Michael P. Carbone, Esq.

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Publications > Partition of Real Estate

 

USING A REFEREE TO RESOLVE DISPUTES

AMONG CO-OWNERS OF REAL PROPERTY

 

Michael P. Carbone, Esq.

 

I.

INTRODUCTION

 

Disputes among co-owners of real property can sometimes be difficult and costly to resolve.  They may arise from disagreements about the use, development or management of the property.   In some cases one of the owners may simply want to liquidate his or her interest.  Frequently the dispute can be resolved through negotiation or mediation.  If those avenues fail, then the only recourse will be the filing of an action for partition.

 

Partition is governed by a very detailed statutory scheme that is found in Code of Civil Procedure §§872.110 et seq.[1]  The statutes require the court to appoint one or more referees.[2]  The partition referee will be charged with a number of tasks, which will vary according to the nature of the partition, and will be given broad powers to deal with the property in order to effect a division of the interests of the co-owners. [3]

 

Some cases may present problems that a partition referee is not authorized to handle.  Claims for accounting, breach of lease, or breach of fiduciary duty with respect to the property would be examples of claims over which a partition referee would have no jurisdiction. 

 

For example, suppose that the parties have inherited investment property from a family member’s trust.  One of the parties has been named as trustee of the decedent’s estate.  The other parties have questions about the administration of the trust.  They are concerned about the collection of rents, the reasonableness of expenses incurred to manage the property, and payments made by the trustee to himself or herself for services and expenses.  They also want to liquidate their interest in the property.  They sue for partition, and they also demand a trust accounting.

 

Or assume that the parties are two co-owners of a limited liability company that owns a commercial building.  Party A uses a portion of it to operate a business under a percentage rent lease from the LLC.  Party B believes that Party A is not properly accounting for all of his sales and that Party A is also in default under the lease for failure to maintain the property in good condition.  Tensions between the parties over these issues reach the point where Party A no longer wants to be in co-ownership with Party B and so he sues for partition and for breach of lease.

 

In cases such as these the parties can choose to litigate the issues that are outside the scope of the partition referee’s authority.  Or, the parties can choose a different option.  They can ask the court to appoint the partition referee to act in an additional capacity, which would be that of a general or special referee under §638 or §639 of the Code. This appointment will give the partition referee the additional powers needed to resolve or help resolve the entire case.

 

This article explains the powers and duties of a partition referee and of a referee who is charged with assisting the court in the resolution of civil disputes by means of judicial reference (“general referee” or “special referee”).  It demonstrates how the combined use of the powers of both types of reference can accomplish the division of the parties’ interests in the real property and resolve all related issues.

 

II.

THE PARTITION REFEREE

 

A.        Methods of Partition

 

Real property can be partitioned in one of three ways.  The partition can be accomplished by physical division,[4] by sale and distribution of the net proceeds,[5] or by the sale of a co-owner’s interest to another co-owner.  The third method is referred to as “partition by appraisal” because the interest to be sold must first be appraised.[6]

 

The partition may also be accomplished by a combination of two or all three of these methods.  For example, one part of the property might be physically divided while another part is sold or partitioned by appraisal.

 

The court may ask the referee for a report on whether the property should be sold or divided in kind.[7]  If it is to be sold the referee may be asked to recommend whether it should be sold at public auction or private sale.[8]  If there is to be a private sale the referee can employ a real estate broker and do all other acts that are necessary in order to complete the sale and then distribute the net proceeds to the owners.[9]  All of these powers will be exercised under the supervision of the court and with full opportunity for the owners to be heard.[10]

 

B.        Powers and Duties of Partition Referees

 

The powers and duties of partition referees are spelled out in great detail in the Code and will vary according to the manner of partition.  In most cases the referee will have two kinds of responsibilities.  The referee will act as an advisor to the court and will also carry out assigned tasks, such as selling the property.

 

The Code does not require any particular qualifications for a partition referee.  Lawyers and accountants, as well as real estate appraisers, brokers or developers, may all be suitable.

 

The number of referees may vary, according to the preferences of the parties.  The court may, with the consent of the parties, appoint three referees to partition the property.[11]  In the typical case the use of single referee is sufficient.

 

If part of the property is to be sold and the remainder is to be divided, the court in its discretion may appoint a referee for sale and a referee for division or may appoint a single referee for both purposes.[12]

 

Some of the powers and duties of partition referees pertain only to one method of partition and others are common to more than one of them, but they are best understood as they relate to the three different methods.

 

1.         General Powers and Duties

 

            All partition referees have the following powers and duties.

 

The referee may enter into contracts for services, but will not be personally liable under such contracts, nor for expenses incurred, except as such liability is expressly assumed by the referee in writing.[13]  With the approval of the court the referee may employ an attorney.[14]

 

The court may direct the referee to ascertain the facts necessary to determine the status and priority of all liens upon the property and to report thereon to the court.[15]  The referee may petition the court for instructions concerning the referee's duties under the Code.[16]  

 

The referee must file with the court a report of his or her proceedings, including a specification of the manner in which the referee has executed his or her trust, a description of the property divided and of the share allotted to each party, and, if applicable, any recommendation as to opening and closing of public and private ways, roads, streets, and easements.[17] 

 

The referee’s report may include recommendations as to “owelty,” which refers to equitable adjustments to be made among the parties,[18] and the court may order allowance, accounting, contribution, or other compensatory adjustment among the parties according to the principles of equity.[19]  However, the partition referee has no express authority to hold evidentiary hearings for the purpose of ascertaining the facts requiring such adjustments, as could be done under §638 or §639.

 

2.         In Sale or Physical Division

 

            In the case of either a sale or physical division, or a combination thereof, the court and the referee have certain responsibilities that are necessary to complete the partition.

 

The court determines whether a referee's bond is necessary, and if required the court will fix the amount of the bond.[20] The court instructs the referee as needed, fixes reasonable compensation for the referee’s services, and provides for payment of the referee's reasonable expenses.[21]

 

The referee is entitled to a lien on the property for the payment of fees and expenses, and the court will provide for the date of commencement of that lien.[22]  The court may require the referee to file interim or final accounts.[23] 

 

The referee may employ a surveyor to aid in making a sale or division of property.[24]  The referee may, if it is advantageous to the interested parties, designate a portion of the property as a public or private way, road, or street, and may also recommend the closure of any or all other roads on the property and the allocation of the portion of the property occupied by such roads to the parties.  If the court accepts the referee’s report, and if the appropriate public entities grant the necessary approvals, the portion of the property designated as a road or street will become an open and public right of way; or the property designated as a private way, road, or street can be a private way for the use of the parties.  Any roads to be closed will be deemed abandoned.[25]

 

Subject to court authorization or approval, the referee may enter into contracts for services and expenses of surveyors, engineers, appraisers, attorneys, real estate brokers, auctioneers, and others.[26]  The court may allow or reject claims under such contracts and may provide for the date of commencement of any lien provided by law or contract for such claims.[27]

 

3.         In Physical Division Only

 

If the property is to be divided physically then the referee must allocate portions thereof to the parties, “quality and quantity relatively considered,” according to their interests as determined by the court.[28]  If one of the owners has made improvements to the property, then the referee must ordinarily assign those improvements to that owner.  The Code provides that “As far as practical and to the extent it can be done without material injury to the rights of the parties the referee must allot to a party any portion of the property that includes improvements made by that party, and in such division and allotment the value of such improvements must be excluded.”[29]  “If division cannot be made equally among the parties according to their interests without prejudice to the rights of some, compensation may be required to be made by one party to another to correct the inequality.”[30]  The Code is silent with regard to the referee’s authority to determine the amount or manner of such compensation, but that is an issue that the parties can ask the court to refer to the referee under §638 or §639.

 

4.         In Sale Only

 

If the parties agree that a partition by sale would be acceptable, then the court will order the property to be sold by the referee.[31]  Even if the parties do not agree, the court may make its own determination that sale of the property would be more equitable than physical division.[32]  The court may ask for advice from the referee as to whether sale of the property would be more equitable than physical division thereof.[33]

 

The property may be sold either at private sale or public auction, and the court may refer this question to the referee for advice.[34]  The referee may with the approval of the court employ an auctioneer who is authorized to act as such in the locality to conduct a public auction.[35]  Part of the property may be sold at public auction and part at private sale if it appears that it will be more beneficial.[36] 

 

If the parties have not agreed upon the methods and terms of sale then the court must make a determination of the manner, terms, and conditions of sale as it deems proper.  The court may refer such questions to the referee for a recommendation and report.[37]

 

The referee must submit a report of sale to the court for confirmation, including a description of the property sold to each purchaser, the name of the purchaser, the sale price, the terms and conditions of sale and any security, any amounts payable to lien holders, a statement as to contractual or other arrangements or conditions as to agent’s commissions, any determination and recommendation as to opening and closing of public and private ways, roads, streets, and easements, and the material facts relevant to the sale and the confirmation proceeding.[38]

 

Upon confirmation of a sale the court will order the referee to execute a conveyance or other instrument of transfer, to collect the proceeds, take security, and perform other acts required to consummate the sale.  The order may direct the referee concerning the distribution, deposit, or securing of sale deposits and sale proceeds.[39]

 

5.         In Partition by Appraisal

 

If the parties agree to a partition by appraisal then the court will appoint a referee (or three referees, if the parties have so agreed) to appraise the property and the interests involved.[40]  In a two party case, if three referees are used then typically one would be nominated by and speak for each party and those two would choose a third, who would be neutral.

 

Alternatively the parties can use just one referee while each hiring their own appraisers.  If the values reported by the two appraisers differ by more than ten percent (or another agreed percentage), then the referee can be authorized to obtain a third appraisal. 

 

III.

 

THE GENERAL OR SPECIAL REFEREE

 

A referee who has been appointed under §638 or §639 acts in a quasi-judicial capacity. If appointed under §638, the referee can make a binding decision.[41]  If appointed under §639, the referee will make a report and recommendation to the court.[42]  The court may appoint a single referee or as many as three referees.[43]

 

A.        Consensual General Reference

 

Judicial reference under §638 (referred to as a “consensual reference” or “general reference”) requires the agreement of the parties.  The court may authorize the referee to hear and dispose of the entire case.  If so, the referee will decide all issues of fact and law, and his or her statement of decision will stand as the decision of the court.[44]  Judgment may be entered thereon, and the judgment may be reviewed on appeal in the same manner as if it had been rendered by the court.[45]

 

A general reference may also be made for the limited purpose of deciding specific factual issues.[46]  In that event, the referee’s decision has the effect of a special verdict.[47]

 

General reference should not be confused with arbitration, although there are some similarities between the two processes.  Like arbitration, general reference offers convenience, privacy[48] and the opportunity to choose a decision maker with expertise in the subject matter.  Jury trials are avoided, and the process should normally be speedier and less expensive than litigation.[49]  There are, however, more differences than similarities.

 

Unlike arbitration, general reference operates entirely within the court system and referees normally conduct the proceedings in the same manner as a court. Referees are required to follow the law and their decisions are subject to judicial review.[50]  On the other hand, “…with narrow exceptions, an arbitrator’s decision cannot be reviewed for errors of fact or law.”[51]  Likewise, the rules of evidence and civil procedure that apply to litigation do not apply to arbitration.[52] 

 

Judicial reference also avoids the stringent Judicial Council rules governing arbitrator disclosures of potential conflicts of interest.[53]   If an arbitrator inadvertently fails to make a required disclosure, the failure may require vacatur of the award, even if no one was prejudiced, thereby requiring the parties to start the entire process over.[54]  Referees, on the other hand, are subject to rules of disclosure and disqualification that are prescribed by statute and the California Rules of Court.[55]  Failure on the part of the referee to comply with these requirements may provide grounds for a motion for new trial, but only if the failure prevented a party from receiving a fair trial.[56]

 

B.        Special Reference

 

A special reference under §639 is typically used for complex accounting issues or other matters that require special expertise or extraordinary amounts of time to review.[57]  It can be made without the agreement of the parties for any of the purposes that are spelled out in the statute, including the investigation of any factual issue.[58]  The decision of a special referee is advisory only.[59]  The special referee will make recommendations or advisory findings of fact and will submit a report to the court, which may adopt the report in whole or in part.[60]

 

Special references do not generally result in a binding decision by the referee, the sole exception being “the examination of a long account” wherein the referee is authorized to decide “technical accounting matters.”[61]

 

C.        Reference Distinguished from Mediation

 

A referee should not act or be viewed as a mediator.  Mediation is a voluntary process in which the mediator facilitates communication between the parties for the purpose of helping them to reach an agreement.[62]  If the parties wish to utilize mediation, which they can do at any stage of the proceedings, they should simply hire a mediator. The court cannot use the reference power to appoint a mediator.[63]  

 

A mediator operates under legal constraints which make it impossible to perform the reporting functions of a referee.  Under Evidence Code §703.5 a mediator may not report to the court on any statement or conduct of any participant in a mediation.  Thus it has been held that a mediator/referee may not report a party’s refusal to comply with a court order.[64] 

 

IV.

PUTTING IT ALL TOGETHER

 

            In order to make effective use of a referee’s services in a partition action, the parties need to identify all of the matters to be disposed of and the skills that will be required of the referee.  If there are issues that are outside of the statutory authority of a partition referee, then the parties should consider giving the referee additional powers under §638 or §639 and choosing a referee with the skills necessary to exercise those powers.

 

In the first example discussed in the introduction, the referee would need the skills necessary to require the trustee to account for his or her administration of the trust.  An attorney with experience in both real estate and trust law would probably be a good candidate.  In the second example, involving allegations of breach of a commercial lease, a referee with experience in leasing and sale of commercial real estate would probably be a good choice.

 

If the referee will need to conduct evidentiary hearings, then the use of an attorney or retired judge as referee is advisable.  If hearings will not be required then the referee could also be a person from the real estate industry or from another business or profession, such as accounting.

 

The parties also have to decide what the extent of the referee’s authority should be with the respect to the issues other than division of the property.  Do the parties want to have the referee appointed under §638 so that the referee can make a binding decision?  Or would they prefer to have the referee appointed under §639 so that the referee(s)’ decision would only be advisory? 

 

If the appointment is to be made under §638, then there is another decision to be made.  Should the referee be authorized to decide all issues of fact and law that make up the dispute(s) or should the referee just make findings of fact on specific issues with the decision of the case being reserved for the court?

 

The question of whether to use more than one referee can arise whether or not the case requires the exercise of additional powers under §638 or §639.  The completion of the referee’s assignment will often require skills and resources that the referee does not have.  The use of one or more additional referees could be a solution to that problem, but since the Code enables the referee to hire appraisers, real estate agents, attorneys, and other professionals as needed, most cases can be handled with the services of a single referee.

 

If the referee will be acting under §638 or §639, then the parties will want to consider whether a single referee or a panel of three would be more appropriate.  This is similar to deciding whether a single arbitrator or a panel of three is the better idea.  Some attorneys believe that having a panel of three just creates unnecessary expense, whereas others believe that a sound decision is more likely to result from the deliberation of a group.

 

The parties can also contract for additional services.  As discussed in Paragraph B.5 above, if the property is being partitioned by appraisal, each party can employ his or her own appraiser, and if the two appraisals do not resolve the issue then the referee can be authorized to hire a third appraiser.  Another way to reconcile the two appraisals, if the parties agree to it, would be for the referee to meet with the appraisers, review their analyses, and then make his or her own determination of value.

 

            The availability of the various reference powers in partition cases offers opportunities for creativity on the part of the parties and their counsel.  By working together in a cooperative fashion, they can take advantage of the expertise of individuals with various backgrounds, including real estate law, judging, brokerage, appraisal, or whatever the situation may require.  Since the partition itself requires the use of a referee it makes sense to give him or her all of the powers that are necessary in order to resolve any related disputes.  Doing so will save time and expense for the parties and avoid unnecessary litigation before the court.

 

Copyright 2009 Michael P. Carbone, Esq.



[1] All statutory references are to the Code of Civil Procedure (“Code”).

[2] The term “referee” as used in this article should be read to mean “referees” as applicable.

[3] § 873.060

[4] §872.810.  Physical division may be subject to compliance with applicable subdivision laws unless the property already consists of separate parcels.   See generally California Subdivision Map Act Practice and the Development Process, 2d ed. Cal CEB 2001.

[5] § 872.820

[6]§§ 873.910-873.980

[7] § 872.820(b)

[8] § 873.520

[9] §§ 873.110, 873.060

[10] §§ 873.280, 873.290

[11] § 873.030, 873.940.

[12] §873.020

[13] §§ 873.110, 873.160

[14] § 873.120

[15] § 872.630 (b)

[16] § 873.070

[17] § 873.280

[18] Id.

[19] § 872.140

[20] § 873.010(b)(1).  A bond would be necessary if the referee will be handling substantial amounts of money, but that is usually not the case.

[21] § 873.010(b)(2), §873.010(b)(3)

[22] § 873.010(b)(4)

[23] § 873.010(b)(5)

[24] § 873.130

[25] § 873.080

[26] § 873.110

[27] Id.

[28] § 873.210

[29] § 873.220

[30] § 873.250(a).

[31] § 872.820

[32] Id.

[33] Id.

[34] § 873.520

[35] § 873.140

[36] § 873.530

[37] § 873.610

[38] § 873.710

[39] § 873.750

[40] § 873.940

[41] §638

[42] §§ 638, 639

[43] § 640(a)

[44] § 644(a)

[45] § 645

[46] § 638(b)

[47] §645

[48] As a quasi-judicial proceeding a hearing before a referee is open to the public although hearings are frequently held in private offices rather than at the courthouse. Cal. Rule of Court 3.909.

[49] The speed and economy depend upon how the process is conducted.  Some parties and neutrals allow ADR to be turned into “private litigation” replete with extensive motion practice, discovery and lengthy hearings.  Counsel who wish to avoid these problems should consider drafting their reference order to preclude or at least limit such abuses.  For example, counsel might consider limiting the number of depositions and the amount of written discovery.

[50] §§ 644, 645

[51] See Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 6.

[52] The requirements of §§1282 et seq. govern the procedure to be followed in arbitration.  These requirements may be supplemented by the rules of an ADR service provider or an arbitration agreement entered into by the parties.

[53] See Appendix to California Rules of Court, Division VI.

[54] §1286.2(a)(6).

[55] §641 and Cal. Rules of Court 3.904(b) and 3.924(b).  See also Calif. Rule of Professional Conduct 1-710.  §170.5 defines “judge” to include referee, thus making the disclosure requirements for judges applicable to referees.  See generally ADR Practice Guide, The Rutter Group (2004)§§7:330-7:354.

[56] Failure to make a required disclosure would be an “irregularity in the proceedings” that would warrant the granting of a new trial if the complaining party did not receive a fair trial.  See §657, subd. 1.

[57] The situations covered by Section 639 include: (a) the examination of a long account, in which case the referee may be directed either to hear and decide the entire matter, or just to report upon a specific question of fact; (b) when the taking of an account is necessary either before judgment, or for carrying a judgment or order into effect; (c) when a question of fact, other than one upon the pleadings, arises at any stage of the action; (d) when it is necessary for the information of the court in a special proceeding; or (e) when the court determines that it is necessary to appoint a referee to hear and determine any or all discovery motions and disputes and to report findings and make a recommendation thereon.

[58] §639

[59] §644(b)

[60] §644(b)

[61] See DeGuere v. Universal City Studios, Inc. (1997) 56 Cal.App.4th 482, 500-501.

[62] Cal. Evid. Code §1115.

[63] Cal. Rules of Court 3.900 and 3.920(b) ­­­­­­­­­­­­­­

[64] Foxgate Homeowners Ass’n v. Bramalea Cal., Inc. (2001) 26 Cal.4th 1.



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