Bronchik/Gatten on Land Trusts - a conversation - Posted by Bill Gatten
Posted by Bill Gatten on December 04, 1998 at 21:07:03:
THE FOLLOWING IS A CONVERSATION BETWEEN ATTORNEY BILL BRONCHIK AND BILL
GATTEN, WITH REGARD AN EARLIER POST BY BILL J. GATTEN, WHICH BEGAN WITH THE
ISSUE OF THE GARN-ST. GERMAIN ACT’S PROTECTING A 3RD PARTY “CO” BENEFICIARY
CONVEYANCE FROM A LENDER’S DUE-ON-SALE CALL. GATTEN MAINTAINS THAT A D.O.S.
CALL IS CLEARLY NOT ALLOWABLE IN A 3RD PARTY CO-BENEFICIARY LAND TRUST
CONVEYANCE (E.G., SUCH AS THE PACTRUST)
BRONCHIK: Subject… One minor point . . .
I really don’t care about the DOS and neither do most lenders, but just for the mental masturbation consider this:
The Garn Act states that a transfer to an intervivos trust does not violate the DOS if the transfer does not relate to a transfer in occupancy. Even if the borrower does remain “a” beneficiary, if he transfers the
property into trust, moves out, then the buyer moves in, he has technically
violated the DOS.
RE. 12 U.S.C. Code 1701(j)(8): “a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property”
Furthermore, what if the seller files for bankruptcy? Do you really want him having ANY interest in the property. The chances of the lender finding out and calling the loan are slim. The chances of a defaulting seller coming back to haunt you with his financial problems and his remaining interest in the trust are very good.
GATTEN: Bill, my understanding is that the point of 12 U.S.C. Code 1701(j)(8) is to assure that the Trust itself doesn’t relate to a transfer of Occupancy, so as to jeopardize the lender’s claim to its security in the event of a Default (re. issues of adverse possession, etc.). In the PACTrust (the name for our 3rd party system), the Land Trust is created only (exclusively) between the property’s owner and his/her trustee… no one else is involved, and no rights of occupancy are given or referred to in any manner within the Trust Agreement. It is only following the creation of the
trust that a co-beneficiary is assigned, and it is after that, that occupancy rights are conveyed (to anyone the beneficiaries choose to lease to, but probably one of the beneficiaries) by a simple Lease Agreement. After all, people place their rental (income) properties into living trusts everyday, and convey occupancy rights via lease agreements – definitely not a DOS issue. The transfer of beneficiary interest is of Personalty, not of the real estate that secures the lender’s loan; and such a Lease is fully authorized by GSG, so long as it is not for more than 3 years, and so long as it does not contain an option to purchase.
BRONCHIK: Thanks for that. I see your point. The “transfer of occupancy” could make a good argument. Though I still think it is academic, since the chances of lender finding out or caring is slim to none (unless interest rates soar above 12% and lenders start policing mortgages again).
GATTEN: But bear in mind, Bill, that if the “transfer of occupancy” made ANY point at all, then every person holding a rental property in any intervivos trust would be guilty of a Due-on-Sale violation. None the less,
I do agree that (today) under normal circumstances, a lender’s foreclosure on the DOS may not be much of a risk if one doesn?t jump up in front of them with a red flag and a bomb strapped to their chest, or something. However,
we (actually “I”) have worked since 1984 to create what we feel is as safe a "Creative? RE transaction as can be. Its virtual elimination of EVEN the due-on-sale threat (of crucial importance, or not) is a feather in our cap. In our business, we find that the fear of Acceleration of one?s loan, for reasons of a DOS violation, is one of the most (if not singularly the most) often encountered reasons that seller’s won’t consider remaining on a loan
for the benefit of someone else (e.g., one of us investor-type CRE folks). However, with the 3rd party co-beneficiary land trust (e.g., “PACTrust”)
arrangement we can ameliorate, if not totally eliminate, that consternation or fear.
BRONCHIK: Anyway, my remaining concern is if the seller still has a beneficial interest and files for bankruptcy or has judgments against him, this could jeopardize the property. A creditor could attach his beneficial interest.
GATTEN: Yes, that’s true, the beneficiary interest, but not the property! On the issue of the potential for a seller’s BK (or martial dispute, creditor judgement, tax lien, etc.), the co-beneficiary land trust is a “near perfect” protection, so long as the “CO” beneficiary interest is held by unrelated parties. This is so because of the non-partitionability
(by judgement creditors) of prsonalty (See local statutes, as well as [e.g.] Kenoe, Edwards (IICLE) etal, and their cites, such as (among many): Sparr Realty Corp. vs. BofA Trust Sav Assoc., 20 Cal. App 2d 10, 16 (3rd Dist), 1937).
Bill, as I’m sure you know, probably better than I, that many (if not “most”) authors on the subject regard the Land Trust, itself, as the protection. E.g. Robert De Witt, writing in the LA Bar Bulletin 30 years ago, says unequivocally, having been quoted a thousand times: “…since the beneficiary interest [in a land trust] is in fact personalty, a creditor of such a beneficiary could not [ever] attach the land, or claim lien rights in the corpus of the trust” (In that article, De Witt cites Houghton v. Pac. SW, 111 Cal. App 509, 1d 1931 and Finnie v. Smith 83 Cal. App., 707 3d,
However? be that as it may? my take on this issue? Whether De Witt (and the many others) is right or not; I personally I get a much better feeling from knowing the real safety to be the “non-partitionability” of personal
property (by judgement creditors). In a co-beneficiary held trust, I see non-partitionability as being the protection of either beneficiary (resident or non-resident), against the untoward actions of the other. Since the property cannot be so attached: a lien then against one?s beneficiary interest in a land trust would have to wait for settlement until the trust was terminated and the property was dealt with. Consequently, satisfaction would be only from any proceeds due the beneficiary with the lien. If the party with the lien have no equity due it upon sale (because the contract
provided for a forfeiture in consideration of prompt payments and strict adherence throughout the contract period), then certainly there would be no settlement possible.
It’s true that “personalty (e.g., personal property beneficiary interest in a land trust)” can, in-fact, be partitioned between beneficiaries, or between spouses in a divorce action: however, as pertinent to judgement creditors (even the IRS), it can not. Although (I fear) the IRS, with its might and right to shoot people at will, could (probably) create enough smoke and hassle to, regardless of who it hurt, force the sale of the corpus in their favor, should they really want to. Although, I do not believe this has ever happened, and doubt that it ever will (unless they are going after someone the size of the Disney Corporation, through their Buena Vista Land Trust).
I look forward to your comments. Thank you.
PS, I?d like to post our conversation on CRE, as it answers some good
questions; but would only do so, of course, with your permission.
BRONCHIK: Sure! Interesting stuff!
From: Ed Wachsman