#4 BE WARY OF NON-MARITAL RELATIONSHIPS & REAL ESTATE OWNERSHIP: PLANNING, SETTLING AND PARTITIONS, OH MY!

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1 The Family Law Section proudly presents #4 BE WARY OF NON-MARITAL RELATIONSHIPS & REAL ESTATE OWNERSHIP: PLANNING, SETTLING AND PARTITIONS, OH MY! Marcus T. Brown, Law Office of Marcus T. Brown Steven J. Kahn, Hoge Fenton Kimberly Kilpatrick, Law Offices of Joseph H. Wolch Agenda 1. How these issues arise for family law attorneys a. Limits on Jurisdiction Over Real Estate in Family Law Matters b. Real Property Issues Related to Child Custody Matters c. Third-parties on Title with the Divorcing Couple 2. Different Ways of Holding Title a. Tenants in common b. Joint tenants c. Investment property LLC d. Trusts 3. Overview of Litigating the Co-Owners Dispute a. Partitions b. Dissolutions for LLCs and Corporations 4. Jointly Representing the Settling Co-Owners (0.5 hour for ethics credit) a. Buy-outs b. Sales 5. How to Avoid/Control Disputes on the Front End a. TIC Agreements b. LLCs for investment property c. Planning for possible marriage

2 Speaker Biographies Marcus Brown is a real estate and litigation attorney based in Walnut Creek. Prior to opening his current office in 2015, he practiced real estate and financial services litigation at Wolfe & Wyman LLP (Irvine/Walnut Creek) and real estate and commercial litigation at Plastiras & Terrizzi (San Rafael). Marcus attended Seattle University School of Law (J.D., 2005), where he was a Presidential Scholar, received the Award of Distinction for Public Service, and graduated with honors. He received his bachelor s from Middle Tennessee State University (B.S., 2002, cum laude). Marcus regularly speaks and writes for the legal and real estate communities on real property issues. He is an active member of the Contra Costa County Bar Association, sitting on multiple boards, and is the current President of the CCCBA Real Estate Section. Steven Kahn is a shareholder with Hoge Fenton and chair of the firm s real estate and land use practice group. He focuses on cases involving ownership, use, and control of real estate (land, leases, title, boundaries, easements). He typically advocates for his clients in litigation, but takes great pride in helping them avoid a dispute in the first place or reaching an efficient, fair resolution. Steven s cases span the real estate spectrum, including: boundary disputes, easements, ownership disputes, priorities of title, deeds of trust, quiet title and title correction, mechanic's liens, title insurance coverage, escrows, real estate transactions "gone bad," representing real estate professionals (realtors, lenders, mortgage brokers), and unlawful detainers. In addition to litigation and disputes, Steven drafts and negotiates commercial and residential leases, counsels clients in real estate transactions, and advises clients on title insurance coverage and escrows. Steven started his career as associate claims counsel with First American Title Insurance Company, where he handled coverage determinations under title insurance policies, managed claims litigation, and provided legal counsel on title insurance, escrows, and a variety of complex real estate issues. Steven graduated from Claremont McKenna College (B.A. 2001) and Santa Clara University School of Law (J.D. 2004). He currently serves as chair of the advisory board for the Alexander Community Law Center in San Jose. Kimberly Kirkpatrick is a family law attorney with The Law Offices of Joseph H. Wolch in Walnut Creek. She has been practicing family law exclusively for 11 years and is currently in the application process for her specialization in Family Law. Kim is the President-Elect of the Family Law Section of the CCCBA and has served as a Director of the Family Law Section for the past five years. Kim attended Thomas Jefferson School of Law in San Diego where she graduated summa cum laude in She was active with the San Diego Family Law Bar Association before moving to Nor Cal in When she isn t practicing law, she enjoys boating and camping with her husband and their three teenage daughters.

3 Non-Marital Relationships & Real Estate Ownership: Planning, Settling, & Partitions Presented To: Contra Costa County Bar Association MCLE Spectacular November 16, 2018 Marcus T. Brown Law Office of Marcus T. Brown Walnut Creek Steven J. Kahn Hoge Fenton Pleasanton Kimberly B. Kirkpatrick Law Offices of Joseph H. Wolch Walnut Creek

4 1 Non-Marital Relationships & Real Estate Ownership: Planning, Settling, & Partitions Presented To: Contra Costa County Bar Association MCLE Spectacular November 16, 2018 Marcus T. Brown Law Office of Marcus T. Brown Walnut Creek Steven J. Kahn Hoge Fenton Pleasanton Kimberly B. Kirkpatrick Law Offices of Joseph H. Wolch Walnut Creek 2 3 How Do Real Property Issues Arise for Family Law Attorneys? A. Limits on jurisdiction over real property in Family Law Matters B. Real property issues related to child custody matters C. Third parties on title with divorcing spouses Family Court Jurisdiction over Real Property Family Court has jurisdiction over real property when real property is included in the assets held by either spouse or domestic partner in a dissolution, legal separation, or request for nullity. Family Court can consider ownership of real property in paternity cases for limited purposes such as setting support or for attorney fee awards. The most common way real property issues arise in the Family Court is in the division of the marital estate. Family Court s remedies generally restricted to ordering sale of property. 4 5 Let Me Tell You a Story About Free Milk & A Cow The Kids! The House! The Dog! (But no ring!) Changing attitudes and norms = more couples having children without getting married Couple has children, decide to buy a house together Particularly common in areas with high cost of housing Relationship ends Clear rules govern real property when ending marriage Not so clear when ending a non-marital relationship Clear rules regarding children when ending marital or non-marital relationship If couple has children, MAY be able to include property in paternity agreement 1

5 No agreement, MUST proceed with a general civil case Birth Certificates are Not Enough Even if both parents names are listed on the child s birth certificate, the Family Court does not have jurisdiction to make orders as to custody, visitation, parenting and child support until a Petition to Establish a Paternal Relationship is filed. This Petition follows same general path as a Dissolution, Legal Separation or Nullity. Petition Response Motions & Orders Judgment of Paternity Stipulated Judgment of Paternity If non-married partners agree on disposition of real property, include the terms of the agreement as to the real property in a Stipulated Judgment for Paternity Can include agreement to sell and distribute proceeds Can include agreement for one party to buy out the other s interest Can include agreement to continue co-ownership with one party paying entirety of mortgage/taxes/etc. or paying rent to the other. Does not require parties to agree on all aspects of custody, parenting and support- can litigate some issues and incorporate court orders into final Stipulated Judgment Tiptoe to the Courthouse When including agreement as to disposition of jointly owned real property, process Judgment of Paternity carefully: With a private judge With the assigned courtroom judge at a scheduled appearance in department Not likely to get past the clerk s office Enforcement issues Not a problem to date Worse case- get sent to general civil department, no worse off than alternative Why? Cost Simplicity Did I mention cost? Third Party on Title Spouses own property with a third party, all names on title Community property interest in property, one spouse and third party on title Separate property interest in property, one spouse and third party on title Date of acquisition 2

6 Gift/inheritance/estate planning Fractional interest, multiple parties on title, one or both spouses on title Family Member on Title Spouses with parent of one spouse, helping elderly parent Spouses with parent/s of one spouse, parent/s helping adult child (spouse) One or both spouse added to title of parent/s real property Sometimes used as estate planning tool Can be problematic when spouses divorce To whom is the gift made? Value and buy-out the out spouse s interest Partition action Investment Properties One or both spouses listed on title as fractional owner along with third party or parties Comes up in investment and income properties Tricky to value when a fractional minority interest Best resolution generally to offset against other asset/s Watch for unintended consequences in changes to title Consider holding in trust/indemnifying out spouse Trust & Indemnify Husband is awarded the community s 15% interest in the real property located at 123 Main Street, Anytown, CA. The parties agree that the interest in 123 Main Street shall continued to be held as titled at the date of the parties acquisition of the interest. The parties agree that Wife shall hold her share of the community property interest in 123 Main Street in constructive trust for Husband until subject property is sold and shall release all interest to Husband at time of sale. Husband shall be responsible for all encumbrances and obligations relating to 123 Main Street, and shall indemnify and hold Wife harmless from same. As equalization for this award, Wife shall receive Wyland painting Different Ways To Hold Title Together Tenancy In Common Joint Tenancy Community Property Community Property With Right Of Survivorship LLC / TIC (by agreement) Trust 3

7 Tenancy In Common Multiple owners possible Any arrangement of ownership interests by percentages Ownership interests independently transferrable No right of survivorship upon death interests pass by will, probate, trust, or other agreement Each ownership interest exists in its own world Terminated by agreement or court order Presumed form of ownership (except spouses) Creditor rights against specific tenant in common Joint Tenancy Two or more owners in equal shares Equal right of possession Conveyance by one owner ends joint tenancy Result with two owners is tenancy in common Result with more than two owners is remaining owners stay joint tenants as to their interest, but are tenants in common with new owner KEY: Right of Survivorship Other ways to end joint tenancy: partition; judgment; agreement; execution sale (creditor claim creditor becomes tenant in common) NOT presumed form of ownership Community Property Presumed form of ownership as between spouses and registered domestic partners Separate interests cannot be conveyed Purchaser must acquire entire property Upon death of one owner, surviving owner retains 50% ownership and other 50% goes to successors KEY: Generally, creditors can satisfy debts of either spouse against entire community property Ways to terminate: Death of one owner; divorce; permanent separation of spouses; court order Community Property With Right Of Survivorship Same rules as Community Property EXCEPT: Right of survivorship When one spouse dies, the other takes 100% interest No disposition by will Automatic no probate required 4

8 NOT presumed form of ownership between spouses and domestic partners (must be declared) Must be married for this ownership (obvious) LLC / TIC LLC can be a tenant in common LLC / TIC agreement terms typically private Owners of LLC / TIC typically private (undisclosed) An LLC can be one of several members holding title to property as an LLC / TIC LLC / TIC can have a single / specific purpose LLC / TIC agreement can control / address most conceivable circumstance (buyout, sale, right of first refusal, etc.) Creditor claims of LLC / TIC members can potentially reach debtor s LLC / TIC interest Trust Trust owns the property; holds title via trustees. Cannot hold title as John Smith Trust Instead: John Smith as Trustee of the John Smith Trust Avoids probate Generally avoids individual creditor claims Can privately structure ownership, possession, rights within the trust agreement Typically, automatic conveyance to beneficiaries per trust terms upon death of Trust settlor Succession of ownership controlled by trust Terminable by: agreement; operation of trust; end / elimination of trust Litigating Co-Owner Disputes Partition Actions Available for property held as Tenants in common, or joint tenants Right is generally absolute Right of partition may be limited by agreement. Judicial dissolution of LLCs, Corps. Partition Actions Value of Client s Interest 1. Value of the property 2. Minus liens (mortgage payoffs) 3. Multiplied by client s percentage interest 4. Plus other owners percentage share of common expenses paid disproportionately by client. 5. Plus client s share of rents received by other owners. 6. Plus client s percentage share of rental value if client ousted by other co-owner 7. Minus client s percentage share of common expenses paid by other owners. 8. Minus other owners share of rents received by client. 5

9 9. Minus other owners share of rental value if client ousted them Partitions Common Expenses Mortgage principal Mortgage interest Property taxes Property insurance Cost of necessary repairs Cost of agreed upon improvements Down payment to buy the property. (Demetris v. Demetris (1954) 125 Cal.App.2d 440.) Partition Actions Procedure 1. Pre-litigation demand for buyout or agreed upon sale 2. Ouster demand where client not in possession, other owner in. (Civ. C 843.) 3. Civil Action for Partition (CCP et seq.) a. Plead and prove that plaintiff is tenant in common or joint tenant b. Plead and prove basis for partition by sale instead of division c. Defendants are co-owners, mortgagees, and other record interest-holders which will be materially affected d. Also name all persons unknown claiming any interest in the property e. Include causes of action for accounting and contribution lien, also ouster and waste if appropriate. f. Lis pendens g. Litigation guarantee, amend complaint if necessary. h. Serve unknown defendants by publication. 4. Interlocutory judgment for manner of partition a. Referee required. b. By appraisal only if parties agree 5. Sale by auction and final judgment of partition. a. Determination and distribution of relative monetary interests (CCP ) Jointly Representing Co-Owners (In Settlement / Resolution) Sale of Interest (Buy Out) One owner to the other Financing considerations Disclosures? Consider: party in possession Sale of Entire Property Disclosures Consideration of TIC / LLC agreement terms Joint Owners as Joint Clients Joint Owners As Joint Clients 6

10 Rule 1.7: Informed written consent for direct conflict / adverse (a) Informed written consent if significant risk that representing one client will materially limit representation of other client (b) If risk of materially limited representation of one co-client becomes a reality, must obtain further written consent to continue representation of both with conflict (b becomes a) Conflict scenarios: Owners want different outcomes for jointly owned property Owners disagree as to details of disposition / sale Common partition issues: accounting for expenses; one owner in possession; accounting for rents received Dealing With Joint Representation Separate letter providing advice as to potential conflicts of interest in the representation Sent to and signed by all potential clients Advise of right to consult with independent counsel Disclose potential future adversity, which would require further disclosure and consent, or disengagement Disclose potential of adversity that creates exception to attorney-client privileged communications for disputes between joint clients (Evidence Code 962) Disclose that communications shared amongst joint clients Agreement on what happens if actual adversity between joint clients develops: withdraw; continue with one joint client; etc. Organization Co-Owner As Client Representing organization (LLC) does not automatically create attorney-client relationship with individual owners/members. (Rule 1.13) Can represent individual members as well, if no conflict Consider giving written disclosure per Rule 1.7(c) BUT: If potential significant risk, or actual conflict, arises, consider getting informed written consent Potential Conflict Buy Out Sale of Interest (Buy Out) One owner to the other Financing considerations Disclosures? Consider: party in possession Consider: one party in control of the property Could lead to a partition action. Then what? Can you advise if co-clients agree to non-litigated buy out? Review how a non-litigated buy out works How to Avoid/Control Disputes with Good Planning 7

11 Tenants-in-Common ( TIC ) Agreements LLC/Partnership Agreements How to Avoid/Control Disputes with Good Planning Essential elements of TIC agreements: Signed by all co-owners per record title Restrictions on transfer Rights of refusal on voluntary transfers Buy out provisions for involuntary transfers, e.g., death, incapacity, divorce, bankruptcy Buy out provisions before partition may be filed. Appraisal processes for determining buy-out prices. Accounting for expenses on any buy out Agreement to sign and record memorandum of agreement. How to Avoid/Control Disputes with Good Planning Optional provisions for TIC Agreements Who will be responsible for managing the property Accounting for common expenses Accounting for rents and profits Rights of possession if any How to Avoid/Control Disputes with Good Planning TIC Agreement Procedure/Checklist Before buying (before writing offers) Clients should have purchase money in order Clients should have understanding on sharing expenses, rents, possession, and exit strategies. Draft and sign TIC Agreement property TBD Review and approve TIC deed prepared by title company escrow Have title company escrow record memorandum of TIC agreement from close of escrow (after deeds of trust) TIC Agreements as Prenups CA Fam Code Section 1615 governs requirements for a valid, enforceable prenuptial agreement Tenancy in Common Agreement could cover a situation in which non-married co-owners marry at some point after acquiring the property Could opt out of community property presumptions regarding the subject property -IFthe TIC Agreement meets statutory requirements set forth in CA Fam Code Section 1615 Numerous requirements but key is both parties must have independent legal representative review the agreement prior to execution Thank You! 8

12 Thank You! If you have any questions... Marcus T. Brown Law Office of Marcus T. Brown 3100 Oak Road, Suite 100 Walnut Creek, CA Steven J. Kahn Hoge Fenton 4309 Hacienda Drive, Suite 350 Pleasanton, CA Kimberly B. Kirkpatrick Law Offices of Joseph H. Wolch 100 Pringle Avenue, Suite 200 Walnut Creek, CA This presentation was provided as an educational service. It is an overview only, and should not be construed as legal advice or advice to take any specific action. If you have questions regarding any of the content contained in this presentation, we recommend you seek the assistance of a knowledgeable legal professional Hoge Fenton Jones & Appel, Inc Law Office of Marcus T. Brown 2018 Law Offices of Joseph H. Wolch