A married couple filed a fraud action against multiple defendants. While the fraud action was pending, husband filed for divorce. Husband and wife entered into a written marital property agreement that characterized any recovery in the fraud action as the separate property of each spouse.
Judgment was entered against the defendants in the fraud action, but husband filed for bankruptcy prior to enforcement of the judgment. The fraud defendants, aware of the marital property agreement, entered into a settlement with the bankruptcy trustee. Next, they moved to stay collection proceedings brought by wife in the fraud action on the ground that the entire amount of the judgment was community property included in husband’s bankruptcy estate and settled by the bankruptcy trustee.
Wife argued that under the marital property agreement, her interest in the fraud judgment was her separate property, which was not part of husband’s bankruptcy estate. Defendants argued the marital property agreement was ineffective because it did not meet the transmutation requirements of Family Code section 852, which precludes extrinsic evidence to resolve ambiguities. The trial court interpreted the marital property agreement to have had no effect on the character of the judgment proceeds. The agreement specifically identified the fraud action, but it referred to the spouses’ separate claims in the action; in fact, all of the claims in the fraud action were brought jointly. The trial court found the 1 All further statutory references are to the Family Code unless otherwise specified. 3 agreement was impermissibly vague, so it failed to transmute the community property judgment proceeds to separate property interests.
The trial court granted the protective order. On appeal, wife contends the fraud defendants do not have standing to challenge the property agreement based on the transmutation requirements of section 852.
Marital property settlement agreements are favored under California law (Adams v. Adams (1947) 29 Cal.2d 621, 624), and governed by general contract principles (Tanner v. Tanner (1997) 57 Cal.App.4th 419, 424).
The property rights provided to spouses by statute may be altered through a marital property agreement. (§ 1500; Litke O’Farrell, LLC v. Tipton (2012) 204 Cal.App.4th 1178, 1183.) Married people can transmute community property to separate and separate property to community by agreement or transfer. (§ 850, subds. (a) & (b).)
“In general, California law does not give a party personal standing to assert rights or interests belonging solely to others. (See Code Civ. Proc., § 367 [action must be brought by or on behalf of the real party in interest]; Jasmine Networks, Inc. v. Superior Court (2009) 180 Cal.App.4th 980, 992.)” (Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 936, fn. omitted.) Whether a third party can invalidate a transmutation agreement that fails to meet the requirements of section 852 depends whether the defective agreement is void or simply voidable. “A void contract is without legal effect. (Rest.2d Contracts, § 7, com. a, p. 20.) ‘It binds no one and is a mere nullity.’ (Little v. CFS Service Corp. (1987) 188 Cal.App.3d 1354, 1362.) ‘Such a contract has no existence whatever. It has no legal entity for any purpose and neither action nor inaction of a party to it can validate it . . . .’ (Colby v. Title Ins. and Trust Co. (1911) 160 Cal. 632, 644.)” (Yvanova, supra, 62 Cal.4th at p. 929.) “A voidable transaction, in contrast, ‘is one where one or more parties have the power, by a manifestation of election to do so, to avoid the legal relations created by the contract, or by ratification of the contract to extinguish the power of avoidance.’ (Rest.2d Contracts, § 7, p. 20.) It may be declared void but is not void in itself. (Little v. CFS Service Corp., supra, 188 Cal.App.3d at p. 1358.) Despite its defects, a voidable transaction, unlike a void one, is subject to ratification by the parties. (Rest.2d Contracts, § 7; Aronoff v. Albanese (N.Y.App.Div. 1982) 85 A.D.2d 3.)” (Yvanova, supra, 62 Cal.4th at p. 930.) Only the contracting parties have the power to ratify or avoid a voidable agreement; “the transaction is not void unless and until one of the parties takes steps to make it so.” (Yvanova, supra, 62 Cal.4th at p. 936 [discussing void and voidable assignments].) A litigant who alleges an agreement is void, however, is not enforcing the terms, but instead asserting that the agreement is void ab initio. (Ibid.) “Unlike a voidable transaction, a void one cannot be ratified or validated by the parties to it even if they so desire. (Colby v. Title Ins. and Trust Co., supra, 160 Cal. at p. 644; Aronoff v. Albanese, supra, 446 N.Y.S.2d at p. 370.)” (Yvanova, supra, 62 Cal.4th at p. 936.)
The California Court of Appeal concluded a transmutation that does not meet the requirements of section 852 is voidable, rather than void. Since the defendants are not parties to the marital property agreement, they cannot rely on section 852 to invalidate the agreement.
Govgassian and Agadjanian cannot invalidate the marital property agreement under section 852. To the extent the terms of the marital property agreement are ambiguous, the intent of the parties should be determined on remand in accordance with ordinary principles of contract interpretation
The California Court of Appeal reversed and remanded for further proceedings to determine the effect of the marital property agreement under ordinary rules of contract interpretation.
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