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.
>
>Readers are encouraged to respond to or criticize this posting.
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