Yes. Partnership property is subject to partition on the dissolution, accounting, and wind-up of partnership matters just like other types of property. As real estate presents unique issues, however, there are many important things to know about the process to ensure that it is done correctly. The purpose of this blog post is to address some of the issues involved with partitioning property belonging to a partnership.
What is a Partnership?
Partnerships are a type of corporate entity with their own set of rules and regulations. By code, a partnership is born by the association of two or more individuals to carry on as co-owners of a business for profit, whether or not the persons intended to form a partnership. (Corp. Code § 16202.)
As with any other form of business entity, disputes sometimes arise, and a partner may seek to dissolve the partnership and liquidate its assets, including any real property. But is the partner permitted to do so? What type of action would they need to bring in court? And how would liquidated assets be distributed among the partners? This post will address those common issues which arise during this type of dispute.
What is a partition action?
A partition action is a judicial procedure whereby the court “segregates and terminates common interests in the same parcel of property.” (Moorpark Homeonwer’s Ass’n v. VRT Corp. (1998) 63 Cal.App.4th 1396, 1404-1405.) In essence, “it is simply a dividing up of what the parties already own.” (Rancho Santa Margarita v. Vail (1938) 11 Cal.2d 501, 539.) But as noted above, partners do not “own” partnership property. “Property acquired by a partnership is property of the partnership and not of the partners individually.” So is a partition action available to a partner?
Given the above, when may a partner seek to dissolve the partnership? Generally, this type of action will be governed by the partnership agreement already in place. But, in the event that it does not, then Corporations Code “governs relations among the partners and between the partners and partnership.” (Corp. Code § 16103, subd. (a).)
When is a partition of partnership property available?
Historically, as stated in Logoluso v. Logoluso (1965) 223 Cal.App.2d 523, 530 (Logoluso), the courts stated that “it is true the statutes are silent,” on whether one can seek partition of partnership property. The court held, however, that a solution existed to this question. “[W]e note that an action to dissolve a partnership is an equitable proceeding, and so is an action in partition. Both kinds of cases present similar problems as to whether jointly-owned property should be divided or sold.” (Id.) Thus, even though the correct relief to seek would be that of partnership dissolution, courts will “apply the long-established rules of partition to the property division aspects of a partnership dissolution action.” (Ibid.)
Under current law, however, “to the extent that the court determines that the provisions of the partition statutes are a suitable remedy, such provisions may be applied in a proceeding for a partnership accounting and dissolution, or in an action for partition of partnership property.” (CCP § 872.730.) Thus, partnership property can be partitioned in an accounting even though held in the name of the partnership. (Brown v. Fairbanks (1953) 121 Cal.App.2d 432; Gray v. Palmer (1858) 9 Cal. 616.)
As a prime example, a court ordered the partition of partnership property, when the partnership asset consisted solely of a hotel, no agreement existed between the partners for the division of the property, and a division would have left the partners as tenants in common. (see Jacoby v. Feldman (1978) 81 Cal.App.3d 432.)
Additionally, when title stands in the name of a partner, and a third person, then that third person is an indispensable party to any partition action. (Shirley v. Cook (1953) 119 Cal.App.2d 220.)
Thus, should a partner bring an action for the dissolution of a partnership, the next question would be how funds would be distributed to members of the partnership upon the partition.
How are partnership funds distributed in a partition?
Generally, the partnership agreement will govern each partner’s interest in the partnership. Upon dissolution, each partner is entitled to a settlement of all partnership accounts. (Corp. Code § 16807, subd. (b).) The settlement is effectuated by the liquidation of partnership assets, the funds from which will be distributed in accordance with the charges or credits on each partner’s account. (Id.)
A partner will be reimbursed for payments made and indemnified for liabilities incurred by the partner in the ordinary course of business of the partnership or for the preservation of its business and property. (Corp. Code §16401, subd. (c).) Partners will also be reimbursed for any advance to the partnership beyond the amount of capital the partner agreed to contribute. (Id., subd. (d).) A payment or advance made by a partner constitutes a loan to the partnership that accrues interest from the date of the payment or advance. (Id., subd. (e).)
But because the amount of recovery on dissolution is uncertain prior to a full accounting fixed by judgment, interest is not allowed prior to the date of judgment. (Combs v. Haddock, (1962) 209 Cal.App.2d 627.) Further, because a proceeding to liquidate a partnership is controlled by equitable principles, the court has broad discretion in fixing costs. (Vangel v. Vangel (1955) 45 Cal.2d 804, 810.)
Additionally, a strict sale of the partnership property is not always required upon dissolution. Just as cotenant may demand a partition in kind, so too can a partner, “unless it appears that a partition cannot be made without great prejudice to the parties.” (Logoluso, 233 Cal.App.2d 523, 530.) Thus, “absent a compelling necessity to satisfy partnership obligations, a public sale of assets can be justified only if it is found that distribution in kind would result in great prejudice to the parties.” (Id.)
How can the attorneys at Underwood Law Firm assist you?
While all lawsuits are challenging, and unique, a partition of partnership property is of another beast entirely. The knowledgeable attorneys at Underwood Law Firm are able to use their years of combined corporate business litigation knowledge to assist you with your available options or help prepare you for bringing a partition suit of partnership property.