Does a Partition Count as a Bankruptcy Claim?

underwood-does-partition-count-bankruptcy-claim-300x300Yes, it can. Partitions and bankruptcy can interact in unusual ways despite the fact that they can often seek the same thing: the sale of a piece of property. 

Nonetheless, a co-owner of property filing for bankruptcy either before or during a partition lawsuit immediately raises several issues for the other innocent co-owners. For example, they’ll need to decide whether they can file a bankruptcy claim, and they’ll also need to figure out whether their partition action is subject to the automatic stay provisions of bankruptcy.

As such, in these situations, the right representation can make all the difference. At Underwood Law Firm, our attorneys know the ins and outs of partition actions, and are ready to handle the accompanying litigation that’s sure to result, even in bankruptcy courts. 

What is a Bankruptcy Claim?

When someone declares for bankruptcy, they usually do so by filing a bankruptcy petition under one of several “chapters.” Each chapter is different, and brings with it specific objectives. For example, only individual persons may file under Chapter 7 and Chapter 13. And between the two, Chapter 7 is designed to liquidate a debtor’s assets by selling everything off, whereas Chapter 13 provides debtors with the opportunity to adjust their debts. 

Regardless, the debtor is bankrupt because they owe too much money. The persons and entities they owe money to are called “creditors.” And in order to collect from the bankruptcy estate, the creditors must file a “claim.” 

In essence, the claim is simply the means for a creditor to get the court to acknowledge that the estate indeed owes them money. With a definition like that, many people may believe that a claim is proof of a debt. But in actuality, the definition is much broader. In fact, the Supreme Court itself has stated that the word “claim” must be given the broadest available definition possible. (Johnson v. Home State Bank (1991) 501 U.S. 78, 83-84.) 

With that in mind, a claim can really be thought of as a “right to payment.” (11 U.S.C. § 101(5)(A).) If you have a right to be paid by the debtor for some type of previously secured obligation, that is a claim.    

Claiming Partition in Bankruptcy

With the broad definition of claim in mind, some litigants may wonder whether their status as a co-owner means they have a “claim” against another co-owner who declares bankruptcy. 

The answer ultimately depends on timing. If two co-owners own a single piece of property, and then one of them files for bankruptcy, then the other’s status as a 50% owner, for instance, does not automatically entitle them to file a bankruptcy claim. The logic behind this is that one’s distribution rights in property are property interests rather than claims designed to be discharged (ultimately paid off) in bankruptcy proceedings. (Bush v. Taylor (8th Cir. 1990 912 F.2d 989, 992.) 

If a co-owner has already filed a lawsuit for partition, however, then that changes the calculus. This is because in suing for partition, the plaintiff now has a “right to payment” from the sales proceeds, in addition to rights from the debtor’s proceeds stemming from offsets, credits, and attorney’s fees. (CCP § 874.040.) 

What if a co-owner files for bankruptcy?

Regardless of whether a co-owner has a claim, they will doubtless be wondering what may happen to the property co-owned with the debtor. 

The answer depends on what chapter they filed under. If they file under Chapter 7, for instance, the trustee will be looking to liquidate every asset possible to settle the debts, making a sale much more likely. 

This is true even of co-owned property. Under 11 U.S.C. section 363 (h), the trustee may sell both the estate’s undivided interest and the non-debtor cotenant’s interest in the subject property provided the trustee can make a showing of several factors. (A&D Prop. Consultants, LLC v. A&S Lending, LLC (In re Groves) (9th B.A.P. 2023) 652 B.R. 104, 115.)

Chief among these is that partition in kind must be “impracticable.” This means a literal physical division of the property must be out of the question. In coming to this determination, it’s likely that the federal bankruptcy court would turn to California partition law and the factors that the Code of Civil Procedure lays in helping state courts come to this determination. (CCP § 874.318.) 

In all likelihood, though, this determination will fall in the trustee’s favor. It’s simply much easier to sell an entire piece of property as supposed to only the debtor’s interest. In addition, it’s much harder today to achieve partitions in kind because of zoning regulations and the size of housing in urban areas. (Butte Creek Island Ranch v. Crim (1982) 136 Cal.App.3d 360, 365.) 

What happens if the trustee sells co-owned property?

Thankfully, co-owners need not worry if the trustee does decide the sell the property. This is because under 11 U.S.C. 363(j), the trustee shall distribute to the co-owners of such property, the proceeds of such sale. What’s more is that the plain language of the statute directs the trustee immediately to distribute proceeds after the sale. (UTSA Apartments, L.L.C. v. UTSA Apartments 8, L.L.C. (In re UTSA Apartments 8, L.L.C.) (5th Cir. 2018) 886 F.3d 473, 487.)

Can you continue a partition during bankruptcy?

What if, however, a co-owner had already begun their own partition procedure prior to the bankruptcy filing? Could they still continue that lawsuit while the bankruptcy plays out?

Perhaps. The reason is that every bankruptcy case is accompanied by an automatic “stay.” Put differently, any and all claims against the debtor or the property must cease until the debtor is discharged from bankruptcy. If the stay is violated, say by a co-owner trying to partition the property, then any and all orders and judgments that litigant would receive become automatically void. (Bank of N.Y. Mellon v. Enchantment at Sunset Bay Condo. Ass’n. (9th Cir. 2021) 2 F.4th 1229, 1234.) 

As such, it’s critical that the co-owner either obtain a relief from the stay via petitioning the bankruptcy court, or obtaining a stipulation from the bankruptcy trustee to continue the partition. 

How the Lawyers at Underwood Law Firm Can Help

Attempting to litigate a partition can be difficult enough on its own. Adding in a bankruptcy petition makes it even more complicated. For the inexperienced litigant, the next steps might seem impossible to determine. Fortunately, the lawyers at the Underwood Law Firm specialize in partition actions and solving the difficult problems that can accompany them. If you have found yourself in one of these situations, then please do not hesitate to contact us today.

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