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Joint Owner’s Agreement to Settle Home and Approval by Court

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In re Pertis; Case No. 04-14471-RGM; March 6th, 2008

This case was before Judge Mayer on a motion to approve a settlement between the debtor and herself relating to the division of the proceeds of sale of their former marital home. The non-debtor party, Ms. Herrick, asserts that the debtors failure to make post-petition payments should be taken into account in the distribution of the proceeds of the sale. While the debtor’s attorney agreed to this, the judge had a problem with the distribution of the proceeds.

In Virginia, when adjusting accounts between joint tenants, the party who makes the mortgage payment is credited with one-half of the mortgage payments and the party that is not in possession is credited with one-half the fair rental value of the property. In this case, there was an agreement for possession in return for certain compensation, so the aforementioned principal is not applicable.

A normal state court proceeding would have taken into account the unpaid mortgage payments by the debtor, however, it is not proper when the rights of third parties (the creditors in this case), are affected, as they are in a bankruptcy proceeding.

The debtor’s interest in the property became property of the estate while Ms. Herrick’s did not. The debtor had exclusive possession of the property, but also had the obligation to make all mortgage payments when due. When he failed to honor this obligation post-petition, he became in default of the property settlement agreement and divorce decree.

The court noted that Ms. Herrick does have a claim against the debtor for the unpaid mortgage, it is not a pre-petition claim and is not payable from the bankruptcy estate. However, it will not be discharged by the bankruptcy either.

Ms. Herrick also argued that she and the debtor held the real property as partners and that the partnership obligations must be settled before the proceeds of the partnership can be disbursed to the two partners. While as a principal of law this is true, co-owners are not automatically partners. The Virginia Code defines partnersihip to mean “an assoiciation of two or more persons to carry on as co-owners a business for profit.” VA Code. § 50-73.79. The facts in this case show that the debtor and Ms. Herrick were not engaged in a business. They were not sharing profits or losses nor contributing money, labor or goods to a common venture. Their contract was not one to create a partnership and carry on a joint business, but rather to separate and carry on their individual lives. There was no partnership and, thus, no partnership accounts to be settled before net surplus of partnership assets are distributed to the partners.

To the extent that the settlement agreement purported to give Ms. Herrick additional compensation over ½ of the proceeds, the agreement provided for a payment of an obligation that was not dischargeable in this bankruptcy case. In short, the debtor sought to spend other people’s money, i.e., his pre-petition creditors’ money, to pay a post-petition debt to his former spouse.

The motion was granted to the extent one-half of the net proceeds of sale taking into account the judgment lien deducted by the settlement agent.

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