Opinion
No. 99-42104 JD, Adv. No. 00-4106-AJ
August 22, 2000
MEMORANDUM DECISION
Lois I. Brady, trustee in bankruptcy (the "trustee"), has moved for summary judgment under Fed.R.Bankr.P. 7056 in this adversary proceeding, by which she seeks to establish that certain assets were community property of the debtor and defendant Thomas B. Hargrave ("Hargrave") at the date of the debtor's bankruptcy petition herein, and thus, are part of the debtor's bankruptcy estate pursuant to Bankruptcy Code § 541(a)(2). The motion will be denied. The facts are undisputed. The debtor and Hargrave married in 1990. In 1998, Hargrave filed an action in California Superior Court to annul the marriage. On March 12, 1999, while the annulment action was pending, the debtor filed a chapter 13 petition herein. Thereafter, the court converted the case to chapter 7.
Bankruptcy Code § 541(a)(2) provides:
(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
. . .
(2) All interests of the debtor and the debtor's spouse in community property as of the commencement of the case that is —
(A) under the sole, equal, or joint management and control of the debtor; or
(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor's spouse, to the extent that such that such interest is so liable.
Following the conversion, the court granted a motion by Hargrave for relief from the automatic stay provided by Bankruptcy Code § 362(a) to continue his prosecution of the superior court annulment action. On July 31, 2000 the superior court issued its Memorandum of Decision holding that Hargrave was entitled to a judgment of nullity, based upon the debtor's fraud. The trustee contends that the property at issue herein must be treated as community property, and thus, property of the estate, notwithstanding the annulment. The trustee argues that as a matter of both California state law and federal bankruptcy law, the annulment cannot "relate back" to an earlier date if relation back would prejudice the rights of innocent third parties, and that the trustee is an innocent third party whose rights would be prejudiced by relation back. Therefore, argues the trustee, the court must look at the status of the marriage as it existed on the petition date. Because the annulment followed the filing of the petition, the trustee contends that it is simply irrelevant.
The superior court found that prior to the marriage, the debtor "had already been stealing huge sums" from Hargrave and his partners, and that "her intention to continue the thefts, and to make the thefts easier to cover up, was a substantial reason why she married [Hargrave]". The court also commented, "It would be hard to find a more outrageous case than this one".
Hargrave disagrees, and argues that the fact that the annulment decree followed, rather than preceded, the bankruptcy filing does not prevent the annulment from relating back to the date of marriage, thereby precluding the creation of any community property. Rather, Hargrave contends, the parties' property rights are governed by Cal. Family Code § 2251, which provides that in the case of annulment of a marriage that one or both of the parties believed to be valid, the parties are deemed to be "putative spouses" and any property that would have been community property had the marriage been valid (called "quasi-marital property") is to be divided between them as if it were, in fact, community property. Cal. Family Code § 2252 (West 1994) goes on to provide:
Cal. Family Code § 2251 (West 1994) provides:
(a) If a determination is made that a marriage is void or voidable and the court finds that either party or both parties believed in good faith that the marriage was valid, the court shall:
(1) Declare the party or parties to have the status of a putative spouse.
(2) If the division of property is in issue, divide, in accordance with Division 7 (commencing with Section 2500), that property acquired during the union which would have been community property or quasi-community property if the union had not been void or voidable. This property is known as "quasimarital property".
(b) If the court expressly reserves jurisdiction, it may make the property division at a time after the judgment.
The property divided pursuant to Section 2251 is liable for debts of the parties to the same extent as if the property had been community property or quasi-community property.
Hargrave concedes that if he and the debtor are ultimately found to be putative spouses under Cal. Family Code § 2251, then their quasi-marital property would be included in the estate. (This issue has not yet been determined.)
The court agrees with Hargrave. It is clear that property rights are created and governed by applicable state law. Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914 (1979); In re Farmers Market, Inc, 792 F.2d 1400, 1402 (9th Cir. 1986). Thus, the issue of whether the debtor had an interest in the assets at issue that would bring them into the estate is governed by California law. Butner, 440 U.S. at 55; In re Mantle, 153 F.3d 1082, 1084 (9th Cir. 1998). Given the annulment, the determination will ultimately turn on whether the debtor and Hargrave were "putative spouses" under Cal. Family Code § 2251, and if so, what property would have been community property had the marriage not been annulled. Relying heavily on the Ninth Circuit's decision in Mantle, the trustee argues that the debtor was married at the date of the petition, thereby vesting the community property in the estate by operation of Bankruptcy Code § 541(a)(2), and that the superior court's subsequent annulment decree cannot change the community nature of the property at the petition date.
The court rejects this argument. In Mantle, a couple had sold a community property residence prior to bankruptcy but after the debtor spouse had filed for divorce. The Ninth Circuit held that the sales proceeds, which were on hand at the date of the petition, were community property for purposes of Bankruptcy Code § 541(a)(2). The decision, however, was not grounded on any supposed principle of federal bankruptcy law under which decrees affecting property, entered after the filing, are irrelevant and cannot adversely affect the trustee's claim of title. (Indeed, title disputes between the trustee and third parties are often resolved after bankruptcy.)
Rather, Mantle was grounded on the court's construction of California law, under which the event that terminates the liability of community property for community debts is not entry of a decree dissolving the marriage, but the division of the community property. Id. at 1085. Thus, Mantle merely held that issuance of the post-petition dissolution decree was not an event that was relevant under California law to the issue of whether the proceeds were community property. Moreover, under California law, the consequences of an annulment are quite different than those of a divorce, thus distinguishing the present case from the numerous additional divorce cases that the trustee cited, e.g., In re Willard, 15 B.R. 898 (9th Cir. BAP 1981). As the California Supreme Court explained in Sefton v. Sefton, 45 Cal.2d 872, 874 (1955): It has been said that an annulment decree has the effect of declaring a marriage void ab initio. A divorce in this state merely dissolves the existing marriage, leaving intact the marriage relationship between the time of the marriage ceremony and the entry of the final decree. An annulment, on the other hand, has been said to "relate back" and erase the marriage and all its implications from the outset.
The present case is distinguishable from Willard for the additional reason that here, the annulment proceeding went forward only after this court lifted the automatic stay.
It is true, as the Sefton court noted, that the relation back doctrine is essentially a fiction, and not absolute. Id. at 875. As the court stated:
[I]n cases involving the rights of third parties, courts have been especially wary, lest the logical appeal of the fiction should obscure fundamental problems and lead to unjust or ill-advised results respecting a third party's rights. Thus, the exceptions to the theory of "relation back" should have their typical application to situations affecting an innocent third party.
Id. The court found further support for its view that the relation back doctrine is not absolute from former Cal. Civ. Code § 86, since reenacted as Cal. Civ. Code § 2212(b) (West 1994), which provides:
A judgment of nullity of marriage is conclusive only as to the parties to the proceeding and those claiming under them.
Because relation back is not absolute, California courts have declined to apply the doctrine when to do so would harm innocent children of a void or voidable marriage, see Sefton, 45 Cal.2d at 876 (internal citation omitted). Courts have also declined to apply relation back when to do so would retroactively reinstate alimony from a prior marriage, Sefton, 45 Cal.2d at 876-77, or create a liability for the issuer of an insurance policy, Interinsurance Exch. of Auto. Club of So. Cal. v. Velji, 44 Cal.App.3d 310, 118 Cal.Rptr. 596 (1975), or for the California Real Estate Recovery Fund, Powers v. Fox, 96 Cal.App.3d 440, 158 Cal.Rptr. 92 (1979), or for the U.S. Social Security Administration, Purganan v. Schweiker, 665 F.2d 269 (9th Cir. 1982), when no liability otherwise existed. Thus, the "California rule [is] that annulment should relate back only when it promotes sound policy." Purganan, 665 F.2d at 271. Unlike the present case, the foregoing cases involved situations where application of the relation back doctrine would have created a claim against a third party in favor of one of the parties to the annulment proceeding, under circumstances where no general policy would have been served by creation of the claim. Here, however, it is the failure to apply relation back that would create the claim, the claim would be in favor of, not against, the third party (i.e., the trustee), and the claim so created would be at the expense of a defrauded innocent party. The foregoing cases therefore have no application here.
Here, to permit the debtor's creditors, and perhaps the debtor herself, to profit from the debtor's fraudulent scheme at the expense of an innocent victim, Hargrave, would not promote any "sound policy" of either California or federal bankruptcy law. Thus, relation back is not barred by California law. Moreover, the trustee's title, if any, derives solely from the debtor's title or interest, because the trustee is the debtor's successor in interest to her community property rights, if any. Bankruptcy Code § 541(a)(2). Thus, the trustee "claims under" the debtor for purposes of Cal. Family Code § 2212(b), and can have no better interest than the debtor in Hargrave's assets. The trustee's final argument is that under Bankruptcy Code § 544(a)(1), she enjoys the rights of a judicial lien creditor under state law as of the date of the petition, and that her resulting claim to the community property prevails over
If any creditors holding debts that are nondischargeable under Bankruptcy Code § 523(a) filed claims, then the debtor would receive a direct benefit by payment of those claims out of the estate. The record here does not show whether any such claims exist.
Hargrave's conflicting claim. This argument fails because it assumes, incorrectly, that the property was, in fact, community property at the petition date (community property being subject to levy as a matter of California state law). In the case of an annulment, however, the rights of a levying creditor under California law turn on whether the property levied on was quasi-marital property under Cal. Family Code § 2251, and thus available to creditors under Cal. Family Code § 2252. This issue, as mentioned, has not yet been decided.
The cases cited by the trustee are not to the contrary. Sampsell v. Staub, 194 F.2d 228 (9th Cir. 1951) involved a creditor levy on property that was the subject of a subsequently recorded declaration of homestead. In Lezine v. Sec. Pac. Financial Servs., 14 Cal.4th 56, 58 Cal.Rptr.2d 76 (1996), the court upheld the validity of a creditor levy on community property before the property had been divided between the spouses, even though the levying creditor had previously held an invalid consensual lien on the same property. None of these cases dealt with an annulment, and none held that a levying creditor of one party to an annulled marriage can somehow obtain rights in property owned by the other party without regard to Cal. Family Code §§ 2251 and 2252.
For the foregoing reasons, the court will issue its order denying the trustee's motion for summary judgment. The court expresses no opinion as to whether the debtor and Hargrave were putative spouses under Cal. Family Code § 2251, a determination that is best left to the state court.
The parties may disagree as to whether this court's Order Granting Motion for Relief from the Automatic Stay, filed September 2, 1999, lifted the automatic stay to permit the state court to determine whether the debtor and Hargrave were putative spouses, and if so, which property became "quasi-marital property" under Cal. Family Code § 2251. To clear up any ambiguity, the court is willing to entertain a motion to modify the order to permit the state court to decide the putative spouse issue.