Partition Offsets and Accounting in California

//

Receiving your equity when forcing the sale of a home in California

When co-owners of shared property in California cannot agree on what to do with a property, they may petition the court to force the sale of the property through a partition action. Very often, co-ownership issues go hand-in-hand with financial issues related to the property. Perhaps one co-owner paid the entire down payment and all mortgage payments but the other co-owner is requesting one half of the proceeds of the sale of home. Or maybe one co-owner makes the mortgage payments but the other co-owner paid for a kitchen remodel and built a pool. How do California courts equitably distribute the proceeds of sale of such properties? The short answer is that the courts will calculate each co-owner’s expenditures related to the home through an accounting and then distribute the proceeds equitably.

Accounting in a partition action

The partition process includes an accounting whereby attorney’s fees, costs, offsets, reimbursements and credits can be awarded by the court in a partition. Generally, allowable costs and fees are apportioned among the owners “in proportion to their interests,” though the court may “make such other apportionment as may be equitable.” [1]Code of Civil Procedure Section 874.040. To qualify for this exception, it is important to include in the record facts to “support an apportionment in any manner other than according to the respective interest of the parties in the property.” [2]Stutz v. Davis (1981) 122 Cal. App. 3d 1, 5.

The court in Southern Adjustment Bureau, Inc. v. Nelson (1964) 230 Cal. App. 2d 539, 541 discussed the method of awarding credits and making adjustments, stating “[w]hen a cotenant makes advances from his own pocket to preserve the common estate, his investment in the property increases by the entire amount advanced. Upon sale of the estate he is entitled to be reimbursed his entire advancement before the balance is equally divided.” Therefore, a cotenant will be entitled to a reimbursement for any credits or adjustments before the balance of any proceeds is divided between the two cotenants.

When does the accounting of offsets occur in a partition action [second phase of the partition action]?

The accounting of offsets occurs in what is known as the second phase of a partition, which occurs after the first phase of a partition where the court enters an interlocutory judgment of partition by sale such that a referee sells the property and deposits the proceeds with the court or the referee.[3]Code of Civil Procedure Section 872.720

“When property is partitioned by sale in California, sale proceeds are first used to pay general costs of the action; costs reimbursed before any distribution to either cotenant include fees for any attorney engaged for the common benefit of the parties, as well as costs and expenses of any referee and third parties hired by the referee, the costs of title reports, and interest on any of these expenditures.” [4]48 Cal. Jur. 3d Partition § 98 To determine the proceeds of sale, the court first applies the gross proceeds in the following order under Code of Civil Procedure section 873.820:

  • (a) Payment of the expenses of sale.
  • (b) Payment of the other costs of partition in whole or in part or to secure any cost of partition later allowed.
  • (c) Payment of any liens on the property in their order of priority except liens which under the terms of sale are to remain on the property.
  • (d) Distribution of the residue among the parties in proportion to their shares as determined by the court

After the liens and costs of sale are paid, what remains is the net proceeds of sale that will ultimately be divided between the co-owners. While normally, the parties receive the proceeds based on their interest in the property (e.g., a 50% owner would receive 50% of the proceeds), the court first holds a trial to determine if either party claims to be owed more than their proportional interest in the property.

This distribution to the parties as determined by the court is set forth in California Code of Civil Procedure 873.850, which states that: “When the proceeds of the sale belonging to persons who are parties to the action, whether known or unknown, have not been allocated among such parties, the action may be continued as between such parties, for the determination of their respective claims thereto, which must be ascertained and adjudged by the court. Further testimony may be taken in court, or by a referee, at the discretion of the court, and the court may, if necessary, require such parties to present the facts or law in controversy, by pleadings, as in an original action.”

Indeed: “The court shall order the proceeds of sale and any security therefor to be paid, transferred, deposited in court, placed in trust, or invested in State of California or United States government obligations or interest-bearing accounts in an institution whose accounts are insured by an agency of the federal government, to or for the benefit of the persons in interest entitled thereto, as may be appropriate or as specifically provided in this article.”[5]California Code of Civil Procedure section 873.810

This second phase of a partition allows for the reimbursement of offsets between the parties. 

What is included in an accounting in a partition action?

“In a California partition action, a cotenant who has advanced funds to pay common expenses generally is entitled to be reimbursed from the sale proceeds before distribution.
After the court has determined the share of each party in the net proceeds of the sale according to their respective interests, any claims that one party may have against the other should be deducted from the share of the party to be charged, and that of the other party should be increased accordingly.”[6]48 Cal. Jur. 3d Partition § 98

The accounting the court performs in a partition action under section 872.140 includes contributions from the parties for the down payment on a property, payments on a promissory note secured by a deed of trust on the property, and improvements to the property. (See Wallace v. Daley, supra, 220 Cal.App.3d at pp. 1035-1036, 270 Cal.Rptr. 85 [“[c]redits include expenditures in excess of the cotenant’s fractional share for necessary repairs, improvements that enhance the value of the property, taxes, payments of principal and interest on mortgages, and other liens, insurance for the common benefit, and protection and preservation of title”]; Milian v. De Leon (1986) 181 Cal.App.3d 1185, 1194, 226 Cal.Rptr. 831 [“a cotenant who pays taxes, trust deed payments or other charges against the property or expends money for the preservation of the property or who, with the assent of his cotenant, makes improvements to the property is entitled to contribution from the cotenant, and on partition by sale is entitled to reimbursement for those expenditures before division of the proceeds among the property owners”]; In re Marriage of Leversee (1984) 156 Cal.App.3d 891, 897, 203 Cal.Rptr. 481 [in a partition action, “the court may order an equitable compensatory adjustment to compensate [a spouse] for her use of separate funds for the down payment on the residence”].)” [7] Medina v. Di Pieri, No. B283909, 2019 WL 1236384, at *4 (Cal. Ct. App. Mar. 18, 2019).

What kinds of costs of partition are recoverable?

The costs of partition under Code of Civil Procedure Section 874.010 include:

  • (a) Reasonable attorney’s fees incurred or paid by a party for the common benefit.
  • (b) The fee and expenses of the referee.
  • (c) The compensation provided by contract for services of a surveyor or other person employed by the referee in the action.
  • (d) The reasonable costs of a title report procured pursuant to Section 872.220 with interest thereon at the legal rate from the time of payment or, if paid before commencement of the action, from the time of commencement of the action.
  • (e) Other disbursements or expenses determined by the court to have been incurred or paid for the common benefit.

These costs of partition constitute a “lien on the share of the party specified” and have “priority over any other lien on the share except those imposed under this section.” [8]Code of Civil Procedure section 874.120.

Recovering attorney’s fees against co-owners in a partition

Parties commonly attempt to shift the attorney’s fees they have incurred to their co-owners by asking for a determination that they were the prevailing party. Code of Civil Procedure section 874.010(a) allows for this to occur since it includes as an allowable category of recoverable costs “reasonable attorney’s fees incurred or paid by a party for the common benefit.”

“This section, read in conjunction with California Code of Civil Procedure section 874.040 which states: ‘Except as otherwise provided in this article, the court shall apportion the costs of partition among the parties in proportion to their interests or make such other apportionment as may be equitable,’ leads to the conclusion that costs should be awarded in proportion to the litigant’s interest in the property….The purpose of the statute is to divide the cost of legal services among the parties benefited by the result of the proceeding.” [9]Stutz v. Davis (1981) 122 Cal. App. 3d 1, 4.

Stated simply, “section 874.040 permits the trial court to apportion attorney fees based upon equitable considerations.” [10]Lin v. Jeng (2012) 203 Cal. App. 4th 1008, 1025. “A court also can adjust the allocation of fees incurred by a party to the extent they are not “reasonable” as required by section 874.010, subdivision (a).” [11]Orien v. Lutz (2017) 16 Cal. App. 5th 957, 968.

To recover fees, it is important to find special facts that suggest the inequity of requiring one party to pay all of their own fees. For example, in the Lin case, the actions cited by the court involved both (1) active wrongdoing towards other co-owners, and (2) efforts to increase the cost to other parties.

Co-owners in partition actions often have claims for reimbursement that arose before the lawsuit was filed. These offsets are treated under the law as being claims against the sale proceeds.

Code of Civil Procedure Section 872.140 allows the court to “order allowance, accounting, contribution, or other compensatory adjustment among the parties in accordance with the principles of equity.” The purpose of this rule is found in the Law Revision Commission Comments to this section, which sets forth that it is intended to allow courts to make adjustments among the owners for “such items as common improvements, unaccounted rents and profits, and other matters for which contribution may be required.”

The seminal case of Wallace v. Daley (1990) 220 Cal.App.3d 1028 , 1036 explained as follows:

Every partition action includes a final accounting according to the principles of equity for both charges and credits upon each co-tenant’s interest. Credits include expenditures in excess of the co-tenant’s fractional share for necessary repairs, improvements that enhance the value of the property, taxes, payments of principal and interest on mortgages, and other liens, insurance for the common benefit, and protection and preservation of title.

When the partition action involves one co-owner out-of-possession (usually the plaintiff) and one co-owner in possession (usually the defendant), the owner out-of-possession may claim the value of occupancy of the property. Generally, a claim for the implied rental value of exclusive possession by one co-owner depends upon a showing of actual ouster. As one court explained: “In order for a cotenant who is not in possession to recover the rents and profits, or the value of possession, from the cotenant in possession, he must establish that there has been an ouster….” Estate of Hughes (1992) 5 Cal. App. 4th 1607, 1612.

“An ouster, in the law of tenancy in common, is the wrongful dispossession or exclusion by one tenant of his cotenant or cotenants from the common property of which they are entitled to possession. The ouster must be proved by acts of an adverse character, such as claiming the whole for himself, denying the title of his companion, or refusing to permit him to enter. Actual or constructive possession of the ousted tenant in common at the time of the ouster is not necessary.” [12]Zaslow v. Kroenert (1946) 29 Cal. 2d 541, 548. The bottom line is that co-owners should be entitled to “admittance upon demand.” [13]Zaslow v. Kroenert (1946) 29 Cal. 2d 541, 548.

“The practical borderline between privileged occupancy of the whole by a single cotenant and unprivileged greedy grabbing which subjects the greedy one to liability to his cotenants is not crystal clear.” [14]Estate of Hughes (1992) 5 Cal. App. 4th 1607, 1612.

However, courts have found it proper to “offset the reasonable value of the use of plaintiff’s interest in the property against the payments for interest, taxes and insurance made by defendants in preservation of the property.” [15]Hunter v. Schultz (1996) 240 Cal.App. 2d 24, 32.

Partition referees can be instructed to report on offsets

In certain cases, the court may appoint a partition referee, whose usual duty is to sell the property. However, those duties can also include holding the proceeds of sale until the court determines the costs, fees, offsets and expense reimbursements in an accounting between the co-owners. [16]Code of Civil Procedure Sections 873.030(a) & 873.010. Even further: “The referee may perform any acts necessary to exercise the authority conferred by this title or by order of the court,” which may include providing a report on offsets, in addition to changing the locks on uncooperative co-owners of real estate and occupants, if allowed by the court. [17]Code of Civil Procedure Section 873.060 & 873.070.

Contact an Experienced California Partition Lawyer

The bottom line is that a skilled partition attorney in California will ensure that the rights of co-owners are properly advanced in the courts to maximize the outcome. If you have further questions, do not hesitate to call us at (844) 4-TALKOV (825568) or email us at info(at)talkovlaw.com to speak with a real estate attorney in California.

References

References
1 Code of Civil Procedure Section 874.040.
2 Stutz v. Davis (1981) 122 Cal. App. 3d 1, 5.
3 Code of Civil Procedure Section 872.720
4, 6 48 Cal. Jur. 3d Partition § 98
5 California Code of Civil Procedure section 873.810
7 Medina v. Di Pieri, No. B283909, 2019 WL 1236384, at *4 (Cal. Ct. App. Mar. 18, 2019).
8 Code of Civil Procedure section 874.120.
9 Stutz v. Davis (1981) 122 Cal. App. 3d 1, 4.
10 Lin v. Jeng (2012) 203 Cal. App. 4th 1008, 1025.
11 Orien v. Lutz (2017) 16 Cal. App. 5th 957, 968.
12, 13 Zaslow v. Kroenert (1946) 29 Cal. 2d 541, 548.
14 Estate of Hughes (1992) 5 Cal. App. 4th 1607, 1612.
15 Hunter v. Schultz (1996) 240 Cal.App. 2d 24, 32.
16 Code of Civil Procedure Sections 873.030(a) & 873.010.
17 Code of Civil Procedure Section 873.060 & 873.070.
About Scott Talkov

Scott Talkov is a real estate lawyer, business litigator and bankruptcy lawyer in California. He founded Talkov Law Corp. after more than one decade of experience with one of the region's oldest law firms, where he served as one of the firm's partners. He has been featured on ABC 7, CNN, KCBS, and KCAL-9, and in the Los Angeles Times, the Orange County Register, the San Diego Union-Tribune, the Press-Enterpise, and in Los Angeles Lawyer Magazine. Scott has been named a Super Lawyers Rising Star for 9 consecutive years. He can be reached about new matters at info@talkovlaw.com or (844) 4-TALKOV (825568). He can also be contacted directly at scott@talkovlaw.com.

Talkov Law is Rated 5 out of 5 stars based on 106 customer reviews.

Contact Us to Schedule Your Complimentary Consultation

Awards and Recognition

US News and World Report Scott Talkov

We Have Been Featured On:

The Real Deal

Recent Blog Posts

The information on this site, including the Talkov Law Blog, is intended for general information purposes only. By using this site, you agree that any information contained in the site does not constitute legal, financial or any other form of professional advice. Information on this site may be changed without notice and is not guaranteed to be complete, accurate, correct or up-to-date.