Community property

This article discusses the effect a marriage has on a spouse’s ability to sell real estate.

The broker’s role

A broker who represents a married person in the sale, lease or financing of community real estate must know whether the married person can avoid performing under a listing (paying the brokerage fee) or under a transactional purchase agreement (closing escrow) by raising community property defenses in order to inflict a loss on the broker.

For example, a broker obtains an exclusive right-to-sell listing signed only by the wife. The real estate listed is community property, vested in the name of the husband and wife as joint tenants.

During the listing period, the husband and wife sell the property without the aid of the listing broker. The listing entitles the broker to a fee if the property is sold by anyone during the listing period. [See first tuesday Form 102 §4.1(a)]

The broker claims both the husband and wife are liable for the brokerage fee since the property was sold during the listing period.

The wife claims the listing is unenforceable without the husband’s signature since the property listed cannot be sold and conveyed without her husband’s written consent.

Is the broker entitled to his fee?

Yes! While the husband, who did not sign the listing agreement, is not personally liable for the brokerage fee, the wife is liable for the fee since she signed the listing agreement. The broker’s enforcement of his fee agreement under the listing is an action for money due on an employment agreement, not an action for specific performance of a real estate purchase agreement – which would require both spouses’ signatures. [Tamimi v. Bettencourt (1966) 243 CA2d 377]

Judgment against a spouse

Further, on recording an abstract of the judgment against the wife for the brokerage fee, the judgment becomes a lien on any community real estate owned by the couple. The husband’s separate property, however, is not liened and is unaffected by the abstract.

Now consider a husband who encumbers community property with a trust deed, executed by the husband alone without the consent of his wife, to secure a note which evidences a loan.

Later, the trust deed held by the lender is set aside in an action by the wife to clear title of the trust deed since the wife did not consent to the encumbrance – financing – of the community property.

The husband defaults on the now unsecured loan. The lender obtains a money judgment against the husband and records an abstract of the judgment.

The abstract now attaches as a lien to the same community property which had previously been encumbered by the now void trust deed.

Later, the couple’s marriage is dissolved and the wife is awarded sole ownership of the community property.

The wife claims the property cannot be attached to the money judgment lien since the original debt which created the money judgment was secured by the same property under a trust deed the court declared void.

However, when the abstract of judgment against the husband was recorded, the abstract created a valid lien on all of their community property, including the property now solely owned by the wife. The judgment attached to the property while it was still community property, before the dissolution of the marriage. [Lezine v. Security Pacific Financial Services, Inc. (1996) 14 C4th 56]

Transfer by transmutation

A husband and wife divide their community assets between them so they can now conveniently pass the assets on to their children from previous marriages.

The husband and wife do not provide for the division of the funds received by the husband from his pension fund. However, the money from the pension is community property, even though the pension is vested only in the husband’s name.

The husband places funds from the pension into an individual retirement account (IRA) vested in the name of the husband’s revocable living trust. The husband obtains the wife’s written consent to the deposits, containing her acknowledgement that she is not to be named as a beneficiary on the IRA account.

For a written declaration to transmute property from a community asset to a separate asset of one spouse, the declaration must contain an explicit statement that the spouse conveys the community property interest held in the property.

Later, the wife asserts an interest in the IRA, claiming the funds are community property. The husband claims the wife transmuted her community property interest into his separate property when she signed the consent form for the change in vesting.

Does the wife have a community property interest in the husband’s IRA?

Yes! For a written declaration to transmute property from a community asset to a separate asset of one spouse, the declaration must contain an explicit statement confirming the spouse conveys and terminates the community property interest held in the property.

The use of the word “transmutation” is not required in a transfer document to transmute property. A transmutation would have taken place had the consent agreement contained the provision, “I give to the account holder any interest I have in the funds deposited in this account.” [In re Estate of MacDonald (1990) 51 C3d 262]

Now consider a husband and wife who buy property with money they earned during their marriage. Escrow is instructed to vest title to the property in the wife as her sole and separate property.

Concurrent with the recording of the grant deed to the wife, the husband signs a quitclaim deed (or joins in the grant deed as the husband of the grantee) clearing title of any interest he may have in the property.

Later, the property is sold and the wife’s conveyance is insured by a title company as a transfer of the entire fee ownership of the property. The husband does not sign and record another quitclaim deed, or join in the wife’s conveyance.

The title insurance company considers the husband’s quitclaim deed on his wife’s acquisition of title to the property to be the only conveyance required since the quitclaim deed was recorded.

Within one year after the wife’s conveyance is recorded, the husband seeks to set aside the sale as voidable.

The husband claims the original quitclaim deed was not a transmutation of their community property into the separate property of his wife since they only intended to vest the property so his name did not appear on record.

Is the quitclaim deed a written declaration that changed the characteristics of the property from community to separate ownership by the other spouse?

Yes! The husband’s execution (signature and delivery) of the quitclaim deed transferred his interest in the community property to his wife as her separate property since the deed released all interest held in the property. Thus, the spouse’s quitclaim deed transmuted the community property into the separate property of the other spouse. [In re Marriage of Broderick (1989) 209 CA3d 489]

A transmutation occurs when a married individual or couple transfers personal or real property from:

community property to a separate property interest of one spouse;
a separate property interest of one spouse to community property; or
a separate property interest of one spouse to the separate property interest of the other. [Calif. Family Code §850]

Unrecorded transmutations

A transmutation occurring after 1984 must be written and recorded to be effective against persons relying on the record title. The recording of a transmutation gives notice to others who rely on the recorded title i.e., title insurance companies, and whose rights may be affected by a transmutation i.e., family members. [Fam C §852]

For example, an individual acquires title to property as his sole and separate property.

Later, and after 1984, the individual marries. The individual, now a spouse, transmutes his separate property to community property by handing his wife a signed deed conveying his interest in the property to himself and his wife as a married couple. However, the deed transmuting the property is never recorded.

Later, the husband sells and conveys the property. Within one year after the sales transaction closes, the wife seeks to set aside the sale, claiming she did not consent to the sale of the community real estate.

The buyer claims he (and his title insurer) can rely on the recorded title, which showed the property to be vested only in the husband as his sole and separate property.

Can the sale of the community property be set aside by the wife?

No! The transmutation of the husband’s separate property to community property was never recorded. The buyer (and the title insurer) can rely upon the recorded title. [Fam C §852(b)]

The recording gives notice to others who rely on the recorded title and whose rights may be affected by a transmutation.

Note – This situation is unlikely to occur unless the broker representing the buyer knows the transmutation rules and presses the title company to issue a policy. Title insurance companies do not readily insure the conveyance by a spouse who is the sole vested owner of property until the off-record spouse delivers a quitclaim deed or joins in the conveyance.

However, no reported case or statute suggests a community interest accrues which can be adjudicated and enforced against a buyer or a lender. Title companies insuring conveyances on property acquired post-1984 or acquired prior to a post-1984 marriage can and should rely on the recorded title.

Community status imputed to buyer

Both spouses must consent to the sale, lease (for more than one year) or encumbrance of community real estate. [Fam C §1102]

If one spouse, without the consent of the other, sells, leases for more than one year or encumbers the community real estate, the nonconsenting spouse may either ratify the transaction or have it set aside. The nonconsenting spouse has one year from the recording of the transaction to file an action to set the transaction aside. If the third party to the transaction – the buyer, tenant or lender – has no notice of the community interest in the property, the transaction cannot be set aside. [Fam C §1102]

However, consider a buyer’s broker who has knowledge the seller of real estate is married and was married when he acquired the property being sold. The broker does not inform the buyer (or the title company) of the seller’s married status. The property is vested of record in the name of the seller only, with no recorded reference that he is married.

Within one year, the nonconsenting spouse learns of the sale and files suit to void the transaction, claiming a community property interest in the real estate. The buyer claims he is a bona fide purchaser, unaware of the seller’s marriage at the time of the sale.

Both spouses must consent to the sale, lease or encumbrance of community real estate.

However, the knowledge of the buyer’s broker is imputed to the buyer since the broker is the buyer’s agent. Thus, the nonconsenting spouse is able to set aside the sale of the property, even though the buyer himself was actually unaware of the marriage. [Waldeck v. Hedden (1928) 89 CA 485]

LLC as a vesting

To circumvent the need to obtain quitclaim deeds or determine whether a transmutation has occurred, the real estate could be vested in a limited liability company (LLC) solely owned by one spouse, or owned by both spouses with only one spouse as the manager of the LLC.

For instance, a wife can transfer her separate property to an LLC, and as the manager of the LLC, she has control of the property. While the LLC owns the real estate, the wife owns the LLC as its sole member.

As manager, the wife is able to sell, encumber or lease the property in the name of the LLC – without her husband’s consent. [Calif. Corporations Code §§17052(f); 17157]

Other instruments and entities which can be used to authorize one spouse’s management and control of community property include: