Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.
Date: November 12, 2020
To: All Scheer Law Group Clients and Affiliates:
Subject: Don’t Be Lulled: Holding Property in Joint Tenancy Does not Insulate it from Sale to Pay Creditors if Only One Spouse Files Bankruptcy.
By: Spencer Scheer
Many people misconstrue the effect of holding title to real property as joint tenants. The primary distinction between holding property in joint tenancy or as tenants in common, is the right of survivorship under joint tenancy. In essence, “winner/survivor takes all” under joint tenancy. However, many people overlook the effect of community property laws on the issue.
The issue and dangers are highlighted in the recent California Supreme Court advisory opinion to the 9th Circuit in Brace v. Speier, 470 P.3d 15 (Cal. Sup. Ct. July 23, 2020). In essence, the Court held that jointly owned real property is also presumed to be community property. Applied to the bankruptcy context: Even if one spouse files, the entire interest of both spouses in real property is subject to administration and sale by the bankruptcy trustee, and proceeds used to pay creditors, even though the property is held in joint tenancy.
Examining California Family Code (Section 760, raising a presumption that all property acquired during marriage is community property) and contrasting with California Evid. Code Section 662 (providing that the owner of legal title is presumed to be the owner i.e. the surviving joint tenant, when property held as joint tenants), the Court sided with the community property presumption. This allowed the bankruptcy trustee who technically succeeded to the interest of only one joint tenant who filed bankruptcy, to sell the property without the consent or death of the other joint tenant and without paying the other joint tenant.
The takeaway is: Don’t assume that joint tenancy will protect your respective interests if you are a joint tenant. Bankruptcy is often an unplanned event, brought on by unplanned factors such as economic changes or illness. Strategic planning may result in the need for only one spouse to file a bankruptcy. Plan adequately with an estate planner or other professional to reach your desired goals. If not, you may be lulled into a false sense of security, only to find that someone like a bankruptcy trustee can upset your plans.
Note: There are ways to transmute property from community property to separate property and vice a versa, also discussed in the above opinion. It is beyond the scope of this article.
Note: The Ninth Circuit interpreted the Supreme Court’s opinion to apply the community property statute to property acquired after 1975. See Brace v. Speier (In re Brace), 17-60032 (9th Cir. Nov 9, 2020).