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In re Brace

United States Bankruptcy Appellate Panel of the Ninth Circuit

May 15, 2017


          Argued and Submitted on January 19, 2017 at Pasadena, California

         Appeal from the United States Bankruptcy Court for the Central District of California Honorable Scott Ho Yun, Bankruptcy Judge, Presiding

          Stephen R. Wade argued for appellants;

          Matthew W. Grimshaw of Marshack Hays LLP, argued for appellee.

          Before LAFFERTY, TAYLOR, and NOVACK, [*] Bankruptcy Judges.




         The bankruptcy court found that Debtor's transfers of marital property into a trust for the benefit of his non-debtor spouse were avoidable as actually fraudulent conveyances. In a separate unpublished memorandum decision, we affirmed that aspect of the bankruptcy court's ruling.

         Relying on a recent California Supreme Court decision, Valli v. Valli (In re Marriage of Valli), 58 Cal.4th 1396, 1400 (2014), the bankruptcy court also determined that while avoidance of the transfers restored title to the couple as joint tenants, under California's community property presumption, the entirety of each property was recoverable by the estate.

         Appellants contend that, notwithstanding Valli, the community property presumption applies only in the context of property division in a marital dissolution or legal separation. They assert that the bankruptcy court should have applied the record title presumption of Cal. Evid. Code § 662, rather than the community property presumption of Cal. Fam. Code § 760, to find that the real properties were held separately by the spouses and to conclude that only Debtor's separate interest in the properties was recoverable by the estate.

         For the reasons set forth below, we AFFIRM the bankruptcy court's determination that the community property presumption applies in this context.


         During their marriage, Debtor and his non-debtor spouse, Anh N. Brace, acquired their residence in Redlands, California, a rental property in San Bernardino, California, and a parcel of real property in Mohave, Arizona (collectively, the "Properties"). Appellants took title to each of the Properties as "husband and wife as joint tenants."

         On July 30, 2004, Debtor formed the Crescent Trust. The instrument creating the Crescent Trust states that it is an irrevocable trust and that Debtor is the sole trustee; Ms. Brace is the beneficiary of the trust. The trust instrument was not recorded. Shortly thereafter, Debtor executed and had recorded trust transfer deeds transferring his interests in the Redlands and San Bernardino properties into the Crescent Trust for no consideration. At the time of the transfers, Debtor was a defendant in litigation in San Bernardino County Superior Court, and a judgment in that litigation was entered a few weeks after the transfers occurred.

         Debtor filed a chapter 7[1] petition on May 16, 2011, and Robert L. Goodrich was appointed chapter 7 trustee ("Trustee").[2]In December 2011 Trustee filed an adversary proceeding against Appellants, individually and in their capacities as trustees of the Crescent Trust, [3] seeking: a declaration that the Properties were property of the bankruptcy estate; a judgment quieting title to the Properties in the bankruptcy estate; turnover of any of the Properties determined to be property of the estate; avoidance and recovery of Debtor's transfers of the Redlands and San Bernardino properties into the Crescent Trust as actually and/or constructively fraudulent transfers under Cal. Civ. Code § 3439.04(a) (collectively, the "Fraudulent Transfer Claims"); and revocation of Debtor's discharge under §§ 727(d)(1) and (d)(2).

         After trial on the Fraudulent Transfer Claims, the bankruptcy court ruled in favor of Trustee on the actually fraudulent transfer and alter ego claims, finding, among other things, that the transfers of the Redlands and San Bernardino properties into the Crescent Trust were avoidable and that all three Properties were recoverable in their entirety by the estate. The bankruptcy court found not credible Appellants' testimony that they had intended the Properties to be held separately and that the transfers were done for estate planning purposes.

         After the bankruptcy court entered judgment on the Fraudulent Transfer Claims, Appellants timely moved to amend the judgment, arguing that the judgment should have provided that the Properties, as recovered, were owned one half by Debtor and one half by Ms. Brace as tenants in common[4] and that only Debtor's interests in the Properties, but not Ms. Brace's, were property of the estate. The bankruptcy court disagreed, finding

that although these properties are returned to joint tenancy between the Debtor and Defendant Anh Brace, the properties were acquired by the Debtor and Anh 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.

Second Amended Judgment, ¶ 6. Thereafter the bankruptcy court entered an amended judgment clarifying that although the Properties were restored to joint tenancy as a matter of title, they were community property under California law and were thus property of the estate.

         Appellants timely appealed the amended judgment.[5]


         The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(E), (H), and (J). We have jurisdiction under 28 U.S.C. § 158.


         Whether the bankruptcy court erred in determining that, upon avoidance of the transfers of the Properties, those properties were held by Appellants as community property and were thus property of the estate.


         We review the bankruptcy court's findings of fact for clear error, and its conclusions of law de novo. Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). A finding is clearly erroneous "when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, N.C. , 470 U.S. 564, 573 (1985) (citation omitted).

         We review de novo the bankruptcy court's interpretation of state law. Salven v. Galli (In re Pass), 553 B.R. 749, 756 (9th Cir. BAP 2016). In interpreting California law, we are bound by decisions of the California Supreme Court, including reasoned dicta. See Muniz v. United Parcel Serv., Inc., 738 F.3d 214, 219 (9th Cir. 2013); Johnson v. Fankell, 520 U.S. 911, 916 (1997) (a federal tribunal has no authority to place a construction on a state statute different from the one rendered by the highest court of the State). And, as we discuss more fully at Subsection C.3. below, though we are ordinarily bound by prior decisions of the Ninth Circuit on all matters, if, subsequent to a Ninth Circuit decision interpreting state law, the highest court of the state has issued a decision disagreeing with the Ninth Circuit's interpretation, we are not bound to follow the Ninth Circuit's interpretation of that state law any more than a subsequent Ninth Circuit panel would be. See Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (noting that the Circuit is not bound by its prior decisions when a "relevant court of last resort has undercut the reasoning underlying the prior circuit precedent in such a way that the cases are clearly irreconcilable."); Cf. F.D.I.C. v. McSweeney, 976 F.2d 532, 535-36 (9th Cir. 1992) (in the absence of intervening controlling authority, a three-judge Ninth Circuit panel is bound by its prior decisions interpreting state and federal law).


         We look to relevant non-bankruptcy law to determine the nature and extent of a debtor's interest in property. Butner v. United States, 440 U.S. 48, 55 (1979); Hanf v. Summers (In re Summers), 332 F.3d 1240, 1242 (9th Cir. 2003). Here the relevant law is California state law. Whether restoration of the Properties to the transferor(s) on avoidance of the transfers warranted, in this case, a finding that the Properties were community assets subject to administration by the estate in their entirety requires an analysis of the presumptions found in California statutes, the application of those presumptions by California courts, and their application to the facts presented here.

         A. California Presumptions Affecting Property Ownership

         In this appeal, we are concerned with two California presumptions affecting determinations of the ownership of property. The first is Cal. Evid. Code § 662 (the "record title presumption"), which provides generally that "[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof."

         The second is CFC § 760 (the "community property presumption"), which provides, "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."

         The community property presumption applies to property acquired during marriage unless it is: (1) traceable to a separate property source; (2) acquired by gift or bequest; or (3) earned or accumulated while the spouses are living separate and apart. Valli, 58 Cal.4th at 1400. The community property presumption may be rebutted by evidence that the spouses agreed to recharacterize, or "transmute" the property from community to some other form of ownership. A transmutation is not valid unless "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." CFC § 852(a).[6]

         The record title presumption promotes California's public policy in favor of the stability of titles to property. In re Marriage of Haines, 33 Cal.App.4th 277, 294 (1995). And there can be no question that, as a general rule, ...

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