Source: https://dgdk.com/category/blog/
Timestamp: 2019-04-19 02:50:02+00:00

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

References: § 760
 § 662
 § 2581
 § 2581
 § 662
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