Re: Land Trusts: Changing Beneficial Interests - Posted by Bill Gatten
Posted by Bill Gatten on March 30, 1999 at 10:07:05:
I’m enjoying your comments on this issue.
As food for thought, however, contrary to your comment about a DOS violation, remember that selling or assigning beneficiary interest in a Land Trust (per se) is technically NOT a violation of the lender’s alientation provisions (DOS), in that such a transfer is clearly of “personalty” and not of “realty” (because in a bona fide Land Trust, both legal and equitable real estate owership is vested in, and remains with, the trustee).
It’s the divestiture of control over the trust’s asset (“Power of Direction”) that a court might find adverse to the lender’s security interest. Although in several Illinois cites over the past fifty years, such findings for plaintiffs (lenders) have not been forthcoming.
Now, watch the pea under the shell below, and tell me where the DOS violation takes place (if it does):
A property is placed into a revocable inter vivos land trust by its owner, the mortgagor, for estate planning purposes (the right to do so being fully protected under the Garn St. Germain Law 12USC 1701(d) 1982).
All or a portion of the personal property interest in the borrower’s revocable, living (inter vivos) beneficiary-directed trust…NOT in the lender’s security… is assigned to another (the borrower being a “natural person”). No part of the Real Estate Security is changed, sold, disposed of, or transferred in any manner, other than to a legitimate land trust trustee.
The silent assignment itself remains private, secret, annonymous, without public notice (recordation), and without any request by borrower for alteration of documentation, or Release of Liability with respect to the underlying financing.
At this point, the lender has the same security, the same guarantor, the same income and profit, and the same right and pathway to foreclosure for cause that it has always had. And no sale or unauthorized divestiture of the Real Estate security has taken place.
Before you decide where the violation may have occurred, note that Para. 17 of the underlying loan document says that an assignment of beneficiary interest (in “the borrower”… not the borrower’s trust) is disallowed ONLY if/when borrower is NOT a natural person (e.g., a corporation, partnership, LP, joint venture, co-op, association, etc.). In other words, such divestiture of related personalty (beneficial interest) does not apply to natural persons: stating otherwise would be in opposition to Federal Law (Garn St. Germain).
In VA and FHA type loan docs, the warning is even more obfuscated by legalese in order to make you “think” you can’t do something that in fact you can. The Due-on-Sale Clause states in essence that: “…if permitted by applicable law” the lender has a right to deem such transfer [of beneficiary interst in a trust] a DOS violation. But the fact is, that a lender’s so declaring is specifically NOT PERMITTED BY APPLICABLE LAW (i.e., The Garn St. Germain Federal Depository Instituions Regulations Act of 1982)!
Nonetheless, Jim, to avoid being ultimately seen as having relinquished control, and therefore having violated the DOS: why not just have the seller retain some percentage of the beneficiary interest (to justify retention of control and voting rights), with a silent Power of Attorney on your behalf, and an agreement to forfeit all interest to you (in consideration of your prompt payments) upon revocation.