Brace for impact: The death of the title presumption in community property

Knowing when an asset or liability is community or separate property is essential, not just in a divorce but also in debtor-creditor and probate actions. The outcome of a dispute involving a bankruptcy can depend on the character of property, as seen in the opinion last week by the California Supreme Court of In re Brace, 2020 DJDAR 7719 (July 23, 2020). The debtor in Brace wanted to shield half of the real estate he acquired during marriage with his wife as joint tenants, claiming she had an equal, separate interest outside the reach of his creditors because of the joint tenancy.

The court rejected that claim, holding instead that joint tenancy acquisitions are community property. This is the second time in six years the California Supreme Court has considered if the manner in which spouses title their assets can create separate interests. The earlier case was In re Marriage of Valli, 58 Cal. 4th 1396 (2014), where the Supreme Court held that Frankie Valli's purchase of life insurance on his life during marriage, naming his wife as the owner, did not convert the policy into her separate property. (I was involved in both cases, as amicus counsel in Brace and Frankie's attorney in Valli.)

In Brace and Valli, the court refused to apply the title presumption in Evidence Code Section 662 (that the owner of record is the beneficial owner) to overcome the normal rules for characterizing property as community or separate. Earlier cases mentioned the title presumption as controlling character when a spouse takes title solely in his or her name. Modern authority, like Valli, disagree because there are many reasons spouses hold title in one of their names. If title controlled characterization, every vehicle, stock or bank account acquired during marriage in one spouse's name would be separate. That would disrupt our community system by allowing property acquired during marriage to be separate based on the form title was taken. Valli involved a dispute between spouses in a divorce, so the court's opinion was limited to marital dissolution proceedings. Brace was a dispute between a bankruptcy trustee and a debtor, extending the reach of the decision beyond the boundaries of divorce.

Before diving into Brace, a word about protecting bona fide purchasers of community property. Some have argued that property titled in the name of one spouse must be deemed separate to protect third parties who buy the asset from that spouse. Not true. Purchasers may rely in good faith that the form of title reflects beneficial ownership when they acquire property titled in the name of one spouse -- if they acted in good faith without knowledge of the marriage relation. Family Code Section 1102(c) presumes valid title is transferred to a bona fide purchaser, free of any claim by the spouse who did not join in the conveyance, even if the property was community.

The result in Brace was predictable using basic rules of statutory construction. The starting point is the community property rule in Family Code Section 760, that all property acquired by a spouse during marriage is community except as provided by statute. That last part is important; only a statute can defeat the community property rule. As explained in Valli, only statutes that characterize property as separate qualify. Statutes of general application, like the title presumption in Evidence Code Section 662, do not affect characterization, so are not exceptions to the community property rule.

In Brace, the debtor relied on early case law for their claimed exception to the community property rule for joint tenancy. The Supreme Court rejected those cases and disapproved a prior Supreme Court opinion, In re Marriage of Lucas, 27 Cal. 3d 808 (1980), to the extent it implies the existence of a form of title presumption. Erroneous conclusions in early case law that joint tenancy was separate property were adopted by later cases, carrying it forward for nearly 100 years. Courts that concluded joint tenancy created equal, separate interests for each spouses failed to understand that joint tenancy, by definition, has unity of title. It is one estate with equal, undivided interests. The argument by the debtor in Brace would treat joint tenancy more like tenancy in common, a form of co-ownership with separate interests.

When property is acquired during marriage by either or both spouses, it is community property under the community property rule. The only exceptions to that rule are (1) premarital property, gifts or inheritances during marriage, and the income or appreciation from separate property per Family Code Section 770, (2) earnings and accumulations after separation or divorce per Sections 771 and 772, (3) personal injury damages for causes arising after divorce per Section 781, and (4) property made separate by agreement per Sections 1500, 1612 or 1620. No statute says joint tenancy is separate property, so the property acquired in that form of title during marriage is community. Again, a predictable result using the rules of statutory construction.

Without a doubt, arguments over the characterization of property will continue to be debated in divorce, bankruptcy and probate courts, but one thing is sure: Any argument that the title presumption applies is dead. 