Court Opinion

ID: 4584976
Source: CourtListenerOpinion
Date Created: 2020-11-09 18:00:18.988969+00
Date Added: 2024-06-11T13:46:46.316617
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

IN RE CLIFFORD ALLEN BRACE, JR.,         No. 17-60032
                         Debtor,
                                           BAP No.
                                           16-1041
CLIFFORD ALLEN BRACE, JR.,
Individually and as the Trustee of
The Crescent Trust dated July 30,          OPINION
2004; ANH N. BRACE, individually
and as The Trustee of The Crescent
Trust dated July 30, 2004,
                           Appellants,

                  v.

STEVEN M. SPEIER, Chapter 7
Trustee,
                          Appellee.

             Appeal from the Ninth Circuit
              Bankruptcy Appellate Panel
  Taylor, Novack, and Lafferty III, Bankruptcy Judges,
                       Presiding

        Argued and Submitted August 10, 2018
       Submission Withdrawn November 8, 2018
           Resubmitted November 2, 2020
                 Pasadena, California
2                          IN RE BRACE

                     Filed November 9, 2020

Before: Consuelo M. Callahan and Jacqueline H. Nguyen,
   Circuit Judges, and David A. Ezra, * District Judge.

                     Opinion by Judge Ezra

                          SUMMARY **

                           Bankruptcy

    The panel affirmed in part and vacated in part the
Bankruptcy Appellate Panel’s order affirming the
bankruptcy court’s judgment against a Chapter 7 debtor and
his non-debtor spouse in an adversary proceeding brought by
the Chapter 7 trustee concerning the characterization of two
properties acquired by the couple during their marriage.

    The panel held that if a debtor holds property in joint
tenancy, only his one-half joint interest becomes part of the
bankruptcy estate, and the Chapter 7 trustee may sell the
jointly held property and apportion the proceeds. If property
is community property, it becomes part of the bankruptcy
estate in its entirety, and the trustee may sell the property and
distribute all proceeds to the debtor’s creditors, rather than
apportioning some of the proceeds to the non-debtor spouse.

    *
      The Honorable David A. Ezra, United States District Judge for the
District of Hawaii, sitting by designation.
    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
                        IN RE BRACE                         3

    The panel had certified to the Supreme Court of
California the question whether, in Chapter 7 bankruptcy
proceedings, Cal. Evid. Code § 662, which affords a
presumption based on the property’s form of title,
supersedes Cal. Fam. Code § 760, which applies a
presumption in favor of community property for property
purchased during the marriage with community property.
The California Supreme Court determined that for joint
tenancy property acquired during marriage before 1975,
each spouse’s interest is presumptively separate in character.
For such property acquired with community funds on or after
January 1, 1975, the property is presumptively community
in character. The panel therefore limited the holding of In re
Summers, 332 F.3d 1240 (9th Cir. 2003), that a married
couple’s acquisition of property in joint tenancy destroys the
statutory presumption that the property is community
property, to properties acquired before 1975. The California
Supreme Court also determined that, for property acquired
before 1985, the parties can show a transmutation from
community property to separate property by oral or written
agreement or a common understanding. For joint tenancy
property acquired with community funds on or after January
1, 1985, a written declaration is required.

    Affirming in part, the panel held that for the first
property, the community property presumption applied
because the property was acquired with community funds on
or after January 1, 1975. The record was unclear regarding
when appellants acquired the second property. The panel
therefore vacated the bankruptcy court’s determination that
the community property presumption applied to the second
property and remanded for further proceedings. The panel
found no clear error in the bankruptcy court’s factual finding
that no oral transmutation of the properties took place in the
1970s. Accordingly, the panel affirmed the bankruptcy
4                       IN RE BRACE

courts’ conclusion that appellants did not meet the
requirements for a transmutation of either property.

                        COUNSEL

Stephen R. Wade (argued), Law Offices of Stephen R. Wade
P.C., Claremont, California, for Appellants.

D. Edward Hays (argued), Matthew W. Grimshaw, and
Judith E. Marshack, Marshack Hays LLP, Irvine, California,
for Appellee.

Wayne A. Silver (argued), Law Office of Wayne A. Silver,
Redwood City, California; Tara Twomey, National
Consumer Bankruptcy Rights Center, San Jose, California;
for Amici Curiae National Association of Consumer
Bankruptcy Attorneys, and National Consumer Bankruptcy
Rights Center.

                        OPINION

EZRA, District Judge:

    Chapter 7 debtor Clifford Brace, Jr. (“Brace”) and his
wife Anh Brace, a non-debtor, (collectively “Appellants”)
appeal the Bankruptcy Appellate Panel’s (“BAP”) order
affirming the bankruptcy court’s judgment in an adversary
proceeding brought by Steven Speier, the Chapter 7 Trustee.
We affirm in part and vacate and remand in part.
                        IN RE BRACE                          5

                       I. Background

    This appeal concerns the characterization of two
properties acquired by Appellants during their marriage but
before Brace individually filed for bankruptcy protection.
Each property’s characterization under state law as either a
joint tenancy or community property determines the extent
to which it is included in Brace’s bankruptcy estate.

    If a debtor holds property in joint tenancy, only his one-
half joint interest becomes part of the bankruptcy estate. See
In re Reed, 940 F.2d 1317, 1332 (9th Cir. 1991). The
Bankruptcy Code permits a Chapter 7 trustee to sell the
jointly held property and apportion the proceeds between the
bankruptcy estate and the non-debtor joint owners. See
11 U.S.C. § 363(h), (j). However, if the property at issue is
community property, the property becomes part of the
bankruptcy estate in its entirety. See 11 U.S.C. § 541(a)(2).
In that scenario, the trustee is permitted to sell the property
and distribute all proceeds to the debtor’s creditors, rather
than apportioning some of the proceeds to the non-debtor
spouse. See id.

    The first property at issue is located at 470 E. Crescent
Avenue in Redlands, California (the “Redlands Property”),
and the second is located at 4250 N. F Street in San
Bernardino, California (the “San Bernardino Property”)
(collectively “the Properties”). The underlying facts and
procedural history in this case were laid out in our previous
order certifying a question to the Supreme Court of
California. See In re Brace, 908 F.3d 531, 534–36 (9th Cir.
2018). We repeat only the relevant facts.

    Appellants married in 1972. The record before us shows
that Appellants acquired both properties with community
property as “husband and wife as joint tenants” during their
6                       IN RE BRACE

marriage. The bankruptcy court also found that Appellants
acquired the Redlands Property in either 1977 or 1978.
However, the bankruptcy court did not determine when
Appellants acquired the San Bernardino Property, stating
only that the acquisition occurred “shortly after [Appellants]
were married” and “[p]rior to bankruptcy.”

    The bankruptcy court determined that under sections 760
and 2581 of the California Family Code, the Properties were
community property—thus belonging in their entireties to
the bankruptcy estate—notwithstanding that the deeds
characterize the Properties as joint tenancies. Appellants
claimed that, even if the Properties were originally
community property, they orally transmuted the Properties
from community to separate property “sometime in the
1970s.” The bankruptcy judge found that allegation not
credible. The BAP affirmed these rulings in a published
opinion. In re Brace, 566 B.R. 13 (B.A.P. 9th Cir. 2017).

             II. Answer to Certified Question

    On November 8, 2018, we certified a question to the
Supreme Court of California to resolve a conflict between
presumptions under California state law. In re Brace,
908 F.3d at 534. The question was whether, in Chapter 7
bankruptcy proceedings, California Evidence Code section
662, which affords a presumption based on the property’s
form of title, supersedes California Family Code section 760,
which applies a presumption in favor of community property
                            IN RE BRACE                           7

for property purchased during the marriage with community
property. 1

                  A. Property Characterization

     The Supreme Court of California determined that the
answer to the certified question hinges on when the property
at issue was acquired. Specifically, “[f]or joint tenancy
property acquired during marriage before 1975, each
spouse’s interest is presumptively separate in character.” In
re Brace, 470 P.3d 15, 36 (Cal. 2020) (citing Cal. Fam. Code
§ 803). Conversely, “[f]or joint tenancy property acquired
with community funds on or after January 1, 1975, the
property is presumptively community in character.” Id.
(citing Cal. Fam. Code § 760).

    Accordingly, we find it necessary to limit the
precedential value of our reasoning in In re Summers,
332 F.3d 1240 (9th Cir. 2003), to properties acquired prior
to January 1, 1975. Id. at 1243–44. In that case, we held
that, “[w]hen property is conveyed to a husband and wife as
joint tenants, the form of the conveyance is such as to destroy
the statutory presumption that the property is community
even though the consideration for such conveyance consists

    1
      In particular, the certified question asked which presumption
controls 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 re Brace, 908 F.3d at 534.
8                       IN RE BRACE

of community funds or assets.” Id. at 1244 (quoting Lovetro
v. Steers, 44 Cal. Rptr. 604, 608 (Ct. App. 1965)). In other
words, “[t]here is . . . a rebuttable presumption that ‘where
the deed names the spouses as joint tenants . . . the property
was in fact held in joint tenancy.’” Id. (quoting Hansen v.
Hansen, 43 Cal. Rptr. 729, 741 (Ct. App. 1965)).

    In light of the Supreme Court of California’s answer to
our certified question in this case, this reasoning from In re
Summers does not apply to properties acquired on or after
January 1, 1975. In re Brace, 470 P.3d at 36. Instead, such
property is “presumptively community in character” under
California Family Code section 760. Id. Nevertheless, for
properties acquired before 1975, In re Summers is still valid
precedent. See id.

              B. Transmutation Requirements

    The Supreme Court of California also identified changes
to the transmutation requirements under California Family
Code sections 850 and 852 that became effective January 1,
1985. Id. at 34. For property acquired before 1985, “the
parties can show a transmutation from community property
to separate property by oral or written agreement or a
common understanding.” Id. at 36. In contrast, “[f]or joint
tenancy property acquired with community funds on or after
January 1, 1985, a valid transmutation from community
property to separate property requires a written declaration
that expressly states that the character or ownership of the
property is being changed.” Id.

                 III. Standard of Review

    We review decisions of the BAP de novo, and we apply
the same standard of review that the BAP applied to the
bankruptcy court’s ruling. In re Jacobson, 676 F.3d 1193,
                        IN RE BRACE                        9

1198 (9th Cir. 2012). In doing so, we review conclusions of
law de novo and findings of fact for clear error. Id. Because
the bankruptcy court interpreted California state law, we
review de novo the bankruptcy court’s interpretation of state
law. See In re Rucker, 570 F.3d 1155, 1159 (9th Cir. 2009).

                      IV. Discussion

          A. Redlands Property Characterization

    Under the Supreme Court of California’s framework, the
lower courts properly applied the community property
presumption to the Redlands Property because it was
acquired with community funds on or after January 1, 1975.
Cal. Fam. Code § 760. See In re Brace, 470 P.3d at 36. The
bankruptcy court correctly identified this property as
community property and, thus, part of the bankruptcy estate.
See 11 U.S.C. § 541. Therefore, the bankruptcy courts’
characterization of the Redlands Property upon acquisition
is affirmed.

      B. San Bernardino Property Characterization

    The record is unclear regarding when Appellants
acquired the San Bernardino Property. Appellants may have
acquired the property as early as 1972, “shortly after they
were married,” or as recently as 2011, “prior to bankruptcy.”
Because the bankruptcy court did not determine whether
Appellants acquired the San Bernardino Property before
January 1, 1975, the court was not equipped to decide
whether the community property presumption applied. See
In re Brace, 470 P.3d at 36.

    Accordingly, the bankruptcy court’s determination that
the community property presumption applied to the San
Bernardino Property is hereby vacated. On remand, the
10                          IN RE BRACE

court must determine whether Appellants acquired the
property before January 1, 1975. If not, “the property is
presumptively community in character.” Id. On the other
hand, if the property was acquired before 1975, the
bankruptcy court must apply the presumption in California
Family Code section 803. Id. (noting that, under these
circumstances, “each spouse’s interest is presumptively
separate in character”).

                         C. Transmutation

    To change the nature or characterization, spouses may
transmute the property by agreement or transfer, with or
without consideration. Cal. Fam. Code § 850. 2 The
bankruptcy court found Appellants’ argument that an oral
transmutation of both properties took place “sometime in the
1970s” unpersuasive. We find no clear error with this
factual finding.

    Because the bankruptcy court considered and rejected
the possibility of an oral transmutation, it does not need to
revisit this argument on remand. Appellants did not satisfy

     2
       Subject to Sections 851 to 853, inclusive, married persons may by
agreement or transfer, with or without consideration, do any of the
following:

        (a) Transmute community property to separate
            property of either spouse.

         (b) Transmute separate property of either spouse to
             community property.

         (c) Transmute separate property of one spouse to
             separate property of the other spouse.

Cal. Fam. Code § 850.
                        IN RE BRACE                        11

the relaxed requirements in effect prior to 1985, so the
conclusion does not change depending on whether the
property was acquired before January 1, 1985, or not. See In
re Brace, 470 P.3d at 34–36; see also Cal. Fam. Code
§ 852(a). The bankruptcy courts’ conclusion that Appellants
did not meet the requirements for a transmutation of either
property is affirmed.

                       V. Conclusion

    In light of the Supreme Court of California’s opinion
answering our certified question, the bankruptcy courts
properly applied California law to the characterization of the
Redlands Property. On the other hand, the bankruptcy courts
did not make the necessary factual finding regarding when
the San Bernardino Property was purchased to apply the
proper presumptions when characterizing that property.
Finally, we see no clear error in the bankruptcy courts’
finding that Appellants failed to meet the requirements for a
transmutation of either property. It follows that the
judgment of the lower courts is affirmed in part and vacated
and remanded in part.

  AFFIRMED IN PART;                      VACATED        AND
REMANDED IN PART.

   Each side shall bear its own costs.