The law governing California real estate investment, development, and secured lending evolves in real time | Lessons from the courtroom battlefront

Court: No Partition of Property Before Determining Ownership Interests

Partition is a commonly used legal procedure for “segregating and terminating” common interests in the same parcel of real property.

Partition may be “in kind” (an actual physical division of the property) or “by sale” (with the sale proceeds divided among the parties).

A recent opinion from California’s First Appellate District — Summers v. Superior Court — clarifies that a court cannot order partition before determining the ownership interests of the parties.

Facts

Three individuals — Ricardo Summers, Alejandro Gomez, and Wan Fen Tan — jointly owned investment real estate in San Francisco.

Tan sued Summers and Gomez for partition, among other claims.  The lawsuit centered around the amount of each party’s ownership interest in the property and corresponding right to receive income from, and obligation to pay expenses for, the property.

Tan filed a motion for summary adjudication, requesting the property be partitioned and sold by private sale, with the proceeds to be held in escrow until a later resolution of the ownership interest issues.

Summers and Gomez opposed the motion, arguing that the court could not order a partition sale before determining the parties’ ownership interests.  They also argued that it would be “a huge waste” for the sale to occur before the ownership interests were resolved because the sold property would not generate any rental income while the parties litigated over their ownership interests.

The trial court granted Tan’s motion, ordering that the property be sold, and for the sale proceeds to be held in escrow until the ownership issues were resolved.

Summers and Gomez challenged the court’s ruling.

Court of Appeal’s Opinion

The Court of Appeal reversed.

In its opinion, the court focused primarily on the language of the controlling statute.  Under California Code of Civil Procedure section 872.720, if a court finds that a plaintiff is entitled to partition, then the court “shall make an interlocutory judgment that determines the interests of the parties in the property and orders the partition of the property.”  (Emphasis added.)

The court held that the statute makes two points clear:

First, an interlocutory judgment in a partition action must include both a determination of the parties’ ownership interests in the property and an order granting the partition.

Second, the manner of partition (in kind or by sale) “is to be decided when or after the parties’ ownership interests are determined, but not before.”

Here, the trial court’s ruling was erroneous because it ordered the property to be sold before the parties’ ownership interests were resolved.  The trial court lacked authority to do this.

Lesson

The first lesson has nothing to do with the express holding.  The opinion makes no mention of the three investors forming an entity (an LLC, partnership, etc.) to define expectations and manage their real estate investment.  It appears they did not do so.  If they had, their “ownership interests” would have been easier to determine, and a substantial portion of the litigation would likely have been avoided.  So, lesson one is to use a corporate entity with well-designed documents for real estate investments (especially those involving more than one person).

The second lesson is that if partition litigation is required, the trial court cannot order the partition before determining the parties’ ownership interests.

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