Forcing co-owners out

This article discusses the involuntary partition or sale of real estate to resolve disputes between vested co-owners.

Divide, sell or buy out

On the death of both parents, the surviving children receive real estate vested in their names as co-owners. One child is selected to manage the property on behalf of all the children.

Soon, the children disagree on the ownership and management of the inherited property. One child, concerned about his personal liability exposure from ownership, wants the property to be sold and the proceeds distributed based on each child’s percentage of co-ownership.

Another child wants to subdivide the real estate and eliminate the co-ownership by conveying the separate parcels to one another. Each child would then be the sole owner and manager of his separately divided ownership of their parcel.

Yet another child is willing to cash out the other family members and acquire ownership of the entire property himself.

Thus, no arrangement will meet the individual goals of each child vested as a co-owner.

Can any one of the co-owners force a termination of the co-ownership since they no longer agree on the ownership and management of their real estate?

Yes! A partition action severs co-ownership of real estate by either:

·     dividing the property into parcels and distributing it in kind among the co-owners, if feasible [Calif. Code of Civil Procedure §§873.210 et seq.]; or

·     selling and distributing the net sales proceeds to the co-owners according to their percentage of ownership. [CCP §§873.510 et seq.]

With a partition action, the co-owner wanting to be cashed out would achieve his goal, directly by a sale of the whole or later by a sale on his receipt of his divided interest. Also, the co-owner wanting to buy out the other co-owners could achieve his goal by bidding on the property at the court ordered sale, unless the property is partitioned, in which case the third co-owner directly obtains his goal.

The quieting of quarreling co-owners

A partition action is a lawsuit to sever or sell real estate which is co-owned. [CCP §872.020]

The need for a partition action arises when co-owners cannot agree on the management, division or sale of the real estate they jointly own. Co-owners can mutually agree to divide the real estate in a voluntary partition or sell it as provided in most written co-ownership agreements.

Conversely, a partition action will force a division or sale of the real estate in an involuntary division or sale of the property.

Who can partition

A partition action is an equitable remedy which has its roots in English common law, called chancery. The court of equity — chancery — has great discretion in deciding what is the best resolution for feuding co-owners.

While partition and distribution of the property is the preferred equitable result, not all forms of co-ownership or types of property allow for a partition to terminate a co-ownership.

Nonmarried co-owners vested as joint tenants or tenants in common have an absolute right to partition (or sell) the real estate owned. [Lazzarevich v. Lazzarevich (1952) 39 C2d 48]

A partition action is available to nonmarried joint tenants or tenants in common who take title in their individual names, acquiring title either under an agreement between themselves or by operation of law, such as by a will or trust.

For example, a lender makes a loan secured by the fractional interest of a co-owner in real estate. The co-owner defaults on the loan. The lender forecloses and becomes a tenant in common with the other co-owner of the property. Here, the lender acquires a fractional ownership interest in the real estate, not the entire ownership.

Can the lender, as a fractional owner, sue the co-owner for partition or sale of the real estate simply to liquidate and recover his original investment in the loan?

Yes! The lender, now owning an undivided fractional interest in the real estate, can sue for partition or sale to complete the liquidation of his initial security interest in the property. [Kane v. Huntley Financial (1983) 146 CA3d 1092]

Husband/wife co-ownerships

Husbands and wives who vest title as community property are not entitled to sue for partition of the real estate owned by the community. [CCP §872.210(b)]

Further, real estate acquired after marriage and vested as joint tenants is presumed to be community property. If the property belongs to the community, a partition action is not permitted to divide and sever the ownership. [Calif. Family Code §2581]

However, real estate vested in a joint tenancy by a husband and wife can be separate property, thus rebutting the community property presumption, if either:

·     a statement in the deed notes the real estate is not community property; or

·     a separate written agreement states the real estate is not community property. [Fam C §2581]

Lawsuits between spouses to sever community property interests in real estate may not be brought by partition. Rather, they must be brought as part of divorce proceedings, called a dissolution. Consequently, the termination of a co- ownership of community real estate is subject to offsets and payment of monies to equal out the distribution of all assets of the community on dissolution.

Editor’s note — Under a joint tenancy vesting, a deceased spouse’s entire interest in the real estate passes to the surviving co-owner without the necessity of a probate order conveying title. [Calif. Civil Code §683]

Consider a couple who acquires real estate in a joint tenancy vesting as single or unmarried individuals before they are married.

The couple marry but do not alter the joint tenancy vesting nor enter into a written agreement transmuting the ownership into community property. Later, the couple divorce and cannot agree on the division or sale of the real estate.

Is the real estate community property?

No! Their ownership of the property is vested as joint tenants without a reference to their status as husband and wife since they were not married when they acquired title, and the vesting was not later altered by a writing (deed) to transmute their separate interests to community property. [In re Marriage of Leversee (1984) 156 CA3d 891]

Are the joint tenancy interests acquired before marriage severed by a partition action rather than by divorce proceedings?

Yes! Husbands and wives who vest title as joint tenants are entitled to a partition action if their co-ownership is held in a joint tenancy (or tenancy in common) vesting and the presumption of community property is rebutted by showing their interests are separate property. [CCP §872.210(b)]

Co-owners as partners

Consider co-owners who acquire real estate and vest title in the name of a limited liability company (LLC), each owning a fractional interest in the LLC as members. The LLC, not the individual members, owns the real estate.

When the members agree to dissolve their co-ownership, the relationship is mutually terminated by a dissolution of the LLC and an accounting of the LLC’s assets.

Generally, LLC’s assets are sold as part of the accounting, not partitioned and distributed. The sale proceeds are then distributed to the members. However, members can agree in the LLC operating agreement to a distribution of the LLC property to the individual members as a manner of returning their capital contributions. The distribution is called a distribution in kind.

In another example, several members in an LLC sign an operating agreement to own several parcels of land as a farm. Under the agreement, a member can resign and call for a conveyance of separate parcels to each individual member, which one member does.

Another member claims an LLC cannot distribute property it owns to the members in kind, but must sell the properties and distribute the proceeds pro rata, based on the percentage of ownership each member has in the LLC.

Can a dissolution of an LLC be completed by the division of the LLC real estate between the members as opposed to only a cash distribution?

Yes! While the general rule requires the sale of LLC assets and the net sales proceeds to be distributed, the members can enforce an agreement to divide or partition the real estate. [Logoluso v. Logoluso (1965) 233 CA2d 523]

Additionally, a court can dissolve an LLC and distribute its assets in kind whenever the distribution would be fair and would not impair the payment of LLC debts. [CCP §872.730]

For example, four investors enter into an LLC operating agreement to buy and operate a hotel. Title to the hotel is vested in the name of the LLC. The LLC agreement does not reference the division of the property on a dissolution of the LLC.

One of the members resigns and the LLC is dissolved. The remaining members demand the LLC’s real estate be partitioned and distributed in kind.

Is a partition of the LLC assets proper in this case?

No! In this instance, there is only one LLC asset (the hotel) which would normally be impractical to subdivide, unless a condominium conversion would be practical. [Jacoby v. Feldman (1978) 81 CA3d 432]

Distribution of an LLC

The ability of a member in a limited liability company (LLC) to demand a partition of LLC property is controlled by the buyout and dissolution provisions in the operating agreement.

Ordinarily, a member cannot be forced to receive part of the real estate owned by the LLC as a return of his contribution for his membership interest on dissolution of the LLC. [Calif. Corporations Code §15636(e)]

Additionally, without an agreement, no member has the right during the life of the LLC to receive any LLC asset other than money. [Corp C §15636(d)]

On dissolution and winding up of the LLC’s affairs, the distribution to members will generally be made from the net proceeds of a sale of the assets.

What real estate is partitionable?

The real estate interests which are subject to a partition suit include:

·     fee estates;

·     life estates; and

·     leasehold estates. [CCP §872.210(a)(2)]

Other real estate interests, such as easements or profits a prendre, cannot be partitioned. [Porto v. Vosti (1955) 136 CA2d 395]

Physical division preferred

A brother and sister own two adjacent parcels of unimproved land which they use for personal and recreational hunting and fishing. Title to the real estate is vested as tenants in common, each co-owner holding an undivided one-half interest. Both parcels are of equal value.

One parcel contains the actual hunting and fishing areas while the other provides access. Both co-owners use the property frequently.

The sister dies and passes her interest in the real estate to a hunting and fishing group who wish to open the real estate to the public. The hunting and fishing group offers to buy out the surviving co-owner’s interest, but he refuses and files a partition action seeking to divide the property and become the sole owner of one of the parcels.

The group wants to buy out the co-owner on a sale of the property to permit members of the group to have exclusive access to the recreational areas claiming the real estate cannot be severed due to topographical problems.

The brother, as co-owner, claims he has a right to retain physical possession of a portion of the land since the land can be divided into separate parcels and the division would not reduce the economic value of the separate parcels.

Is a co-owner entitled to retain possession of a portion of the real estate if the property can be as a practical matter divided among the co-owners?

Yes! A division of the real estate is required of tenants in common unless it is impractical to divide and distribute or a sale of the entire real estate is fairer to all involved. [Butte Creek Island Ranch v. Crim (1982) 136 CA3d 360]

Impractical division

Consider two co-owners who inherit an inside lot in the middle of a densely populated area of a major city.

The lot is small (one-eighth of an acre) and is improved with residential structures — one facing the street, the other facing a back alley. The positions of the buildings on the lot do not permit a division (parceling) of the real estate or the construction of a partition wall.

Additionally, local zoning restrictions do not permit the further subdivision of the lot.

Is a sale of the real estate the best solution?

Yes! The further division of the lot is highly impractical and legally impossible without great loss of value to the co-owners. [Priddel v. Shankie (1945) 69 CA2d 319]

Similarly, consider the co-owners of real estate who operate a large, diverse enterprise on the property (e.g., a movie studio). The co-owners by agreement coordinate the use of the buildings, sets and lots for their own separate ventures.

Eventually, the co-owners can no longer agree on how to use the property. Due to the location of the buildings, a division of the property by partition is highly impractical. In this scenario, a sale of the property is the most practical remedy. [Formosa Corp v. Rogers (1951) 108 CA2d 397]

The partition action

To initiate a partition action, a co-owner must file a lawsuit stating his interest in the real estate and the facts which establish his right to maintain a partition suit.

Specifically, a partition action must include:

·     a description of the real estate;

·     the interest of the co-owner;

·     all other recorded real estate interests or unrecorded interests actually known or reasonably discoverable;

·     the real estate interest sought to be partitioned (fee, leasehold, minerals, etc.); and

·     any facts justifying the sale of the real estate. [CCP §872.230]

Once the partition action is filed, the co-owner seeking partition must record a lis pendens (notice of pending legal action) with the county recorder identifying the parties and the real estate involved. [CCP §872.250(a)]

The lis pendens is notice to all future buyers, lenders or tenants that a dispute exists regarding title or possession to the real estate. Through the recorded lis pendens, any person later acquiring an interest in or encumbering the real estate takes the real estate interest subject to the pending partition action.

Determining real estate interests

The first procedure in a partition action is to establish each co- owner’s interest in a parcel of real estate. [CCP §872.610]

The condition of the real estate’s title is determined next, primarily by use of a title company’s litigation guarantee, an insurance policy issued based on their search of the record title. [CCP §872.620]

The priority of all liens on the property is then set. Provisions will be made for the liens to be paid or assumed before the partition action can be completed or the sale proceeds distributed. [CCP §872.630(a)]

Typically, a real estate broker or attorney experienced in real estate matters is appointed as a referee to wade through the facts presented by the co-owners. The referee is an advisor to the court on the feasibility of the partition or sale. [CCP §872.630(b)]

Cutting up the real estate

An appointed referee’s activities are subject to judicial review and approval. The referee’s job is to balance the competing interests and arrive at a reasonable division of the property between the co-owners. [CCP §873.210]

The referee must consider:

·     improvements made to the property [CCP §873.220];

·     the size and number of lots owned [CCP §873.240]; and

·     any liens on the real estate. [CCP §873.260]

The referee determines how the property is to be divided and prepares a report for the court’s review and approval. [CCP §873.280]

The report can be contested by the owners. [CCP §873.290]

Division of the real estate

The objective in a partition action is to physically divide ownership and possession of the real estate between the co-owners in a practical way. The real estate can be divided in a number of ways:

·     by separate lots or parcels [CCP §873.230]; or

·     by allocating any improved real estate to the co-owner who constructed the improvements. [CCP §873.220]

When the real estate cannot be divided equally, one co-owner can be ordered to pay money to the other to even up the division. The money paid to even the distribution is legally called owelty. [CCP §873.250]

Any division of the real estate must comply with all environmental, zoning and other ordinances affecting the use of the real estate.

Sale of the real estate

The sale of real estate can be held at a public auction or by a privately negotiated sale, depending on:

·     which is likely to bring more money for the co-owners [CCP §873.520]; or

·     a prior agreement between the co-owners. [CCP §873.600]

A court-appointed referee, such as a listing broker, is given great latitude to conduct sales. For example, real estate consisting of more than one parcel can be sold collectively or individually. [CCP §873.620]

Notice of sale

The public or private sale of real estate must be conducted under the same rules for an execution sale on a money judgment. [CCP §873.640(a)]

For example, the notice of sale must be given to all parties named in the partition action at least 20 days before the sale date. [CCP §701.540(b)]

Additionally, the notice of sale must be published in a local newspaper of general circulation once a week for three weeks before the sale, similar to a trustee’s sale under a power-of-sale provision. [CCP §701.540(g)]

Bidding at the sale

At a public or private sale, the real estate is sold to the highest bidder. [CCP §§873.670, 873.680]

The only persons prohibited from bidding at the sale are:

·     the referee;

·     an attorney for the parties in the partition suit; and

·     a guardian of a party to the suit, unless it is for the benefit of his ward. [CCP §873.690(a)]

These prohibitions are not in place at a trustee’s sale where anyone can bid, including the trustee holding the private sale. In a partition action, if one of the co-owners wants to own the entire property, they can acquire it by making the highest bid.

Confirmation and distribution

After the highest bid is accepted, the sale is confirmed in a hearing which permits an overbid to be accepted at the hearing. [CCP §§873.720, 873.730]

The proceeds of the sale are distributed as follows:

·     to the expenses of the sale;

·     to the costs of the partition action;

·     to the payment of the liens; and

·     to the co-owners. [CCP §873.820]

Judgment is entered and is binding on all persons with claims known or unknown in the real estate. [CCP §874.210]

Avoiding a partition action

What can be done by a co-owner to avoid the unnecessary costs of a partition action at the outset of a dispute between co-owners?

The keys to avoiding a partition action include:

·     selecting the correct form of ownership; and

·     including in the co-ownership agreement a provision for disposition of the property on termination of the co-ownership.

The best form of co-ownership of real estate is generally a limited liability company (LLC). In the LLC operating agreement, the co- owners agree in advance what will happen should one of the members want to withdraw or is expelled from the group.

A member himself has no interest in the LLC real estate, only a vote and entitlement to an accounting of the LLC’s activities. [Corp C 17300]

On dissolution of the LLC, the member is only entitled to his percentage share in interest of the net proceeds of a sale, unless an agreement exists calling for a distribution of the real estate in kind. [Corp C §17250]

When a member’s ownership interest in an LLC is assigned, whether voluntarily (to a buyer) or involuntarily (to a creditor), the assignee becomes a nonvoting member of the group with no voice in the LLC’s business affairs, unless accepted as a member by a majority in interest of the existing members. [Corp C §§17301, 17303]

The operating agreement can also indicate events which terminate a member’s interest, allowing others to buy out that member’s interest (e.g., bankruptcy, failure to remove a charging order, death, assignment, etc.) at a prearranged price or valuation arrangement.