In re Stanton

• Decision Date: 30 April 1984
• Docket Number: Adv. No. LA-80-3810 (CA-13).,BAP No. CC-82-1183VPAb,Bankruptcy No. LA-80-12450-RO
• Citation: 38 BR 746
• Parties: In re Karen Virginia STANTON, Debtor. T.O. KING, Appellant and Cross-Appellee, v. Karen V. STANTON, et al., Appellees and Cross-Appellants.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

38 B.R. 746 (1984)

In re Karen Virginia STANTON, Debtor.

T.O. KING, Appellant and Cross-Appellee, v. Karen V. STANTON, et al., Appellees and Cross-Appellants.

BAP No. CC-82-1183VPAb, Bankruptcy No. LA-80-12450-RO, Adv. No. LA-80-3810 (CA-13).

United States Bankruptcy Appellate Panels for the Ninth Circuit.

Argued March 22, 1984.

Decided April 30, 1984.

COPYRIGHT MATERIAL OMITTED

Hugh J. Haferkamp, Santa Barbara, Cal., for appellant and cross-appellee.

John S. Poucher, Hollister & Brace, Santa Barbara, Cal., for appellees and cross-appellants.

Before VOLINN, PYLE and ABRAHAMS, Bankruptcy Judges.

OPINION

VOLINN, Bankruptcy Judge:

Dr. T.O. King commenced an action against the debtor, Ms. Stanton, for dissolution of a partnership, an accounting, and a declaration that he was sole owner of the partnership assets. Ms. Stanton asked for the same relief and for a declaration that they held equal shares in the partnership assets. She also cross-claimed for damages. We affirm the trial court's judgment as to the accounting and dissolution awarding Ms. Stanton a 42.28% interest in the partnership and 57.72% to Dr. King. We reverse and remand on Ms. Stanton's cross-appeal for further proceedings on the cross-complaint for damages against Dr. King.

FACTS

The parties entered a written partnership agreement on June 30, 1977, for the purpose of buying real estate in Montecito, California, known as the Tara property. It consisted of a large main house and several cottages on five acres of land. Before the parties became partners, Ms. Stanton had leased Tara for six months with an option to buy. The monthly rental payments of $3,000 were to be applied on the purchase price of $350,000. She gave notice of exercise of the option in April, 1977.

The partnership agreement gave each party a 50% share in the Tara property. Ms. Stanton contributed the credit of $18,000 from her past rent, plus the option to buy. Dr. King contributed $43,000 cash toward the purchase price for his 50%. The agreement provided that Ms. Stanton would make all payments on debt service, totaling $1,966.78 per month, plus real property taxes, insurance, and maintenance. If she failed to make a payment by a specified deadline, Dr. King had the right to pay. For each $1,000 he paid, he would receive an additional 1.4% of the total partnership interest. The agreement gave Stanton a right of redemption, within specified time periods, running from the date of payment by Dr. King.¹

The agreement recited that Tara was an appreciating asset and that it was the purpose of the partnership to sell Tara if a buyer—including Stanton—offered a sum which netted Dr. King at least $1,000 for each 1% of the partnership which he owned.

In August 1977, Dr. King asked Ms. Stanton whether she had made the payments on the first and second deeds of trust. She said she would do so, but would be late. Dr. King offered to pay instead, and she accepted. This payment was agreed to in writing. At his request, she wrote a note stating that she was unable to make the payments that month.

Thereafter, Dr. King made all the monthly debt service payments without communicating to Ms. Stanton the fact of such payments or the dates thereof. He kept a record, unknown to her, whereby, as each payment was made he added to his capital interest 1.4% per $1,000 and subtracted that amount from hers. Some nine months later, in a letter dated May 27, 1978, he advised Stanton that he owned 100% of Tara and demanded that she immediately surrender possession and title. She denied that he was the sole owner and refused to vacate.

LITIGATION

Dr. King filed a complaint in the Superior Court for the County of Santa Barbara, California on December 13, 1978, requesting a dissolution of the partnership and an accounting declaring that he owned Tara 100%. Ms. Stanton filed a cross-complaint charging him with fraud and breach of the partnership agreement, and also requesting a dissolution.

The complaint was removed to Bankruptcy Court after Stanton filed a Chapter 13 petition in bankruptcy on November 28, 1980. Trial was held and a memorandum of decision thereafter entered on January 26, 1982. Judgment thereon was entered on March 15, 1982, holding that Dr. King was entitled to a 57.72% interest in the partnership property, while Ms. Stanton was entitled to a 42.28% interest. The court allocated to Dr. King an additional share of 7.72% because of Ms. Stanton's written agreement, whereby Dr. King advanced $3,000 before the close of escrow and $2,516.78 in August 1977 on the deed of trust.

The judgment ordered the Chapter 13 trustee to sell Tara. It further ordered that, after expenses of sale, the parties were to be reimbursed for their expenses as contributions to the partnership. Ms. Stanton was to be paid $37,700 for her improvements to Tara. Dr. King was to be paid $193,631 for his payments. In addition, he was to be reimbursed for payments made after December 31, 1981 on the first deed of trust. The balance of sale proceeds was to be divided in accordance with the parties' shares of ownership: 57.72% to Dr. King and 42.28% to Stanton.

Dr. King timely filed his notice of appeal and Ms. Stanton timely appealed the court's dismissal of her cross-claims.

The court's findings were stated in the course of its narrative memorandum of decision. These may be summarized as follows:

1. Stanton is a singer, dancer and actress trained in drama, with no experience in real estate or business transactions. Dr. King is educated as an agricultural economist and has invested in real estate since 1954.

2. King gave most of the input for the partnership agreement and may have dominated the partnership negotiations.

3. At the time of trial the value of the property had appreciated (beyond the purchase price of $350,000) "and may exceed $1,000,000."

4. After August, King did not give the notice required by the agreement as to any advances he made. The advances were made pursuant to a subsequent modification of the agreement as to payments. There is evidence that Stanton and King agreed that Stanton\'s contribution would be in the form of improvements to the property.

5. According to Dr. King\'s account, his ownership exceeded 100%, a conceptual impossibility. Further, the result would be a forfeiture by Stanton, a result not favored in equity.

6. The partnership objective was to sell the appreciating property. Neither partner intended to develop the property for personal use.

The court concluded that there is a duty on the part of a partner to work for accomplishment of the partnership objective. In this case, the objective was the sale of the property at a profit. The court further concluded that there should have been notice to Stanton that the payments were being made on her behalf and that the redemption periods were starting to run. It also found that no such notices, except one, were given by King, and that he saw a rapidly appreciating piece of property and realized the advantage to him of making the advances.

APPELLANT'S CONTENTIONS

Dr. King contends, on appeal, that:

1. The bankruptcy court and this Panel lack jurisdiction; this case should be remanded to state court for retrial.

2. If the Panel retains jurisdiction, the standard of review in this case requires reversal if the bankruptcy court committed simple error, because its interpretation of the partnership agreement was a matter of law.

3. The court made no finding that the parties orally modified the written partnership agreement; it erred in deciding not to enforce the written agreement.

4. The court erred in treating appellant\'s payments as capital contributions to be repaid without interest, rather than requiring that debtor reimburse him at the market rate of interest from the date of payments.

5. The court erred by not ordering that Dr. King be paid a management fee of $16,076, and by ruling that he was not entitled to an additional sum for manual labor on the property.

APPELLEE\'S CONTENTIONS

1. The judgment having granted equitable relief, the proper standard of review allows reversal only if the court abused its discretion.

2. The court did not abuse its discretion in refusing to hold that appellant obtained all of appellee\'s partnership interest, because it correctly found that equity required Dr. King to warn Ms. Stanton that she could lose her interest.

3. The bankruptcy court erred by transferring 7.72% of Ms. Stanton\'s interest to appellee, and by denying her cross-claim for damages based on Dr. King\'s refusals of offers to buy Tara.

DISCUSSION

1. Jurisdiction

Dr. King contends, without merit, that the bankruptcy court and this Panel have no jurisdiction over this case, based on the decision of the United States Supreme Court in Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). In Marathon, the Court held that Congress' grant of jurisdiction to the bankruptcy courts under the Bankruptcy Act of 1978 was unconstitutional. However, it expressly stayed its judgment until October 4, 1982, and held that its decision would apply only prospectively. The Court later extended the stay until December 24, 1982. 459 U.S. 813, 103 S.Ct. 199, 200, 74 L.Ed.2d 160 (1982). In the case before us, the bankruptcy court entered its judgment on March 15, 1982, and therefore retained jurisdiction in this case, based on the prospective application of Marathon. In re Wallen, 34 B.R. 785 (Bkrtcy. 9th Cir.1983), citing In re Eastview Estates II, 713 F.2d 443 (9th Cir.1983).

2. The Finding of Oral Modification

Contrary to Dr. King's contention, the bankruptcy court did make a finding that the parties orally modified the partnership agreement so that Ms. Stanton's renovations took the place of her duty to make various payments. The finding stated, "there is evidence that Stanton and King agreed that Stanton's contributions would be in the form of improvements to the property." (...