Case of the Month – Clifford Allen Brace, Jr. et all v. Steven M. Speier

Clifford Allen Brace, Jr. et al. v. Steven M. Speier

Clifford Allen Brace, Jr. & Anh Brace are a married couple that purchased two real properties, one in the 70’s and one in the 80’s. Thereafter, in 2011, Clifford Brace filed Chapter 7 Bankruptcy (only him).

Characterization of the jointly held properties as joint tenancy or community property determines the extent to which the properties are included in the bankruptcy estate. If a debtor holds property in joint tenancy, only his or her joint interest becomes part of the bankruptcy estate. In such circumstances, 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. However, if the property at issue is community property, the property becomes part of the bankruptcy estate in its entirety. 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.

In this case, title to both properties was originally taken as joint tenants. Notwithstanding, the bankruptcy court determined that the properties were community property based upon an interpretation of California Family Code section 760 which applies a presumption in favor of community property for property purchased during a marriage with community property. As such, the bankruptcy court ruled that the properties were to be sold and the proceed distributed to creditors. Brace appealed the decision of the Bankruptcy Appellate Panel (“BAP”).

On November 18, 2019, The BAP raised the question to the California Supreme Court to clarify for all parties how the properties should be identified for the bankruptcy. The question put to the court was whether California Evidence Code section 662, which affords a presumption based on the property’s form of title (in this case joint tenancy), supersedes California Family Code section 760 which applies a presumption in favor of community property for property purchased during a marriage with community property.

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).

Therefore, the BAP ruled that the property acquired by Brace and his wife in the 80’s was community property and thus fully part of the bankruptcy estate. As to the property bought in the 70’s, no date of acquisition was determined by the bankruptcy court. Such a determination is necessary to apply the rule so as to that property, so the finding of community property as to that property was vacated pending further findings.