Clifford Brace, Jr. v. Steven Speier , 908 F.3d 531 ( 2018 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE CLIFFORD ALLEN BRACE, No. 17-60032
JR.,
Debtor, BAP No.
16-1041
CLIFFORD ALLEN BRACE, JR.,
Individually and as the Trustee ORDER
of the Crescent Trust dated CERTIFYING
July 30, 2004; AHN N. BRACE, QUESTION TO THE
Individually and as the Trustee SUPREME COURT
of the Crescent Trust dated OF CALIFORNIA
July 30, 2004,
Appellants,
v.
STEVEN M. SPEIER, Chapter 7
Trustee,
Appellee.
2 IN RE BRACE
Filed November 8, 2018
Before: Consuelo M. Callahan and Jacqueline Nguyen,
Circuit Judges, and David A. Ezra, * District Judge.
Order
SUMMARY **
Certified Question
In a bankruptcy case, the panel certified the following
question to the Supreme Court of California:
Does the form of title presumption set forth
in section 662 of the California 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
*
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
debtor and non-debtor spouse are aligned
against the trustee of the bankruptcy estate?
The panel withdrew the case from submission and
directed the Clerk to administratively close the docket,
pending further order.
ORDER
We respectfully ask the Supreme Court of California to
exercise its discretion to decide the certified question set
forth in Part II of this Order, below. See Cal. R. Ct. 8.548.
The answer to this question of California law will be
dispositive of the appeal before us, and no clear controlling
California precedent exists. Id. Moreover, because the
question that we certify is of great importance to many
debtors and creditors in California, considerations of comity
and federalism suggest that the court of last resort in
California, rather than our court, should have the opportunity
to answer the question in the first instance. See Kilby v. CVS
Pharmacy, Inc., 739 F.3d 1192, 1196–97 (9th Cir. 2013);
Klein v. United States, 537 F.3d 1027, 1028 (9th Cir. 2008).
I. Administrative Information
We provide the following information as required by
California Rule of Court 8.548(b)(1):
The title of this case is: CLIFFORD ALLEN BRACE,
Jr., individually and as the Trustee of the Crescent Trust
dated July 30, 2004, and AHN N. BRACE, individually and
as the Trustee of the Crescent Trust dated July 30, 2004,
Appellants v. STEVEN M. SPEIER, Chapter 7 Trustee,
Appellee (In re: CLIFFORD ALLEN BRACE, Jr.).
4 IN RE BRACE
The case number in our court is: 17-60032.
The names and addresses of counsel are: for Appellants,
William Derek May, Law Office of W. Derek May,
400 North Mountain Avenue, Suite 215b, Upland, CA
91786, and Stephen R. Wade, Law Offices of Stephen R.
Wade, P.C., 350 W. 4th Street Claremont, CA 91711; for
Appellee, Matthew W. Grimshaw, D. Edward Hays, and
Judith E. Marshack, Marshack Hays LLP, 870 Roosevelt
Avenue, Irvine, CA 92620; for Amicus Curiae the National
Association of Consumer Bankruptcy Attorneys and the
National Consumer Bankruptcy Rights Center, Tara
Twomey, the National Consumer Bankruptcy Rights Center,
1501 The Alameda, Suite 200, San Jose, CA 95126, and
Wayne A. Silver, Law Office of Wayne A. Silver, 643 Bair
Island Rd., Suite 403, Redwood City, CA 94063.
II. Certified Question
We request a decision by the Supreme Court of
California on the following question that is now before us:
Does the form of title presumption set forth
in section 662 of the California 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?
IN RE BRACE 5
Our phrasing of the question should not restrict the
Supreme Court of California’s consideration of the issues
involved; that court may reformulate the question. Cal. R.
Ct. 8.548(f)(5).
We agree to accept and to follow the decision of the
Supreme Court of California, as we are required by both
California Rule of Court 8.548(b)(2) and our own precedent.
See Klein, 537 F.3d at 1029.
III. Statement of Facts
Appellants, Clifford and Ahn Brace, have been married
since 1972. Around 1977 or 1978, Appellants acquired their
residence located at 470 E. Crescent Avenue in Redlands,
California (the “Redlands Property”). Sometime before
bankruptcy, Appellants also acquired a rental property
located at 4250 N. F Street in San Bernardino, California (the
“San Bernardino Property”) (collectively, the “Properties”)
and a parcel of land located in Mohave, Arizona (the
“Mohave Property”). 1 Appellants took title to each property
as “husband and wife as joint tenants.”
On July 30, 2004, Mr. Brace (“Debtor”) formed the
Crescent Trust, an irrevocable trust, which designated Mrs.
Brace as the sole beneficiary and Debtor as the sole trustee.
The Crescent Trust document was never recorded. A few
months later, in August 2004, Debtor executed and recorded
trust transfer deeds that transferred his interests in the
Redlands and San Bernardino Properties into the Crescent
Trust for no consideration. At the time of the transfers,
1
On appeal, Appellants do not challenge the characterization of the
Mohave Property. Therefore, we address the characterizations of only
the Redlands and San Bernardino Properties.
6 IN RE BRACE
Debtor was a defendant in a civil action in state court. Two
weeks after Debtor transferred the Properties into the Trust,
a default judgment was entered against him.
On May 16, 2011, Debtor filed a voluntary petition under
Chapter 7 of the Bankruptcy Code, and Robert L. Goodrich
was appointed Chapter 7 Trustee. 2 In December 2011, the
Trustee filed an adversary proceeding against Appellants,
individually and in their capacities as trustees of the Crescent
Trust, 3 seeking: (1) a declaration that the Properties were
property of the bankruptcy estate; (2) a judgment quieting
title to the Properties in the bankruptcy estate; (3) turnover
of any of the Properties determined to be property of the
bankruptcy estate; (4) avoidance and recovery of Debtor’s
transfers of the Properties into the Crescent Trust as actually
or constructively fraudulent transfers under the California
Uniform Fraudulent Transfer Act (the “CUFTA”), Cal. Civ.
Code § 3439.04(a); and (5) revocation of Debtor’s discharge
under 11 U.S.C. § 727(d)(1) and (d)(2).
Following the trial, the bankruptcy court ruled in favor
of the Trustee on the actual fraudulent transfer claims,
voided the transfer of the Properties, and held that the
Properties were part of the bankruptcy estate in their
entireties. In so ruling, the bankruptcy court rejected
Appellants’ defense that, many years earlier, they had orally
transmuted the property from community property to
separate property.
2
Goodrich resigned during the bankruptcy court trial and was
replaced by the current Trustee, Steven Speier.
3
Mrs. Brace was not a trustee of the Crescent Trust, and the Trustee
erroneously named her as such in the complaint.
IN RE BRACE 7
After judgment was entered, Appellants timely moved
for reconsideration and to amend the judgment, arguing that
the Properties, as recovered, were not part of the bankruptcy
estate in their entireties. Rather, because Appellants held the
Properties as joint tenants before the transfer, Appellants
argued that they held the Properties as tenants in common
post-transfer. 4 Thus, as separate property, only Debtor’s
one-half interest in each of the Properties should be included
as part of the estate.
The bankruptcy court disagreed. At the hearing on
Appellants’ motion for reconsideration and to amend the
judgment, 5 the bankruptcy court explained that Appellants
acquired the Properties during their marriage and took title
“as husband and wife, as joint tenants”; thus, post-avoidance
of the transfer to the Crescent Trust, Appellants once again
held the Properties as joint tenants. The bankruptcy court
further explained that, under sections 760 6 and 2581 7 of the
4
Specifically, Appellants explained that when Debtor transferred
his one-half interest in each of the Properties to the Crescent Trust, the
respective joint tenancies were severed, and thus Appellants held the
Properties as tenants in common. Appellants later abandoned this
argument at the hearing on the motion for reconsideration and to amend
the judgment.
5
Due to the complexity of the matter, the hearing was divided
between two proceedings, the first of which occurred on November 5,
2015, and the second on December 10, 2015.
6
“Except as otherwise provided by statute, all property, real or
personal, wherever situated, acquired by a married person during the
marriage while domiciled in this state is community property.” Cal.
Fam. Code § 760.
7
Section 2581 of the Family Code states, in relevant part:
8 IN RE BRACE
California Family Code, the characterization of property in
the deed is irrelevant. Accordingly, it determined that the
Properties were community property and therefore property
of the bankruptcy estate in their entireties.
In the interest of clarity, the bankruptcy court amended
the judgment, finding that:
although these properties are returned to joint
tenancy between the Debtor and Defendant
Ahn Brace, the properties were acquired by
the Debtor and Ahn Brace during the
marriage with community assets and they
presumptively constitute community
property under applicable law. Defendants
failed to establish that the Redlands Property,
San Bernardino Property, or [Mohave]
Property were not community in nature and,
therefore they constitute property of the
Estate pursuant to 11 U.S.C. § 541 and are
subject to administration by the Estate.
Appellants timely appealed the bankruptcy court’s
amended judgment to the Ninth Circuit Bankruptcy
Appellate Panel (the “BAP”). In an unpublished
memorandum disposition, the BAP affirmed the bankruptcy
court’s decision on the CUFTA claims and avoidance of the
Crescent Trust. This issue is not on appeal. In a separate
published opinion, the BAP affirmed the bankruptcy court’s
For 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 tenancy in common, joint
tenancy, or tenancy by the entirety, or as community
property, is presumed to be community property.
IN RE BRACE 9
amended judgment that the Properties were part of the
bankruptcy estate in their entireties. Specifically, the BAP
determined that the community property presumption
applied in the bankruptcy context, Appellants had failed to
overcome the presumption that the Properties were
community property, and therefore the Properties, in their
entireties, were part of the bankruptcy estate. Appellants
timely appealed to this court.
The primary issue on appeal is whether the bankruptcy
court erred in characterizing the Properties as community
property, irrespective of the fact that Appellants held title to
the Properties as joint tenants, and therefore erred in
determining the Properties were part of the bankruptcy
estate. Resolution of this issue turns on whether, in a
bankruptcy proceeding, the community property
presumption can be overcome with evidence that the debtor
and non-debtor spouse hold title to the property at issue as
joint tenants where there is no underlying marital dissolution
proceeding and the interests of the debtor and non-debtor
spouse are not opposed.
IV. Explanation for Request for Decision
A Chapter 7 bankruptcy petition creates an estate to
satisfy creditors’ claims. Under the Bankruptcy Code, the
bankruptcy estate generally includes “[a]ll interests of the
debtor and the debtor’s spouse in community property” at
the time the bankruptcy case is filed. 11 U.S.C. § 541(a)(2).
While the Bankruptcy Code specifies that community
property is part of the bankruptcy estate, it does not address
“the threshold questions of the existence and scope of the
debtor’s interest in a given asset.” In re Mantle, 153 F.3d
1082, 1084 (9th Cir. 1998) (quoting In re Farmers Markets,
Inc., 792 F.2d 1400, 1402 (9th Cir. 1986)). Instead,
bankruptcy courts are required to look to state law—in this
10 IN RE BRACE
case, California law—to determine whether property is
community property and therefore included in the
bankruptcy estate. Id. at 1084; see also Butner v. United
States, 440 U.S. 48, 54 (1979) (“Congress has generally left
the determination of property rights in the assets of a
bankrupt’s estate to state law.”); In re Reed, 940 F.2d 1317,
1332 (9th Cir. 1991).
California is a community property state, which
characterizes marital property as either community or
separate property. See Cal. Fam. Code § 760; In re Marriage
of Benson, 116 P.3d 1152, 1155 (Cal. 2005). 8 In California,
classification of property as community or separate property
depends on the time of its acquisition. See v. See, 415 P.2d
776, 779 (Cal. 1966) (“The character of property as separate
or community is determined at the time of its acquisition.”).
“Property that a spouse acquired before the marriage is that
spouse’s separate property.” In re Marriage of Valli,
324 P.3d 274, 276 (Cal. 2014); see also Cal. Fam. Code
§ 770(a)(1). Property that a spouse acquired during the
marriage is community property, “[e]xcept as provided by
statute.” Cal. Fam. Code § 760; see also Valli, 324 P.3d at
276.
The characterization of the property interest in the
bankruptcy context is crucial and determines the outcome of
this appeal. Under California law, if the property at issue is
held in joint tenancy, only the debtor’s one-half joint interest
becomes part of the bankruptcy estate. See Reed, 940 F.2d
at 1332; In re Obedian, 546 B.R. 409, 412 (Bankr. C.D. Cal.
2016). In a Chapter 7 bankruptcy case, the trustee is
8
“Spouses may hold property as joint tenants or tenants in common,
or as community property, or as community property with a right of
survivorship.” Cal. Fam. Code § 750.
IN RE BRACE 11
permitted, under certain circumstances, to sell the jointly
held property and apportion the proceeds accordingly
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. Mantle,
153 F.3d at 1084. In that scenario, the trustee is permitted,
under the Bankruptcy Code, to sell the property and
distribute all sales proceeds to the debtor’s creditors, rather
than apportioning some of the proceeds to the non-debtor
spouse. See 11 U.S.C. § 541(a)(2). The certified question
addresses the interplay between federal bankruptcy law and
state law property characterization.
Under California law, there is a general presumption
that, absent a statute to the contrary, all property acquired
during marriage is community property. See Valli, 324 P.3d
at 281–82 (Chin, J., concurring); see also Cal. Fam. Code
§§ 65, 760; Cal. Civ. Code § 687. “This is a rebuttable
presumption affecting the burden of proof; hence it can be
overcome by the party contesting community property
status.” In re Marriage of Haines, 39 Cal. Rptr. 2d 673, 681
(Ct. App. 1995). The standard of proof to overcome this
burden is a preponderance of the evidence. See Valli,
324 P.3d at 276.
A more stringent application of the community property
presumption, which is not applicable here but is nonetheless
relevant, is contained in section 2581 of the California
Family Code. That section provides that:
For 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 tenancy in common, joint
12 IN RE BRACE
tenancy, or tenancy by the entirety, or as
community property, is presumed to be
community property. This presumption is a
presumption affecting the burden of proof
and may be rebutted by either of the
following:
(a) 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.
(b) Proof that the parties have made a
written agreement that the property is
separate property.
Cal. Fam. Code § 2581.
According to the California Family Code, to change the
nature or characterization of property, spouses may
transmute the property by agreement or transfer, with or
without consideration. Id. § 850. 9 To be valid, a
9
Section 850 of the California Family Code provides:
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.
IN RE BRACE 13
transmutation must be “made in writing by an express
declaration that is made, joined in, consented to, or accepted
by the spouse whose interest in the property is adversely
affected.” Id. § 852(a). “An ‘express declaration’ is a
writing signed by the adversely affected spouse ‘which
expressly states that the characterization or ownership of the
property is being changed.’” In re Marriage of Lafkas,
188 Cal. Rptr. 3d 484, 497 (Ct. App. 2015) (quoting In re
Estate of MacDonald, 794 P.2d 911, 918 (Cal. 1990)). “An
‘express declaration’ does not require use of the terms
‘transmutation,’ ‘community property,’ ‘separate property,’
or a particular locution.” Id. (quoting In re Marriage of
Starkman, 28 Cal. Rptr. 3d 639, 642 (Ct. App. 2005)).
“Though no particular terminology is required, the writing
must reflect a transmutation on its face, and must eliminate
the need to consider other evidence in divining this intent.”
Benson, 116 P.3d at 1158; see also Starkman, 28 Cal. Rptr.
3d at 642–43 (“The express declaration must unambiguously
indicate a change in character or ownership of property. A
party does not ‘slip into a transmutation by accident.’”
(internal citation omitted) (quoting In re Marriage of
Koester, 87 Cal. Rptr. 2d 76, 80 n.5 (Ct. App. 1999))). The
transmutation statute applies to property transactions
between spouses, as well as property transactions between
spouses and third parties. See Valli, 324 P.3d at 279–80.
On appeal, Mrs. Brace argues—as she did in the lower
courts—that the general community property presumption
yields to the common law form of title presumption, codified
in section 662 of the California Evidence Code. Section 662
provides, in full, that “[t]he owner of the legal title to
property is presumed to be the owner of the full beneficial
(c) Transmute separate property of one spouse to
separate property of the other spouse.
14 IN RE BRACE
title. This presumption may be rebutted only by clear and
convincing proof.” Cal. Evid. Code § 662. On appeal, Mrs.
Brace contends that the lower courts erred in applying the
community property presumption and characterizing the
property at issue as community property because the
evidence demonstrated that she and her debtor husband
acquired the property from a third party as joint tenants. In
support, Mrs. Brace relies on our decision in In re Summers,
which held that under California law, “the community
property presumption is rebutted when a married couple
acquires property from a third party as joint tenants.”
332 F.3d 1240, 1243 (9th Cir. 2003) (relying on, inter alia,
Haines, 39 Cal. Rptr. 2d at 682, and In re Pavich, 191 B.R.
838, 844 (Bankr. E.D. Cal. 1996)).
In Summers, a married couple and their daughter
purchased a parcel of real estate and took title as “Eugene
Summers and Ann Marie Summers, husband and wife[,] and
Aurora Summers, an unmarried woman, all as joint tenants.”
332 F.3d at 1242. Eventually, all three individuals filed
separate bankruptcy petitions with the wife filing first. Id.The trustee in the wife’s case argued that the real property
was a community asset and thus property of the bankruptcy
estate in its entirety. Id. After a trial on the merits, the
bankruptcy court held that the community property
presumption was overcome by evidence of the deed, which
indicated the real property was held in joint tenancy. Id. The
BAP affirmed. Id.On appeal, we affirmed the BAP. Id. at 1245. We first
explained the significance of the nature or characterization
of the property when defining the bankruptcy estate. Id. at
1243. We explained that the presumption under section 760
of the California Family Code that all property acquired by
married persons is community property can be rebutted
IN RE BRACE 15
through an agreement between the spouses or “by specifying
the form of title in which [the property] is held.” Id. at 1243.
Thus, we determined that “the community property
presumption ‘is overcome when a declaration in a deed or
other title instrument indicates spouses take title to property
as joint tenants.’” Id. (quoting Pavich, 191 B.R. at 844).
Because the deed in Summers specifically conveyed the real
property as joint tenants, we concluded that only the wife’s
separate interest in the property was part of the bankruptcy
estate. Id. at 1245. 10
On appeal, the parties dispute whether Summers is still
precedential in light of Valli, a marital dissolution
proceeding concerned with the division of property between
a husband and wife—in particular, an insurance policy on
the husband’s life purchased with community funds but
naming the wife as the sole beneficiary.
In Valli, the husband (Frankie Valli) used community
property funds to purchase an insurance policy on his life,
naming his wife (Randy Valli) as the policy’s only
beneficiary and owner. 324 P.3d at 275. In the marital
dissolution proceeding, the husband—relying on the
community property presumption—argued that the
insurance policy was community property because (1) it was
purchased with community property funds and (2) the
transmutation requirements under section 852 of the
California Family Code had not been met to change the
10
After finding that the community property presumption had been
overcome, we addressed whether California’s transmutation statute
generally applies to transactions between the spouses and a third-party
seller. Summers, 332 F.3d at 1244. Relying on several California Court
of Appeal decisions, we concluded that the transmutation statute is not
applicable to transactions between spouses and third parties. Id. That
holding was abrogated by Valli, and is not at issue here.
16 IN RE BRACE
property from community to separate property. Id. at 276.
The wife—relying on the form of title presumption—argued
that the insurance policy was separate property because the
husband put the policy in her name. The wife also argued
that, although the couple had not complied with the statutory
requirement that any transmutation be in writing, the
transmutation formalities are unnecessary in situations
where one spouse acquires property directly from a third
party rather than through an interspousal transaction. Id.
The Supreme Court of California rejected the wife’s
arguments, holding that: (1) the transmutation statutes apply
in property transactions between spouses, as well as in
property transactions between spouses and third parties; and
(2) section 662’s form of title presumption “does not apply
[in marital dissolution proceedings] when it conflicts with
the transmutation statutes.” Valli, 324 P.3d at 280 (citing In
re Marriage of Barneson, 81 Cal. Rptr. 2d 726, 733 (Ct.
App. 1999)). Finding that such a conflict existed, the Court
held that “the transmutation requirement of an express
written declaration applie[d] to [the] wife’s claim.” Id. The
Court did not otherwise expound on the matter. Id.However, a concurring opinion joined by three justices
suggested that “rules that apply to an action between the
spouses to characterize property acquired during the
marriage do not necessarily apply to a dispute between a
spouse and a third party.” Valli, 324 P.3d at 284–85 (Chin,
J., concurring).
Appellee argues that Valli applies not only to suits
between spouses but also to non-dissolution cases involving
both spouses and third parties. Appellants and the amicus
curiae disagree. They contend that Valli does not abrogate
the holding in Summers (i.e., in bankruptcy cases, the
community property presumption can also be rebutted with
IN RE BRACE 17
evidence that spouses hold title as joint tenants) and that the
cases are reconcilable because Valli addressed the
community property presumption/transmutation statute only
in the context of a marital dissolution proceeding.
Appellants and the amicus curiae argue that marital
dissolution proceedings are unique and that it is only within
that context that the form of title presumption is disregarded
in favor of the general community property presumption.
Appellants and the amicus curiae contend that because the
special concerns in marital dissolution proceedings do not
exist in the broader context of bankruptcy and debtor-
creditor relationships, Valli does not abrogate Summers to
the extent that the record title presumption can no longer
overcome the community property presumption in
bankruptcy cases.
No controlling California precedent addresses the
applicability of the community property presumption in suits
between a married person and a third party creditor. We
recognize that, under California law, statutory interpretation
begins with the text. People v. Scott, 324 P.3d 827, 829 (Cal.
2014). But the text of the relevant statutes (and relevant
evidentiary codes) is susceptible to both of the opposing
interpretations offered by the parties, and we do not find the
answer to these issues obvious.
Accordingly, we respectfully ask the Supreme Court of
California to exercise its discretion to decide the following
certified question: Does the form of title presumption set
forth in section 662 of the California 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
18 IN RE BRACE
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?
V. Accompanying Materials
The clerk of this court is hereby directed to file in the
Supreme Court of California, under official seal of the
United States Court of Appeals for the Ninth Circuit, copies
of all relevant briefs and excerpts of the record, and an
original plus ten copies of this order, along with a certificate
of service on the parties, as required by California Rule of
Court 8.548(c) and (d).
This case is withdrawn from submission. The Clerk is
directed to administratively close this docket, pending
further order. Further proceedings before us are stayed
pending final action by the Supreme Court of California.
The parties shall notify the clerk of this court within seven
days after the Supreme Court of California accepts or rejects
the request for a decision and again within seven days if that
court renders an opinion. The panel retains jurisdiction over
further proceedings.