Even when a party finally secures a judgment of partition, the property itself must still be sold (or partitioned in another way). This raises a brand-new set of issues for litigants as they attempt to figure out the terms of sale, when the property should be sold, and, most importantly, the asking price.
But sometimes, one of the buyers is a party to the litigation itself. While the law allows for this, it would be counterintuitive to force that party to submit a bid for the full price of the house when they already have equity in it. The law’s solution to this is the full credit bid.
Full credit bids allow parties to “credit” their bid for the property with the value of their equity already in place. This reduces the amount of cash they actually need to bid for the property. That said, it isn’t always an option, and sometimes it can wind up being a disadvantage for the party attempting to utilize it.
At Underwood Law Firm, our expert attorneys are well-versed in the practice and procedure governing partition sales. With our experience, we believe we can help assist you in achieving your litigation objectives.
How does a Full Credit Bid Work?
As the name implies, a full credit bid requires “credit” in the property to be purchased. As such, there are really only a couple of situations where credit bids are relevant: partition sales and foreclosure sales.
In both cases, someone (or some entity, if it’s a bank or lender) already has equity in a property, be it through a mortgage interest or an ownership interest. If this person decides to place a bid on the property, then it would make little sense for them to place a bid for the full value of the property in cash. After all, they would just get the money back anyways.
They are therefore allowed to bid on the property in an amount equal to their interest that is already present in the property. Or, in the case of a lender, an amount equal to the unpaid principal and interest of the mortgage debt. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1238.)
As an example, suppose that “Shawn” and “Julie” own a home with the mortgage completely paid off. The home is worth $100,000, and each has a 50% ownership interest in the property. Suppose that the parties later split, and a court orders the home to be sold in a partition sale.
If Shawn decides he wants the buy the home, then it would be counterintuitive to take out a $100,000 dollar loan. Once he paid for the property, half of the money would immediately return right back to him. With a full credit bid, however, he can bid the $50,000 credit he already has in the property. This way, the loan he has to take out is substantially smaller, as he is really only paying $50,000 for the property, with that amount going to Julie.
Are Full Credit Bids Allowed at Partition Sales?
As stated above, full credit bids do often arise during partition sales, but they are subject to a few key caveats. First, it is important to note that partition sales are not standardless affairs. Instead, the court prescribes the manner, terms, and conditions of the sale based on the argument of the parties and the suggestions of any partition referees involved. (CCP § 873.610.)
One of the many terms of sale available for negotiation is a credit bid. The code is very clear in stating that the court may direct a sale on credit for the property or any part thereof. (CCP § 873.630.) Therefore, credit bidding is not a right for the parties. It has to be something that the court believes to be fair and equitable under the circumstances or something the parties themselves agree to.
What are the Disadvantages of a Full Credit Bid?
Because credit bids are not automatically allowed, it begs the question of when and why they would be prohibited. In short, the answer is that cash sales offer flexibility that credit sales do not.
As a matter of law, every partition includes a final accounting between the parties. (Wallace v. Daley (1990) 220 Cal.App.3d 1028, 1037.) This means that once the property is sold, the parties do not immediately get the sales proceeds in accordance with their ownership interests. Instead, the court will increase or decrease the amount for both parties depending on their property expenditures over the years.
For instance, payments of the mortgage, property taxes, physical improvements, and the like all increase one party’s disbursement while lowering the other’s. Having cash on hand is, therefore, advantageous because it allows for a cleaner disbursement of funds to the parties once they have been adjusted.
Full credit bids make this process more difficult. Take the Shawn and Julie example above. Suppose that the mortgage for the property had been paid off entirely by Julie over a decade. She would be entitled to recover that full amount. But because of Shawn’s credit bid, there is only $50,000 of cash immediately available to Julie, despite her entitlement to a higher figure.
Thus, a party may argue against allowing a full credit bid if the accounting has yet to be completed and the party is anticipating the litigation over the accounting to be a strenuous and lengthy process.
How can the Attorneys at Underwood Law Assist You?
Getting a judgment of partition is often only the first step in partition litigation. Perhaps unsurprisingly, getting the property sold can take even longer than litigating the right to partition itself. The nature of the lawsuit becomes that of accounting as parties attempt to find common ground on the methods and costs of the partition itself.
As each case is unique, property owners would be well-served to seek experienced counsel familiar with the intricacies of partition actions and the sales procedures that follow. At Underwood Law, our knowledgeable attorneys are here to help. If you are trying to decide whether a full credit bid is right for you, attempting to fight another party’s implementation of a full credit bid, or if you just have questions, please do not hesitate to contact our office.
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