When Spouses Acquire Real Property and Take Title as Joint Tenants, Is It Really Community Property? The Ninth Circuit Seeks Guidance from the California Supreme Court

Family Code § 760 provides that “[e]xcept as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in [California] is community property.” This statute codifies a presumption that property acquired by a spouse during marriage is community property.

Family Code §§ 850-853 allow spouses to “transmute” community property to separate property of either spouse. The requirements for a transmutation are strictly enforced. Among other things, a transmutation of real property “is not valid unless made in writing by an express declaration that is made in, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.”

California’s Evidence Code contains a series of presumptions which dictate which party has the initial burden of providing evidence or proving certain facts. A presumption affecting the burden of proof is not evidence; it simply reflects a policy decision made by the Legislature, “such as the policy in favor of . . . the stability of titles to property.” Evidence Code § 662 provides that “[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title.” This is commonly referred to as the “title presumption.”

When spouses purchase a home in California, they usually don’t give much thought to how title should be held. Historically, spouses have taken title as joint tenants so that, when one spouse dies, the ownership interest of the deceased spouse automatically transfers to the surviving spouse. This “right of survivorship” is convenient because it avoids the need for a probate.

What most people don’t realize is that when two people take title as joint tenants, each person separately owns a one-half interest in the property. In fact, each person has the right to transfer his or her one-half interest to a third party without the other joint tenant’s approval or consent. Obviously, this is not what most spouses intend when they buy their family home.

This has been an issue for decades. In 1965, California’s Legislature observed that “husbands and wives take property in joint tenancy without legal counsel but primarily because deeds prepared by real estate brokers, escrow companies and by title companies are usually presented to the parties in joint tenancy form. The result is that they don’t know what joint tenancy is, that they think it is community property, and then find out upon death or divorce that they didn’t have what they thought they had all along and instead have something else which isn’t what they had intended.”

The Legislature expressly addressed this issue in the context of divorce and legal separation. Today, Family Code § 2581 provides that “[f]or the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in . . . joint tenancy . . . or as community property, is presumed to be community property. This presumption . . . may be rebutted by . . . [a] clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property.” It may also be rebutted by proof that the parties “made a written agreement that the property is separate property.” The Law Revision Commission comments state that “[t]he community property presumptions created by [§ 2581] are applicable only in dissolution and legal separation proceedings.”

Family Code §§ 760 and 850-853, and Evidence Code § 662, present some difficult questions when spouses acquire real property as joint tenants. Family Code § 2581 eliminates some of those questions in the context of divorce and legal separation proceedings. However, they continue to arise in bankruptcy cases when one spouse files for bankruptcy.

1.
Subto
Does the “title presumption” in Evidence Code § 662 rebut the “community presumption” in Family Code § 760? If the answer is yes, each spouse should be presumed to separately own a one-half interest. If this presumption cannot be rebutted by “clear and convincing proof,” a bankruptcy trustee will be able to sell only the debtor’s one-half interest to generate funds to pay creditors. (The other half of the net sale proceeds will be paid to the non-debtor spouse.)
2.
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If the “title presumption” does not rebut the “community presumption,” does the act of taking title as joint tenants transmute the property from community property to separate property? If the answer is yes, each spouse owns a one-half interest and, again, a bankruptcy trustee will be able to sell only the debtor’s one-half interest.
3.
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If the “title presumption” does not rebut the “community presumption,” and if the act of taking title as joint tenants does not transmute the property from community property to separate property, what’s the point of Family Code § 2581? At least as to real property that spouses acquire as joint tenants, is that section superfluous?

In 2003, although it did not cite to Evidence Code § 662, the Ninth Circuit answered “Yes” to the first question. In re Summers, 332 F.3d 1240 (9th Cir. 2003). First, relying on California appellate court and lower federal court decisions, the Ninth Circuit concluded that the community presumption is rebutted when spouses acquire real property from a third party as joint tenants. Second, the court held that California’s transmutation statutes do not apply to transactions in which spouses acquire property from third parties.

The second holding of Summers was expressly rejected by the California Supreme Court in Marriage of Valli, 58 Cal.4th 1396 (2014). In that case, a husband used community property funds to purchase an insurance policy on his life, naming his wife as the policy’s owner and beneficiary. Later, in divorce proceedings, the husband asserted that the policy was community property. The court agreed, because the husband had not made, joined in, consented to, or accepted a written, express declaration that the character or ownership of the insurance policy was being changed from community property to the wife’s separate property.

In bankruptcy cases, Valli reopened the door previously shut by Summers. Not only did the California Supreme Court reject Summers’ second holding, it expressly stated that the title presumption “does not apply when it conflicts with the transmutation statutes.” This latter statement was expanded on by Justice Chin in a concurrence in which he stated that the title presumption “plays no role” in an action between spouses in which the community presumption controls.

That brings us to In re Brace.

Clifford and Ahn Brace were married in 1972. In the late 1970s, they purchased a home in Redlands and a rental property in San Bernardino. They took title to each property as “husband and wife as joint tenants.”

In 2011, Mr. Brace filed for bankruptcy. After some preliminary legal issues were resolved, the bankruptcy court needed to decide whether the bankruptcy estate owned 100%, or just 50%, of each property. In 2015, the bankruptcy court entered a judgment determining that the properties were community property and, therefore, entirely property of the bankruptcy estate. The Ninth Circuit’s Bankruptcy Appellate Panel affirmed, and the matter was appealed further to the Ninth Circuit Court of Appeals.

On November 8, 2018, the Court of Appeals certified a question to the Supreme Court of California. Although the California court is not bound by the Ninth Circuit’s formulation of the question, the question is as follows:

Does the form of title presumption set forth in section 662 of the 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?

If it accepts the question, the California Supreme Court’s answer will have a significant impact on cases in which only one spouse files for bankruptcy. In many such cases, the answer will determine whether creditors receive anything at all.

Non-Filing Spouses, Homestead Exemptions, and Voidable Transactions

The California Bankruptcy Journal has published an article by Michael G. D’Alba entitled “Non-Filing Spouses, Homestead Exemptions, and Voidable Transactions” (Volume 34, 2017, Number 2). A copy of the article may be obtained by emailing Mr. D’Alba at mdalba@dgdk.com.

California is a community property state, and Mr. D’Alba examines issues which arise when non-debtor spouses try to claim homestead exemptions in community property.

Mr. D’Alba discusses issues that arise when a spouse relocates from the marital residence, files for bankruptcy, and then fails to claim a homestead exemption in the martial residence.  Meanwhile, the non-debtor spouse continues to reside in the former marital residence.  The following issues, at a minimum, require prompt analysis on the part of the non-filing spouse, creditors, and the bankruptcy trustee:

  • If the debtor spouse has filed a list of exemptions, how does it affect the non-filing spouse’s rights?
  • Are there time periods in which the non-debtor spouse must act to assert his or her rights, and what are those time periods?
  • May the non-debtor spouse file a list of exemptions in the debtor spouse’s bankruptcy case?

Mr. D’Alba also examines what happens when one spouse transfers property to the other and files a bankruptcy case in which that transfer is avoided by the trustee as a fraudulent conveyance.  While there is an established prohibition of the debtor spouse claiming an exemption in the now-recovered property, can the transferee spouse claim a homestead exemption?  If so, what would be the basis to claim the exemption, and are there grounds to object?

The matrimonial law and bankruptcy law fields are complicated by themselves, but when they intersect there are particularly difficult questions which may arise.  Specialists in this area may be necessary, and Mr. D’Alba’s article provides a guide to some of the main issues requiring discussion.

Return to Michael G. D’Alba, Associate

Supreme Court Holds that the Fair Debt Collection Practices Act Does Not Impose Liability on a Creditor Who Files a Proof of Claim to Collect a Time-Barred Debt

In September, we wrote that a major question ripe for Supreme Court consideration was whether a creditor can be held liable under the Fair Debt Collection Practices Act (“FDCPA”) when it files a proof of claim in a bankruptcy case to collect a time-barred debt.  On May 15, 2017, in a 5-3 decision, the Supreme Court ruled in favor of debt collectors.  Midland Funding, LLC v. Johnson, ___ U.S. ___ (2017).

In or before mid-2003, Aledia Johnson (“Johnson”) took out credit with Fingerhut Credit Advantage.  Johnson’s last payment was made in May 2003, and the debt was “charged off” in January 2004.  The debt appears to have been sold a few times, and ultimately was owned by Midland Funding, LLC (“Midland”) — one of the nation’s largest buyers of unpaid debt.

In March 2014, Johnson filed a chapter 13 bankruptcy petition in Alabama.  Midland filed a proof of claim for $1,879.71, even though any suit to recover the debt would have been time-barred under Alabama’s 6-year statute of limitations.  Johnson objected to the claim, Midland did not contest the objection, and the bankruptcy court disallowed the claim.

Johnson then filed a lawsuit against Midland, seeking actual damages, statutory damages, attorneys’ fees and costs for violating the FDCPA.  The district court dismissed the lawsuit, but the 11th Circuit reversed.

The Supreme Court concluded that Midland’s filing of a proof of claim to recover a time-barred debt did not violate the FDCPA.  Among other things, the Court noted that in most states (including Alabama) creditors have the right to payment of a debt even after the limitations period has expired.  There are procedural rules which allow for a streamlined evaluation of claims in bankruptcy cases, and the Bankruptcy Code preserves the estate’s ability to raise affirmative defenses such as statutes of limitations.  Also, in chapter 7 and 13 cases there are relatively sophisticated trustees who examine proofs of claims and, where appropriate, pose objections.  Thus, in the Court’s estimation, Midland’s assertion of a time-barred claim was not “false, deceptive, or misleading,” “unfair” or “unconscionable.”

Justice Sotomayor filed a dissent, joined by Justices Ginsburg and Kagan.  In their view, the practice of filing claims in bankruptcy proceedings in the hope that no one notices that the debt is time-barred is both “unfair” and “unconscionable.”  The FDCPA was enacted to, among other things, beat back debt collectors’ practice of filing lawsuits to collect time-barred debts.  But that has not entirely halted the behavior; indeed, in 2015 Midland and its parent company entered into a consent decree with the Government prohibiting them from filing suit to collect time-barred debts and ordering them to pay $34 million in restitution.  Now, debt buyers have shifted their focus to bankruptcy cases, where they file time-barred proofs of claims in the hope that nobody notices that they are too old to be enforced.  In the dissenting justices’ view, these claims are not filed in good faith; indeed, they are filed in the hope and with the expectation that the bankruptcy system will fail.  Thus, they conclude, the practice of filing time-barred claims violates the FDCPA.

The majority places great trust in the bankruptcy system to weed out time-barred claims.  However, for small claims such as Midland’s claim in Johnson’s bankruptcy case (less than $2,000), debtors usually have little incentive to object and the cost to trustees and creditors of doing so is often prohibitive — even when it seems clear that the claim is time-barred and the claimant will not contest the objection.  And of course, whether a claim is time-barred is usually not clear from the face of the proof of claim.  If the Court had ruled in favor of Johnson, its ruling would have had a significant impact on debt collectors by making them responsible for ensuring that they don’t file time-barred claims.  Instead, absent a Congressional adjustment to the FDCPA or the Bankruptcy Code, its ruling will allow debt collectors to file, and sometimes get paid on, stale claims without fear of liability under the FDCPA.

Supreme Court to Decide Whether the Fair Debt Collection Practices Act Imposes Liability on a Creditor Who Files a Proof of Claim to Collect a Time-Barred Debt

timemoneyJust a few weeks ago, we wrote that a major question begging for Supreme Court consideration is whether a creditor can be held liable under the Fair Debt Collection Practices Act (“FDCPA”) when it files a proof of claim in a bankruptcy case to collect a time-barred debt.  In May 2016 the Eleventh Circuit said yes; in July 2016 the Eighth Circuit said no (as long as the proof of claim is accurate and complete).

At the request of both the petitioning creditor and the responding debtor, the Supreme Court has agreed to review the Eleventh Circuit’s decision in Johnson v. Midland Funding, LLC, 823 F.3d 1334 (11th Cir. May 24, 2016).  The questions to be examined by the Court are as follows:

(1)  Whether the filing of an accurate proof of claim for an unextinguished time-barred debt in a bankruptcy proceeding violates the Fair Debt Collections Practices Act.

(2)  Whether the Bankruptcy Code, which governs the filing of proofs of claim in bankruptcy, precludes the application of the Fair Debt Collection Practices Act to the filing of an accurate proof of claim for an unextinguished time-barred debt.

The stakes are high, particularly for collection companies and claims purchasers (like Midland Funding) that are most at risk for filing proofs of claims relating to time-barred debts.  This will be a very hotly contested case with many amici curiae briefs likely to be filed.  We hopefully will have a resolution to these issues by next summer.

Does the FDCPA Apply When a Creditor Files a Proof of Claim to Collect a Time-Barred Debt?

The U.S. Supreme Court has accepted a number of bankruptcy cases over the last few years, and another issue seems ripe for the big stage:  Can a creditor be held liable under the Fair Debt Collection Practices Act (“FDCPA”) when it files a proof of claim in a bankruptcy case to collect a time-barred debt?  On July 11, 2016, the Eighth Circuit added to the existing circuit split regarding application of the FDCPA in bankruptcy cases.  See Nelson v. Midland Credit Mgmt., Inc., ___ F.3d ___ (8th Cir. 2016).Continue reading

Unmarried Same-Sex Couples Are Not Eligible to File Joint Bankruptcy Petitions Even If They Are Registered Domestic Partners

Section 302 of the Bankruptcy Code provides that a debtor “and such individual’s spouse” may file a joint bankruptcy case. Courts have held that persons who cohabitate, but are not legally married, are not eligible to file a joint petition. See In re Malone, 50 B.R. 2 (Bankr. E.D. Mich. 1985) (opposite-sex couple); Bone v. Allen (In re Allen), 186 B.R. 769 (Bankr. N.D. Ga. 1995) (same-sex couple); In re Lucero, 408 B.R. 348 (Bankr. C.D. Cal. 2009) (opposite-sex couple). On the other hand, legally married couples – including same-sex couples – may file joint petitions. See In re Somers, 448 B.R. 677 (Bankr. S.D.N.Y. 2011) (same-sex couple legally married in Vermont).Continue reading

Supreme Court: “Actual Fraud” Exception to Discharge Is Not Limited to Cases in Which the Debtor Has Made a False Representation to the Creditor

A principal purpose of the Bankruptcy Code is to provide a fresh start to an “honest but unfortunate debtor.”  Under certain circumstances, a creditor may ask the bankruptcy court to determine that a particular debt is nondischargeable.  If the court agrees, the debtor will continue to owe that debt even after the case is over and all other debts are discharged.

Section 523(a)(2)(A) of the Bankruptcy Code provides that an individual debtor’s discharge does not cover any debt “for money, property [or] services . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud.”  Over the years, courts have disagreed about the meaning of “actual fraud.”  Continue reading

Don’t Lose Your Shirt

Recently there have been a series of high profile retailer bankruptcies – Radio Shack, Haggen Stores and Quicksilver. These cases shine a light on a very difficult problem for commercial property owners. This problem is exacerbated for single-tenant net-leased investments that rely exclusively on the income from one tenant and have become a virtual safe-haven for many investors, especially 1031 exchanges. So what is an owner to do when his formerly blue chip tenant files for Chapter 11?Continue reading

A Bankruptcy Horror Story

In the case of State Bank v. Covey (In re Duckworth), an opinion was issued in late 2014 by the United States Court of Appeals for the Seventh Circuit which voided a $1.1 million security interest because of just one small mistake.

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