood

While we wait for the California Supreme Court to weigh in on the legal effect of a married couple purchasing real property during marriage but taking title to the property as joint tenants sad cases continue to pile up.  Under California law two parties, whether married or not, may take title to real property as joint tenants.  The main feature or benefit of taking title as a joint tenant is the right of survivorship that comes along with it.  This is particularly beneficial to married couples as it allows them to avoid going through probate upon the death of a spouse.  The real property just passes to the surviving spouse.  California law also provides that when title is as joint tenants the one half interest in the property is the person’s separate property and not community property.  Here is where it gets crazy though.  The real property being separate property is only true under certain circumstances and not all circumstances?  In comes the community property presumption regarding property acquired during marriage.  So far various courts, not the Supreme Court of California, have held in the bankruptcy context the community property presumption wins, not how the actually legal recorded title is taken at the time of purchase.  The actual legal title is not sufficient evidence to show the married couples intent that the real property acquired during marriage be each spouses separate property. 

When married couples get divorced in community property states the community property is supposed to be divided 50/50 unless the spouses agree otherwise or there has been a transmutation of the property from being community property to the separate property of one of the spouses.  Simply put, transmutation laws cannot apply to a piece of real property acquired during marriage.  Spouses are not transferring anything when purchasing a house during marriage.  They are acquiring it and taking title as joint tenants evidencing their intent for the house to be separate property……..  Also, how is a piece of real property titled as joint tenants where each spouse owns a 50 percent interest not consistent with community property law and dividing the community property 50/50 upon divorce?  Seems like it is consistent so what is the problem?  Oh wait, this is only applicable in a divorce and not under other circumstances like filing bankruptcy?       

On November 8, 2018, the Ninth Circuit Court of Appeals entered an order certifying question to the Supreme Court of California as follows:

“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 husband 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?”

In the meantime cases are still being decided that provide the community property presumption is what matters and not the clear and convincing evidence of a recorded title as joint tenants giving each spouse a separate property interest in the purchased home.  In a prior blog article I provide all the different cases regarding this issue.  I have listed them again at the end of this article.  A recent Ninth Circuit Bankruptcy Appellate Panel cases provides some additional feedback on this issue a couple interesting twists.  Unfortunately the same result was found; the legal taking of title as joint tenants was trumped by the community property presumption.

Why Do Bankruptcy Attorneys Care So Much About This Issue?

Each spouse has the right to file for bankruptcy protection even if married.  When one spouse files all community property and the separate property of the filing spouse is part of the bankruptcy estate.  The separate property of the non-filing spouse is not part of the assets that must be listed.  If a house of a married couple has equity of $200,000 and the title is held as joint tenants we should only have to list the filing spouse’s portion or $100,000.  Ignoring the title of the house as joint tenants and calling the house community property requires us to schedule the equity in the house as the entire $200,000 interest even though taking title as joint tenants is supposed to provide each spouse has a separate property interest.  As of right now a married couple is only entitled to a homestead exemption to protect equity in a primary residence of $100,000 pursuant to California law.  So an interpretation of the law that says the community property presumption wins instead of the title presumption creates a bankruptcy estate twice as large, not exemptable/protectable under the example above.  This creates a large obligation to creditors that would not exist if the title presumption was properly followed given title as joint tenants under California law provides the spouses interest is their separate property…

Recent Ninth Circuit Bankruptcy Appellate Panel Case

In an unpublished opinion by the Ninth Circuit Bankruptcy Panel a couple in Southern California seemingly did everything to provide the real property they acquired during marriage be held as joint tenants, separate property and not community property.  They even had a post-nuptial agreement providing additional language to strengthen their intent to have the real property be deemed separate property.  The problem is a bankruptcy case under chapter 7 of the Bankruptcy Code was filed and what a family law attorney or estate planning attorney would believe to be true simply is not the case in the context of filing bankruptcy.  There were also some cracks in the documents of this married couple and that is what makes this particular case interesting.

Facts of the Chapter 7 Bankruptcy Case Appealed

The lower bankruptcy court held regarding the character of real property owned by the debtor at the time the bankruptcy case was filed as; (1) the properties were presumed to be community property despite the fact that they were held by the couple as joint tenants, and (2) Non-filing spouse did not produce evidence sufficient to raise a genuine issue of material fact regarding the character of the ownership of the properties.  The Ninth Circuit Bankruptcy Appellate Panel affirmed the decision and agreed with the lower bankruptcy court.

The specific issues that are part of this current appeal involve a postnuptial agreement between the spouses and evidence of third party family members of the filing spouse providing down payments for the properties acquired during the marriage.  While I believe the taking and recording of title as joint tenants is clear and convincing evidence of a married couples’ intent to take the real property acquired during marriage as separate property that is not the current interpretation. 

In this chapter 7 case there were actually two different properties purchased during marriage that added complications.  The couple also entered into the postnuptial agreement after purchasing one property and not before purchasing both properties.  Unfortunately the postnuptial agreement did not include language addressing the purchase of the first property prior to the postnuptial agreement.  If the postnuptial agreement did say the purchase of the first property was to be held as separate property maybe things would have been different.  The postnuptial agreement provided the amounts paid by third party relatives would be part of the equation to determine the spouses interest in the purchased properties.  Again, there was no mention of the first purchased property though…..  The bankruptcy case was originally filed as a chapter 11 reorganization and later converted to a chapter 7 case.  This also is significant but I will not get into that other than the bankruptcy case becomes a liquidation of not exempt/protectable assets such as the two pieces of real property/houses.

Naturally the chapter 7 trustee assigned to the bankruptcy case properly sought to liquidate the bankruptcy estate and the question arose as to what is part of the bankruptcy estate.  The lower bankruptcy court held that the homes were part of the bankruptcy estate and the evidence presented did not overcome the presumption of the community property.  What is a new wrinkle from most cases like this was the postnuptial agreement.  The lower bankruptcy court held and the Ninth Circuit Bankruptcy Appellate Panel agreed that the postnuptial agreement did not apply given it was not recorded pursuant to California Family Code Section 852(b), transmutation law of assets acquired during marriage, and under California Civil Code Section 1217, that unrecorded instruments are only valid between the parties to the instrument and those have notice of it.  So the chapter 7 trustee was not bound by the postnuptial agreement and the spouses intent to hold property as separate property.  Again I argue this is a misapplication of California transmutation laws given these properties are acquired during marriage and the title is taken as joint tenants, separate property, and the recorded title is clear and convincing evidence of their intent.  This of course is not how the law is being interpreted.  So the recorded title as joint tenants does not provide notice of the spouses intent to third parties and the taking of title as joint tenants is not a valid transmutation……..

As a bankruptcy attorney I hope the Supreme Court of California comes to a different conclusion on this issue soon.  As of right now there is no such thing as taking title to property as joint tenants that creates a separate property interest in the property without creating additional documentation as to the spouses intent.  There are also not clear answers to exactly what the documentation should be for a court to hold the property title as joint tenants is separate property.  Whatever that documentation is should be notarized and recorded so that all third parties have notice of the spouses’ intent the hold the property as joint tenants and be entitled to separate property status under any and all circumstances; including filing for bankruptcy protection.    

Brace v. Speier (In re Brace), 566 B.R. 13 (9th Cir. BAP 2017)

Valli v. Valli (In re Marriage of Valli), 58 Cal. 4th 1396, 1400 (2014)

In re Obedian, 546 B.R. 409, 422 (Bankr. C.D. Cal. 2016)

Hanf v. Summers (In re Summers), 332 F.3d 1240, 1243 (9th Cir. 2003)