By Ryan C. Wood
There will be more and more cases involving arguably voidable transactions due to the recent In re Clifford Brace California Supreme Court decision. In re Clifford Brace was about whether the California Family Code community property presumption should be followed rather than the record title presumption when a married couple acquires real property during marriage and takes title as joint tenants. The California Supreme Court, right or wrong, provides there needs to be some sort of additional writing or evidence of the married couple’s intent; a transmutation agreement, providing the married couple’s intent.
A recent Ninth Circuit Bankruptcy Appellate Panel case, In re: RUDOLPH MEDINA a.k.a. Rudy Medina, BAP No. SC-19-1299-FSG; Bk. No. 12-13764-LT7 and Adv. No. 18-90039-LT the issue was just a transmutation and whether it could be voided. This appeal is form the United States Bankruptcy Court for the Southern District of California. The chapter 7 debtor had a $1.4 million judgment against another party and that was part of his chapter 7 bankruptcy estate. The judgment debtor, after a judgment examination, transmuted half of his community property to his spouse then argued her separate property interest could not be touched or was protected from chapter 7 trustee enforcing the judgment against them. During another judgment debtor examination the judgment debtor informed the chapter 7 trustee he has transferred half the community property to his wife. The judgment debtor’s assets totaled approximately $3.8 million with liabilities the married couple in aggregate totaling $4.1 million. In theory there was no harm or actual injury due to the transmutation agreement given the judgment being enforce was around $1.4 million or less than the judgment debtor’s assets even after the transfer. The record on appeal is not clear on how the $4.1 million in liabilities affects the judgment debtor’s assets. Maybe the bankruptcy attorney or the chapter 7 trustee’s attorney can make the party that made the transfer pay for the cost of voiding the transfer even though there was no actual harm or injury.
This a huge deal given that a creditor may enforce its claim to payment against the debtor’s separate property and all community property but may not enforce its claim to payment against the non-filing or non-debtor spouses separate property. This is why in the Medina case the judgment debtor transmuted half the community property to his spouse in an attempt to protect half the value of their assets. Timing in the Medina case is the issue and this will be potentially true of married couples that execute a transmutation agreement due to the In re Clifford Brace holding.
Even with the holding in In re Clifford Brace taking title to property as joint tenants does create separate property interests; just not when filing for bankruptcy protection due to the inconsistent interpretation of law. See how joint tenancy is treated under California law upon: Death vs. Bankruptcy vs. Taxes vs. Divorce.
The issue is when must the transmutation agreement or additional writing providing their intent and in theory transferring assets to a spouse and the filing of a bankruptcy case be executed? I had this question a long time ago and when filing for bankruptcy the look back period for the California Uniform Voidable Transactions Act is four years. In 1985 the State of California requires the transmutation of property, from community property to separate property, be in writing clearly providing the parties intent; but when? If the transaction took place in 2001 does the transmutation writing have to be in 2001 or close in time? If the issue is as in In re Clifford Brace that a married couple purchased property and took title as joint tenants during marriage why would they have to enter into a transmutation agreement until now given the Supreme Court of California just now ruled on this issue? Up until now it was unclear how to precisely interpret the community property presumption versus title presumption. If a couple enters into a transmutation today but one spouse files for bankruptcy in two years did they fraudulently transfer or create a voidable transaction under California law?
Presumptions Defined and Discussed
Presumptions are how humans discriminate against other humans on a daily basis and it is all wrong. Some horrible people use race as a conclusive presumption while others use race as a rebuttable presumption. Both way it is horrible and not how we should strive to analyze an issue.
The truth is we all have certain beliefs that are rebuttable presumptions. Our society has programmed everyone to believe certain products say something about their owners and creates a rebuttable presumption. Just because someone is driving a $100,000 car does not mean they are rich. It does create a rebuttable presumption. If someone is walking towards me and they are covered in dirt and smell it creates a rebuttable presumption that they are homeless. For far too many people things they see or experience create conclusive presumptions without further information. Not good.
I should get back to the legal stuff and presumptions. So the law creates presumptions to help solve problems. Let us create then assume something that may or may not be true rather than start with the truth to find the truth?
According to the Merriam-Weber Dictionary the definition of presumption is: a legal inference as to the existence or truth of a fact not certainly known that is drawn from the known or proved existence of some other fact.
So the fact that a married couple purchased a home or land during marriage, a true fact, creates an unknown truth or unproven presumption that the home or land is community property while ignoring the signed, notarized and recorded joint tenant tile. Oh by the way, in my legal world we have something called authentication of evidence. Evidence has to be properly authenticated to be entered and considered by the Court. I can obtain a certified copy of the recorded title
Federal Rules of Evidence 902: (4) Certified Copies of Public Records. A copy of an official record — or a copy of a document that was recorded or filed in a public office as authorized by law — if the copy is certified as correct by: (A) the custodian or another person authorized to make the certification; or (B) a certificate that complies with Rule 902(1), (2), or (3), a federal statute, or a rule prescribed by the Supreme Court. So I guess the self-authenticating title is just evidence of how the property was taken during marriage and that truth must be ignored until further evidence of the married couples’ intent is presented; another writing that probably is not even self-authenticating. Not good.
So again back to timing of the transmutation agreement and the judgment debtor in the Median 9th Cir. BAP case.
Back to the Medina Case and the Judgment Debtor Transmutation During Enforcement of the Judgment by the Chapter 7 Trustee
Okay, so to recap, Medina filed a chapter 11 that was converted to chapter 7 and part of property of the bankruptcy estate that was being enforced by the chapter 7 trustee was a judgment. The defendant or judgment debtor while the chapter 7 trustee was enforcing the judgment, trying collect on the judgment, the judgment debtor transmuted or transferred half his community property to his wife creating two separate property interests in theory protecting his wife’s now separate property interest from enforcement/collection of the judgment by the chapter 7 trustee. But arguably there was no harm in the transfer to the bankruptcy estate so what is the problem? Whew!!
Think it will work when timing is everything in this world? The Bankruptcy Court held the chapter 7 trustee had to prove actual injury or harm for the transfer to be voidable under the California Uniform Voidable Transactions Act; See California Civil Code Section 3439 – 3439.14. The Bankruptcy Court acknowledged that the Transmutation Agreement put certain assets out of reach of the bankruptcy estate but found that there was “cushion” to satisfy the State Court Judgment.
That may or may not have been true given the chapter 7 trustee chose to spend the time and money to appeal the Bankruptcy Court’s holding. It is never that simple and just because there might be assets to satisfy the judgment the transfer of half of the judgment debtor’s interest could significantly increase the costs of satisfying the judgment. If this was an issue the published opinion by the 9th Cir. BAP does not address it. One of the most frustrating parts of being a bankruptcy attorney for me over the years is other parties unnecessarily increasing costs in cases so they can profit at the expense of debtors. This is why we have court appointed and paid defense attorneys in criminal matters. So rights are protected and the ability to pay is not an issue. This is not true in bankruptcy or most civil matters. If you do not have the funds to defend yourself you will lose regardless of the merits of the claim against you. Not good.
The Ninth Circuit Bankruptcy Appellate Panel held that was an erroneous interpretation of the law and reversed the granting of summary judgment for the judgment debtor and remanded the matter back to the Bankruptcy Court for the litigation to continue.
The California Uniform Voidable Transfer Act provides a party must prove there was: (1) “transfer” of an (2) “asset” and was (3) “made . . . with actual intent to hinder, delay, or defraud any creditor of the debtor. There is no statutory language that supports a requirement that the plaintiff prove damages or actual injury or that the debtor’s remaining assets after the transfer were insufficient to satisfy the debt without undue burden.
So the timing of the transmutation in this case was not as important as first though. Whether the transfer is voidable pursuant to the California UVTA is a much more fact based analysis that does not include proving actual harm or damages to void the transfer.