California Family Code § 851: Transmutations Cannot Defraud Creditors

Plain-Language Summary

California Family Code § 851 is a safeguard against spouses abusing “transmutation” agreements to cheat creditors or others. A transmutation is a legal agreement between spouses changing property from community property (owned by both) to separate property (owned by one spouse), or vice versa. In general, California law (see Family Code § 850) permits spouses to transmute property during marriage. However, § 851 makes clear that any such change in property ownership is still subject to the state’s fraudulent transfer laws. In simple terms, spouses cannot re-title or transfer assets between themselves if the purpose is to hinder, delay, or defraud someone else’s legitimate rights to those assets (such as creditors or people owed support). If a husband and wife attempt to shuffle property between them to put it out of reach of creditors, a court can undo that transfer under the Uniform Voidable Transactions Act (formerly known as the Uniform Fraudulent Transfer Act). The law is designed to prevent couples from exploiting marital property agreements to dodge debts, judgments, or support obligations. In summary, you can’t avoid your liabilities or cheat someone out of their claim by simply transferring your money or property to your spouse – Family Code § 851 ensures that those kinds of spousal transfers can be treated as fraudulent and reversed.

Real-World Examples

Dodging a Tax Debt: Imagine a husband owes substantial back taxes. Upon learning the state plans to garnish his wages, he and his wife sign an agreement transmuting all of their community property and future earnings into the wife’s separate property. Shortly thereafter, the wife starts earning a high salary. Family Code § 851 allows the tax authorities to challenge that transmutation. In a real case, a California court agreed that the couple’s post-nuptial agreement making the wife’s future salary her separate property was a fraudulent transfer intended to evade the husband’s tax debt. The court invalidated the agreement, and the wife’s wages could still be garnished to pay what was owed.
Evading Child Support: In another case, a husband going through a divorce transferred his entire interest in the family home to his wife as part of their marital settlement, leaving himself with no assets. It turned out he did this just as he faced a claim for child support from an extramarital relationship. The child’s mother challenged the property transfer as fraudulent. The California Supreme Court held that even though the transfer was part of a divorce agreement, it could be undone if it was meant to defraud a creditor – in this case, the child entitled to support. In the end, the courts allowed the mother to pursue reversing the home transfer so that the property could be available to satisfy the support obligations.
Shielding Assets from Lawsuit Creditors: Consider a scenario where one spouse is about to lose a big lawsuit (for example, from a business debt or injury claim). In anticipation, the couple might agree to transmute a valuable asset – say a house or a bank account – from community property into the other spouse’s separate property, hoping it will be off-limits to the lawsuit judgment. Family Code § 851 prevents this tactic. Such a transfer can be deemed a fraudulent conveyance and set aside by the court. In practice, if a judge finds that the primary reason for the transmutation was to keep the asset away from the suing creditor, the transfer will not be honored, and the asset can still be used to satisfy the judgment.

Published Case Law on § 851

State Bd. of Equalization v. Woo (2000) 82 Cal.App.4th 481 – A California appellate court upheld the tax authority’s claim that a marital agreement transmuting community property into separate property was void as a fraudulent transfer. In this case, a couple had entered a post-marital contract to make the wife’s future earnings her separate property after the husband incurred a $35,000 tax debt. The court found the husband had a present community-property interest in his wife’s future earnings, and that converting those earnings to the wife’s separate property (right after learning of an impending wage garnishment) was done to hinder creditors. Relying on § 851, the court ruled that the transmutation intended to avoid the tax debt was unlawful and the wife’s income remained reachable by the creditor.

Mejia v. Reed (2003) 31 Cal.4th 657 – The California Supreme Court confirmed that Family Code § 851 and fraudulent transfer laws apply even to property divisions in a divorce. In this case, a divorcing husband transferred all his interest in the family’s real estate to his wife in their marital settlement agreement. An outside creditor – the mother of the husband’s child from another relationship – argued this transfer left the husband insolvent and unable to pay future child support. The Supreme Court agreed that creditors (including someone owed child support) can invoke fraudulent transfer laws against transfers in an MSA (marital settlement agreement). The Court emphasized California’s strong policy of protecting creditors from spousal transactions intended to defeat legitimate claims. However, the Court also noted that for constructive fraud analysis, future child support obligations shouldn’t be counted as a “debt” against current assets. This nuance meant that while the case was sent back for further proceedings, the core holding was that spouses cannot use a divorce agreement as a one-time chance to defraud creditors by shifting assets to one spouse.

Sturm v. Moyer (2019) 32 Cal.App.5th 299 – This recent Court of Appeal decision extended the reach of § 851 to premarital agreements. In Sturm, a man with a $600,000 judgment against him got married after executing a prenuptial agreement that designated each spouse’s earnings and acquisitions during marriage as their separate property. The creditor from before the marriage argued the prenup was effectively a transfer designed to thwart collection of the debt once the couple married. The court agreed that even though the agreement was made before marriage, it took effect upon marriage and immediately transmuted what would have been community property (the debtor-spouse’s share in community earnings) into the other spouse’s separate property. Citing Family Code § 851, the court held that such a premarital arrangement is subject to fraudulent transfer law just like any post-marital transmutation. In short, if a prenup or postnup is used with actual intent to hinder or defraud creditors, it can be invalidated. The Sturm case was a matter of first impression and confirmed that creditors are protected from fraudulent asset shielding in the context of marriage, whether the agreement is made before or during the marriage.

Full Text of California Family Code § 851

California Family Code § 851. A transmutation is subject to the laws governing fraudulent transfers.

This content is provided for general informational purposes only and is not legal advice. Laws and their interpretations can change, and how the law applies to your specific situation may vary. For advice regarding your own circumstances, consult a qualified attorney.