Property may be sold and acquired in a variety of different ways especially based on the type of property it is. One of these forms is a land sale contract. A land sale contract is different from a deed or other traditional instrument of title. Under a land sale contract, the buyer does not get title or full ownership of the land right away.

What is a land sale contract?

A land sale contract arises between a vendor and a buyer. Depending on the circumstances, a land sale contract may be made orally however this may cause enforceability issues later. (Rogers v. Davis (1994) 28 Cal.App.4th 1215, 1219.) The contract is for the sale of land in return for installment payments being made over a period of time longer than a year. (Cal. Civ. Code § 2985.) This means the title to the land is retained by the vendor until all or most of the purchase price is paid. (Venable v. Harmon (1965) 233 Cal.App.2d 297, 299-300.) 

A land sale contract acts as a security device which gives the buyer possession immediately but allows the seller to keep the title until the buyer pays the final installment. (Taggart v. Cal-Linda Packing Co. (1956) 146 Cal.App.2d 545, 548.) As such, the land cannot be transferred to someone else by the purchaser unless they also assign the contract to that new purchaser. (Cal. Civ. Code § 2985.1; Petersen v. Hartell (1985) 40 Cal.3d 102, 116.) 

This assignment must be specific as to the rights transferred in the land, not just transferring things like mineral or oil rights. (Klamath Land & Cattle Co. v. Roemer (1970) 12 Cal.App.3d 613,619.) Because of the time allowed for the buyer to pay for the property, the seller in the meantime may encumber the property with a lien but must clear the property by the time title transfers. (Darr v. Clevelin Realty Corp. (1939) 33 Cal.App.2d 500, 504.) Once the buyer has fully paid off the contract, the land is theirs. 

What rights do the buyer and seller have under a land sale contract?

As this is a contract, both parties also have the ability to bring a breach of contract claim. The seller is considered to be the trustee of the land while the contract is in place, while the buyer holds equitable ownership of the land. (Roemer v. Pappas (1988) 203 Cal.App.3d 201, 205-206.) A seller is usually still responsible for real estate taxes during the duration of the contract. (Parr-Richmond Indus. Corp. v. Boyd (1954) 43 Cal.2d 157,165-166.)

Once the buyer has paid fully, the seller must turn over the title. If they are unable to, the buyer can collect what they paid to the seller. So, if the land is taken the buyer may be entitled to any award made, the vendor is limited to any outstanding balance owed under the land sale contract. (Alhambra Redevelopment Agency v. Transamerica Financial Services (1989) 212 Cal.App.3d 1370, 1376-1377.)

Because this is a security instrument, a buyer has similar rights under an owner of land who holds title subject to a deed of trust or mortgage. As such, if the buyer of a land sale contract defaults on installment payments they have a right to reasonable opportunity to complete the purchase before the seller can foreclose. (Petersen, 40 Cal.3d at 121.) 

What are some examples of a land sale contract?

For example, Julie sells a home to Shawn under a land sale contract. This gives him two years to pay off the home. During that time Shawn may reside in the house. As a result of this land sale contract, Julie holds title to the home essentially as a trustee. Shawn holds equitable title until he pays the full price of the contract.

If the contract was for $500,000, once Shawn had paid all or most of it depending on the terms set Julie would need to transfer title to Shawn. Shawn would then have full ownership of the property. 

If Shawn defaulted on his payments to Julie, he would have the right to a reasonable period of time to get current on those payments. If Shawn breached the contract Julie would get to retain title and the payments Shawn had already made. If Julie cannot convey the title once Shawn has fully paid, he has the right to all the money he paid Julie under the contract.

Due to the way ownership rights are in flux in a land sale contract, this may raise issues with selling the property or otherwise determining individuals’ rights in the property. If multiple people have been given rights to property under an installment contract, disputes over who owns what may arise. If the dispute reached a certain level of animosity, parties might seek out a partition action. This would allow the court to determine the parties’ interests in the property. This is important because the court could decide ownership interests and whether the contract had assigned the appropriate rights necessary for ownership. 

Alternatively, if a land sale contract had not been fully paid off and a partition action was ongoing, the title not having passed to the buyer may pose an issue in asserting a claim for partition. To have a claim for partition, the person must be an owner of the property. Being a purchaser under a land sale contract may complicate that. 

Conclusion

If you are a buyer under a land sale contract or or think you may have ownership interests in a property under such a contract, you may want to seek court determination of these interests. In pursuing a partition action, a court will determine parties’ interests in the property and divide it accordingly. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

Contingencies are conditions or requirements included in purchase agreements that must be met before the agreement moves forward. Contingencies are designed to protect the parties’ interests in the transaction by allowing them to back out of deals or renegotiate terms when certain conditions are not satisfied. 

In California real estate contingencies commonly address financing, inspections, and appraisals. Understanding what contingencies are and how they influence purchase agreements is crucial to protecting the parties’ interests in any real property transaction.  

What is a Contingency?

Contingencies are conditions or requirements that must be met for a real estate transaction to proceed or a contract to become binding. (Civ. Code § 1436.) In real estate contracts, contingencies protect the parties, typically buyers by allowing them to back out of the deal if certain conditions are not met. Contingencies give buyer’s the power and privilege to terminate the contract when the condition is not satisfied without penalty, so long as the buyer is acting reasonably and in good faith. (Crescenta Valley Moose Lodge v. Bunt (1970) 8 Cal.App.3d 682, 687; Mattei v. Hopper (1958) 51 Cal.2d 119, 122.) 

To create a contingency, real estate agreements must include certain conditions that must be met before the transaction can continue, such as abiding to the contingency period, which is the specified timeframe during which buyers must satisfy contingencies to proceed with the transaction. There are many kinds of contingencies, including inspections, appraisals, funding, lender approval, and more. 

What is an Inspection Contingency?

Inspection Contingencies condition the buyer’s purchase obligation on the approval of various inspections and documents before finalizing the property’s purchase. (Civ. Code § 1436.) 

Buyers have the right to conduct inspections, investigations, surveys, tests and other studies at their own expense, unless the parties have agreed otherwise. (In re Barker (2008) 393 B.R. 864, 867.) Generally, these inspections look for wood-destroying pests, mold, and other property conditions like compromised structural integrity. (Ibid.) 

The buyer’s obligation to purchase the property is conditioned upon their approval of inspection results, meaning buyers must be satisfied with the property’s condition based on the conducted inspections’ results. (Beverly Way Associates v. Barham (1990) 226 Cal.App.3d 49, 55.) Buyers must complete inspections and approve or disapprove results during the specified contingency period. Contingency periods are generally defined in the purchase agreement and can be extended by the parties’ mutual agreement. (WDYA Associates v. Merner (1996) 42 Cal.App.4th 1702, 1712-13.) 

Buyers must formally remove inspection contingencies by a certain date to indicate they approve of the property’s condition. If buyers fail to remove contingencies, they may retain the right to cancel the purchase agreement without incurring penalties. (In re Barker 393 B.R. at 867-68.) When buyers remove inspection contingencies, they effectively waive their right to object to any issues uncovered during the inspections, meaning the buyer accepts the property as is and the purchase can proceed. (RSB Vineyards, LLC v. Orsi (2017) 15 Cal.App.5th 1089, 1103-04.) 

By design, inspection contingencies give buyers the right to inspect the property for defects and make the inspections’ approval a necessary condition before can escrow close.

What is an Appraisal Contingency?

Appraisal contingencies allow buyers to back out of real property purchase transactions if the property is appraised at less than the purchase price, ensuring buyers are protected from obligations to pay more than the property’s value. 

Appraisal contingencies typically act as a condition precedent to the buyer’s obligation to complete the purchase, meaning the buyer has the right to cancel the purchase if the property appraises at or below a specified value. (Willemsen v. Mitrosilis (2014) 230 Cal.App.4th 622, 627-32.) 

Contracts may specify the process for selecting appraisers. For example, contracts may allow each party to select an appraiser, and provide that if both appraisers do not agree, the parties must select a third appraiser whose decision will be binding. (Hooper v. Los Angeles Valve & Fitting Co. (1921) 55 Cal.App. 17, 22.) Contracts might also specify that the appraisal result is binding on the parties, meaning both parties must accept the appraised value as conclusive and final. (Northern Acceptance Trust 1065 by Handy v. Amfac, Inc. (1973) 59 F.R.D. 116, 121.) Lastly, Contracts may provide parties with an opportunity to present evidence or information to the appraisers to support their valuation, however, an opportunity to present evidence is not mandatory. (Hooper v. Los Angeles Valve & Fitting Co. 55 Cal.App. at 19-20.) 

What is a Funding Contingency?

Funding contingencies condition buyers’ obligation to complete the purchase on securing financing, meaning buyers can cancel transactions without penalty if they are unable to obtain the necessary financing within the contingency period. (Kays v. Brack (1972) 350 F.Supp. 1243, 1246.) Funding contingencies are also effectively a condition precedent. 

In the funding contingency context, contingency periods protect sellers by ensuring the property is not kept off the market indefinitely while the buyer secures financing. Thus, buyers must secure financing during the specified timeframe to proceed with the transaction. (Kays v. Brack (1972) 350 F.Supp. 1243, 1246.) If buyers are unable to do so, they must notify the seller of the inability to secure financing. This notice allows either party to cancel the sale. (Ibid.) 

Funding contingencies are removed when lenders notify buyers of loan approval. Notification of approval must be deposited into escrow to remove the contingency. (Fogarty v. Saathoff (1982) 128 Cal.App.3d 780, 787.) Like inspection and appraisal contingencies, buyers and sellers reserve the right to cancel the purchase transaction if the buyer cannot secure funding during the contingency period. Additionally, both parties must mutually agree to extend the contingency period to allow the buyer an opportunity to obtain alternative funding if they are unable to do so as they initially expected. 

What is an Example?

“Shawn” and “Julie” own a duplex property together in Southern California, as joint tenants. Julie lives in one unit, while Shawn rents out the other. Over time, Shawn and Julie’s relationship deteriorates, and now, Shawn wants to sell the property, but Julie does not. Unable to agree, Shawn files for partition. Because Shawn and Julie are joint tenants, Julie has the option to buyout Shawn’s interest in the property, however, Julie does not have the funds readily available and must obtain financing. To do so, Julie and Shawn negotiate a funding contingency into their buyout agreement. If Julie is unable to secure financing within 60 days, she will notify Shawn and the court, the partition will proceed, and the court will sell the property. If Julie does successfully obtains the planned financing, she will buyout Shawn’s interest, keep the property, and avoid a partition proceeding. 

Conclusion

Contingencies afford buyers and sellers the flexibility to back out of deals or renegotiate terms in real estate transactions that fail to satisfy certain, negotiated conditions. Protecting your interest, whether you’re buying or selling, is vital in any real estate transaction, especially one involving co-owned real estate. At Underwood Law, our partition attorneys can help you navigate your partition case efficiently and with care. We are here to help. 

In end-of-life planning, the person will usually choose who gets what from their assets and property via a trust, insurance policy, or other estate planning tool. The person or persons on the receiving end are called beneficiaries as they benefit from the instrument. 

What are the Different Types of Beneficiaries That Exist?

A beneficiary can be anyone, unlike an heir. A beneficiary is someone who can take an interest in or has the power to control property. (Prob. Code § 267.) These types of beneficiaries are usually primary beneficiaries. Because a beneficiary can have a present or future interest, they may be entitled to enforce a trust giving them a present interest and a future interest once the person dies. 

Contingent beneficiaries require a condition to occur in order for their interest to vest. For example, with a life insurance policy that condition is the death of the policy holder. In a trust, where beneficiaries are a class of persons, they may hold a future interest. 

This means their interest vests when one or more members come into existence and can be determined, like children or grandchildren being born. (Estate of Woodworth (1993) 18 Cal.App.4th 936, 942.) These are contingent beneficiaries who must come into existence for their interest to vest. There are some differences however in how contingent beneficiaries interact with these different instruments.

What does Appointing a Contingent Beneficiary Mean for a Trust?

Appointing contingent beneficiaries allows you to grant interests to children or grandchildren even if they have not all been born yet. Having a designated class of beneficiaries like this also prevents a trust from being terminated. For a trust the interest of a beneficiary is either vested, so the condition has occurred, or it is contingent. 

So, if a trust granted assets to all children of the family and all children had been born that interest would be vested in each of the children as beneficiaries. (Civ. Proc. Code § 699.720, subd. (a)(9).) If some children had not been born yet their interest would be contingent on them being born. It would only vest upon their birth and when all possible children were born. So where possible unborn children are not before the court a trust cannot be terminated.  (Gray v. Union Trust Co. of San Francisco (1915) 171 Cal. 637, 641; Bixby v. Hotchkis (1943) 58 Cal.App.2d 445, 451.)

What does Appointing a Contingent Beneficiary Mean in a Will?

In a will, there must be a precise contingency to grant an interest in an estate to the contingent beneficiary. For example, if a will provides an interest contingent on the beneficiary not surviving the testator by 180 days and she did, the interest will not vest, and she would not get an interest in the estate. (Estate of Murphy (1979) 92 Cal.App.3d 413, 426–427.)

Where it is somewhat unclear what the will intends, extrinsic evidence may be considered. (Estate of Russell (1968) 69 Cal.2d 200, 207.) So, the will and external evidence may be interpreted to limited who the contingent beneficiaries were. (In re Shafer’s Estate (1969) 269 Cal.App.2d 538, 543–545 [limiting contingent beneficiaries to blood related parents of grandchildren].)

When can a Contingent Beneficiary Begin Litigation?

A contingent beneficiary may bring an action to enforce their interests if they think their interests should have vested. Upon their interest vesting, a contingent beneficiary can bring an action against third parties. In the case of a trust, if the trustee fails to act the beneficiary can step in. (Pillsbury v. Karmgard (1994) 22 Cal.App.4th 743, 756.) This also applies if the beneficiary feels property was wrongly transferred, in order to recover it or proceeds of the property sale. (Wolf v. Mitchell, Silberberg & Knupp (1999) 76 Cal.App.4th 1030, 1038.)

Alternatively, where an instrument like a trust is vague in describing the class of people it benefits, beneficiaries may need to take action to ensure they will receive what they are meant to. (Prob. Code. 15404(c).) 

If this implicates real property, disputes about ownership will likely arise. Following the distribution of an estate whether through a will or trust, primary and contingent beneficiaries may end up co-owning property. Because of these divided interests a partition may be useful for beneficiaries who wish to dispose of the property following distribution.

What are Some Examples of a Contingent Beneficiary?

For example, Julie and Shawn are siblings. Their grandfather Frank names all his grandchildren as beneficiaries who are alive at his death. If Julie and Shawn are the only grandchildren, then they are the only beneficiaries. Up until Frank dies, any other children born would be part of this class of contingent beneficiaries. 

If Frank named his beneficiaries vaguely in the trust instrument the court would interpret Frank’s intent based on the instrument and may consider extrinsic evidence. 

Where the instrument gave Shawn and Julie Frank’s home in equal shares, upon Frank’s death Shawn and Julie would get this interest in the home, vesting their interests as beneficiaries. Upon Frank’s death if both Shawn has his own home and family, wanting nothing to do with Frank’s home he could begin a partition action. This would allow Frank’s home to be sold and Shawn and Julie would receive the proceeds divided proportionate to their shares. This would only be possible once they were actual owners of the home and thus could not happen before their interest had vested. 

Alternatively, in an insurance context, Frank may name his daughter Lucy as the primary beneficiary of his life insurance policy. He names Julie and Shawn as contingent or alternative beneficiaries to Lucy, their mother. If Lucy dies before Frank does Julie and Shawn would receive the benefits from this life insurance policy. 

If Lucy wanted to get these benefits and killed Frank for them, she would not be able to benefit because she killed him. However, as Julie and Shawn had an independent relationship with their grandfather the fact that their mother killed Frank would not necessarily prevent them from receiving benefits. 

Conclusion

If you are a contingent beneficiary or there are contingent beneficiaries you think may co-own property with, you may want to pursue a partition action. If there is disagreement among beneficiaries as to what to do with property after estate distribution, at Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

Usually, a decedent has a valid legal will or estate upon their death which indicates how they want their assets distributed. Intestacy refers to someone who dies without a will. This means how their assets are distributed will be decided by the probate court.

The probate process requires the court to determine whether someone died intestate and whether any testamentary instrument, like a will, is valid. If there is no will and the person is deemed to have died intestate, property is passed down based on next of kin. The court will determine heirs and beneficiaries to pass the property down to. The court will also appoint an administrator or executor to distribute the property. 

What is Intestate Succession?

Intestate succession is the court’s determination of who should get what based on their degree of relation to the decedent. Law in California sets out who is picked to “succeed” the decedent. 

Heirs are considered to have a legal right of succession because of their affinity to the decedent, not just because they are related to the decedent.  (Dickey v. Walrond (1927) 200 Cal. 335, 339; Estate of Jones (1934) 3 Cal.App.2d 395, 397.) Heirs are different from just those who are “next of kin” or people solely related by blood. (Estate of Roberts (1948) 85 Cal.App.2d 609, 614.) 

Other forms of succession may happen if appropriate. For example, if the descendants of the decedent would take the same share of the estate that the decedent would have taken if he was still alive, that is succession by right of representation. (Lombardi v. Blois (1964) 230 Cal.App.2d 191, 198.)

Overall, the property division will begin with the first generation of descendants with any living members and then to those descendants’ relatives. (Cal. Prob. Code § 240.)

What if the Decedent had a will?

Usually, courts will avoid finding intestacy where possible, so where a will exists it will be broadly and liberally interpreted to prevent intestacy. (Estate of Stockird (2018) 30 Cal.App.5th 558, 566; Estate of Vanderhoofven (1971) 18 Cal.App.3d 940, 947). This means if a will is not entirely valid it will be read to cause only partial intestacy if possible. (In re Karkeet’s Estate (1961) 56 Cal.2d 277, 281-282.) The court will interpret the testator’s (decedent’s) intentions based on what language was used in the document. (In re Bailess’ Estate (1967) 249 Cal.App.2d 970, 975-976.)

So, where a will does not provide for the distribution of particular assets the court will usually have those assets distributed according to the laws of intestate succession as described above. (In re Deacon’s Estate (1959) 172 Cal.App.2d 319, 323.) Just because the court can determine some of the testator’s intent, they must consider evidence of the testator’s actual specific intent at the time of drafting. (Estate of Duke (2015) 61 Cal.4th 871, 879.) The court’s interpretation cannot be entirely independently determined. 

How does an Administrator or Executor Divide Property?

The court will appoint an administrator when someone dies intestate to ensure property is distributed according to the probate code. This administrator may sell probate property to pay debts, family allowances, expenses, taxes or if it is in the interest of the estate. (Cal. Prob. Code § 10000.) 

They must be given the ability to do so by the will or the court. An administrator may have limited or full authority. If the administrator is given limited authority, they must undertake the sales or exchanges of property under court supervision. (Cal. Prob. Code § 10403.) This includes listing the property, using a broker, and even determining the price. An administrator must give notice of any sale taking place to the devisees or hairs who are affected by the sale. (Cal. Prob. Code § 10580.)

These heirs may object to the sale occurring or requesting it be done under court supervision. (Cal. Prob. Code § 10589.) If no objection is made, then the sale of the property will proceed to escrow.

Sale of real property may be part of distribution. This is the final stage of the probate process where shares are divided up and delivered based on intestate succession. Individual assets must be appraised and inventoried. (Cal. Prob. Code § 8800.) beneficiaries and heirs can stake their claim at this time to portions of the property which may result in disputes. (Cal. Prob. Code § 11700.) 

What are some examples of how intestacy works?

For example, if Julie and Shawn are siblings and their mother passes away without a will, their mother died intestate. This means the probate court will determine how their mother’s assets will be distributed in accordance with California’s Probate Code.

If their mother was survived their father, it is likely her assets would go entirely to Julie and Shawn in equal parts. If their father was still alive any community property (property held during their marriage) would be split with 50% going to Julie and Shawn’s father and 50% going to Julie and Shawn. 

Once the court determined the appropriate order and amount of distribution the court would appoint an administrator to transfer this property. This could be Julie or Shawn or a third party if they so requested. 

If their mother had any remaining debts those would need to be paid off prior to distribution. All property would need to be inventoried and appraised. If the assets at issue were personal property like money, they could easily be divided. Ownership interests in real property would also be passed to the appropriate heirs. For example, if their mother left Julie and Shawn the family home it would likely be distributed in equal shares giving Julie and Shawn a half interest each in the home. 

If Julie or Shawn wanted to take issue with how any of the property was divided, they would need to raise this with the court before distribution occurred. Following this distribution, Julie and Shawn may disagree on what to do with the family home and could undertake a partition action to dispose of the property or remove their interests from the home. 

Alternatively, if their mother died intestate and had no surviving relatives come forward to commence probate proceedings the attorney general could bring an action to vest title to her assets in the state. This would pass all assets to the state. If Shawn or Julie realized this happened without them knowing they would have five years to bring a claim to the property and have it distributed to them instead of going to the state. 

Conclusion

If there is disagreement among heirs as to what to do with real property after intestate distribution, at Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

Under California law, co-owners of property who cannot agree on how to divide or manage their co-owned property have an absolute right to partition, which could result in the property’s forced sale. Generally, partition actions can’t be stopped without a valid waiver, however, co-owners can avoid, and even stop, partition proceedings in some circumstances using waivers, buyout agreements, mediation, or other settlement options. Understanding the partition alternatives available to you as a co-owner of shared property can help prevent the disruption and financial strain accompanying forced sales of property. 

What is a Partition Sale?

Partition Sales are the legal process designed to sell co-owned property in the most equitable manner possible. Procedurally, partitions are the laws favored remedy for segregating and terminating common interests in the same parcel of land. (Summers v. Superior Court (2018) 24 Cal.App.5th 138.) Typically, partition sales occur when co-owners of property, often family members, business partners, or unmarried couples, cannot agree on how to manage or divide the property. 

California law favors partition in kind over partition by sale because partition in kind preserves the existing form of ownership and avoids forcing sales against a co-owner’s will. (Williams v. Wells Fargo Bank & Union Trust Co., (1943) 56 Cal.App.2d 645.) Courts order partition by sale when partition in kind would inflict “great prejudice” on the co-owners as a group. (Ibid.) 

Avoiding a Court-Ordered Partition

Generally, once partition actions have started, they cannot be stopped, unless there is a valid waiver or other agreement between co-owners exists allowing them to do so. 

Because California law favors partition in kind, co-owners can attempt to oppose a sale by presenting evidence showing the property can be practically divided among co-owners without a significant loss in value. 

Co-owners may negotiate an agreement to avoid formal partition actions by agreeing to a private buyout, physical division of the property, or other outcomes so long as all co-owners agree. When co-owners cannot agree, mediation may facilitate settlement negotiations. In fact, some states mandate appointment of a mediator to assist in settlement negotiations or partition of interests and rights. 

If, however, mediation fails, parties can proceed with the partition by sale. (Sekaquaptewa v. MacDonald, (1978) 575 F.2d 239.) California law does not mandate mediation in disputed partition actions. 

Waiver

Proof of waiver, either explicit or implied, is the most effective means of stopping or avoiding a partition sale. Under California law, the right to partition is absolute, but can be waived. (Code Civ. Proc., § 872.710(b); Orien v. Lutz, (2017) 16 Cal.App.5th 957.) Thus, co-owners may argue that the right to partition was waived. (LEG Investments v. Boxler, (2010) 183 Cal.App.4th 484.) The burden of proof belongs to the party seeking to invoke the waiver, meaning they must prove the waiver’s existence by clear and convincing evidence. (Id.)

Accordingly, waiver must be proven by clear and convincing evidence of the waiving party’s intentional relinquishment of their known right to partition after obtaining full knowledge of the facts. (City of Ukiah v. Fones (1966) 64 Cal.2d 104.) If the party seeking to invoke the waiver fails to satisfy their burden or otherwise leaves the court with doubt surrounding the waiver, the court will find no waiver exists. (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1.) 

Courts hesitate to find valid waivers of the right to partition because co-owners rarely execute formal written agreements that unambiguously document their waiver. As such, cases that find a valid waiver most often include a written agreement or knowledge of a prior agreement that waives the right to partition. (Pine v. Tiedt (1965) 232 Cal.App.2d 733.) Therefore, temporary or implied waivers are unenforceable unless they are for a specific, clear, and “certain period of time.” (Ibid.) 

Right of First Refusal

Agreements including Rights of First Refusal may imply a waiver of the right to partition among co-owners. (LEG Investments v. Boxler, (2010) 183 Cal.App.4th 484.)  A Right of First Refusal requires the selling owner to offer their interest to their co-owners before a partition can occur. (Ibid.) If their co-owners decline or fail to act on the offer within a reasonable time, the selling owner may proceed with the partition sale. (Ibid.) 

Whether the right of first refusal clause is considered an express or implied waiver of the right to partition is dependent on the clause’s specific language. For example, in LEG Investments v. Boxler, a right of first refusal clause included in a tenancy in common agreement was not an express contractual wavier of the co-owners right to partition because it did not mention “partition” or “waiver.” ((2010) 183 Cal.App.4th 484; Code Civ. Proc., § 872.710(b).) The same agreement, which gave rights of first refusal in property held by a tenancy in common, did, however, imply an agreement between co-owners to not bring a partition action instead of selling the property to co-owners first. (Ibid.)  

Buyout of Co-Owners

Similarly, the Partition of Real Property Act (“PRPA”) provides additional procedural safeguards for partition actions filed after January 1, 2023. These additional safeguards include valuation and buyout options to protect co-owners from forced sales while encouraging negotiation and resolutions that do not involve the property’s sale. 

Under the PRPA’s buyout provision, if a co-owner requires a partition by sale, the other co-owners can avoid the sale by buying out the interest belonging to the co-owner seeking the sale. (Code Civ. Proc., § 874.317.) Under California law, a determination of the property’s value must be made before the court may notify the co-owners of their ability to buyout the requesting party’s interest. (Ibid.) If no co-owner exercises the buyout option within 45 days, the partition action continues. (Ibid.) 

What is an Example?

“Shawn” and “Julie,” an unmarried couple, purchased a home together in California. Shawn and Julie purchased the home together as joint tenants, meaning they each have equal ownership of the home. Over time, Shawn and Julie each contribute to the home’s mortgage payments, necessary maintenance, and improvements. 

After several years, Shawn and Julie break up and no longer want to live together, but they have differing opinions on what to do with the house. Shawn wants to sell the house and split the profits equally, while Julie wants to keep the house. Shawn refuses to consider a partition in kind, because the property is a single-family home, and he does not want to continue living with or near Julie.  

Shawn and Julie cannot reach an agreement, and Shawn begins considering a court-ordered sale. So, Julie hires out an independent appraisal of the property to determine its fair market value and offers to buyout Shawn for his share of the home’s fair market value. Shawn accepts Julie’s offer, ultimately allowing Shawn and Julie to avoid a forced partition sale entirely. Now, Julie can keep the house, and Shawn can walk away from the relationship and house with his monetary share of the house’s value, allowing them both to have their desired outcome. 

Conclusion

Forced sales of property are disruptive and financially burdensome. When physical division of land through partition in kind is impossible, negotiating a buyout, exercising a right of first refusal, or invoking a valid waiver, may be the only way to avoid a forced sale. The Underwood Law Firm has a team of experienced lawyers who can help guide you through complicated legal matters like partition. We are here to help. 

An executor is someone appointed to manage a person’s estate once they pass away and ensure assts and property are given to the appropriate people. Because of the power they have, they must abide by their duties to the estate. Otherwise, they may be liable for their misconduct. 

What qualifications must an executor have?

An executor acts as a personal representative of an estate. (Cal. Prob. Code § 7660.) They are usually appointed by the decedent to carry out the terms of the decedent’s will. If the decedent dies intestate a person will be appointed as an administrator, but these administrators are often considered along with executors regarding their responsibilities as personal representatives. 

An executor takes possession and control of the estate and distributes its assets to the beneficiaries. (Estate of Gerber (1977) 73 Cal.App.3d 96, 110.) To be an executor, the person must be above the age of majority and able to execute the duties of the office, meaning they are not incapacitated. (Cal. Prob. Code § 8402.) If they do not adhere to their duties, like fiduciary duties, they can be removed by the court or their appointment to be executor may be denied. (Cal. Prob. Code § 8502, 8402, 9601.) 

As an executor the appointed person must properly manage the funds within the estate and ensure they are completing any necessary acts in a timely manner. Any heirs of the estate or any other interested party may petition the probate court for removal of the executor if they think the executor is engaging in misconduct. (Cal. Prob. Code § 8500.) An executor is usually entitled to a statutory fee but that compensation may be limited or barred if there is any fault, mismanagement, or other misconduct by the executor. (In re Fulmer’s Estate (1928) 203 Cal. 693, 702.)

What does an executor committing fraud look like?

For an executor or other representative to have committed fraud in relation to the estate it does not just need to be actual fraud in a money or assets context, they can also be liable for constructive fraud. Actual fraud might look like trying to send estate funds out of the jurisdiction to prevent creditors from accessing them. (Estate of Gainfort (1938) 11 Cal.2d 298, 300.) It may also be the executor leveraging their position to get money or property from the estate. (Estate of Kromrey (1950) 98 Cal.App.2d 639, 645.) 

Constructive fraud may be less money focused. For example, the decedent’s widow could try to become a representative of his estate even while she was actually married to someone else at the time of her marriage to the decedent. (Estate of Tersip (1948) 86 Cal.App.2d 43, 48.) Under actual or constructive fraud, a court may remove the administrator. Fraud may also expose the executor to charges for embezzlement. (Cal. Penal Code § 506.)

For example, Julie is appointed as the executor of her friend’s estate. Shawn is designated as a beneficiary of this estate. If Julie was trying to use her position as an executor to take money from the estate or trying to avoid the estate having to pay off her friend’s debts Shawn could bring an action against her for actual fraud. 

If Shawn and Julie were estranged siblings, Shawn may allege constructive fraud if he felt Julie was using her position as executor to disadvantage him as a beneficiary. 

If Shawn was successful in bringing a claim against Julie for actual or constructive fraud she would be removed as the executor.

What does an executor neglecting the estate look like?

An executor or representative may also be removed for neglecting the estate. For example, failing to file inventory of the estate over several years may cause removal. (Estate of Richardson (1946) 74 Cal.App.2d 350, 351.) Similarly, not providing an account of the estate may allow removal of the executor. (Gross v. Needham (1960) 184 Cal.App.2d 446, 462.)

Neglect may also look like the executor delaying their compliance with other obligations. If an executor does not comply with the probate court’s order regarding the administration of the estate, they may be removed. For example, the failure to comply with a court order to sell property for 15 years leading to its decline in value was grounds for removal. (Estate of Sapp (2019) 36 Cal.App.5th 86, 106.) A mere delay is not enough to remove an executor as they benefit from the presumption that their conduct was fair, and they faithfully performed their duties. (In re Buchman’s Estate (1954) 123 Cal.App.2d 546, 554-555.) So, where a delay in hope of discovering additional assets did not cause significant loss to the estate an executor would not necessarily be removed. (Estate of Meyers (1955) 130 Cal.App.2d 145, 150.)

For example, Julie is the executor. Before her passing her friend informed Julie she wished to sell her home and have the proceeds distributed among the estate’s beneficiaries. If Julie put off selling the home that significantly decreased the home’s sale value, she could be found in breach of her duties as a trustee. As a beneficiary, Shawn could bring an action against her for these lost profits as well as for her removal. 

How might the sale of estate property cause an executor’s removal?

A refusal to sell property in the estate may be grounds for removal. For example, where the main asset in an estate is the decedent’s home and the executor failed to perform the sale can be considered the executor acting in their own personal interest and is grounds for removal. (In re Estate of Feeney (1983) 139 Cal.App.3d 812, 820-821.) This is significant because many individuals’ wealth is centered around property, specifically their residence. Ensuring the property is properly sold or handed off is thus a very important duty for an executor. 

This duty also applies when the property is ordered to be sold by court order. For example, a property was to be sold pursuant to a contract and the sale was confirmed. (Harm v. Frasher (1960) 181 Cal.App.2d 405, 423.) However, the executor refused to execute and deliver the necessary documents. (Id.) This caused the executors to be personally liable because of their refusal to carry out the sale. (Id.)

An executor may also be liable if any of the property’s value is lost through neglect to pay taxes or otherwise ensure the property does not lose value prior to sale. (In re Estate of Harteman (1887) 73 Cal. 545, 546.) 

If the executor were to fraudulently sell property of the estate against statutory provisions governing the probate process, they will be liable for double the fair market value of the property sold. (Cal. Prob. Code § 10381.) This allows a beneficiary to bring an action against the executor for these liquidated damages.

For example, Julie is the executor and Shawn is the beneficiary. If Julie refused to sell the decedent’s home Shawn could bring an action against her both to compel the sale and to remove her as the executor. Julie would be personally liable for failing to carry out the sale, not the estate. 

If Julie tried to sell the property to herself under an alias or through someone else that could be considered a fraudulent sale. She may be liable then for double the fair market value of the property and would be removed. 

When can an executor be removed for acting self-interested?

An executor may also be removed for acting in their own interests. For example, a beneficiary may seek to remove an executor when they fail to file an inventory and use estate assets for things like personal travel expenses. (Estate of Hammer (1993) 19 Cal.App.4th 1621, 1637-1638.) Specifically, the named executor was the estranged husband of the beneficiary. (Id.) The executor engaged in litigation against the beneficiary both causing a serious conflict of interest but also allowing him to exploit his position as an executor. (Id. at 1642.)

If the executor used the property of the estate for their own purposes, they may be surcharged on the final account for loss of the property and interest on its value. (In re McSweeney’s Estate (1954) 123 Cal.App.2d 787, 792-793.)

For example, Julie is the executor and Shawn is the beneficiary. Julie would need to provide an account of the estate assets upon Shawn’s request. Failure to do so repeatedly may be grounds for her removal as Shawn would have no way of knowing how she is managing the estate and if she is doing so properly. 

If Julie and Shawn or other beneficiaries had a strained relationship the beneficiaries could raise their concerns about there being a conflict of interest. However, they would need to show actual evidence of Julie’s conduct showing a conflict of interests.

Conclusion

As an executor, if an estate is requiring you to manage real estate or you are a beneficiary and want to dispute your claim to real estate, we may be able to help. Ensuring no executor misconduct is occurring ensures this property is dealt with properly. If you want to pursue a partition action for estate property, at Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

A self-directed individual retirement account (IRA) is an option as an individual retirement account that allows for more investment options than a traditional IRA-type account. If concerns arise surrounding your IRA, you may need to bring a lawsuit. As an owner or investor in that account you are able to. 

What is a self-directed IRA?

A self-directed IRA is a retirement account structured like a Roth IRA or other traditional IRA. A self-directed IRA allows alternative investments like real property or cryptocurrency.

A self-directed IRA may be used to buy investment real estate because the income earned from that property is not subject to tax until the IRA owner begins receiving distributions. 

A self-directed IRA cannot be used to purchase property that you yourself own as the account holder. This means an IRA should not be used to purchase a vacation home or primary or secondary residence. 

Real estate sales must be done at an arm’s length so no self-dealing or personal transactions can be made without being taxed. 

An owner can decide how assets are invested, and assets can be invested into a single member LLC. (McGaugh v. Commissioner, T.C. Memo. 2016-28, at *9, aff’d, 860 F.3d 1014 (7th Cir. 2017) citing Swanson v. Commissioner, 106 T.C. 76 (1996).) 

Who can file a lawsuit on behalf of a self-directed IRA?

The owner of a self-directed IRA can sue on their own behalf. This means the plaintiff in such a lawsuit is a real party in interest not the custodian. A custodian is considered uninterested for the purposes of a self-directed IRA because they cannot give advice to the owner or investor. (Deem v. Baron (2016) 2:15-CV-00755-DS.) 

So, to bring a lawsuit on behalf of a self-directed IRA, the person must have some sort of interest in the account. 

Owners and spouses of owners may have the ability to bring suit in the name of the self-directed IRA as to how the borrower of their funds in those accounts was defaulting in payments to investors. (Brown v. California Pension Administrators & Consultants, Inc. (1996) 45 Cal.App.4th 333, 337–338.)

Taxpayer claims for a self-directed IRA

If the holder of a self-directed IRA engages in a prohibited transaction, that ends the IRA and leads to a distribution of everything in the IRA which is taxable. Often through having to pay taxes on distributions from a self-directed IRA, those owner taxpayers will bring suit for their IRA account. These cases are brought in tax court. For example, the owner of an account may dispute the funds as being non-taxable. (Thiessen v. Commissioner of Internal Revenue (T.C. 2016) 146 T.C. 100, 101-102.)

This may arise when a transaction occurs, and the custodian improperly reports it as taxable. For example, the account holder can on behalf of the IRA trustee (or custodian) ensure a check is delivered like a conduit will not make that transaction into one that would result in a distribution. (Ancira v. C.I.R. (T.C. 2002) 119 T.C. 135, 138–139.) This is the same type of behavior like an IRA account holder requested the custodian buy stock on his behalf and requested the custodian initiate a wire transfer for this purpose. This was not a distribution to the account holder, and to the extent he had control over the wired funds he was acting as a conduit for the custodian. (McGaugh v. Commissioner of Internal Revenue (T.C. 2016) 111 T.C.M. (CCH) 1116, aff’d (7th Cir. 2017) 860 F.3d 1014.)

An owner may not have “unfettered command” over the IRA assets without tax consequences. For example, where an owner had control over collectible coins those were considered taxable IRA distributions. (McNulty v. Commissioner of Internal Revenue (T.C. 2021) 157 T.C. 120, 127–129.) Similarly, where real estate is titled in an owner’s name that is considered a taxable distribution. (Dabney v. Commissioner, T.C. Memo. 2014-108.) But an owner can dispute these in court.

What is an example of what such a lawsuit might look like?

For example, Julie opens a self-directed IRA and wants to invest in real estate with her account. The custodian for this account, which is the bank where she opened this account, is Bank of the North. Julie may bring a suit on behalf of this account as she invests in it. If Julie was married, her spouse could bring a suit with her on behalf of their individual accounts. If Julie designated a beneficiary of the IRA besides herself, that beneficiary would have an interest in the IRA and thus could bring a lawsuit on behalf of the account.

Because the custodian does not offer advice, even though the custodian “holds” the account, Bank of the North could not bring a suit on behalf of the IRA.

If the self-directed IRA was used for real estate (like commercial real estate) and the IRA was used for a partnership, it is possible the other partners could bring a lawsuit on behalf of the IRA. This is because through the use of the IRA in a partnership, Julie and the partners now all have an interest.

If Julie had bought real estate through her self-directed IRA and held title through that IRA or as an agent of the IRA, she would be an owner of the real estate, entitling her to partition. (Lawrence v. American IRA, LLC (N.D. Ga., Nov. 26, 2014, No. 1:12-CV-2209-JSA) 2014 WL 11728723 [an agent or owner of an IRA can allege quiet title for IRA real estate]. 

Where an IRA and those future interests can be subject to partition, real estate interest held in an IRA should be subject to partition as well. (Simm v. Ameriprise Financial, Inc. (La. Ct. App. 2022) 360 So.3d 498, 499-501.) If the property at issue is subject to an equitable mortgage under the self-directed IRA, it may be partitioned. (Deem v. Baron (D. Utah, Jan. 10, 2020, No. 2:15-CV-00755-DS) 2020 WL 114138.) 

So, if Julie wishes to dispose of a property associated with a self-directed IRA, she should be able to through a partition action. 

Conclusion

If your interests in a property are associated with a self-directed IRA account, those funds may come into play in a partition action. If you want to pursue a partition action for self-directed IRA property, at Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

1031 exchanges are a real estate tax break that allows commercial property sellers to exchange a business, trade, or investment property for another, like kind, property while deferring capital gains tax on the sale. Without this tax break, sellers must pay capital gains tax at the time of sale. California law does not require the 1031 exchange be in the same state, however, California does have a “claw back” provision that could ultimately lead to owing the deferred taxes. Understanding what 1031 exchanges are, how they work, and how California law differs from other states is crucial to ensuring you access every benefit of the tax break without incurring avoidable costs. 

What is a 1031 Exchange?

By definition, a 1031 Exchange allows taxpayers to defer recognition of capital gains or losses on the exchange of real property kept for productive use in a business or trade investment, so long as the property is of “like kind.” (26 U.S.C.A. § 1031.) Productive use is defined broadly and generally includes any property held for profit. Like kind exchanges are rooted in the idea that one investor who exchanges a piece of property for another of “like kind,” is merely continuing an ongoing investment instead of cashing out one investment to obtain another. (Starker v. United States (9th Cir. 1979) 602 F.2d 1341, 1352.) 

Eligibility for a 1031 Exchange is dependent on the exchange’s timeline and the Same Taxpayer Rule. To qualify, the replacement property must be identified within 45 days, and the exchange must be completed within 180 days of the relinquished property’s transfer. (26 U.S.C.A. § 1031.) The exchange must involve real property kept for productive use in a business, trade, or for investment, and cannot involve property held primarily for sale. (Ibid.) Under the Same Taxpayer Rule, the seller of the relinquished property must be the same individual buyer the replacement property. Failing to comply with either the statutory timeline or Same Taxpayer Rule disqualifies parties from receiving the tax break benefit.

1031 Exchanges may also require an exchange facilitator. Exchange facilitators are persons who facilitate the exchange of like kind property, for a fee, by acquiring the taxpayer’s relinquished property and then transferring the replacement property to the taxpayer as a qualified intermediary or as an exchange accommodation titleholder, qualified trustee or qualified escrow holder, as agreed. (26 U.S.C.A. § 5603(d).)

Special Rules for Relatives & Disregarded Entities

Special rules govern exchanges between related parties where the nonrecognition of gains or losses may be denied if the related party disposes of the property within two years of the initial exchange. (26 U.S.C.A. § 1031.) These special rules are designed to prevent taxpayers from using related parties to cash out investments while still receiving the benefits of the nonrecognition treatment. 

Similarly, 1031 exchanges may occur between multiple entities. Generally, the Same Taxpayer Rule requires the seller of the relinquished property be the same as the buyer of the replacement property for the seller’s capital gains to transfer to their new property. When title is held by multiple entities this rule is violated, however, the IRS’ Regulations provide an exception called Disregarded Entities. 

Disregarded Entities are entities that are separate from its owner(s) but chooses to be disregarded as an entity separate from its owner for tax purposes. (Regs. § 301.7701-3(a).) Under this exception, the disregarded entity’s activities are treated in the same way as a sole proprietorship, branch, or division of the owner. Business entities that are not corporations and have a single owner are generally always disregarded as a separate entity from its owner for federal tax purposes. (PLR 200131014.) In short, disregarded entities can exchange property between themselves as if they have a single owner. 

The IRS’ Disregarded Entity exception even allows entities owned by a husband and wife as community property in California to be treated a single owner disregarded entity. In this setting, the IRS created a three-part test to determine whether entities qualify as disregarded entities when owned as community property by a husband and wife. The test requires that: 

“(1) The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States;

(2) No person other than one or both spouses would be considered an owner for federal tax purposes; and 

(3) The business entity is not treated as a corporation under § 301.7701-2.” (Rev. Proc. 2002-69.) 

Additionally, the test requires that the entity not be a corporation and that taxpayers did not design the entity as an association that would pay its own taxes. If the entity is either of these, they are disqualified from receiving the disregarded entity treatment and cannot participate in a 1031 exchange. (Cal. Code Regs., tit. 18, § 23038(b)-3.) 

Delayed Exchanges

Delayed 1031 exchanges, commonly known as deferred exchanges, allow taxpayers to defer capital gains taxes on an investment property’s sale by directly reinvesting sale proceeds into a like kind property. Here, taxpayers must use qualified intermediaries to facilitate the exchange. The intermediary is responsible for holding the relinquished property’s sale proceeds and using them to purchase the like kind replacement property. (Silver State Broadcasting, LLC v. Beasley FM Acquisition (2015) 148 F.Supp.3d 1132, 1136.)

Successful delayed exchanges require: 

1. an exchange agreement with a qualified intermediary stipulating the qualified intermediary will receive and hold the sale proceeds until the replacement property can be purchased. 
2. The replacement property must be identified within 45 days of the relinquished property’s sale and title transfer. Additionally, the three rules of identification must be met.
   1. Three Property Rule: A maximum of three replacement properties may be identified without considering fair market value. 
   2. Two-Hundred Percent Rule: The fair market value of all identified replacement properties cannot exceed 200% of the relinquished property’s aggregate fair market value. 
   3. Nine-Five Percent Exception:  The replacement properties may be identified without considering their combined market value if the acquired properties amount to at least 95% of all identified properties’ fair market value by the end of the exchange period. 
3. Lastly, the replacement property must be acquired within 180 days of the relinquished property’s transfer. (26 C.F.R. § 1.1031(k)-1.)

Taxpayers cannot take possession of the relinquished property’s sale proceeds at any time during the exchange. If the taxpayer takes possession of the sale proceeds or consideration at any time during the exchange, before receiving the like kind replacement property, the transaction is treated as a sale and the taxpayer recognizes gain or loss. (26 C.F.R. § 1.1031(k)-1.)

California Law’s “Claw Back” Provision

California law generally aligns with federal law governing 1031 exchanges; however, California law differs in one main way: the “clawback” provision. California’s claw back provision ensures California can collect taxes on gains from real property transactions, including 1031 exchanges with seller financing, when the transactions do not meet the requirements necessary for tax deferral. Under the provision, the deterred gain of failed 1031 exchanges is subject to California taxes, effectively “clawing back” the deferred tax benefit. 

The provision provides that the intermediary or accommodator notify the Franchise Tax Board of any 1031 exchange that does not qualify for nonrecognition treatment for California income or franchise tax purposes. (Rev. & Tax Code, § 18662.) The intermediary must give notice within 10 days of the statutory periods’ expiration and remit any applicable withholding amounts. (Ibid.) 

The provision additionally specifies that in case of an installment sale, the withholding requirements apply to each principal payment made under the installment sale agreement’s terms. (Ibid.) For seller-financed transactions, this means the withholding obligations are spread out across installment payments that allow the state to collect taxes on the gain as it is realized. 

What is an Example?

“Shawn” and “Julie” co-own rental property in Southern California, they purchased together several years ago. Shawn and Julie originally bought the property for $500,000.00, and it is now worth $1,000,000.00, so they have a combined capital gain of $500,000.00. 

After several years, Shawn and Julie’s business relationship deteriorates. As a result, Julie wants to reinvest her share of the property’s sale into another rental property, but Shawn wants to sell the property and take the proceeds in share to fund another venture, without Julie. 

Julie suggests doing a 1031 exchange to defer taxes on their capital gains. Shawn is open to the exchange but will only agree if Julie agrees to sell the property so that he can cash out his portion of the profits immediately. Julie, however, wants to use the full $500,000.00 from her half of the sale proceeds to purchase another “like-kind” investment property in Southern California. Shawn’s desire to cash out his portion of the sale proceeds means his portion won’t qualify for the 1031 exchange. 

Unable to agree, Shawn and Julie partition the property. As a result, Julie receives her portion of the sale proceeds to purchase a like kind replacement party in Southern California and benefits from the 1031 exchange by deferring taxes. Meanwhile, Shawn cashes out his portion of the sale proceeds and immediately faces the tax burden of his portion. 

Conclusion

A 1031 exchange is a valuable strategy that allows investors to defer capital gains taxes on real estate transactions by reinvesting the proceeds into a like-kind property. If property ownership is a point of contention, partition may be a solution. The Underwood Law Firm has a team of experienced lawyers prepared to help you navigate your partition action efficiently and with care. We are here to help. 

A trust is unlike a will or other similar document as it does not need to go through the probate process. Because it is exempt from probate proceedings, a trust does not become a public record. This is an issue when trying to locate the original trust document.

What is a trust?

A trust is assets and liabilities held by a trustor, the person who creates the trust, and transferred to a beneficiary through that trust.” (Portico Mgmt. Grp., LLC v. Harrison (2011) 202 Cal.App.4th 464, 473.) The trustor holds legal title to the property in a trust before it passes to the beneficiary. This trust must be administered by a trustee who ensures the property and assets are distributed according to the trustor’s wishes. (Higgins v. Higgins (2017) 11 Cal.App.5th 648, 662.) This is important because a trust is usually set up to be administered following the trustor’s death. 

If the trust is established during the trustor’s lifetime, the trust property remains the trustor’s property up until their death. (Estate of Giraldin (2012) 55 Cal.4th 1058, 1065-66.) This form of trust is a revocable inter vivos trust which allows the trustor to alter the trust and its beneficiaries while they are still alive. The trust then becomes finalized and irrevocable after the trustor’s death. 

This type of trust is administered by the trustee following the trustor’s death. This is done privately, without going through probate. As such, it is on the trustee to locate the trust document if they are not already in possession of it. The beneficiaries will then be notified and receive a copy of the trust when the trust is administered. 

When can you locate a trust through public record?

Testamentary Trust

A testamentary trust is created by a trustor’s will. A will is admitted to probate court to go through the probate process. The court will order the trust to be established, making it public record. The court will confirm its validity, scope, and interests passing to the trustee. (Wells Fargo Bank & Union Trust Co. v. Superior Court (1948) 32 Cal.2d 1, 8.) This trust will then supersede the terms of the will. Similar to an inter vivos trust, the testamentary trust designates a trustee to administer it. (In re Callnon’s Est. (1969) 70 Cal.2d 150, 156.)

The probate process makes the trust public record and thus easily discoverable. If you know someone had a will and think that will created a trust, you can check through public court records for more information regarding the associated probate proceedings.

Trustee Misconduct

Trusts create a fiduciary duty in the trustee. (Hearst v. Ganzi (2006) 145 Cal.App.4th 1195, 1208.) A trustee is necessary to administer trusts because their fiduciary relationship with the property prevents the trust from being sued or holding title to property. (Greenspan v. LADT, LLC, 191 Cal.App.4th 486, 521.) The trustee must adhere to their duties and specific fiduciary duty to administer the trust properly. A trustee is required to serve beneficiaries and heirs with notice of the trust. (Cal. Prob. Code. § 16061.7.) This means they must serve notice when the trust is being administered or when the trust becomes irrevocable. 

A beneficiary concerned about how a trustee is administering the trust can bring a claim for trustee misconduct if they feel the trustee has breached any of their duties. (Triplett v. Williams (1969) 269 Cal.App.2d 135, 137-138.) This type of claim, like all court claims, would become public record. By association the trust’s existence would become public record.

Trust Involving Real Estate

When putting property like a home in trust, the trustor must transfer title to the property to the trustee. This is done by a deed which is recorded in the county recorder’s office. The deed designates the trustee and the beneficiary. (Gov. Code, § 27321.5.) After the trustor’s death, the trustee would then transfer the title again to the proper beneficiary or beneficiaries.This deed is required to prove ownership and is usually recorded. Because deeds are usually recorded, the trust deed can be found through your county recorder’s office. 

When might a court inform you a trust exists?

The court can also create trusts known as resulting trusts and constructive trusts. (Kenneally v. Bank of Nova Scotia (2010) 711 F.Supp.2d 1174, 1190.) In the case of a resulting or constructive trust because they are imposed by the court for equitable reasons there is no need or requirement for a trust document. (Martin v. Kehl (1983) 145 Cal.App.3d 228, 238.) Under these types of trust the court will identify and enforce beneficial rights and the trustee is only expected to hold onto and then convey the property. (Haskel Engineering & Supply Co. v. Hartford Acc. & Indem. Co. (1978) 78 Cal.App.3d 371, 375, 378.) This is more passive than a regular trust. In finding the existence of such an involuntary trust, you would receive notice through the court proceedings whether you are the trustee or beneficiary. If you are an unrelated third party, you could find this trust through public court records.

What are some examples of how you might locate a trust?

For example, Julie was designated as the trustee for the trust. She needs to do her best to locate this trust document so the trust can be distributed in accordance with her duties. As the trustee, Julie likely met with the trustor before their death and knew who helped draft the trust document and where it was located. If she did not, she would need to ask other relatives of the trustor about the document’s location or ask anyone who helped draft it like a notary or attorney. 

If Julie knew the trust included real estate, she could look for evidence of the trust in public record by checking with the county recorder office for the deed.

Alternatively, Shawn is the son of the grantor. He has suspicions that there was a trust he is a beneficiary of, and remembers his father, the grantor, making comments about it before his death. Shawn could undertake the same steps as Julie to find the document. 

However, because he is a beneficiary, if the trust is administered properly, he will get a copy of the trust document and have what he is entitled to under the trust distributed to him. Shawn could only get a copy of this document after his father’s death. 

Conclusion

If you think there might be a trust entitling you to real estate or you are a beneficiary and want to dispute your claim to real estate we may be able to help. If you want to partition trust property we can help. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

Step 1: Commencing the Partition Action

Partition is an absolute right, meaning, any co-owner of property can initiate a partition action, including owners of inherited estates or life estates. (Formosa Corp. v. Rogers (1951) 108 Cal.App.2d 397; Code Civ. Proc., § 872.210.) 

To officially commence the action, the party seeking to partition the property must file a complaint in the appropriate court. Complaints must include a description of the property to be partitioned, the interests of all involved parties, and a request for the court to partition the property. (Code Civ. Proc., § 872.210.) 

Step 2: Interlocutory Judgments

Interlocutory judgments are temporary judgments ordered before the end of trial, during the case’s litigation. The court will issue an interlocutory judgment if it finds that the plaintiff is entitled to partition. Interlocutory judgments determine the parties’ interests and order the property’s partition. (Code Civ. Proc., § 872.720.) As such, applicant co-owners must establish their right to partition, 

Now, the plaintiff must properly give notice. The Partition of Real Property Act allows various forms of service. For example, party’s seeking an order of notice by publication must post a conspicuous sign on the property within 10 days of the court’s determination. This posting must state that a partition action has commenced, and provide the court’s name and address, as well as the property’s common designation. (Code Civ. Proc., § 874.314.) 

Plaintiffs may also file a notice of pendency action, called a lis pendens, to provide public notice that the property is now subject to a partition action. (Code Civ. Proc., § 872.210.) 

Step 3: Appointing a Partition Referee

Generally, courts appoint partition referees after they have issued an interlocutory judgment granting the partition. Partition referees are neutral, court-appointed, third parties who are accountable to the court in overseeing and facilitating the partition process. (Code Civ. Proc., § 873.510.) In some cases, parties may nominate a partition referee if all parties agree with the nomination. (Code Civ. Proc., § 873.040.) Courts, however, retain discretion to appoint referees, meaning courts may refuse to appoint the parties’ nomination. Courts may even refuse to appoint a referee entirely if they believe the partition action is too simple, such as the property’s partition is undisputed. 

Once appointed, referees must complete, and file with the court, a report describing the property and their recommendations for its partition. (Code Civ. Proc., § 873.280.) In fulfilling their role, referees “…may perform any acts necessary to exercise the authority conferred” to them by court or California law upon appointment. (Code Civ. Proc., § 873.060.) 

Step 4: Electing the Method of Partition

Courts may determine the method of partition during the interlocutory judgment stage, or a later time in proceedings. Typically, courts determine the method of partition after the referee has filed their report. 

Courts most often order one of three kinds of partition: (1) Partitions in Kind; (2) Partitions by Sale; or (3) Partition by Appraisal. Ultimately, the method of partition chosen depends on what method is more equitable to all involved parties. 

A Partition in Kind is the process of physically dividing property among co-owners. In kind partitions are the process favored by law, as they avoid forcing co-owners to sell property against their will. Courts determine whether a partition in kind is equitable by considering whether the partition is practical and whether physically dividing the property would result in a substantial decrease of the property’s fair market value. (Code Civ. Proc., § 874.319; Williams v. Wells Fargo Bank & Union Trust Co., (1943) 56 Cal.App.2s 645.) Courts will additionally consider other relevant factors to determine whether partition in kind would inflict great prejudice. These factors include any co-owner’s sentimental attachment, the current lawful use of the land, the extent of each co-owner’s contributions to property expenses, and any evidence of the co-owners’ collective ownership duration. (Ibid.) Ultimately, the co-owner seeking the sale bears the burden of proving partition in kind would inflict great prejudice on the parties. (Sting v. Beckham, (1949) 94 Cal.App.2d 823.) 

Partition by Sale results in the property being sold, and the sale proceeds being divided equitably among co-owners, to avoid inflicting great prejudice on the parties. (Cummings v. Dessel, (2017) 13 Cal.App.5th 589; Code Civ. Proc., § 872.820.)

Before ordering a sale, courts may allow co-owners to buy-out the interests of those co-owners seeking partition by sale. (Code Civ. Proc., § 874.820.) This buy-out option is called Partition by Appraisal. Partition by Appraisal is used when physical division is inequitable or otherwise impossible, and sale would result in the unwanted loss of property or tax liability. (Cummings v. Dessel, (2017) 13 Cal.App.5th 589.) This process requires courts to order an appraisal that establishes the property’s fair market value, before presenting parties with the buy-out option. (Code Civ. Proc., §§ 874.316; 874.317.) Co-owners can object to the appraiser’s valuation and offer additional evidence they believe is more indicative of the property’s actual value. (Code Civ. Proc., § 874.316.) 

Step 5: Final Judgment and Accountings

Courts order a final judgment of partition to officially partition the subject property in the manner determined to be the most equitable under the circumstances. In this step, the final judgment specifies the manner of partition and any necessary accounting measures. 

An accounting ensures that the partition is just and results in each co-owner receiving the proportional value to their ownership interests. In partitions by sale, an accounting must occur after the property is sold, and ensures the proceeds are split according to each co-owner’s expenses, meaning it accounts for any additional contributions one co-owner may have made over the other. (Code Civ. Proc., § 874.318.) 

What is an Example?

“Shawn” and “Julie” are siblings who inherited their childhood home in California when their parents died. Julie is emotionally attached to the home and wants to keep the property as an Airbnb and vacation home. Shawn, however, refuses, and seeing the home as nothing but a massive expense, wants to sell. 

Refusing to compromise with Julie, Shawn files for partition by sale in their local California Court. The court grants Shawn’s petition because the siblings disagree, and the property cannot be fairly divided into two usable parts. As a result, a court-appointed referee lists the property for sale and accepts the highest bid. Then, the property is sold, and the court approves the sale and each party’s final accounting before dividing the sale proceeds accordingly. Once the sale proceeds are divided equally between Shawn and Julie, the partition action ends, as their dispute is now resolved. 

Conclusion

Although the right to partition in an absolute right of every co-owner, navigating a partition is often a complex, tiresome, and lengthy process. If sale or disposal of property is a point of contention, partition may be a solution. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help. 

What is an Action to Quiet Title?

Under any form of property ownership an owner may bring an action to quiet title where ownership interests are being disputed. This allows them to target any adverse interests to the property. This type of claim allows an owner to “establish an interest in real property as against all existing adverse claims or clouds on title.” (Paterra v. Hansen (2021) 64 Cal.App.5th 507, 532.) In doing so they must prove their title or ownership of the property. (Pacific States Savings & Loan Co. v. Warden (1941) 18 Cal.2d 757, 759.) A partition action incorporates this determining of interest but goes even further by then dividing or selling the property. 

Under California’s Evidence Code, the person with legal title to the property is presumed to be the owner, absent clear and convincing proof otherwise. (In re Brace (2020) 9 Cal.5th 903, 914.) But, in a quiet title action, the plaintiff must sue unnamed defendants because they are broadly establishing their right to the property. A successful suit for quiet title applies even against owners they might not know about. A quiet title action is binding on the defendant but also the nonparties to the suit. (Nickell v. Matlock (2012) 206 Cal.App.4th 934, 944.) That said, the owner bringing suit does need to reasonably and diligently try to find all potential defendants. (Donel, Inc. v. Badalian (1978) 87 Cal.App.3d 327, 332.)

What is a Partition Action?

A partition may encompass a quiet title action. A partition action arises when co-owners cannot agree on what to do with a property. It is also an appropriate solution when an owner wishes to dispose of their interest in property, but the other co-owners do not want to buy him out of his interest. All owners are entitled to the right to partition. (Civ. Proc. Code § 872.710 subd. (b).)  A partition action always offers the opportunity for a buyout. It also settles the interests of each owner. This is why quiet title actions are brought in tandem with a partition action. 

Three types of partition are available to co-owner: (1) partition in kind (2) partition by sale and (3) partition by appraisal. The type of partition pursued is usually based on the ownership interests of the parties and what type of property it is. Partition in kind may not be possible where the property cannot be physically divided. (Butte Creek Island Ranch v. Crim (1982) 136 Cal.App.3d 360, 365.)

Usually if any individual owner has encumbrances or debts tied to the property those follow their interest, but if the debt is so big it may impact the ability to sell the property. (Dang v. Smith (2010) 190 Cal.App.4th 646, 660–661.) However, owners are still entitled to the right to partition even if the property is subject to a lien or easement (Gardiner v. Cord (1908) 145 Cal. 157, 164-165; see Anaheim Union Water Co. v. Ashcroft (1908) 153 Cal. 152.) 

What is a Slander of Title Action?

An owner can bring a slander of title action when another owner disparages their title. This is like a slander or defamation action but having to do with property. A successful claim requires a publication without privilege or justification that is false and causes direct and immediate pecuniary loss. (Klem v. Access Ins. Co. (2017) 17 Cal.App.5th 595, 612.) The disparagement must happen when the owner affected actually own a portion of the property. (Slusher v. Buckley (1959) 174 Cal.App.2d 324, 332.) The owner must also experience financial loss as a result. This would happen if someone posted a sign on the property next to the plaintiff’s home stating anyone buying the plaintiff’s property is buying a lawsuit. (Phillips v. Glazer (1949) 94 Cal.App.2d 673, 677-678.) This type of action allows an owner to defend against other parties attempting to decrease their property value or prevent its sale.

What are Some Examples?

For example, Shawn and Julie are brother and sister who bought an apartment building as a shared investment. They bought this building as co-owners or tenants in common with both of them holding 50% shares in the building.

If Shawn was collecting rent from tenants and refusing to split the rent money with Julie that would likely cause a dispute. Julie could try to settle this out of court because it is a minor dispute. However, if it escalated and led to a breakdown in Shawn and Julie’s relationship, they may need to begin a partition action, so they no longer needed to interact about the property. The court would determine their interests and the rents owed. The court would then likely order a sale and divide the sale proceeds according to Shawn and Julie’s interests in the property. 

Alternatively, Shawn or Julie might try to claim they had more of an interest in the property. Julie could begin an action to quiet title. She would need to inform Shawn of this action and find any other potential defendants. If she succeeded in quieting title and an estranged relative came out of the woodwork claiming an interest in the property, her interest would be protected. 

For example, Shawn and Julie own a home as joint tenants and want to sell the property. 

If Alex lived next door and was trying to prevent them from selling the house and put a sign on his property telling buyers not to buy it or alleging it had black mold Shawn or Julie could bring an action for slander of title. As long as they are both owners and what Alex’s sign said was false, they would be able to bring this action. Any depreciation in sale value of the home or loss of offers would qualify as financial loss.

Conclusion

The best way to handle ownership disputes is to talk with your co-owners and try to reach an agreement outside of court. If it is something simple like how you are using the property or how you are distributing rents it is easier and less costly to talk this out outside of litigation. If the dispute escalates or ends in wanting to dispose of the property, partition is a good option. If title to property is a point of contention, partition may be a solution. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

Yes. In California siblings can force the sale of inherited property through a partition action. Partition actions allow siblings who co-own inherited property to request a court-ordered sale of property when it cannot be physically divided or the siblings cannot reach an agreement on the property’s management and disposal. Allowing siblings to force the sale of inherited property through partitions ensures co-owners can fairly resolve disputes while properly protecting their individual ownership interests. 

Co-Owners’ Right to Partition

Partition is the legal process through which co-owners of property divide their interests. Division is typically done using either a Partition in Kind or Partition by Sale. A partition in kind is the process of physically diving the property between co-owners. Partition by sale results in selling the property and dividing the sale proceeds among co-owners. 

Courts determine the manner of partition based on the circumstances and equitable interests of the parties. (Code Civ. Proc., § 872.820; Summers v. Superior Court, (2018) 24 Cal.App.5th 138.) Courts may also appoint a referee to oversee the partition process and are required to appoint referees when appointment is necessary, desirable, or helpful to facilitate the partition process. (Code Civ. Proc., § 873.510; Richmond v. Dofflemyer, (1980) 105 Cal.App.3d 745.) Referees are responsible for investigating the property, recommending how the property should be divided or sold to the court, and executing the court’s orders regarding the partition. (Ibid.) 

The Right to Partition is an absolute right of co-owners, meaning co-owners can demand partition without needing to provide a reason, however, the right to partition can be waived. (De Roulet v. Mitchel, (1945) 70 Cal.App.2d 120.) Accordingly, courts must grant partitions if all legal requirements are met, regardless of the motives behind the request. (Thomas v. Witte, (1963) 214 Cal.App.2d 322.) 

Can Siblings Force the Sale of Inherited Property?

Under California’s Partition of Real Property Act (“PRPA”), siblings can force the sale of inherited property through partition actions. (Code Civ. Proc., § 874.316.) The act provides all co-owners of inherited property the right to sell their individual shares of property or buy out another co-owner’s shares; functionally, this is a right of first refusal. (Code Civ. Proc., § 874.317.) 

The PRPA mandates a partition action when co-owners are unable to buy out the party seeking the partition. In the context of siblings forcing the sale of inherited property, the PRPA allows them the opportunity to agree on the method used to divide the property, however, the court will decide the most equitable method of partition if they cannot agree. (Code Civ. Proc., § 872.210; Cummings v. Dessel, (2017) 13 Cal.App.5th 589.) 

How to Start the Sale of Forced Property?

Under the PRPA, siblings can initiate the partition process for inherited property by filing a partition action with the court. Partition actions can be commenced by any co-owner of real property held in tenancy in common. (Code Civ. Proc., § 872.210.) 

California law generally favors partitions in kind because physically dividing the property among co-owners avoids disrupting the existing form of inheritance and compelling a co-owner to sell their property against their will. (Richmond v. Dofflemyer, 105 Cal.App.3d at 757.) As such, when parties contest the type of partition to be used, the burden of proof is on the party seeking partition by sale to prove partition in kind is improper under the circumstances. (Ibid.) 

Still, partition by sale is used when partition in kind is impractical or would result in great prejudice to the owners, including circumstances where the relationship between co-owners has severely deteriorated. (Cummings v. Dessel, 13 Cal.App.5th at 598; LEG Investments v. Boxler, (2010) 183 Cal.App.4th 484.) 

Can I Prevent the Sale of Forced Property?

Once a partition action commences, it is incredibly difficult to stop the forced sale of property. Co-owners may, however, prevent the forced sale before partition actions commence by reaching an agreement among heirs, settlements, or enforcing pre-existing contractual obligations. 

If heirs can agree on how to handle the property, they can avoid a forced sale. For example, in In re Estate of Canfield, the heirs all agreed they wanted to sell the property, but none wished to take the property at its appraised value. ((1951) 107 Cal.App.2d 682.) Accordingly, the court recommended the executrix petition for partition or for the property’s sale emphasizing partition is the proper remedy when it can be accomplished without inflicting great prejudice on the owners. (Ibid.) 

Settlement agreements prevent the forced sale of property when they outline how the property should be handled. Specifically, settlement agreements may allow siblings to sell the property if they all agree to the sale, while simultaneously preserving the right to file a partition action if they do not all agree to the sale. (Orien v. Lutz, (2017) 16 Cal.App.5th 957.) When settlement agrees contain terms like these, they can be used to prevent forced sale by complying with their written terms.

Pre-existing contractual obligations that modify the right to partition must be honored. These agreements can either modify the right by requiring one heir to offer their interest to the co-owners before selling it to third-parties or waive the right to partition completely. (Schwartz v. Shapiro, (1964) 229 Cal.App.2d 238.) Because the right to partition can be waived either expressly or impliedly, partition should be denied when it would be unfair to co-owners or when pre-existing agreements limit the right to partition. (American Medical International, Inc. v. Feller, (1976) 59 Cal.App.3d 1008.) 

Overall, California law does not provide an explicit way to prevent forced sale once partition actions have commenced because of the absolute right to partition. Thus, while it isn’t impossible it is uncommon, and co-owners should strive to reach an agreement before a partition petition is filed. 

What is an Example? 

For example, “Shawn” and “Julie” inherited their family home in Southern California. After their parents’ death, the home was placed in a family trust and Shawn and Julie were named as trustees and beneficiaries of the trust. Shawn wants to sell the property because he believes that since no one lives in the house, splitting the proceedings is better than paying the expensive property maintenance costs. Shawn has no emotional attachment to the property and sees no reason to keep it because of its financial burdens. Julie wants to keep the property in the family for sentimental reasons and is confident the property value will increase steadily over time, but Julie cannot afford to buy out Shawn’s ownership interest and keep the property herself.

Shawn refuses to consider keeping the property and files a partition action, arguing him and Julie cannot agree on what to do with their inherited family home. No agreement limits or waives either Shawn or Julie’s right to partition the property. Therefore, assuming Shawn establishes all the legal requirements, the court will order a partition by sale and split the proceeds between the siblings according to their ownership shares because Shawn and Julie cannot agree on what to do with the property. 

Conclusion

Siblings who inherit property are immediately faced with financial considerations, emotional attachment, and the practicalities of property ownership. Together, these factors can frustrate the decision-making process and communication leading to sibling disputes. If sale or disposal of property is a point of contention in these relationships, partition may be a solution. Understanding the absolute right to partition is important whether co-owners are siblings, or merely business partners, who co-own property. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help. 

A trust is a great way to determine what happens to your property after death and ensure that it is distributed the way you intended. This also applied to real property. If the real property is a house, that may create disputes over how it is divided, especially if your trust grants an interest in the house to multiple people.

What is a trust?

A trust allows property to be transferred with an intermediary holding the property in trust or for the benefit of another person. (Higgins v. Higgins (2017) 11 Cal.App.5th 648, 662.) A trust is created by a trustor or grantor who wants to predetermine how their assets will be managed and distributed. This can be during their lifetime or after death. (Cal. Prob. Code § 15401.) The trustor can modify, terminate, or revoke the trust before their death, which makes the trust revocable before their death. A trust is created by a trust instrument which is a document usually held by the trustee. A trustee is the person who will administer the trust ensuring its assets are distributed properly and promptly. These assets are distributed to beneficiaries.

How does a trust work after death?

After a trust’s creator dies the trustee distributes trust assets to beneficiaries. A trustee has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration. (Cal. Prob. Code § 16060.) Trustees must give written notice to trust beneficiaries and the grantor’s heirs that trust administration will start within 60 days from the grantor’s date of death or 60 days from the date they took over as trustee. (Cal. Prob. Code § 16061.7.) Trust assets need to be accounted for and valued. Beneficiaries must be notified by the trustee when a revocable trust becomes irrevocable due to the death of a settlor or if there is a change in trustee of an irrevocable trust. (Cal. Prob. Code § 16061.7(a)(1)-(2).) 

What ensures the trustee distributes property correctly?

The trustee has a duty of loyalty not to engage in self-dealing which would mean administering the trust for their own benefit. (Copley v. Copley (1981) 126 Cal.App.3d 248, 278-279.) This means, they must adhere to the trust instrument which is why creating one is of the utmost importance for the trustor’s intent to be preserved. 

Because of this duty to the beneficiaries, the beneficiaries have the right to inspect any of the trustee’s records related to their interest in the property. (Strauss v. Superior Court In and For Los Angeles County (1950) 36 Cal.2d 396, 401-402.) If the beneficiary asks, they can also obtain an account of all transactions, especially disbursements from the trust. (Purdy v. Johnson (1917) 174 Cal. 521, 527.) At a minimum the trustee must account to each beneficiary annually, at the termination of the trust or if the trustee changes. (Cal. Prob. Code § 16062, subd. (a).)

If a trustee disagrees with the need for an accounting or has a misunderstanding with a beneficiary about the trust instrument the trustee’s interest is presumed adverse and to not be representing the beneficiaries’ interests. (Donkin v. Donkin (2020) 47 Cal.App.5th 469, 473-474.) These presumptions will apply if the trustee does not account or refuses to account. (Blackmon v. Hale (1970) 1 Cal.3d 548, 560-561.)

What happens when a trust requires distribution to multiple beneficiaries?

Often, a trust requires distribution of the property (in this case, a house) to multiple beneficiaries. When interests, or ownership percentages, can be determined one owner may begin a partition action. Partition statutes have been broadened so any beneficiary or trustee could file a partition action if it was in the best interest of all the parties. (C.C.P. § 872.710(c).) Often it would just be a beneficiary beginning the action following the property’s distribution from the trust. 

Unfortunately, after a house is distributed to multiple beneficiaries, disputes often arise as to what should be done with the Property. For example, one beneficiary may wish to continue to live in the Property, while another wishes to sell it. Once the Property is distributed to multiple owners, each owner has the absolute right to file a partition action, which can lead to either a buy-out or a sale of the Property. 

What is an example of this?

For example, Julie and Shawn are siblings who were designated as beneficiaries to their mother’s trust. Their mother Martha placed her home in trust for them. Upon Martha’s death, the trustee of that trust must notify Julie and Shawn that the trust will be disbursed. This also informs Julie and Shawn of their respective interest in the property. Upon disbursement, the legal title in the home would pass from the trustee to Julie and Shawn in their respective ownership percentages. 

If Shawn or Julie wanted to contest their ownership percentages, they could do so upon notification that the trust would be distributed. If the trustee was trying to keep some of the property for themselves or improperly give the entire home to Julie contrary to the trust instrument, Shawn could bring an action against the trustee for violation of their duty of loyalty. 

If Shawn and Julie could not agree on what to do with the property following distribution either of them could begin a partition action. Alternatively, if Shawn and Julie were unable to agree and it was in everyone’s best interest the trustee could also initiate a partition action.

Conclusion

Real property may be part of a trust that you are a trustee or beneficiary for. Because property interests can be granted to more than one person, this may cause disputes over ownership and title. If trust property is a point of contention, partition may be a solution. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

Under California law, paying someone’s property taxes does not automatically grant ownership of the property. In California, paying someone else’s taxes, even if done in good faith, is considered a gesture of goodwill or a means of avoiding a tax lien, but no matter the motive, payment does not transfer legal ownership. 

If, however, individuals pay someone else’s property taxes for a long period, they may have an ownership claim through adverse possession. Understanding the consequences of paying someone’s else property taxes helps individuals develop a better understanding of property ownership and all its obligations.  

Property Taxes

Generally, property taxes are synonymous with property ownership. Property taxes are ordinarily assessed on all property within a certain territory proportionally to its value. Under California law, this means property taxes are imposed on the property itself, not the individual property owner. Accordingly, no personal liability arises from the nonpayment of property taxes; instead, the unpaid taxes become a lien against the property. (Garcia v. County of Santa Clara, (1978) 87 Cal.App.3d 319.) This lien attaches directly to the property and remains until the delinquent taxes are paid. (National Holding Co. v. Title Ins. & Trust Co., (1941) 45 Cal.App.2d 215.) 

Property owners do, however, have an equitable and moral obligation to pay property taxes. (Glunt v. City and County of San Francisco, (1969) 274 Cal.App.2d 269.) As a public policy matter, courts impose delinquent penalties on owners defaulting on their tax obligations to encourage voluntary and timely payment. (Weston Inv. Co. v. State, (1948) 31 Cal.2d 390.) These penalties accumulate over time, steadily increasing the amount owed. (Ibid.) If the delinquency persists, owners may forfeit their property interest in a sale of the property to the state as the preliminary step of enforcing a tax lien. (Ibid.; see also Chesney v. Gresham, (1976) 64 Cal.App.3d 120.) This sale is the start of a five-year period during which the property owner can reclaim their property by paying the outstanding taxes, costs, and incurred penalties. (Weston Inv. Co. v. State, 31 Cal.2d, 391-92.) 

Paying Someone’s Property Taxes

Paying someone else’s property taxes does not automatically grant you ownership of the property. In fact, California law provides no meaning to this act comparable to gaining ownership interest, whether payment is made by mistake or good-will. Instead, the payment is considered to fulfill the property tax obligation, potentially curing existing tax liens on the property, without conferring any ownership interest to the payor. 

Mistaken Payment

If taxpayers accidentally pay property taxes on the wrong parcel of land, they can petition the tax collector for relief. (Sierra Inv. Corp. v. Sacramento County, (1967) 252 Cal.App.2d 339.) Upon receiving the petition, the tax collector can cancel the payment on the unintended property and transfer the payment to the correct property, if this action meets certain criteria, like notifying the mistaken property’s owner and allowing them a chance to contest the payment’s recission at a hearing. (Ibid.) Mistaken payments do not confer the land’s ownership interest. 

Payment by Strangers

Strangers who pay someone else’s property taxes are not entitled to any property ownership interest. In fact, payment by a stranger, who is not under a moral or legal obligation to pay the taxes, is considered a typical mode of paying taxes despite the payer being unable to acquire to any right or title to the property through payment. (Garvey v. Byram, (1941) 18 Cal.2d 279.) 

Adverse Possession

In some instances, paying someone else’s taxes for a long period of time, may allow the payor to bring an ownership claim under adverse possession. As such, paying someone else’s property taxes does not automatically lead to ownership of the property, but is a necessary element for establishing adverse possession. (Code Civ. Proc., § 325.) Accordingly, the party claiming adverse possession must show they have timely paid all state, county, or municipal taxes on the land for the statutory five-year period and must be able to prove these payments using the county tax collector’s certified records. (Code Civ. Proc., § 325.) 

In California, parties claiming to adversely possess property must meet several requirements, in addition to proving they’ve paid all taxes levied and assessed on the property. Specifically, claimants must also show: 

• Actual Occupation of the property under circumstances that provide the owner with reasonable notice. 
• Possession of the property that is hostile to the owner’s title. 
• A claim that the property is theirs under color of title or claim of right; and, 
• That they have possessed the property continuously and uninterrupted for at least five years. (Nielson v. Gibson, (2009) 178 Cal.App.4th 318; Estate of Williams, (1977) 73 Cal.App.3d 141.) 

Failing to pay property taxes is fatal to adverse possession claims. Thus, the claimant carries the burden of proving that either no taxes were assessed against the land during the statutory period or that they paid all the assessed taxes. (Nellie Gail Ranch Owners Assn. v. McMullin, (2016) 4 Cal.App.5th 982.) Claimants who cannot show either will fail to show they’ve adversely possessed the property and gain no ownership interest. 

What happens when Co-Owners Pay Each Other’s Property Taxes?

In the context of co-ownership, co-owners are obligated to pay their proportionate share of the property’s common costs such as taxes, mortgage payments, insurance payments, improvements and expenses. Because co-owners are required to pay their proportionate share of property taxes on the co-owned property, a co-owner who pays the property taxes in full, discharges a lien on the common estate and inures a benefit on all co-owners. Therefore, the co-owner who paid the entire sum is entitled to a refund from the other co-tenants equal to their proportionate shares. (Conley v. Sharpe, (1943) 58 Cal.App.2d 145, 156.) 

Like California’s general rule on paying someone else’s property taxes, co-owners are not afforded any additional ownership rights by paying the entire sum of property taxes. This is because California courts have established that co-owners have no obligation to protect the property interests of other co-owners. Accordingly, the law affords co-owners no legal mechanism to enforce the payment of property taxes without a written agreement establishing that obligation. (Bardis v. Oates, (2004) 119 Cal.App.4th 1.) 

Because the law does not hold non-paying co-owners liable for refusing to pay property taxes, the best remedy available is to have the property sold in a partition action. Partition Actions are the legal procedure for selling co-owned property in which the court divides the co-owned property and its sale proceeds among co-owners according to their ownership interests. In California, co-owners who make advances from their own pocket to preserve the common estate increase their investment in the property by the entire amount of their advancement.  (Southern Adjustment Bureau, Inc. v. Nelson, (1964) 230 Cal. App. 2d 539, 541.) As such, co-owners are entitled to reimbursement of their entire advancement before the balance of the property’s sale proceeds are equally divided. (Ibid.) 

Further, Wallace v. Daley, established that according to the principles of equity, every partition action includes a final accounting of each co-owners’ charges and credits including their proportional shares for necessary repairs, mortgage payments, and taxes. ((1990) 220 Cal.App.3d 1028, 1035.) So, while co-owners do not obtain additional ownership interest for paying more than their proportional share of property taxes, they are entitled to recover any payments made for common costs exceeding their proportionate share, including property taxes in a partition action. (Ibid.; Code Civ. Proc., § 872.140.) 

What is an Example?

“Shawn” and “Julie” are co-owners of a land parcel in a rural area. For five years, Shawn and Julie both paid their proportionate share of property taxes, however, in the sixth year of their co-ownership, Shawn refuses to pay. To avoid a lien being imposed on their property, Julie pays the entire sum of property taxes assessed against their property. Once the payment has been made, Julie takes the receipt to Shawn and kindly asks him to reimburse her for his half as he always has. Shawn again refuses and tells Julie the property taxes are her sole responsibility from now on. After several failed attempts to recover Shawn’s proportionate share, Julie decides to partition the property. 

Because Julie paid more than her proportionate share of property taxes, she is entitled to a reimbursement of Shawn’s share of all property taxes Julie paid after Shawn’s refusal. During the partition’s accounting stage, Julie will be credited for these payments before sale proceeds are distributed between the two. 

Conclusion

The Underwood Law Firm has a team of experienced lawyers who can help guide you through complicated legal matters like partition and help you pursue solutions to ensure you recover the entirety of what you are legally entitled to. 

What does being a cotenant mean?

A tenant in common means you can hold title in different ownership percentages. Title is usually granted by a deed or similar document. Co-tenants can hold uneven ownership percentages, like person A owning 67% while person B owns 33%. (Donnelly v. Wetzel (1918) 37 Cal.App.741.) This is different from owning property as joint tenants where property is held in equal portions. 

Even with co-tenancy allowing different ownership percentages, each co-tenant still has the equal right to possession of the property. (S.L. Rey (1993) 17 Cal.App.4th 234, 242.) This means even if two people own a home as tenants in common, one of those individuals could live in the house on their own. (Kapner v. Meadowlark Ranch Assn. (2004) 116 Cal.App.4th 1182, 1189.) Because these property interests are held separately of each other if one co-tenant encumbers their interest, like placing a lien on it, that encumbrance will attach only to their interest. (Schoenfeld v. Norberg (1970) 11 Cal.App.3d 755, 765.)

What rights do you have as a cotenant?

As a cotenant you have a right to possession that allows you to occupy the entire property whenever you want. (Preciado v. Wilde (2006) 139 Cal.App.4th 321, 323.) This is permissible only if you are not excluding the other co-owner even if it is just for a period of time. (Krum v. Malloy (1943) 22 Cal.2d 132, 135.) You cannot purposely exclude your co-owner.

Your right to occupy the property also means you can grant the right to possess the property to a third party.” (Verdier v. Verdier (1957) 152 Cal.App.2d 348, 352.) A co-owner or co-tenant can lease their interest to a third party as a renter. The co-tenant then receives rent money. That lessee (or tenant) through a lease is able to possess the entire property and temporarily holds the rights that the lessor or co-owner enjoys. (Swartzbaugh v. Sampson (1936) 11 Cal.App.2d 451, 457.) 

The co-tenant lessor can collect the rent payments made by the tenant under the lease agreement as they stem from his right in the property. (In re Knox’ Estate (1942) 52 Cal.App.2d 338, 354.) However, each co-tenant is entitled to a share of those profits derived from the tenant’s use of the common property. This share is proportionate to the co-owners’ respective percentages of ownership. (Garcia v. Andrus (9th Cir. 1982) 692 F.2d 89, 92.)

Can you remove another cotenant from the deed?

Similar rights apply to co-tenants regarding the instrument giving them title. This confirms the co-owner’s right in the property, essentially granting them their percentage of ownership. (Estate of Stephens (2002) 28 Cal.4th 665, 672.) A co-tenant cannot unilaterally remove another co-tenant from a deed, unless the other owner grants that co-tenant their interest. 

A cotenant can sell their own interest without approval or agreement by the other co-tenant.  (Wilk v. Vencill (1947) 30 Cal.2d 104, 108-109.) However, a co-tenant cannot sell the entire property to remove the other owner from the deed. (Linsay-Field v. Friendly (1995) 36 Cal.App.4th 1728, 1734.) In a similar vein you cannot cancel a lease made by another co-tenant without giving the tenant proper notice. (Swartzbaugh v. Sampson (1936) 11 Cal.App.2d 451, 461.)

As such, you cannot remove a co-tenant from a deed without their knowledge. If you did so you would be violating their property rights. It may also be construed as ouster and in a lawsuit for ejectment the court may choose to award the entire property to that co-tenant you tried to remove from the deed.

What does ousting a cotenant from the property mean?

Because of a co-tenant’s ability to possess an entire property without excluding or violating the other co-tenant’s right to possession, ouster requires affirmative acts that clearly show that possessing co-tenant’s intent to exclude the other. These acts must be open and notorious, clearly giving notice to the other co-tenant. (Askley v. Bassett (1922) 189 Cal. 625, 642.) This means the co-tenant in possession is claiming the whole property for themselves, denying that the other co-tenant has title, or refusing their co-tenant entry. (Zaslow v. Kroenert, (1946) 29 Cal.2d 541, 548.) Ouster may also be something as overt as putting up no trespassing signs on the property and changing the locks on the doors. (Id.) While a co-tenant can bring a claim for ejectment in response to another co-tenant dispossessing them of the property, if the possession goes on for long enough that claim may fail. 

What are some examples of removing a cotenant from possession?

For example, Julie and Shawn are co-tenants who own a home, with Julie owning 70% and Shawn owning 30%. Julie or Shawn could both live in the house alone and not be violating either’s right as a co-tenant. However, if Julie was living in the house and changed all the locks to try to keep Shawn out, Shawn would have a cause of action for ejectment, and he would be able to claim he was ousted by Julie. 

Alternatively, if Shawn was living in the property by himself and needed to make payments on utilities, he could seek partial payment from Julie. The same would be the case if he decided to renovate the kitchen increasing the value of the entire house. 

However, if Shawn just wanted to change the paint color because he did not like it, he would likely be unsuccessful in getting partial payment from Julie. 

Julie could decide to rent out the house to a third-party renter named Sarah. Sarah would pay Julie rent. Assuming Sarah was occupying the entire property, the rent would be split in accordance with Shawn and Julie’s ownership interests. This means if the monthly rent was $2,000 Julie would receive $1,400 or 70% and Shawn would receive $600 or 30%. Shawn (or Julie) could only evict Sarah if they gave proper notice, or she might file an unlawful detainer lawsuit.

Julie and Shawn could individually choose to sell their interests in the property. However, Julie or Shawn would not be able to unilaterally remove each other from the deed. Doing so might create a claim for ouster. If Julie or Shawn wanted to get rid of their interest in the home and the other did not want to, they might need to begin an action for partition. 

Conclusion

Co-tenancy guarantees the right of possession and the ability to sell one’s own interest in property. However, it does not permit a co-tenant to remove another owner from the deed. If title to property is a point of contention, partition may be a solution. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

In California, Limited Liability Companies (“LLC”) are either managed by their members or designated managers, depending on how it is structured. These two kinds of management structures are the primary approaches to LLC management in California and are known as the (1) Member-Managed and (2) Manager-Managed structures. In member-managed LLCs, members are actively involved in daily operations, whereas members in manager-managed LLC’s, take a more passive role in the businesses’ management. Ultimately, the power to govern the LLC rests in its founders’ hands by allowing them to define how the business will be run in the LLC’s operating agreement. California law provides a flexible approach to LLC management through these two main structures. 

What is an LLC? 

“LLC” is the shortform name for a Limited Liability Company. LLCs are a form of business entities that combine corporation’s limited liability aspect with partnership’s tax benefits and operational flexibility. (CSHV 1999 Harrison, LLC v. County of Alameda, (2023) 92 Cal.App.5th 117.) LLCs are separate legal entities, meaning they are distinct from their members. (Ibid.) 

Who Manages an LLC?

Limited Liability Companies (“LLC”) are either member-managed or manager-managed. Each type of management structure carries its own formalities, requirements, and benefits. Whether an LLC is member-managed or manager-managed depends on the LLC’s operating agreement or articles of organizations. 

An LLC’s operating agreement plays a crucial role in establishing the businesses’ management structure. Operating Agreements govern relationships between members, the rights and duties of managers, and the conduct of the LLC’s activities (Corp. Code, § 17701.10.) In manager-managed LLC’s, the operating agreement also imposes fiduciary duties on members in addition to those duties imposed by default. (Samuelian v. Life Generations Healthcare, LLC, (2024) 104 Cal.App.5th 331.) 

Operating agreements are the primary document governing an LLC’s internal operations and can modify default statutory provisions to suit the LLC’s specific needs. Operating agreements typically include terms governing when and how the agreement can be modified. Generally, operating agreements cannot be modified by amendments without the consent of all members. (Corp. Code, § 17704.07.)

Member-Managed LLC

In member-managed LLCs, all members participate in the businesses’ management and control. (Corp. Code, § 17703.01.) Accordingly, each member acts as the LLC’s agent, meaning each member can bind the LLC in its usual course of business. (Ibid.) 

Members in member-managed LLCs owe each other fiduciary duties. Fiduciary duties are legal obligations arising out of certain professional relationships requiring one party to act in the other’s best interests. (Corp. Code, § 16404.) Under this structure, member’s fiduciary duties include the duties of care and loyalty including acting in the LLC’s best interest, avoiding conflicts of interest and refraining from competing with the LLC. (Corp. Code, § 17704.09.)

Manager-Managed LLC

Despite the member-managed structure’s existence, members do not gain the authority to manage or bind the LLC in its usual course of business solely by virtue of their membership. (Corp. Code, § 17703.01.) As such, manager-managed LLCs vest management authority in one or more managers who may, or may not, be members of the business. Under this structure, mangers are the individuals responsible for the LLC’s daily operations and strategic decisions while members fill more passive rolls like voting on general matters. (Swart Enterprises, Inc. v. Franchise Tax Bd., (2017) 7 Cal.App.5th 497.) 

Managers owe the LLC and its members fiduciary duties including the duties of care and loyalty. (Corp. Code, § 17704.09.) Members do not, however, owe fiduciary duties in this context unless the operating agreement specifies contrary obligations. (Ibid.) 

Likewise, members do not have the right to control the LLC’s management and conduct of activities unless the operating agreement specifies otherwise. (Swart Enterprises, Inc. v. Franchise Tax Board, 7 Cal.App.5th 497 at 510.) 

Why does an LLC’s Management Structure Matter?

An LLC’s managerial authority is important for many reasons, specifically in the context of its dealings with third parties. Under California’s general rule, agreements entered by an LLC’s true manager with third parties are binding, even if the manager lacked the authority to act under the LLC’s operating agreement. (Corp. Code, § 17703.01.) But, if the third party had “actual knowledge” of the manager’s lack of authority to act under the operating agreement, the agreement cannot be binding because neither party had any reason to believe the LLC would be bound by their agreement. (Ibid.) This rule commonly applies in cases where the manager requires member approval to sell LLC property or engage in similar transactions but fails to obtain it. 

Managers acting beyond the authority granted to them in the operating agreement risk exposing the LLC to an expanded scope of liability. For example, LLCs are at risk of incurring new liability when individuals who are not their designated manager, act as the LLC’s manager while ignoring competing claims to the “manager” title. 

In Sam v. Kwan, California’s Second Appellate District Court addressed this scenario and established the outcome of an LLC that sells its property to a third party during ongoing disputes regarding the identity of the LLC’s manager. Here, the LLC’s operating agreement designated Sam, the plaintiff, as the LLC’s manager and he acted accordingly when entering transactions on behalf of the LLC during his tenure as manager. ((2024) 101 Cal.App.5th 556.) But, after a year, Sam and Kwan, the defendant, were no longer operating on good terms, so Kwan sold a parking lot Sam had purchased as manager and personally guaranteed the loan, without Sam’s knowledge. (Ibid.) Kwan was not the LLC’s designated manager when selling the lot, and did not disclose this to the buyer, and despite Sam’s name appearing on the parking lot’s deed as manager, the buyer did not inquire about the discrepancies between Sam and Kwan’s identities. (Ibid.) Ultimately, because Kwan was not the LLC’s manager when he sold the parking lot to a third party, the court held the parking lot’s purchaser failed to uphold their duty as a buyer to make a reasonable inquiry regarding the identity of the LLC’s manager. (Ibid.) As a result, the buyer was not a “bona fide purchaser” because factual disputes existed on summary judgment regarding the identity of the LLC’s manager that they failed to inquire about to the extent that any reasonable and prudent buyer would have. (Ibid.)

So, while members have authority to make changes in an LLC’s management structure, they must be executed properly to avoid mishandling LLC business and potentially incurring additional liability like in Sam v. Kwan. 

What is an Example? 

For example, “Shawn” and “Julie” purchased six rental properties in California that they deeded to their business “Realty Adventures, LLC.” Three of the properties are extremely profitable Airbnbs while the other three are long term rentals. Shawn notices the Airbnbs produce impressive short term profits and pushes Julie to turn their remaining three rentals into Airbnbs too. Julie, however, is much more concerned with establishing the long-term rentals as stable income sources. Shawn ignores Julie’s desires, refuses to even consider the possibility of long-term rental success, and rents the long-term rentals out as Airbnbs anyways.  

Upon discovering Shawn’s actions, Julie files for partition citing Shawn’s aggressive and selfish tactics as justification for enacting the operating agreements right to partition the LLC. The court rules in Julie’s favor and awards Julie the long-term rental properties, while Shawn keeps the three original Airbnbs. Now, Julie can establish her long-term rentals’ success and Shawn can continue chasing short term profits through renting his Airbnb units. 

Conclusion

The Underwood Law Firm has a team of experienced lawyers who can help guide you through complicated legal matters relating to LLCs and Partitions, and help you pursue solutions to protect your legal rights to the fullest extent of the law.  Contact us to learn more.

The internal affairs doctrine indicates what state’s law is applicable to a corporation or limited liability company’s (LLC) internal affairs. This is important in adjudicating any corporate disputes like breach of contract, breach of fiduciary duty or other lawsuits that might arise involving business and corporations.

What is a corporation?

A corporation is a legal entity that creates an identity separate from its shareholders. (Merco Const. Engineers v. Municipal Court (1978) 21 Cal.3d 724, 729.) These shareholders do not own the corporation’s property and are considered to be a separate party from the corporation itself. (Union Bank v. Anderson (1991) 232 Cal.App.3d 941, 949.) This separation allows shareholders to avoid some liability that comes with running a corporation. For example, shareholders will not be personally liable for the corporation’s debts. In order to establish a corporation, the person or partnership interested in forming it must file articles of incorporation. (Cal. Corp. Code § 200(a).) Where those articles are filed means the corporation is incorporated in that given state. If a corporation is incorporated in California, that corporation must abide by the California Corporations Code.

What is an LLC?

A limited liability company allows for a partnership to get the same limited liability as corporate shareholders. (Ontiveros v. Constable (2018) 27 Cal.App.5th 259, 273.) Under an LLC there only needs to be one person or member for it to exist. (Cal. Corps. Code § 17701.02(s).) Like a corporation, an LLC allows that person or persons to avoid personal liability for the entity’s debts. (Cal. Corps. Code § 17703.04.) To exist, the person wishing to establish the LLC must file articles of organization with the secretary of state. (Cal. Corps. Code § 17702.01(a), (d).) Like a corporation, an LLC is required to abide by the California Corporations Code. Since 2014, LLC must also abide by the California Revised Uniform Limited Liability Company Act. (Kennedy v. Kennedy (2015) 235 Cal.App.4th 1474, 1486-149.) 

LLCs have an operating agreement, which as the name indicates sets out how it will operate and whether the partners have any limited or special duties. This means the agreement cannot allow a member or manager of the LLC to entirely escape any liability on behalf of the LLC or violate their fiduciary duty towards the LLC. (Cal. Corps. Code § 17701.10(c)(4), (5), (14), (15).)

What is the internal affairs doctrine?

The internal affairs doctrine means the laws of a business entity’s state of formation governs matters concerning its internal affairs. Internal affairs mean the issue relates to the relationship between the entity and its shareholders, officers, or directors. (Edgar v. MITE Corp. (1982) 457 U.S. 624, 645.) Internal affairs also may include election or appointment of directors or officers, adoption of bylaws, meetings, and shareholder rights. Internal affairs involve matters of internal corporate governance. (Lidow v. Superior Court (2012) 206 Cal.App.4th 351, 363.) This doctrine is implicated when disputes arise between shareholders, managers, directors or other individuals. If the internal affairs doctrine applies, the law of the state where the corporation or LLC was incorporated will be the law that applies. 

This is important because corporations and LLCs may interact with other states in doing business. The choice of law matters so as to not require corporations to abide by two conflicting state laws. (Grosset v. Wenaas (2008) 42 Cal. 4th 1100, 1106-1107.) In the interest of justice though a local court can take jurisdiction over a corporation’s internal affairs and apply local law. (Friese v. Superior Court (2005) 134 Cal.App.4th 693, 707-708.) 

How would the internal affairs doctrine apply to a corporation?

Because a corporation or LLC is its own legal entity it has the capacity to be sued. As such, determining how the internal affairs doctrine applies is important. The court taking jurisdiction will apply the laws of the state of incorporation. If the corporation has sufficient contacts with the non-incorporation state, like conducting business or having an office in the state, local law may be applied over the incorporation state’s law. (McLean v. Tucker (1938) 26 Cal.App.2d 126, 130-131.) The internal affairs doctrine can be overridden in this way. A court will exercise its jurisdiction unless it is an inappropriate or inconvenient forum for the trial of the action. (Restatement (Second) of Conflict of Laws § 313 (1971).)  

For example, where a corporate officer as an employee was sued for a breach of duty the internal affairs doctrine did not override the California choice of law clause in the employment contract. (Colaco v. Cavotec SA (2018) 25 Cal.App.5th 1172, 1191, 1195.) The corporation was incorporated in Delaware, but the parties had a substantial relationship with California. (25 Cal.App.5th at 1192.) The only reason Delaware law would have been applied would be if Delaware had a materially greater interest in the determination of the particular issues involved. The sections of the Corporations Code which apply to violations of duty do not require all misconduct claims to have incorporated state law apply against corporation executives. It only applies to a corporation’s directors. (25 Cal.App.5th at 1195.)

What if the corporation was incorporated outside of California?

If the corporation has made California its principal place of business and had records and offices there, California law may apply. (Sharp v. Big Jim Mines (1940) 39 Cal.App.2d 435, 438.) For example, directors of a foreign corporation doing business in California are liable for a violation of duty under the laws of the state where the corporation was incorporated. However, that liability could be enforced in California court whether or not the act was done in California. (Saracco Tank & Welding Co. v. Platz (1944) 65 Cal.App.2d 306, 314.) Another instance of its application could be where the state of incorporation was Illinois and so Illinois law governed California policyholders when they challenged a director’s decision in distributing dividends in California court. (State Farm Mut. Auto. Ins. Co. v. Superior Court (2003) 114 Cal.App.4th 434, 446.)

How would the internal affairs doctrine apply to an LLC?

An operating agreement cannot vary the applicability of California law to the LLC’s internal affairs if the LLC was organized in California. (Cal. Corps. Code § 17701.10(c)(2), 17701.06.) Like corporations, the internal affairs doctrine applies to foreign LLCs registered to do business in California. (Cal. Corps. Code § 17713.04(a), (d).) Similarly, internal affairs mean its organization, the authority of members and managers, or their liability for the LLCs debts. (Cal. Corps. Code § 17708.01(a)(1) & (2).) For example, the internal affairs can prevent a California court from ordering dissolution of a foreign LLC just because the LLC was going business in California. (Boschetti v. Pacific Bay Investments Inc. (2019) 32 Cal.App.5th 1059, 1066-1069.) Dissolution is governed specifically by the state in which the LLC was organized. If the LLC was organized in California, then a California court could order dissolution. 

What is an example?

For example, Julie is a director of a corporation and Shawn is an officer of that corporation. The corporation is incorporated in Delaware. If Shawn wishes to dispute Julie’s election of certain officers to the board of directors for another’s company’s gain, he could sue the corporation for breach of duty of loyalty. This would be a matter of internal affairs as it concerns the corporate governance of the corporation. Because the corporation was incorporated in Delaware, and this is a matter of internal affairs, Delaware law would apply. There is not really a reason to apply any other state’s law. This would be the same case if Julie and Shawn were partners in an LLC. If Shawn disagreed with Julie’s management of the LLC, he could sue for that. Because the LLC was organized in Delaware, Delaware law would apply. A California court would apply Delaware law in the case of the corporation and the LLC.

However, if the corporation was incorporated in Delaware but its primary place of conducting business was in California, California law might apply. If the issue being litigated revolves around California and especially if the individual parties live in California, local law may overcome the internal affairs doctrine. 

Similarly, if the matter concerning the LLC revolved around California, a California court would have the ability to apply California law.

Most importantly, the issue must be a matter of internal affairs to be exempted. Things like dissolution may be limited to the jurisdiction of the state of incorporation or organization. This acts as a limit to protect corporations as well as state sovereignty.

Conclusion

The internal affairs doctrine is important because it dictates what state’s law is applicable to a corporation or limited liability company’s internal affairs. If you are involved in a corporation or LLC, it is important to know what laws the entity must abide by and when that internal affairs doctrine may be overridden by local law. If the entity owns property, this may affect any issues or lawsuits arising from that property. If sale or disposal of property is a point of contention, partition may be a solution. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

Commercial Litigation is the process used to resolve legal disputes arising from business transactions and relationships. As an area of law, commercial litigation encompasses a wide range of issues including business torts, antitrust claims, and intellectual property disputes. These claims typically arise out of breaches of contract, disputes over products and services, and financial disagreements. Because California encompasses such a wide variety of commercial business, understanding how commercial litigation disputes arise and are generally addressed is crucial to navigating these claims. 

What is Commercial Litigation?

“Commercial activity” is the regular course of commercial conduct or a particular commercial transaction or act, as determined by the nature of the conduct or transaction instead of its purpose. 

Commercial litigation involves legal disputes that are integral to business transactions and the basis for recovery, such as breach of contract claims, breach of fiduciary duty, and conversion. 

Breaches of Commercial Contracts

In the context of breaches of contract, commercial litigation generally involves disputes where one party alleges the other failed to fulfill their contractual obligations. In these cases, the primary goal is to obtain remedies for the breach. 

Types of Claims to Allege a Breach

Disputes involving breaches of commercial contracts are typically governed by the contract’s specific terms and obligations. Thus, breaches of commercial contract disputes arise in many ways ranging from the contract’s own terms to an involved party’s actions. The nature of the dispute sometimes influences the availability of claims a plaintiff can bring to remedy the breach. For example, plaintiffs can sue for anticipatory breach of commercial contracts when the breaching party positively repudiates, or renounces, the contract through their acts or statements evidencing either their refusal or inability to substantially perform the contract’s essential terms. (Mission Beverage Co. v. Pabst Brewing Co., LLC, (2017) 15 Cal.App.5th 686.) 

 In certain circumstances, courts may refuse to enforce a contract entirely, if it is unconscionable. If the contract is enforceable except for an unconscionable clause, courts may opt to enforce the contract without the affected clause. (Civ. Code, § 1670.5.) And, in other circumstances, parties may seek declaratory relief to resolve commercial contract disputes preemptively or to select their desired litigation forum. (Osseous Technologies of America, Inc. v. DiscoveryOrtho Partners LLC, (2010) 191 Cal.App.4th 357.) 

Available Remedies

Courts regularly defer to the legislature when making significant policy judgments that will affect commercial relationships, including determining what remedies are appropriate in breaches of commercial contracts. (Harris v. Atlantic Richfield Co., (1993) 14 Cal.App.4th 70.) Accordingly, there are several different ways to remedy breaches of commercial contracts.

Courts traditionally award compensatory damages, to make the non-breaching party whole again, without punishing the breaching party. Because predictability is crucial in these circumstances, California law does not allow courts to award general or punitive damages for breach of commercial contracts, as a general rule. (Harris v. Atlantic Richfield Co., 14 Cal.App.4th at 77.) This means that parties who breach commercial contracts must only pay contract damages, so the law does not inquire about the breaching party’s motives such as whether they acted in good faith leading up to the breach. (Rattagan v. Uber Technologies, Inc., (2024) 17 Cal.5th 1.) Instead, California law provides the measure of damages a non-breaching party can recover is limited to the losses that were reasonably foreseen by the parties. (Quigley v. Pet, Inc., (1984) 162 Cal.App.3d 877, 887.) 

Like punitive damages, courts are incredibly wary of applying tort remedies to commercial contracts because tort remedies could potentially lead to every breach of contract becoming a punitive damages claim. (Harris v. Atlantic Richfield Co., 14 Cal.App.4th at 81-2.) In fact, courts consider extending tort remedies to commercial contracts an aggressive deviation from traditional contract law, which does not consider the breach’s motive. (Ibid. at 82.) Therefore, courts avoid awarding punitive damages as a means of ensuring commercial predictability and stability.

Fiduciary Duties in Commercial Litigation

In commercial litigations, asserting a breach of fiduciary duty claim requires proving three key elements: (1) the existence of a fiduciary relationship; (2) breach of that fiduciary duty; and (3) that the breach caused damages. (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc., (1998) 68 Cal.App.4th 445.) 

1. Existence of a Fiduciary Relationship

Fiduciary relationships form in certain legally recognized relationships like between attorneys and clients, principals and agents, and corporate officers and corporations. (Oakland Raiders v. National Football League, (2005) 131 Cal.App.4th 621.) In these relationships, the fiduciary must prioritize the beneficiary’s best interests by managing the relationship’s subject matter with due care, by providing regular and accurate accountings, and ensuring the beneficiary is fully informed. (Ibid.) 

2. Breach of Fiduciary Duty

Breaches of fiduciary duty happen when fiduciaries fail to act in the beneficiary’s best interests. Fiduciaries fail to act in the beneficiary’s best interest when they engage in acts of self-dealing or other acts contrary to their duties. For example, fiduciaries breach their duty of loyalty when they sell shares solely for their personal benefit without considering the beneficiary’s interest. (Uzyel v. Kadisha, (2010) 188 Cal.App.4th 866.) Depending on the circumstances, breaches of fiduciary duties can also be based on fraud or negligence. (Knutson v. Foster, (2018) 25 Cal.App.5th 1075.) 

3. Damages

Plaintiffs must also show the breach of fiduciary duty caused damages. Damages can include financial harm or other losses directly caused by the fiduciary’s actions. (Hasso v. Hapke, (2014) 227 Cal.App.4th 107.) Plaintiffs can generally choose the type of relief they want to recover, such as traditional damages or equitable remedies like disgorgement of profits. (Center for Healthcare Education and Research, Inc. v. International Congress for Joint Reconstruction, Inc., (2020) 57 Cal.App.5th 1108.) 

Conversion 

Conversion is a strict liability, intentional tort, that arises when one party wrongfully exercises control over another party’s tangible or intangible property. Conversion claims must prove three elements: (1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by wrongful act or disposition of the plaintiff’s property rights; and (3) resulting damages. (Duke v. Superior Court, (2017) 18 Cal.App.5th 490.) 

1. Plaintiff’s Ownership or Right to Possession

To satisfy the first element, Plaintiffs must demonstrate their ownership or right to possess the property at the time of conversion. (Welco Electronics, Inc. v. Mora, (2014) 223 Cal.App.4th 202.) In some cases, plaintiffs can bring conversion claims involving money if the claim pertains to a specific, identifiable sum. But defendant’s mere failure to pay money owed under a contract does not qualify as conversion. (Voris v. Lampert, (2019) 7 Cal.5th 1141.) 

2. Defendant’s Wrongful Act or Disposition

The second element requires defendant to have committed a wrongful act or disposed of the property in a manner inconsistent with plaintiff’s property rights. This includes defendant’s unauthorized assumption of control or ownership of the property or application of the property to their own use. (Hartford Financial Corp. v. Burns, (2014) 223 Cal.App.4th 202.) Because conversion is an intentional tort, the defendant must knowingly or intentionally commit the act. Wrongful intent is not, however, necessary because conversion is also a strict liability tort. (Multani v. Knight, (2018) 23 Cal.App.5th 837.) As such, defendant’s intent, good faith, or lack of knowledge is immaterial to the claim because conversion is a naturally tortious act. (Greif v. Sanin, (2022) 74 Cal.App.5th 412.) 

3. Damages

Lastly, plaintiff must suffer damages resulting from the conversion. Courts typically include the property’s value at the time of conversion, interest from that time, and compensation for time and money spent in recovering the property in damages awards. (Myers v. Stephens, (1965 223 Cal.App.2d 104; Civ. Code, § 3336.) 

What is an Example? 

For example, “Shawn” owns a software development firm. Four months ago, Shawn’s firm contracted with “Julie’s” online retail business to sell their products online. Shawn and Julie’s contract requires Shawn’s company to develop an e-commerce platform for Julie’s company within six months. Now, four months into the contract, Shawn’s company delivered a partially functional platform to Julie’s company. Specifically, Shawn’s company delivered a platform that fails to meet several key requirements outlined in the contractual agreement. 

As a result, Julie’s company sues Shawn’s company for breach of contract, seeking damages for lost revenue and the cost of fixing the issues Shawn’s company caused, and hires a new company to finish the job. Shawn’s company defends itself by claiming the issues were caused by delays and technical difficulties beyond their control. Before going to trial Shawn and Julie’s companies participate in a mediation to resolve the dispute quickly. If the companies do not settle in mediation, their case will go to trial. 

Conclusion

The Underwood Law Firm has a team of experienced lawyers who can help guide you through complicated legal matters and help you pursue solutions like partition to ensure you recover the entirety of what you are legally entitled to. We are here to help. 

What is a will?

A will is an estate planning tool. It is formally called a last will and testament, because it is the testator’s (or your) final intentions of what will happen to your assets following death. All of the assets owned by a decedent at their death constitute their estate. The will lists out what will happen to that estate. Specifically, a will names specific people or groups of people who will or will not receive specific assets. (In re Kuttler’s Estate (1958) 160 Cal.App.2d 332, 335-336.) In order to be operative and thus enforceable, a will must appoint an executor. (McMahon v. State Bar (1952) 39 Cal.2d 367, 370-371.) This person ensures the will goes through the probate process.

Certain property is exempt from a will and can be passed through non-probate asset transfers. These include trust distribution, assets owned in joint tenancy because those have a right of survivorship, community property with right of survivorship because that remains with the surviving spouse. (Placencia v. Strazicich (2019) 42 Cal.App.5th 730, 736-737.)

Why is it important to have a will?

A will ensures your surviving family members or other people in your life know what to do with the assets comprising your estate. The court will adhere to what you have spelled out in the will if your intent, or testamentary intent, was clear. (Estate of Wong (1995) 40 Cal.App.4th 1198, 1205.) This means you competently and truly meant for this document to determine who would get what assets.  (Estate of Williams (2007) 155 Cal.App.4th 197, 212.) A will spells out how the assets will be distributed which helps avoid any confusion or disagreements with how things are divided. It also ensures your wishes will be followed. (Eyford v. Nord (2021) 62 Cal.App.5th 112, 121.) A will sets out how assets are to be distributed but also may direct property to be sold. (Cal. Prob. Code § 10000.) That is why filing a will with the probate court is important.

How do wills become public record?

In order to distribute assets, the will must go through probate. (Reed v. Hayward (1943) 23 Cal.2d 336, 339.) This requirement ensures a will is made public record. Once the will is lodged with the court to open probate, the will is public record and can be accessed by anyone even if they are not included in the estate or related to the decedent.

The executor of the estate has a duty to file the will with the probate court. The executor is designated by decedent and will file with the court asserting they are the executor. (Cal. Prob. Code. § 8422.) Once the executor has filed the will, the estate passes through a formal probate process. (Estate of Helm (1935) 6 Cal.App.2d 752, 755.) This proves the authenticity of the will and appoints an executor if one has not been designated already. 

When the executor files a will they also file a petition to open probate with the court which sets a date for the initial probate hearing. (Prob. Code. § 1041.) If there is no will, the executor can petition for letters of administration which triggers intestate succession, and the court will appoint an administrator for the estate. 

The executor must file with the county superior court where the decedent lived for 30 days prior to their death. (Prob. Code. § 7051.) If they do not, or try to delay filing to injure other heirs, they forfeit their role as executor. (Estate of Alfrey (1938) 12 Cal.2d 255, 257.) Even without a will, an estate usually passes through probate so the assets can be valued and distributed in line with intestacy principles. 

How to locate a will in the public record

An interested person can appear to respond or object to a will. (Prob. Code § 1043.) This is why it someone may try to find a will in the public record or find which court the probate hearing will be at.

If you know you are a beneficiary of the estate, and the executor is refusing to provide you with a copy of the will you can obtain a copy for a fee. By going to the office of the County Clerk an employee in the office can search their records for it. (Prob. Code § 8200.) If the will has been filed, it should be there. It may also be obtainable in online court records.

After a will has been filed with the court, an attorney can help locate the will if the court it was filed in is unknown to you. 

What is an example of a will in the public record?

For example, Julie’s mom appointed her to be the executor of her will. Upon her passing, Julie must file the will with the court to begin the probate process and ensure her mother’s assets are distributed appropriately. Once she has done this, the will enters into the public record. If she has a relative Shawn who says he is in the will or should have been in the will Shawn could dispute the will in probate. If Shawn knew about the will it would be easy for him to dispute the will as he knew where it was filed. If Shawn was estranged, he may need to look for the will through the county clerk’s office. He would be able to do this even if he was not a relative of Julie or Julie’s mother. Because of this a “stranger” couldtry to dispute the will, providing he had a valid claim to do so. This can draw out the probate process.

If Julie’s mother was famous or wanted to keep her assets out of the public eye, she could have set up a trust. Trusts are not required to be filed with the court and could prevent an estranged relative or a stranger from trying to state a claim to her assets.

Conclusion

Wills are an important tool in distributing or selling a decedent’s assets like real property. With wills being in the public record, anyone with an interest can object to a will in a probate proceeding. The distribution or sale of real property from a will may cause further disputes leading to disagreements between family members or beneficiaries. If sale or disposal of property is a point of contention, partition may be a solution. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.

Yes. In California the legal process of “abandoning” a partnership is called partnership dissolution. Partnership dissolution is the legal process of ending a business partnership, either voluntarily or involuntarily. Reasons for dissolution include completion of business goals, a partner’s death or incapacity, or the partners’ mutual agreement. The Uniform Partnership Act (“UPA”) governs partnerships and their dissolutions providing procedural steps for the partnership’s end including liquidation of assets, settling debts, and distributing profits or losses among partners. Understanding how partnership dissolution works helps ensure the fair resolution of business affairs for all involved parties. 

What is Partnership Dissolution? 

Partnership Dissolution is the process through which partnerships dissolve and partnership business is “wound up.” Specifically, dissolution is a change in the partners’ relationship caused by any partner leaving the association invoking the partnership’s “winding-up” process. (Freese v. Smith, (1952) 114 Cal.App.2d 283.) 

Under California Partnership Law, dissolution happens when a partner abandon’s the partnership. Abandonment can occur in various ways including, the partner’s express will or on occurrence of other specified events in the partnership agreement. (Corp. Code, § 16801.) Dissolution occurs by law upon a partner’s death or by a judicial determination finding dissolution is equitable or necessary due to a partner’s conduct or other circumstances. (Tsakos Shipping & Trading, S.A. v. Juniper Garden Town Homes, Ltd., (1993) 12 Cal.App.4th 74.) 

Dissolution does not immediately terminate the partnership. Instead, the partnership continues until the partnership’s “winding-up” process is completed. (King v. Stoddard, (1972) 28 Cal.App.3d 708.) Likewise, a partner’s authority to act on the partnership’s behalf generally terminates upon dissolution, however, the partner retains authority to perform acts necessary to complete outstanding transactions and facilitate the partnership’s winding-up process. (Glassell v. Prentiss, (1959) 175 Cal.App.2d 599.) 

What is the “Winding-Up” Process?

In partnership dissolutions, the “winding-up” process is the final step before the partnership officially terminates. “Winding-up” is the process of completing the partnership’s uncompleted transactions, reducing all partnership assets to cash, and distributing proceeds among partners. (Heller Ehrman LLP v. Davis Wright Tremaine LLP, (2018) 4 Cal.5th 467.) As such, a partnership is not immediately terminated by dissolution but instead continues until the partnership’s affairs are “wound up.” (Vangel v. Vangel, (1953) 116 Cal.App.2d 615.)

Who Can Participate in the “Winding-up” Process? 

Partners who have not yet dissociated can participate in winding-up the partnership’s business. (Corp. Code, § 16803.) Alternatively, the last surviving partner’s legal representative may participate in winding-up the business. (Ibid.) Participating partners must take several steps to ensure the winding-up process is properly completed to terminate the partnership. (Glassell v. Prentiss, 175 Cal.App.2d at 605.) Notably, courts may order judicial supervision of the winding up for good cause shown by any partner, their legal representative, or transferee’s application. (Corp. Code, § 16803.) 

The individual, or partner, winding-up the partnership’s business retains authority to preserve the partnership’s business or property as a going concern for a reasonable time. This individual may also prosecute and defend actions and proceedings against the partnership, settle and close the partnership’s business, dispose of and transfer partnership property, discharge the partnership’s liabilities, distribute the partnership’s assets, settle disputes by mediation or arbitration, and perform other necessary acts. (Corp. Code, § 16803; Heller Ehrman LLP v. Davis Wright Tremaine LLP, 4 Cal.5th at 481-82.) 

For law partnerships, the winding-up process requires performance of acts necessary to preserve legal matters for transfer to new counsel, to effectuate such a transfer, and collect on work done pre-transfer. (Heller Ehrman LLP v. Davis Wright Tremaine LLP, 4 Cal.5th at 481; Corp. Code, § 16803(c).) 

Partners’ Rights to Distribution of Assets in “Winding-Up”

Distributing partnership assets is one of the most crucial steps in any partnership’s winding-up. In asset distribution, each partner is entitled to a settlement of all partnership accounts, and portions of the partnership’s profits and losses per their right to distributions. (Corp. Code, § 16807.) Despite their right to distributions, partners are not, however, first in line to receive distributions of assets. Instead, partnership assets are first applied to discharge the partnership’s remaining creditor obligations, including discharging partners who are creditors. (Ibid.) Once creditor obligations are settled, any asset surplus is distributed to partners in accordance with their right to distributions. (Ibid.) A partner’s right to distribution, or right to share in post-dissolution profits, is based on the partnership’s use of each partner’s interest in the firm’s capital. (Oliker v. Gershunoff, (1987) 195 Cal.App.3d 1288.) 

Partners are entitled to an accounting of the partnership’s profits from the time of dissolution until the winding-up. (Urzi v. Urzi, (1956) 140 Cal.App.2d 589.) So, if one partner continues the business using existing partnership assets, they are accountable to the exiting partner for profits acquired during the period between dissolution and winding-up. 

Until a partnership’s affairs are “wound up” partners can only bring equitable claims enforced in accounting actions. (Driskill v. Thompson, (1956) 141 Cal.App.2d 479.) Courts cannot enter personal judgments until all partnership assets are converted into money, debts paid, and the partnership’s final balance is determined. (Pilch v. Milikin, (1962) 200 Cal.App.2d 212.) 

In short, during the winding-up process partners are entitled to discharge partnership liabilities, receive a distribution of any remaining assets proportional to their interests, and must claim profits from using their share of assets to continue the partnership post-dissolution. 

What is an Example?

“Shawn” and “Julie” are business partners who own a coffee shop together. Over time, Julie decides she wants to pursue a new career and no longer wants to continue in the partnership with Shawn. Julie tells Shawn she wants to dissolve the partnership, and after extensively discussing the matter, Shawn agrees. 

Shawn and Julie begin their partnership’s dissolution by following the terms outlined in the agreement they executed at their partnership’s beginning. Accordingly, Julie and Shawn administer the businesses’ winding-up together by liquidating their assets, including equipment and inventory, settling business debts, and dividing the remaining profits equally based on their agreed upon shares. Shawn and Julie agree Shawn will continue the business independently upon their partnership’s dissolution. 

Once Shawn and Julie complete the coffee shop’s winding up, their partnership terminates. Now, Julie exits the partnership to pursue her new career and Shawn, no longer in partnership with Julie, can continue running the coffee shop independently or by associating with a new partner without involving Julie. 

Conclusion

Partnership dissolution is a complex legal process requiring careful navigation to ensure the most equitable outcome possible. The Underwood Law Firm has a team of experienced lawyers who can help guide you through complicated legal matters like your partnership’s end and help you pursue solutions to ensure you recover the entirety of what you are legally entitled to. We are here to help.