Wednesday, January 06, 2010

Junkin v. Golden West Foreclosure Service (Cal. Ct. App. - Jan. 5, 2010)

Gary Bennett is a "hard money" lender in San Carlos, and Donald Junkin -- a real estate investor -- borrows from him a lot; i.e., 40 to 60 times. After a particular deal in San Carlos goes south, Junkin sues Bennett claiming that the interest rate is usurious. Bennett defends the suit on the ground that the usury rules don't apply because the two were in a joint venture.

Justice Jones writes a concise (nine-page) opinion that goes through the various factors and explains why the two were indeed a joint venture. And I agree.

But let me give you my particular take here. The property was bought for $1.975 million. Bennett loaned Jenkins $856,000, and in return got an interest rate of 12 percent (which is generally over the maximum usury rate of ten percent). Bennett also gets a 10% stake in the property. But in my mind, that doesn't make 'em joint venturers. That only makes the loan more usurious -- two percent over ten percent plus additional equity -- not less.

But what swings it for me is that Bennett also co-signed for the $1.185 million first from an institutional lender. That's putting up real exposure, and makes the thing much more like a legitimate joint venture. Take that co-signed loan away, however, and I'd have held that this wasn't a joint venture, but merely a usurious loan.

Admittedly, if I were Jenkins' lawyer, I'd say that this is not significant at all, since the chance that the $1.975 million property tanks to under $1.185 million and hence that Bennett's liable under the loan is darn low. Still, even with this argument, I'd probably come out the same way.

But if you're looking to make a usurious loan, let me tell you how to do it. Charge an excessive interest rate, demand an equity stake as well, and then co-sign a first trust deed that you're darn sure the property will cover (and/or hedge that exposure). That'll probably work.