Partition actions are a unique legal remedy in California, aimed at resolving disputes among co-owners of real property. They ensure equitable distribution of interests and costs, particularly through adjustments and credits for expenditures like taxes, attorney fees, and maintenance. However, an important issue arises when a party involved in a partition action files for bankruptcy: are these adjustments and credits discharged? The unequivocal answer, under California law and relevant federal bankruptcy principles, is no.

The Nature of Partition Actions and Compensatory Adjustments

A partition action, governed by California Code of Civil Procedure (CCP) §§ 872.010–874.050, enables co-owners to divide or sell jointly owned property while accounting for financial contributions. Courts order an accounting to equitably adjust costs and benefits among co-owners. Credits include expenditures for property preservation, taxes, and attorney fees incurred for the common benefit of all co-owners.

For example, CCP § 872.140 mandates equitable adjustments during the partition process, ensuring all parties receive their fair share. Case law, such as Wallace v. Daley (1990), further clarifies that credits may include costs like mortgage payments, taxes, and insurance necessary to preserve the property.

Partition Adjustments and Bankruptcy

When a co-owner files for bankruptcy, the automatic stay under 11 U.S.C. § 362 halts most collection activities, including ongoing partition proceedings. However, partition actions—and the equitable adjustments that accompany them—are not extinguished. This principle is supported by both California and federal bankruptcy law.

Bankruptcy's Limited Preemption

The Ninth Circuit Bankruptcy Appellate Panel (BAP) in In re Flynn (2003) emphasized that state law governs co-ownership adjustments even during bankruptcy proceedings. Specifically, the court held that equitable adjustments under California partition law remain enforceable despite a bankruptcy filing. The panel noted, “The sums authorized to be paid from sale proceeds, as a matter of California law independent of § 363(j), were appropriate” (Flynn, 297 B.R. at 605). This ruling underscores the interplay between state partition laws and federal bankruptcy rules, affirming that bankruptcy does not shield debtors from co-ownership obligations.

Attorney Fees and Other Costs as Adjustments

Under CCP §§ 874.010–874.050, attorney fees incurred for the common benefit of co-owners are reimbursable as compensatory adjustments. In Flynn, the court reaffirmed this principle, ruling that such fees and related costs must be deducted before distributing sale proceeds. Similarly, in Riley v. Turpin (1960), the California Supreme Court clarified that expenses necessary to preserve the property, including legal fees, are recoverable from sale proceeds.

Relief from the Bankruptcy Stay

California courts often require relief from the automatic bankruptcy stay to proceed with partition actions and enforce equitable adjustments. This relief allows state courts to adjudicate credits and offsets under CCP §§ 872.140 and 874.010 et seq. For instance, in a recent California case, a bankruptcy court lifted the stay to permit enforcement of a partition judgment, including compensatory adjustments. The court recognized that these adjustments, intrinsic to the equitable division of property, do not conflict with bankruptcy's objectives.

Why Partition Adjustments Survive Bankruptcy

Partition adjustments, including attorney fees, taxes, and maintenance costs, are not merely debts but equitable offsets integral to determining the value of co-ownership interests. Key reasons why these adjustments are not discharged in bankruptcy include:

1. Equitable Nature of Adjustments: Unlike unsecured debts, partition adjustments ensure fairness in distributing sale proceeds. Bankruptcy courts respect this principle by applying state partition laws to determine offsets before distributions.
2. Preservation of Property Value: Adjustments for expenditures like taxes and attorney fees directly preserve or enhance the property's value, benefiting all co-owners, including the bankrupt party.
3. Statutory Mandate: CCP §§ 872.140 and 874.010 et seq. obligate courts to address adjustments before finalizing partition sales, ensuring that co-owners meet their financial obligations.

Practical Implications for Co-Owners

When faced with a co-owner's bankruptcy, parties to a partition action should take the following steps to protect their rights:

1. Seek Relief from Stay: File a motion in bankruptcy court to lift the automatic stay, allowing the state court to adjudicate adjustments.
2. Document Expenditures: Maintain thorough records of all costs incurred for the property's benefit, including receipts for taxes, repairs, and legal fees.
3. Pursue Equitable Adjustments: Ensure that the partition judgment accounts for all credits and offsets, prioritizing these claims over the debtor's share of sale proceeds.

Conclusion

In California, adjustments and credits in partition actions, including attorney fees and other necessary expenses, are not discharged in bankruptcy. These offsets are fundamental to the equitable resolution of co-ownership disputes, preserving fairness and ensuring that financial responsibilities are properly allocated. By respecting state partition laws, bankruptcy courts uphold these principles, providing a clear path for co-owners to protect their interests even amidst bankruptcy proceedings​.

Disclaimer: This article is for informational purposes only and is not a substitute for legal advice. If you have specific legal questions, consult an experienced attorney.