PARTNER FORECLOSURE
Real estate is often acquired by two or more partners. If one of the partners fails to live up to his or her obligations under the partnership, the property could go into foreclosure. The question often arises if the non-defaulting partner bids at the foreclosure sale, does the defaulting party have any rights against that partner or rights to the property should it be acquired by the non-defaulting party.
The issue was addressed recently in the case of Jones v. Wagner (2001) 90 Cal.App.4th 466. The Wagners had contributed $301,000 toward the down payment on a beach-front townhouse in Oxnard, California. The Joneses contributed $107,000 toward the down payment and agreed to make all of the payments on the $250,000 mortgage. The Joneses defaulted on their obligation to make the mortgage payments, causing lender to foreclose. At the trustee’s sale, the Wagners purchased the property for $263,000, the amount of the defaulted mortgage. Thus, the Wagners had acquired 100% interest in the property for approximately $565,000. This was $85,000 cheaper than the Joneses and Wagners had originally purchased the property.
The Joneses sued the Wagners for breach of their partnership agreement and fraud. The Wagners counterclaimed for the disproportionate amount of their initial investment in the partnership.
The Superior Court and the Court of Appeal agreed with the Wagners and found that while partners have a fiduciary duty to each other, there was no violation in this case because the Joneses had breached the partnership agreement. The partnership was dissolved. The Wagners were entitled to be reimbursed for their losses of $187,000 resulting from the wrongful dissolution of the partnership. There was no breach of fiduciary duty by the Wagners bidding at the foreclosure sale to avoid losing their half of the property. The Joneses were not entitled to share in the good fortune of getting a good price at the foreclosure sale.
In short, when one partner fails to adhere to his or her obligations in the partnership, the remaining partners can take necessary actions to protect their interest, even if it means that they will profit at the expense of the defaulting partner.
