Property Outcomes Can Be Surprising

            When things go well, a property transfer from one owner to another can go smoothly and relatively seamlessly.  But there are many complex considerations involved in every property transfer.  That’s one of the reasons most people hire professionals to help them with a real property transfer.

There can be additional considerations when a property is owned by several owners, and when a claim is made against just one of the owners.  For example, if three unmarried persons own a single property in equal shares, and if one of them gets sued, then the property is at risk – or at least a third of it is.  If judgment is entered in that suit, then the creditor who sued the debtor may be entitled to sell the debtor’s interest in the property.  That doesn’t mean that the creditor gets to sell the entire property.  Two of the owners have their own property interests, and they may not be willing to sell their interest in the property. That means that the creditor may be able to force a sale of the 1/3 interest of the debtor.  But who wants to own a property with two other strangers?  Somebody probably would – but maybe only at a steeply discounted price.  But under California law, only the debtor’s property interest can be affected by a judgment.  The other owners of the property usually continue to own their respective interests in the property free from any judgment.  The creditor may be able to sell the debtor’s 1/3 interest in the property, but the other 2/3 interest would in most cases remain unaffected by such a sale.

This result can be different in Bankruptcy. The Federal Bankruptcy code provides many protections for bankrupt debtors – but it also contains many protections for the interests of creditors.

This law may not be well known, but in bankruptcy an entire property can be sold, even when it is owned by persons who aren’t in bankruptcy.

In one case, a debtor owned a business that sold mobile homes to consumers.  This debtor, along with several other individuals, purchased real property that was to be turned into a mobile home park. Each of the individuals made a contribution to a down payment, and a loan was obtained for the rest of the purchase price.  The mobile home park was eventually developed in 47 lots, and the rental amounts from these lots were generating profits.  However, the debtor filed a bankruptcy petition in a chapter 7 bankruptcy proceeding.  At the time the debtor filed the bankruptcy petition, he owned a 1/3 interest in the mobile home park.  The mobile home park was worth more than the loan against it.

The Bankruptcy court found that the 47 mobile home sites couldn’t be reasonably split up  between the several owners. The Court also found that the mobile home park was worth considerably more as a single unit that it would be as separate tracts.  Therefore, the Bankruptcy Court ordered that the Bankruptcy trustee could sell the entire mobile home park, even though the non-debtors owners did not want the park to be sold.

This is a significant principle in Bankruptcy law.  In certain situations, an entire property can be sold, even when a debtor is only one of several owners.  This can be true even if the other owners haven’t filed petitions in bankruptcy.  There are protections, of course, such that the non-debtors owners receive the value of their interests when the property is sold.  Also, non-debtor owners are typically given a first right of refusal to purchase the debtor’s interest.  But this Bankruptcy principle can end up having a property be sold through a bankruptcy in some cases when non-debtors owners never thought it would be.   The case is reported as Matter of Woolston 147 B.R. 279 (Bankr. M.D. Ga 1992).

Real Property, Partnership, and Bankruptcy law involve complex considerations. The foregoing involves only a portion of the considerations of the case discussed, and should not be relied on.  Persons involved in real property or partnership matters, and those considering bankruptcy, should seek competent legal advice.

Copyright 2023 ROBERT B. JACOBS