Use The Front Door

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
April 2001

Being a mortgage broker involved in private party lending, I come across all sorts of screwball schemes on almost a weekly basis. I could cite example after example of somebody trying to purchase or finance a piece of real estate using a very complex series of maneuvers to circumvent Civil Code. More often investors go through unbelievable, complex maneuvers to try to defraud creditors. From time to time I will give examples of these complex maneuvers. Today I will outline one such “clever practice”.

As most of you are aware, a promissory note secured by a deed of trust is almost always enforced via a non-judicial foreclosure action which I have talked about before. This is approximately a four-month process and is well spelled out in California Civil Code. Far less than 1% of all California foreclosures are completed via a judicial foreclosure, i.e. attorneys, courts, more time and more expense. In any event, both procedures allow the borrower/property owner a reasonable period of time to either sell the property, refinance, or borrow money on other property to pay off or cure the foreclosure. Every so often I hear about a situation involving somebody who lost their property or is about to lose their property to a clever lender who found a way to beat the time requirements necessitated by either a judicial or non-judicial foreclosure. There have been many variations of this for years, but theoretically a lender will make a loan on a property for, let’s say, $50,000 payable in monthly installments with a balloon payment in five years.    In addition to a deed of trust, the lender will require the borrower to give the lender A GRANT DEED OR QUIT CLAIM DEED to the property to “hold as additional security”. Perhaps the lender will tell the borrower, at any time you are more than 30 to 60 days late “I own the property”. Though the clever lender thinks they are avoiding an approximate four-month foreclosure period, they are in fact opening themselves up to a truly expensive scolding in court.

Just because two parties agree on something doesn’t automatically make it a legal or enforceable contract. Judges will look at the writing but also look at the INTENT of the parties. In my example a judge would quickly determine that the transaction was not a sale (grant deed or quit claim deed) but was in fact a loan subject to the statutory foreclosure provisions. Most of these clever self-help procedures are anything but clever and usually boomerang BIG TIME.

The moral of my story is – when in doubt, USE THE FRONT DOOR. If you insist on trying to “beat the system” by using the back door, you will often trip on something and get a bloody nose, i.e. from the judge.

In closing, the next time you think of a clever way to get around the law, by all means get an opinion from an attorney. If, on the other hand, you are subject to a strange over-reaching contract, take it to an attorney for review.

Peter Rosenthal
VIP Trust Deed Company