Daily Development for Thursday, August 26, 2004
>by: Patrick A. Randolph, Jr.
>Elmer F. Pierson Professor of Law
>UMKC School of Law
>Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri
>dirt@umkc.edu
>
>Although this may be a small procedural issue, I thought it an interesting as a
comparison to the escrow funds decision just posted. Ed.
>
>BANKRUPTCY; PROPERTY OF THE ESTATE; PARTNERSHIP ASSETS: When bankruptcy court
erroneously ordered sale of property before determining ownership, party
claiming ownership interest in adversary proceeding was entitled to disgorgement
of sale proceeds from creditor pending resolution of adversary proceeding.
>
>Warnick v Yassian (In re Rodeo Canon Dev. Corp., 362 F3d 603 (9th Cir 2004)
>
>Rodeo and Beverly each held a 50-percent interest the Brighton partnership.
Rodeo held record title to a commercial property in Beverly Hills. Although
Rodeo held legal title, Beverly claimed that, because partnership funds were
used to purchase it, the Brighton partnership was the equitable owner of the
Property and Beverly therefore had a 50-percent interest in it. In 1999, Rodeo
filed for bankruptcy. Beverly initiated adversary proceedings to resolve its
claim of an ownership interest in the Property.
>
>Meanwhile, loans that had been made to Rodeo (not to the partnership) by a
third party, Warnick, were secured by deeds of trust on the Property. As part of
a settlement between Warnick and the bankruptcy trustee, the bankruptcy court
entered an order for sale of the Property and distribution of a portion of the
proceeds to Warnick. Beverly objected to distribution of the sale proceeds
pending resolution of the adversary proceedings over ownership and the
enforceability of the liens. The sale was consummated. The bankruptcy appellate
panel instructed the bankruptcy court to order Warnick to disgorge
$2,150,000-the disputed amount of sale proceeds - to the trustee pending
conclusion of the adversary proceedings.
>
>The Ninth Circuit affirmed. The court pointed out that the bankruptcy court
expressly declined to resolve the issue of who owned the Property before
ordering its sale, and that this decision contravened 11 USC §363, which
authorizes a trustee to sell only property of the estate. The court stated that
the bankruptcy court erred in allowing the sale of property as "property of the
estate" without first determining the threshold question of whether the debtor
did in fact own the property.
>Because sale had been consummated, however, it was not subject to collateral
attack. Therefore, the court could only address the disposition of the proceeds
from the sale, and the panel agreed that Warnick should disgorge them. The court
explained that a bankruptcy court is a court of equity and may order parties to
a bankruptcy appeal to disgorge improperly distributed assets. The court
rejected Warnick's argument that disgorgement was unnecessary because the funds
remaining in the estate were sufficient to protect Beverly's claimed 50-percent
interest. The court pointed out that the entire partnership interest, and not
merely Beverly's 50-percent interest, was in dispute.
>
>Reporter’s Comment: Because the partnership in this case was formed before
1997, this decision was governed by California’s old Uniform Partnership Act (UPA),
which was replaced by the Revised Uniform Partnership Act (RUPA); Corp C
§§16100-16962), effective as of January 1, 1997. However, because RUPA goes even
further than UPA in the direction of adopting the entity theory of partnerships
(Corp C §201(a) provides that "[a] partnership is an entity distinct from its
partners"), the same result is all the more likely to be reached: The
partnership owns the real estate, and the bankruptcy court is not able to sell
it free and clear of liens in a partner's bankruptcy, even though record title
may be in the partner's name.
>
>Editor’s Comment: Just another good example of the maxim - when bankruptcy
occurs - register your claims and objections early and often. Failure to have
registered the protest at this point may well have resulted in a loss of rights
to appeal or in the lender having some estoppel claim.
>
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