avoiding due on transfer provisions in land trusts and single...

Avoiding "Due on Transfer" Provisionsin Land Trusts and Single-Member LLCsA Real-World Guide to Garn-St. Germain Act Exemptions

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, MARCH 22, 2017

Presenting a live 90-minute webinar with interactive Q&A

The audio portion of the conference may be accessed via the telephone or by using your computer'sspeakers. Please refer to the instructions emailed to registrants for additional information. If youhave any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is nolonger permitted.

Today’s faculty features:

William Bronchick, Principal Shareholder, Bronchick & Associates, Aurora, Colo.

Bryan Dunklin, Law Offices of Bryan Dunklin, Dallas

Tips for Optimal Quality

Sound QualityIf you are listening via your computer speakers, please note that the qualityof your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory, you may listen via the phone: dial1-866-961-9091 and enter your PIN when prompted. Otherwise, pleasesend us a chat or e-mail [email protected] immediately so we can address theproblem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

NOTE: If you are seeking CPE credit, you must listen via your computer — phonelistening is no longer permitted.

Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen,press the F11 key again.

FOR LIVE EVENT ONLY

Sound QualityIf you are listening via your computer speakers, please note that the qualityof your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory, you may listen via the phone: dial1-866-961-9091 and enter your PIN when prompted. Otherwise, pleasesend us a chat or e-mail [email protected] immediately so we can address theproblem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

NOTE: If you are seeking CPE credit, you must listen via your computer — phonelistening is no longer permitted.

Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen,press the F11 key again.

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm yourparticipation in this webinar by completing and submitting the AttendanceAffirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email that youwill receive immediately following the program.

For CPE credits, attendees must participate until the end of the Q&A session andrespond to five prompts during the program plus a single verification code. In addition,you must confirm your participation by completing and submitting an AttendanceAffirmation/Evaluation after the webinar and include the final verification code on theAffirmation of Attendance portion of the form.

For additional information about continuing education, call us at 1-800-926-7926 ext.35.

FOR LIVE EVENT ONLY

In order for us to process your continuing education credit, you must confirm yourparticipation in this webinar by completing and submitting the AttendanceAffirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email that youwill receive immediately following the program.

For CPE credits, attendees must participate until the end of the Q&A session andrespond to five prompts during the program plus a single verification code. In addition,you must confirm your participation by completing and submitting an AttendanceAffirmation/Evaluation after the webinar and include the final verification code on theAffirmation of Attendance portion of the form.

For additional information about continuing education, call us at 1-800-926-7926 ext.35.

Program Materials

If you have not printed the conference materials for this program, pleasecomplete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see aPDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

If you have not printed the conference materials for this program, pleasecomplete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see aPDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

Avoiding "Due on Transfer"Provisions in Land Trusts and

Single-Member LLCsStrafford Webinars

Strafford Publications, Inc.590 Dutch Valley Road NEAtlanta, GA 30324-0729Tel: (800) 926-7926 x 12

Fax: (404) 881-0074

Presented byPresented byWilliamWilliam BronchickBronchick and Bryan Dunklinand Bryan Dunklin

March 22, 2017March 22, 2017

Strafford WebinarsStrafford Publications, Inc.590 Dutch Valley Road NEAtlanta, GA 30324-0729Tel: (800) 926-7926 x 12

Fax: (404) 881-0074

Presented byPresented byWilliamWilliam BronchickBronchick and Bryan Dunklinand Bryan Dunklin

March 22, 2017March 22, 201755

William Bronchick, Esq.William Bronchick, Esq.

SelfSelf--unemployed for 26 yearsunemployed for 26 years

Admitted to practice before New York Bar in 1991Admitted to practice before New York Bar in 1991

Admitted to practice before Colorado bar in 1996Admitted to practice before Colorado bar in 1996

Practice limited to real estate, asset protection, and estatePractice limited to real estate, asset protection, and estate

planningplanning

Author of six bestAuthor of six best--selling real estate and business booksselling real estate and business books

Licensed real estate brokerLicensed real estate broker

SelfSelf--unemployed for 26 yearsunemployed for 26 years

Admitted to practice before New York Bar in 1991Admitted to practice before New York Bar in 1991

Admitted to practice before Colorado bar in 1996Admitted to practice before Colorado bar in 1996

Practice limited to real estate, asset protection, and estatePractice limited to real estate, asset protection, and estate

planningplanning

Author of six bestAuthor of six best--selling real estate and business booksselling real estate and business books

Licensed real estate brokerLicensed real estate broker

66

Bryan Dunklin, Esq.Bryan Dunklin, Esq.

Admitted to practice law before Texas Bar in 1980Admitted to practice law before Texas Bar in 1980

Licensed real estate broker in Texas for 28 yearsLicensed real estate broker in Texas for 28 years

Taught real estate and business law at Southern Methodist UniversityTaught real estate and business law at Southern Methodist University

for 23 yearsfor 23 years

Frequent speaker and author for various bar associationsFrequent speaker and author for various bar associations

Chosen as “Best Speaker” by the State Bar of Texas Advanced RealChosen as “Best Speaker” by the State Bar of Texas Advanced Real

Estate Law Course for “Texas Series LLCs”Estate Law Course for “Texas Series LLCs”

Former Chairman, Dallas Bar Association Real Property SectionFormer Chairman, Dallas Bar Association Real Property Section

FrustratedFrustrated musicianmusician

Great joke tellerGreat joke teller

Admitted to practice law before Texas Bar in 1980Admitted to practice law before Texas Bar in 1980

Licensed real estate broker in Texas for 28 yearsLicensed real estate broker in Texas for 28 years

Taught real estate and business law at Southern Methodist UniversityTaught real estate and business law at Southern Methodist University

for 23 yearsfor 23 years

Frequent speaker and author for various bar associationsFrequent speaker and author for various bar associations

Chosen as “Best Speaker” by the State Bar of Texas Advanced RealChosen as “Best Speaker” by the State Bar of Texas Advanced Real

Estate Law Course for “Texas Series LLCs”Estate Law Course for “Texas Series LLCs”

Former Chairman, Dallas Bar Association Real Property SectionFormer Chairman, Dallas Bar Association Real Property Section

FrustratedFrustrated musicianmusician

Great joke tellerGreat joke teller 77

OUTLINEOUTLINE

History of the due on sale clause, and of the Garn-St.Germain Depository Institutions Act

Brief definition of “due-on-sale/due-on-transfer”provisions

Exceptions that the Garn-St. Germain Depository Actprovide to the enforceability of contractual due-on-transfer provisions in mortgages

Drafting revocable living trust documents to holdencumbered real estate

Structuring the transaction to avoid the accelerationprovision

Transfers into single-member LLCs

History of the due on sale clause, and of the Garn-St.Germain Depository Institutions Act

Brief definition of “due-on-sale/due-on-transfer”provisions

Exceptions that the Garn-St. Germain Depository Actprovide to the enforceability of contractual due-on-transfer provisions in mortgages

Drafting revocable living trust documents to holdencumbered real estate

Structuring the transaction to avoid the accelerationprovision

Transfers into single-member LLCs88

BENEFITSBENEFITS

The panel will review these and other keyissues:– What are the specified transfers exempt from

enforcement of due-on-sale/acceleration clauses asthey relate to estate planning?

– What are the practical requirements that a trust musthave to ensure that a transfer of qualified propertydoes not trigger an acceleration clause?

– What are the specific traps that trust counsel mustavoid in structuring a trust transaction?

– Sample language for trust documents

The panel will review these and other keyissues:– What are the specified transfers exempt from

enforcement of due-on-sale/acceleration clauses asthey relate to estate planning?

– What are the practical requirements that a trust musthave to ensure that a transfer of qualified propertydoes not trigger an acceleration clause?

– What are the specific traps that trust counsel mustavoid in structuring a trust transaction?

– Sample language for trust documents99

LEARNING OBJECTIVESLEARNING OBJECTIVES

After completing this course, you will beable to:– Identify the transfers exempt from enforcement of

due-on-sale/acceleration clauses for estate planningpurposes

– Discern trust provision requirements to ensure that atransfer of qualified property does not trigger anacceleration clause

– Determine transfers into LLC structures that will notviolate “due-on-transfer” provisions

– Recognize specific tax traps that trust advisers mustavoid in structuring a trust transaction

After completing this course, you will beable to:– Identify the transfers exempt from enforcement of

due-on-sale/acceleration clauses for estate planningpurposes

– Discern trust provision requirements to ensure that atransfer of qualified property does not trigger anacceleration clause

– Determine transfers into LLC structures that will notviolate “due-on-transfer” provisions

– Recognize specific tax traps that trust advisers mustavoid in structuring a trust transaction 1010

History of theHistory of the“due on sale clause”“due on sale clause”

Before the early 1970s, mortgage loans typically did not contractuallyBefore the early 1970s, mortgage loans typically did not contractuallypermit a lender to demand that a note be paid in full (permit a lender to demand that a note be paid in full (acceleratingacceleratingthe debtthe debt) merely because the borrower sold the property that was) merely because the borrower sold the property that wasthe lender’s collateral. If the contract interest rate on such athe lender’s collateral. If the contract interest rate on such amortgage loan was at a fixed rate, and if interest rates being paid inmortgage loan was at a fixed rate, and if interest rates being paid inthe market began to rise, the value of the note would decline asthe market began to rise, the value of the note would decline asmarket interest rates rose.market interest rates rose.

When inflationary expectations and pressures began to generallyWhen inflationary expectations and pressures began to generallycause an increase in market interest rates in the early 1970s, lenderscause an increase in market interest rates in the early 1970s, lenderssought to protect themselves from increasing interest rates in varioussought to protect themselves from increasing interest rates in variousways, including the addition of contractual language in real estateways, including the addition of contractual language in real estatemortgages that would allow the lender to require the borrower tomortgages that would allow the lender to require the borrower topay the entire balance owing if the property securing the loan waspay the entire balance owing if the property securing the loan wassold (asold (a “due“due--onon--sale” clausesale” clause).).

Before the early 1970s, mortgage loans typically did not contractuallyBefore the early 1970s, mortgage loans typically did not contractuallypermit a lender to demand that a note be paid in full (permit a lender to demand that a note be paid in full (acceleratingacceleratingthe debtthe debt) merely because the borrower sold the property that was) merely because the borrower sold the property that wasthe lender’s collateral. If the contract interest rate on such athe lender’s collateral. If the contract interest rate on such amortgage loan was at a fixed rate, and if interest rates being paid inmortgage loan was at a fixed rate, and if interest rates being paid inthe market began to rise, the value of the note would decline asthe market began to rise, the value of the note would decline asmarket interest rates rose.market interest rates rose.

When inflationary expectations and pressures began to generallyWhen inflationary expectations and pressures began to generallycause an increase in market interest rates in the early 1970s, lenderscause an increase in market interest rates in the early 1970s, lenderssought to protect themselves from increasing interest rates in varioussought to protect themselves from increasing interest rates in variousways, including the addition of contractual language in real estateways, including the addition of contractual language in real estatemortgages that would allow the lender to require the borrower tomortgages that would allow the lender to require the borrower topay the entire balance owing if the property securing the loan waspay the entire balance owing if the property securing the loan wassold (asold (a “due“due--onon--sale” clausesale” clause).). 1111

The “dueThe “due--onon--sale” clausesale” clause

The following is typical dueThe following is typical due--onon--sale language containedsale language containedin the early mortgages:in the early mortgages:

“In the event that the borrower sells the property“In the event that the borrower sells the propertywithout the prior written consent of the lender, thewithout the prior written consent of the lender, thelender may, at its option, declare the entire principallender may, at its option, declare the entire principalbalance of the loan immediately due and payable.”balance of the loan immediately due and payable.”

The following is typical dueThe following is typical due--onon--sale language containedsale language containedin the early mortgages:in the early mortgages:

“In the event that the borrower sells the property“In the event that the borrower sells the propertywithout the prior written consent of the lender, thewithout the prior written consent of the lender, thelender may, at its option, declare the entire principallender may, at its option, declare the entire principalbalance of the loan immediately due and payable.”balance of the loan immediately due and payable.”

1212

Borrower’s tactics in dealing withBorrower’s tactics in dealing witha “due on sale” clausea “due on sale” clause

Creative borrowers began using variousCreative borrowers began using varioustechniques to keep from technically “selling”techniques to keep from technically “selling”the property, to prevent the lender from beingthe property, to prevent the lender from beingable to require immediate payment of the loanable to require immediate payment of the loanin full, such as:in full, such as:–– Entering into contracts for deedEntering into contracts for deed–– Using long term leases coupled with an optionUsing long term leases coupled with an option

granted to the tenant to purchase the propertygranted to the tenant to purchase the property–– Selling the shares in a corporate borrowerSelling the shares in a corporate borrower–– Transferring the beneficial interest in a trustTransferring the beneficial interest in a trust

Creative borrowers began using variousCreative borrowers began using varioustechniques to keep from technically “selling”techniques to keep from technically “selling”the property, to prevent the lender from beingthe property, to prevent the lender from beingable to require immediate payment of the loanable to require immediate payment of the loanin full, such as:in full, such as:–– Entering into contracts for deedEntering into contracts for deed–– Using long term leases coupled with an optionUsing long term leases coupled with an option

granted to the tenant to purchase the propertygranted to the tenant to purchase the property–– Selling the shares in a corporate borrowerSelling the shares in a corporate borrower–– Transferring the beneficial interest in a trustTransferring the beneficial interest in a trust

1313

History of theHistory of the“due“due--onon--transfer” clausetransfer” clause

Lenders then responded to such tactics by addingLenders then responded to such tactics by addingadditional language to exercise their right toadditional language to exercise their right toaccelerate the debt if such specific events occurredaccelerate the debt if such specific events occurred(then referred to a “(then referred to a “duedue--onon--transfertransfer” clause).” clause).

The following is contractual language in a mortgageThe following is contractual language in a mortgagecontaining a more lender friendly “duecontaining a more lender friendly “due--onon--transfer”transfer”clause, which makes a defined “clause, which makes a defined “DispositionDisposition” an” anevent of default, and which would give the lenderevent of default, and which would give the lenderthe right to accelerate the debt:the right to accelerate the debt:

Lenders then responded to such tactics by addingLenders then responded to such tactics by addingadditional language to exercise their right toadditional language to exercise their right toaccelerate the debt if such specific events occurredaccelerate the debt if such specific events occurred(then referred to a “(then referred to a “duedue--onon--transfertransfer” clause).” clause).

The following is contractual language in a mortgageThe following is contractual language in a mortgagecontaining a more lender friendly “duecontaining a more lender friendly “due--onon--transfer”transfer”clause, which makes a defined “clause, which makes a defined “DispositionDisposition” an” anevent of default, and which would give the lenderevent of default, and which would give the lenderthe right to accelerate the debt:the right to accelerate the debt:

1414

Example of a lender’sExample of a lender’s“due“due--onon--transfer” clausetransfer” clause

“Borrower will not make a Disposition withoutobtaining Lender's prior written consent to theDisposition.”

Disposition was then defined in the mortgage toinclude:– “Any sale, lease (except as permitted under this Deed of

Trust), exchange, assignment, conveyance, transfer,trade, or other disposition of all or any portion of theMortgaged Property (or any interest therein) or all or anypart of the beneficial ownership interest in Borrower (ifBorrower is a corporation, partnership, generalpartnership, limited partnership, joint venture, trust, orother type of business association or legal entity).”

“Borrower will not make a Disposition withoutobtaining Lender's prior written consent to theDisposition.”

Disposition was then defined in the mortgage toinclude:– “Any sale, lease (except as permitted under this Deed of

Trust), exchange, assignment, conveyance, transfer,trade, or other disposition of all or any portion of theMortgaged Property (or any interest therein) or all or anypart of the beneficial ownership interest in Borrower (ifBorrower is a corporation, partnership, generalpartnership, limited partnership, joint venture, trust, orother type of business association or legal entity).” 1616

History of theHistory of the“due“due--onon--transfer” clausetransfer” clause

Borrowers began to resist and started litigating the attemptBorrowers began to resist and started litigating the attemptby lenders to require the loan to be paid in full merelyby lenders to require the loan to be paid in full merelybecause the mortgage property was transferred or somebecause the mortgage property was transferred or someinterest in the underlying borrower was transferred, arguinginterest in the underlying borrower was transferred, arguingthat such limitations amounted to anthat such limitations amounted to an unconstitutionalunconstitutionalrestraint on alienationrestraint on alienation (the right to transfer your property).(the right to transfer your property).Because lenders also sometimes charged exorbitant preBecause lenders also sometimes charged exorbitant pre--payment penalties, the courts recognized that the confluencepayment penalties, the courts recognized that the confluenceof these two contractual provisions could effectively restrainof these two contractual provisions could effectively restrainalienation.alienation.

The courts in different states began to interpret theseThe courts in different states began to interpret thesecontractual provisions, and the law was interpreted differentlycontractual provisions, and the law was interpreted differentlyin virtually every state.in virtually every state.

Borrowers began to resist and started litigating the attemptBorrowers began to resist and started litigating the attemptby lenders to require the loan to be paid in full merelyby lenders to require the loan to be paid in full merelybecause the mortgage property was transferred or somebecause the mortgage property was transferred or someinterest in the underlying borrower was transferred, arguinginterest in the underlying borrower was transferred, arguingthat such limitations amounted to anthat such limitations amounted to an unconstitutionalunconstitutionalrestraint on alienationrestraint on alienation (the right to transfer your property).(the right to transfer your property).Because lenders also sometimes charged exorbitant preBecause lenders also sometimes charged exorbitant pre--payment penalties, the courts recognized that the confluencepayment penalties, the courts recognized that the confluenceof these two contractual provisions could effectively restrainof these two contractual provisions could effectively restrainalienation.alienation.

The courts in different states began to interpret theseThe courts in different states began to interpret thesecontractual provisions, and the law was interpreted differentlycontractual provisions, and the law was interpreted differentlyin virtually every state.in virtually every state. 1717

Garn-St. GermainDepository Institutions Act

To eliminate the confusion surrounding the enforceability ofTo eliminate the confusion surrounding the enforceability ofduedue--onon--transfer clauses, on October 15, 1982, Congresstransfer clauses, on October 15, 1982, Congressdecided to preempt state law by passing a federal statute.decided to preempt state law by passing a federal statute.

This act was intended to give uniform treatment of theseThis act was intended to give uniform treatment of thesemortgage provisions in all of the jurisdictions.mortgage provisions in all of the jurisdictions.

The Garn-St. Germain Depository Institutions Act specifiedwhen a lender could, and when it could not, require theborrower to pay the entire balance merely because of atransfer of an interest in the property securing the loan, or atransfer of an interest in the borrowing entity.

12 U.S.C.12 U.S.C. §§ 1701j1701j--3(d)(2000)3(d)(2000)

To eliminate the confusion surrounding the enforceability ofTo eliminate the confusion surrounding the enforceability ofduedue--onon--transfer clauses, on October 15, 1982, Congresstransfer clauses, on October 15, 1982, Congressdecided to preempt state law by passing a federal statute.decided to preempt state law by passing a federal statute.

This act was intended to give uniform treatment of theseThis act was intended to give uniform treatment of thesemortgage provisions in all of the jurisdictions.mortgage provisions in all of the jurisdictions.

The Garn-St. Germain Depository Institutions Act specifiedwhen a lender could, and when it could not, require theborrower to pay the entire balance merely because of atransfer of an interest in the property securing the loan, or atransfer of an interest in the borrowing entity.

12 U.S.C.12 U.S.C. §§ 1701j1701j--3(d)(2000)3(d)(2000)

1818

GarnGarn--St. GermainSt. Germain -- The statuteThe statute12 U.S. Code12 U.S. Code § 1701j1701j--33

Preemption of duePreemption of due--onon--salesaleprohibitionsprohibitions

(a) Definitions– (1) the term “due-on-sale clause” means a contract

provision which authorizes a lender, at its option, todeclare due and payable sums secured by the lender’ssecurity instrument if all or any part of the property, or aninterest therein, securing the real property loan is sold ortransferred without the lender’s prior written consent;

– (3) the term “real property loan” means a loan, mortgage,advance, or credit sale secured by a lien on real property,the stock allocated to a dwelling unit in a cooperativehousing corporation, or a residential manufactured home,whether real or personal property; and

(a) Definitions– (1) the term “due-on-sale clause” means a contract

provision which authorizes a lender, at its option, todeclare due and payable sums secured by the lender’ssecurity instrument if all or any part of the property, or aninterest therein, securing the real property loan is sold ortransferred without the lender’s prior written consent;

– (3) the term “real property loan” means a loan, mortgage,advance, or credit sale secured by a lien on real property,the stock allocated to a dwelling unit in a cooperativehousing corporation, or a residential manufactured home,whether real or personal property; and

1919



(d) Exemption of specified transfers ordispositions– With respect to a real property loan secured by a

lien on residential real property containingless than five dwelling units, …

– a lender may not exercise its optionpursuant to a due-on-sale clause upon—

(d) Exemption of specified transfers ordispositions– With respect to a real property loan secured by a

lien on residential real property containingless than five dwelling units, …

– a lender may not exercise its optionpursuant to a due-on-sale clause upon—

2020



(1) the creation of a lien or other encumbrancesubordinate to the lender’s security instrument whichdoes not relate to a transfer of rights of occupancy inthe property;

(2) the creation of a purchase money security interestfor household appliances;

(3) a transfer by devise, descent, or operation of law onthe death of a joint tenant or tenant by the entirety;

(4) the granting of a leasehold interest of three years orless not containing an option to purchase;

(5) a transfer to a relative resulting from the death of aborrower;

(1) the creation of a lien or other encumbrancesubordinate to the lender’s security instrument whichdoes not relate to a transfer of rights of occupancy inthe property;

(2) the creation of a purchase money security interestfor household appliances;

(3) a transfer by devise, descent, or operation of law onthe death of a joint tenant or tenant by the entirety;

(4) the granting of a leasehold interest of three years orless not containing an option to purchase;

(5) a transfer to a relative resulting from the death of aborrower;

2121



(6) a transfer where the spouse or children of theborrower become an owner of the property;

(7) a transfer resulting from a decree of a dissolution ofmarriage, legal separation agreement, or from anincidental property settlement agreement, by which thespouse of the borrower becomes an owner of the property;

(8) a transfer into an inter vivos trust in which theborrower is and remains a beneficiary and whichdoes not relate to a transfer of rights of occupancyin the property; or

(9) any other transfer or disposition described inregulations prescribed by the Federal Home Loan BankBoard.

(6) a transfer where the spouse or children of theborrower become an owner of the property;

(7) a transfer resulting from a decree of a dissolution ofmarriage, legal separation agreement, or from anincidental property settlement agreement, by which thespouse of the borrower becomes an owner of the property;

(8) a transfer into an inter vivos trust in which theborrower is and remains a beneficiary and whichdoes not relate to a transfer of rights of occupancyin the property; or

(9) any other transfer or disposition described inregulations prescribed by the Federal Home Loan BankBoard.

2222

Statutory limitations onStatutory limitations onprepayment penaltiesprepayment penalties

(B)(B) A lender shall not impose a prepayment penaltyA lender shall not impose a prepayment penaltyor equivalent fee when the lender or party actingor equivalent fee when the lender or party actingon behalf of the lenderon behalf of the lender

((ii)) Declares by written notice that the loanDeclares by written notice that the loanis dueis due pursuant to a duepursuant to a due--onon--sale clause orsale clause or

(ii)(ii) Commences a judicial orCommences a judicial or nonjudicialnonjudicialforeclosureforeclosure proceeding to enforce aproceeding to enforce a duedue--onon--salesale clause or to seek payment in full as aclause or to seek payment in full as aresultresult of invoking such clause.of invoking such clause.

(B)(B) A lender shall not impose a prepayment penaltyA lender shall not impose a prepayment penaltyor equivalent fee when the lender or party actingor equivalent fee when the lender or party actingon behalf of the lenderon behalf of the lender

((ii)) Declares by written notice that the loanDeclares by written notice that the loanis dueis due pursuant to a duepursuant to a due--onon--sale clause orsale clause or

(ii)(ii) Commences a judicial orCommences a judicial or nonjudicialnonjudicialforeclosureforeclosure proceeding to enforce aproceeding to enforce a duedue--onon--salesale clause or to seek payment in full as aclause or to seek payment in full as aresultresult of invoking such clause.of invoking such clause.

2323

GarnGarn--St. GermainSt. GermainRegulationsRegulations

The Federal Home Loan Bank Board, inconsultation with the Comptroller of theCurrency and the National Credit UnionAdministration Board, was authorized toissue rules and regulations and to publishinterpretations governing theimplementation of this section.

Those regulations can be found at:12 CFR 591.5

The Federal Home Loan Bank Board, inconsultation with the Comptroller of theCurrency and the National Credit UnionAdministration Board, was authorized toissue rules and regulations and to publishinterpretations governing theimplementation of this section.

Those regulations can be found at:12 CFR 591.5 2424

GarnGarn--St. Germain RegulationsSt. Germain Regulations12 CFR 591.5 - Limitation on

exercise ofdue-on-sale clauses

§§591.5(b)591.5(b) Specific limitations.Specific limitations. With respect to any loan on theWith respect to any loan on thesecurity of a homesecurity of a home occupied or to be occupied by the borroweroccupied or to be occupied by the borrower,,

(A)(A) A lender shall notA lender shall not (except with regard to a reverse mortgage)(except with regard to a reverse mortgage)exercise its option pursuant to a dueexercise its option pursuant to a due--onon--sale clause uponsale clause upon: …: …

(iii)(iii) AA transfer by devise, descent, or operation oftransfer by devise, descent, or operation oflawlaw on the deathon the death of a joint tenant or tenant by the entiretyof a joint tenant or tenant by the entirety;;

(iv)(iv) TheThe granting of a leasehold interest which has agranting of a leasehold interest which has atermterm of three years or lessof three years or less andand which does not containwhich does not containanan option to purchaseoption to purchase (that is, either a lease of more than(that is, either a lease of more thanthreethree yearsyears oror a lease with an option to purchase will allow thea lease with an option to purchase will allow theexerciseexercise of a dueof a due--onon--sale clause);sale clause);

§§591.5(b)591.5(b) Specific limitations.Specific limitations. With respect to any loan on theWith respect to any loan on thesecurity of a homesecurity of a home occupied or to be occupied by the borroweroccupied or to be occupied by the borrower,,

(A)(A) A lender shall notA lender shall not (except with regard to a reverse mortgage)(except with regard to a reverse mortgage)exercise its option pursuant to a dueexercise its option pursuant to a due--onon--sale clause uponsale clause upon: …: …

(iii)(iii) AA transfer by devise, descent, or operation oftransfer by devise, descent, or operation oflawlaw on the deathon the death of a joint tenant or tenant by the entiretyof a joint tenant or tenant by the entirety;;

(iv)(iv) TheThe granting of a leasehold interest which has agranting of a leasehold interest which has atermterm of three years or lessof three years or less andand which does not containwhich does not containanan option to purchaseoption to purchase (that is, either a lease of more than(that is, either a lease of more thanthreethree yearsyears oror a lease with an option to purchase will allow thea lease with an option to purchase will allow theexerciseexercise of a dueof a due--onon--sale clause);sale clause);

2525



–– ((v) Av) A transfer, in which the transferee is a person who occupies or willtransfer, in which the transferee is a person who occupies or willoccupy the property, which is:occupy the property, which is:

(A)(A) A transfer to a relative resulting from theA transfer to a relative resulting from thedeathdeath of the borrower;of the borrower;

(B)(B) A transfer where the spouse orA transfer where the spouse orchild(child(renren) becomes an owner of the property; or) becomes an owner of the property; or

(C)(C) A transfer resulting from a decree ofA transfer resulting from a decree ofdissolutiondissolution of marriage, legal separation agreement,of marriage, legal separation agreement,oror from an incidental property settlement agreementfrom an incidental property settlement agreementbyby which the spouse becomes an owner of thewhich the spouse becomes an owner of thepropertyproperty; or; or

–– ((v) Av) A transfer, in which the transferee is a person who occupies or willtransfer, in which the transferee is a person who occupies or willoccupy the property, which is:occupy the property, which is:

(A)(A) A transfer to a relative resulting from theA transfer to a relative resulting from thedeathdeath of the borrower;of the borrower;

(B)(B) A transfer where the spouse orA transfer where the spouse orchild(child(renren) becomes an owner of the property; or) becomes an owner of the property; or

(C)(C) A transfer resulting from a decree ofA transfer resulting from a decree ofdissolutiondissolution of marriage, legal separation agreement,of marriage, legal separation agreement,oror from an incidental property settlement agreementfrom an incidental property settlement agreementbyby which the spouse becomes an owner of thewhich the spouse becomes an owner of thepropertyproperty; or; or

2626



With respect to any loan on the security of a homeWith respect to any loan on the security of a homeoccupied or to be occupied by the borroweroccupied or to be occupied by the borrower,,

(A)(A) A lender shall notA lender shall not (except with regard to a reverse(except with regard to a reversemortgage)mortgage) exercise its option pursuant to a dueexercise its option pursuant to a due--onon--salesaleclause uponclause upon: …: …

–– (vi)(vi) A transfer into an interA transfer into an inter vivosvivos trust in which thetrust in which theborrower is and remains the beneficiary andborrower is and remains the beneficiary andoccupant of the propertyoccupant of the property,, unless, as a conditionunless, as a conditionprecedent to such transfer, the borrower refusesprecedent to such transfer, the borrower refusesto provide the lender with reasonable meansto provide the lender with reasonable meansacceptable to the lender by which the lender willacceptable to the lender by which the lender willbe assured of timely notice of any subsequentbe assured of timely notice of any subsequenttransfer of the beneficial interest or change intransfer of the beneficial interest or change inoccupancyoccupancy..

With respect to any loan on the security of a homeWith respect to any loan on the security of a homeoccupied or to be occupied by the borroweroccupied or to be occupied by the borrower,,

(A)(A) A lender shall notA lender shall not (except with regard to a reverse(except with regard to a reversemortgage)mortgage) exercise its option pursuant to a dueexercise its option pursuant to a due--onon--salesaleclause uponclause upon: …: …

–– (vi)(vi) A transfer into an interA transfer into an inter vivosvivos trust in which thetrust in which theborrower is and remains the beneficiary andborrower is and remains the beneficiary andoccupant of the propertyoccupant of the property,, unless, as a conditionunless, as a conditionprecedent to such transfer, the borrower refusesprecedent to such transfer, the borrower refusesto provide the lender with reasonable meansto provide the lender with reasonable meansacceptable to the lender by which the lender willacceptable to the lender by which the lender willbe assured of timely notice of any subsequentbe assured of timely notice of any subsequenttransfer of the beneficial interest or change intransfer of the beneficial interest or change inoccupancyoccupancy.. 2727

Effect ofEffect of GarnGarn--St. GermainSt. Germain

AfterAfter GarnGarn--St. Germain, residential lendersSt. Germain, residential lendersgenerallygenerally–– Changed the language of their dueChanged the language of their due--onon--transfer clauses totransfer clauses to

specify the exceptions stated in the Act.specify the exceptions stated in the Act.–– Stopped charging prepayment penalties if they acceleratedStopped charging prepayment penalties if they accelerated

the debt as a result of a transfer without the lender’sthe debt as a result of a transfer without the lender’sconsentconsent

–– Began to respect circumstances that fell within theBegan to respect circumstances that fell within theexceptions to enforceability of a dueexceptions to enforceability of a due--onon--transfer clausetransfer clause

See the residential mortgage language that follows:See the residential mortgage language that follows:

AfterAfter GarnGarn--St. Germain, residential lendersSt. Germain, residential lendersgenerallygenerally–– Changed the language of their dueChanged the language of their due--onon--transfer clauses totransfer clauses to

specify the exceptions stated in the Act.specify the exceptions stated in the Act.–– Stopped charging prepayment penalties if they acceleratedStopped charging prepayment penalties if they accelerated

the debt as a result of a transfer without the lender’sthe debt as a result of a transfer without the lender’sconsentconsent

–– Began to respect circumstances that fell within theBegan to respect circumstances that fell within theexceptions to enforceability of a dueexceptions to enforceability of a due--onon--transfer clausetransfer clause

See the residential mortgage language that follows:See the residential mortgage language that follows:

2828

Texas Real Estate FormsTexas Real Estate FormsManual dueManual due--onon--sale clausesale clause

""If Grantor transfers any part of the Property withoutIf Grantor transfers any part of the Property withoutLender’s prior written consentLender’s prior written consent,, Lender mayLender may declare thedeclare thedebtdebt secured by this deed of trustsecured by this deed of trust immediately payableimmediately payable andandinvoke any remedies provided in this deed of trust for default.invoke any remedies provided in this deed of trust for default.If the Property is residential real property containingIf the Property is residential real property containingfewer than five dwelling unitsfewer than five dwelling units or a residentialor a residentialmanufactured homemanufactured home occupied by Grantoroccupied by Grantor,, exceptions toexceptions tothis provision are limited tothis provision are limited to (a) a subordinate lien or(a) a subordinate lien orencumbrance that does not transfer rights of occupancy of theencumbrance that does not transfer rights of occupancy of theProperty; (b) creation of a purchaseProperty; (b) creation of a purchase--money security interest formoney security interest forhousehold appliances; (c) transfer by devise, descent, orhousehold appliances; (c) transfer by devise, descent, oroperation of law on the death of a cooperation of law on the death of a co--Grantor; (d)Grantor; (d) grant of agrant of aleasehold interest of three years or less without anleasehold interest of three years or less without anoption to purchaseoption to purchase; (e) transfer to a spouse or children of; (e) transfer to a spouse or children ofGrantor or between coGrantor or between co--Grantors; (f) transfer to a relative ofGrantors; (f) transfer to a relative ofGrantor on Grantor’s death; and (g)Grantor on Grantor’s death; and (g) transfer to an intertransfer to an intervivosvivos trust in which Grantor is and remains atrust in which Grantor is and remains abeneficiary and occupant of the Property."beneficiary and occupant of the Property."

""If Grantor transfers any part of the Property withoutIf Grantor transfers any part of the Property withoutLender’s prior written consentLender’s prior written consent,, Lender mayLender may declare thedeclare thedebtdebt secured by this deed of trustsecured by this deed of trust immediately payableimmediately payable andandinvoke any remedies provided in this deed of trust for default.invoke any remedies provided in this deed of trust for default.If the Property is residential real property containingIf the Property is residential real property containingfewer than five dwelling unitsfewer than five dwelling units or a residentialor a residentialmanufactured homemanufactured home occupied by Grantoroccupied by Grantor,, exceptions toexceptions tothis provision are limited tothis provision are limited to (a) a subordinate lien or(a) a subordinate lien orencumbrance that does not transfer rights of occupancy of theencumbrance that does not transfer rights of occupancy of theProperty; (b) creation of a purchaseProperty; (b) creation of a purchase--money security interest formoney security interest forhousehold appliances; (c) transfer by devise, descent, orhousehold appliances; (c) transfer by devise, descent, oroperation of law on the death of a cooperation of law on the death of a co--Grantor; (d)Grantor; (d) grant of agrant of aleasehold interest of three years or less without anleasehold interest of three years or less without anoption to purchaseoption to purchase; (e) transfer to a spouse or children of; (e) transfer to a spouse or children ofGrantor or between coGrantor or between co--Grantors; (f) transfer to a relative ofGrantors; (f) transfer to a relative ofGrantor on Grantor’s death; and (g)Grantor on Grantor’s death; and (g) transfer to an intertransfer to an intervivosvivos trust in which Grantor is and remains atrust in which Grantor is and remains abeneficiary and occupant of the Property."beneficiary and occupant of the Property."

2929

Can the lender call the note due if thereCan the lender call the note due if thereis a due on sale clause and the propertyis a due on sale clause and the property

is sold without the lender’s consent?is sold without the lender’s consent?

Generally the answer isGenerally the answer is “yes.”“yes.” But there’s some possibility that there might not be a dueBut there’s some possibility that there might not be a due--onon--

transfer clause if the lender is not an institution (need totransfer clause if the lender is not an institution (need tocheck)check)

The lender might grant permission (particularly if you assignThe lender might grant permission (particularly if you assignthe lender additional legal rights)the lender additional legal rights)

So if a lender has this contractual right, why wouldn’t itSo if a lender has this contractual right, why wouldn’t itexercise its right to call the note due?exercise its right to call the note due?–– MarketMarket interest ratesinterest rates are below the note’s rateare below the note’s rate–– Property’sProperty’s value is lessvalue is less than the amount owedthan the amount owed–– Lenders don’t want to forecloseLenders don’t want to foreclose–– Lender’s don’t want to own property (taxes, maintenance, property isLender’s don’t want to own property (taxes, maintenance, property is

vacant)vacant)–– Loan is performing, vs. recognition of loss if property is foreclosedLoan is performing, vs. recognition of loss if property is foreclosed

Generally the answer isGenerally the answer is “yes.”“yes.” But there’s some possibility that there might not be a dueBut there’s some possibility that there might not be a due--onon--

transfer clause if the lender is not an institution (need totransfer clause if the lender is not an institution (need tocheck)check)

The lender might grant permission (particularly if you assignThe lender might grant permission (particularly if you assignthe lender additional legal rights)the lender additional legal rights)

So if a lender has this contractual right, why wouldn’t itSo if a lender has this contractual right, why wouldn’t itexercise its right to call the note due?exercise its right to call the note due?–– MarketMarket interest ratesinterest rates are below the note’s rateare below the note’s rate–– Property’sProperty’s value is lessvalue is less than the amount owedthan the amount owed–– Lenders don’t want to forecloseLenders don’t want to foreclose–– Lender’s don’t want to own property (taxes, maintenance, property isLender’s don’t want to own property (taxes, maintenance, property is

vacant)vacant)–– Loan is performing, vs. recognition of loss if property is foreclosedLoan is performing, vs. recognition of loss if property is foreclosed 3131

Will the lender exercise it’s right to callWill the lender exercise it’s right to callthe note due under its duethe note due under its due--onon--transfertransfer

clause?clause?

As mortgage interest rates have fallen from theAs mortgage interest rates have fallen from thehigh levels of the early 1980s, lenders havehigh levels of the early 1980s, lenders havefrequently not been aggressive in exercising theirfrequently not been aggressive in exercising theirrights under the duerights under the due--onon--sale clause. Instead manysale clause. Instead manylenders have sometimes preferred to allow the loanlenders have sometimes preferred to allow the loancontract to remain in place so long as it is beingcontract to remain in place so long as it is beingtimely paid. As current interest rates rise, it can betimely paid. As current interest rates rise, it can beexpected that more lenders will elect to accelerateexpected that more lenders will elect to acceleratethe debt when it is discovered that the borrowerthe debt when it is discovered that the borrowerhas transferred an interest in the property withouthas transferred an interest in the property withoutthe lender’s consent.the lender’s consent.

As the market improves, they can, and they might,As the market improves, they can, and they might,call the note.call the note.

As mortgage interest rates have fallen from theAs mortgage interest rates have fallen from thehigh levels of the early 1980s, lenders havehigh levels of the early 1980s, lenders havefrequently not been aggressive in exercising theirfrequently not been aggressive in exercising theirrights under the duerights under the due--onon--sale clause. Instead manysale clause. Instead manylenders have sometimes preferred to allow the loanlenders have sometimes preferred to allow the loancontract to remain in place so long as it is beingcontract to remain in place so long as it is beingtimely paid. As current interest rates rise, it can betimely paid. As current interest rates rise, it can beexpected that more lenders will elect to accelerateexpected that more lenders will elect to acceleratethe debt when it is discovered that the borrowerthe debt when it is discovered that the borrowerhas transferred an interest in the property withouthas transferred an interest in the property withoutthe lender’s consent.the lender’s consent.

As the market improves, they can, and they might,As the market improves, they can, and they might,call the note.call the note.

3232

Case law on dueCase law on due--onon--salesaleclausesclauses

Courts in some state, like Texas, routinely uphold theCourts in some state, like Texas, routinely uphold theenforceability of dueenforceability of due--onon--sale clausessale clauses

In recent case law developments in Texas, the Dallas CourtIn recent case law developments in Texas, the Dallas Courtof Appeals in 2005 refused to find in favor of the borrowerof Appeals in 2005 refused to find in favor of the borrowerasserting a cause of action for wrongful foreclosure of aasserting a cause of action for wrongful foreclosure of acommercial loan as a result of the borrower's transfer of thecommercial loan as a result of the borrower's transfer of themortgaged property to a corporation owned by the borrowermortgaged property to a corporation owned by the borrowerunder an unrecorded deed which the borrower claimed wasunder an unrecorded deed which the borrower claimed wasnever delivered.never delivered. AdamsAdams vv. First National Bank of. First National Bank ofBells/SavoyBells/Savoy, 154 S.W.3d 859 (, 154 S.W.3d 859 (Tex.AppTex.App..——Dallas 2005, noDallas 2005, nopet.). The court found that there was evidence in thepet.). The court found that there was evidence in theborrower's corporate financial statement and in theborrower's corporate financial statement and in theborrower's own comments to the lender that the propertyborrower's own comments to the lender that the propertyhad been transferred. Even though the lender did not givehad been transferred. Even though the lender did not givethe borrower a notice of its intent to accelerate the debt, thethe borrower a notice of its intent to accelerate the debt, thecourt found that the borrower had waived her right to noticecourt found that the borrower had waived her right to noticeof intent to accelerate.of intent to accelerate.

Courts in some state, like Texas, routinely uphold theCourts in some state, like Texas, routinely uphold theenforceability of dueenforceability of due--onon--sale clausessale clauses

In recent case law developments in Texas, the Dallas CourtIn recent case law developments in Texas, the Dallas Courtof Appeals in 2005 refused to find in favor of the borrowerof Appeals in 2005 refused to find in favor of the borrowerasserting a cause of action for wrongful foreclosure of aasserting a cause of action for wrongful foreclosure of acommercial loan as a result of the borrower's transfer of thecommercial loan as a result of the borrower's transfer of themortgaged property to a corporation owned by the borrowermortgaged property to a corporation owned by the borrowerunder an unrecorded deed which the borrower claimed wasunder an unrecorded deed which the borrower claimed wasnever delivered.never delivered. AdamsAdams vv. First National Bank of. First National Bank ofBells/SavoyBells/Savoy, 154 S.W.3d 859 (, 154 S.W.3d 859 (Tex.AppTex.App..——Dallas 2005, noDallas 2005, nopet.). The court found that there was evidence in thepet.). The court found that there was evidence in theborrower's corporate financial statement and in theborrower's corporate financial statement and in theborrower's own comments to the lender that the propertyborrower's own comments to the lender that the propertyhad been transferred. Even though the lender did not givehad been transferred. Even though the lender did not givethe borrower a notice of its intent to accelerate the debt, thethe borrower a notice of its intent to accelerate the debt, thecourt found that the borrower had waived her right to noticecourt found that the borrower had waived her right to noticeof intent to accelerate.of intent to accelerate. 3333

GarnGarn––St. GermainSt. GermainLimitations on enforceability ofLimitations on enforceability of

duedue--onon--transfer clausestransfer clauses DueDue--onon--sale clauses are enforceable in residentialsale clauses are enforceable in residential

loan transactions except in the following situations:loan transactions except in the following situations:

–– 1. Death of the borrower1. Death of the borrower –– transfer to the heirstransfer to the heirs

–– 2. Divorce of the borrowers2. Divorce of the borrowers –– transfer to onetransfer to onespousespouse

–– 3. A lease, not coupled with an option to3. A lease, not coupled with an option topurchase, of less than three yearspurchase, of less than three years

DueDue--onon--sale clauses are enforceable in residentialsale clauses are enforceable in residentialloan transactions except in the following situations:loan transactions except in the following situations:

–– 1. Death of the borrower1. Death of the borrower –– transfer to the heirstransfer to the heirs

–– 2. Divorce of the borrowers2. Divorce of the borrowers –– transfer to onetransfer to onespousespouse

–– 3. A lease, not coupled with an option to3. A lease, not coupled with an option topurchase, of less than three yearspurchase, of less than three years

3434

Drafting Trust ProvisionsDrafting Trust Provisions

Which exemption are we relying on?Which exemption are we relying on?–– Transfer by devise, descent, etc.Transfer by devise, descent, etc. –– does thatdoes that

include the transfer into trust?include the transfer into trust?– A transfer into an inter vivos trust in which the

borrower is and remains a beneficiary and whichdoes not relate to a transfer of rights ofoccupancy in the property

Does the trust exemption also apply to non-owner occupied properties (i.e., rentals)?

Transfer to a spouse or children exemption?

Which exemption are we relying on?Which exemption are we relying on?–– Transfer by devise, descent, etc.Transfer by devise, descent, etc. –– does thatdoes that

include the transfer into trust?include the transfer into trust?– A transfer into an inter vivos trust in which the

borrower is and remains a beneficiary and whichdoes not relate to a transfer of rights ofoccupancy in the property

Does the trust exemption also apply to non-owner occupied properties (i.e., rentals)?

Transfer to a spouse or children exemption?3535

Definition in theDefinition in the RegsRegs::

In other words, does it only apply to theIn other words, does it only apply to thegrantor’s principal residence?grantor’s principal residence?

What if the borrower is the only person on theWhat if the borrower is the only person on themortgage and transfers into trust for benefit ofmortgage and transfers into trust for benefit ofgrantor and his spouse?grantor and his spouse?

Does transfer to trustee in trust vs. transfer toDoes transfer to trustee in trust vs. transfer totrust itself matter?trust itself matter?

In this regard, is transfer to an irrevocable trustIn this regard, is transfer to an irrevocable trustok if the beneficiaries are spouse and kids?ok if the beneficiaries are spouse and kids?

In other words, does it only apply to theIn other words, does it only apply to thegrantor’s principal residence?grantor’s principal residence?

What if the borrower is the only person on theWhat if the borrower is the only person on themortgage and transfers into trust for benefit ofmortgage and transfers into trust for benefit ofgrantor and his spouse?grantor and his spouse?

Does transfer to trustee in trust vs. transfer toDoes transfer to trustee in trust vs. transfer totrust itself matter?trust itself matter?

In this regard, is transfer to an irrevocable trustIn this regard, is transfer to an irrevocable trustok if the beneficiaries are spouse and kids?ok if the beneficiaries are spouse and kids?

3636

More Trust IssuesMore Trust Issues……

GarnGarn--St. Germain Act only applies to 1St. Germain Act only applies to 1--4 family (not4 family (notcommercial)commercial)

What about an installment sale to a trust for theWhat about an installment sale to a trust for thebenefit of the borrower and/or his spouse or kids?benefit of the borrower and/or his spouse or kids?

QPRT (spouse and kids are remainder beneficiaries)?QPRT (spouse and kids are remainder beneficiaries)?–– (Qualified Personal Residence Trust)(Qualified Personal Residence Trust)

Illinois Land Trust (aka “nominee” or “realty trustIllinois Land Trust (aka “nominee” or “realty trust”)”) Does Irrevocable vs. Revocable Trust matter?Does Irrevocable vs. Revocable Trust matter? Refinancing trust propertyRefinancing trust property

GarnGarn--St. Germain Act only applies to 1St. Germain Act only applies to 1--4 family (not4 family (notcommercial)commercial)

What about an installment sale to a trust for theWhat about an installment sale to a trust for thebenefit of the borrower and/or his spouse or kids?benefit of the borrower and/or his spouse or kids?

QPRT (spouse and kids are remainder beneficiaries)?QPRT (spouse and kids are remainder beneficiaries)?–– (Qualified Personal Residence Trust)(Qualified Personal Residence Trust)

Illinois Land Trust (aka “nominee” or “realty trustIllinois Land Trust (aka “nominee” or “realty trust”)”) Does Irrevocable vs. Revocable Trust matter?Does Irrevocable vs. Revocable Trust matter? Refinancing trust propertyRefinancing trust property

3737

Practical Implications of aPractical Implications of aDueDue--onon--sale “Violation”sale “Violation”……

Lender’s Remedies:Lender’s Remedies:–– Do nothingDo nothing–– Inquire furtherInquire further–– Accelerate theAccelerate the loan (personal experienceloan (personal experience……))

LachesLaches –– an unreasonable delay in the exercisean unreasonable delay in the exerciseof an equitable remedyof an equitable remedy

No obligation in note or mortgage to notifyNo obligation in note or mortgage to notifylender; thus is the regulationlender; thus is the regulation requiringrequiringnotification enforceablenotification enforceable??

Does nonDoes non--notification prevent laches argument?notification prevent laches argument?

Lender’s Remedies:Lender’s Remedies:–– Do nothingDo nothing–– Inquire furtherInquire further–– Accelerate theAccelerate the loan (personal experienceloan (personal experience……))

LachesLaches –– an unreasonable delay in the exercisean unreasonable delay in the exerciseof an equitable remedyof an equitable remedy

No obligation in note or mortgage to notifyNo obligation in note or mortgage to notifylender; thus is the regulationlender; thus is the regulation requiringrequiringnotification enforceablenotification enforceable??

Does nonDoes non--notification prevent laches argument?notification prevent laches argument?3838

UltraUltra--Vires DoctrineVires Doctrine

Usually applies to corporate players acting beyondUsually applies to corporate players acting beyondthe scope of their authoritythe scope of their authority

Sometimes applied to administrative agenciesSometimes applied to administrative agenciesaction beyond the scope of their enabling statuteaction beyond the scope of their enabling statute(more common in CA, NZ, and England)(more common in CA, NZ, and England)

GarnGarn--St. Germain Act refers to any other exceptionSt. Germain Act refers to any other exceptionpromulgated by the FHLBB (and presumably itspromulgated by the FHLBB (and presumably itssuccessors)successors)

Thus, did the FHLBB act beyond their powers inThus, did the FHLBB act beyond their powers inshrinking the trust exemption to ownershrinking the trust exemption to owner--occupied?occupied?

Usually applies to corporate players acting beyondUsually applies to corporate players acting beyondthe scope of their authoritythe scope of their authority

Sometimes applied to administrative agenciesSometimes applied to administrative agenciesaction beyond the scope of their enabling statuteaction beyond the scope of their enabling statute(more common in CA, NZ, and England)(more common in CA, NZ, and England)

GarnGarn--St. Germain Act refers to any other exceptionSt. Germain Act refers to any other exceptionpromulgated by the FHLBB (and presumably itspromulgated by the FHLBB (and presumably itssuccessors)successors)

Thus, did the FHLBB act beyond their powers inThus, did the FHLBB act beyond their powers inshrinking the trust exemption to ownershrinking the trust exemption to owner--occupied?occupied?

3939

Sample Trust LanguageSample Trust Language

In the event the holder of the mortgage(s) orIn the event the holder of the mortgage(s) orliens against real property held by this trustliens against real property held by this trustseek to enforce the “due on sale” provisions ofseek to enforce the “due on sale” provisions ofsaid mortgage(s) or lien(s), the Trustee issaid mortgage(s) or lien(s), the Trustee isauthorized to transfer the property to theauthorized to transfer the property to thegrantor(s)/borrower(s) of this trust or entergrantor(s)/borrower(s) of this trust or enterinto any agreement that is required by saidinto any agreement that is required by saidmortgage or lienholders to avoid enforcementmortgage or lienholders to avoid enforcementof said ”due on sale” provisions.of said ”due on sale” provisions.

In the event the holder of the mortgage(s) orIn the event the holder of the mortgage(s) orliens against real property held by this trustliens against real property held by this trustseek to enforce the “due on sale” provisions ofseek to enforce the “due on sale” provisions ofsaid mortgage(s) or lien(s), the Trustee issaid mortgage(s) or lien(s), the Trustee isauthorized to transfer the property to theauthorized to transfer the property to thegrantor(s)/borrower(s) of this trust or entergrantor(s)/borrower(s) of this trust or enterinto any agreement that is required by saidinto any agreement that is required by saidmortgage or lienholders to avoid enforcementmortgage or lienholders to avoid enforcementof said ”due on sale” provisions.of said ”due on sale” provisions.

4040

Transfer to LLCTransfer to LLC……

Property owned by LLC provides moreProperty owned by LLC provides moreprotection than a property owned by a livingprotection than a property owned by a livingtrust.trust.

Some courts have held that transfer from H&WSome courts have held that transfer from H&Wto a limited partnership of H&W would triggerto a limited partnership of H&W would triggerdue on sale.due on sale.

Does transfer to a “disregarded” LLC triggerDoes transfer to a “disregarded” LLC triggerdue on sale? LLCs were rarely used in 1983,due on sale? LLCs were rarely used in 1983,thus is a single member LLC a separate “owner”thus is a single member LLC a separate “owner”from the member?from the member?

Property owned by LLC provides moreProperty owned by LLC provides moreprotection than a property owned by a livingprotection than a property owned by a livingtrust.trust.

Some courts have held that transfer from H&WSome courts have held that transfer from H&Wto a limited partnership of H&W would triggerto a limited partnership of H&W would triggerdue on sale.due on sale.

Does transfer to a “disregarded” LLC triggerDoes transfer to a “disregarded” LLC triggerdue on sale? LLCs were rarely used in 1983,due on sale? LLCs were rarely used in 1983,thus is a single member LLC a separate “owner”thus is a single member LLC a separate “owner”from the member?from the member?

4141

Tax Issues in Transferring toTax Issues in Transferring toTrustTrust

Transfer to a “grantor” trust (I.R.C. Secs 671Transfer to a “grantor” trust (I.R.C. Secs 671--678) is a non678) is a non--taxable event.taxable event.

Would apply to typical living trusts,Would apply to typical living trusts,intentionallyintentionally--defective trusts, etc.defective trusts, etc.

Does a trust file a return or get an EINDoes a trust file a return or get an EINnumber?number?

Transfer to a “grantor” trust (I.R.C. Secs 671Transfer to a “grantor” trust (I.R.C. Secs 671--678) is a non678) is a non--taxable event.taxable event.

Would apply to typical living trusts,Would apply to typical living trusts,intentionallyintentionally--defective trusts, etc.defective trusts, etc.

Does a trust file a return or get an EINDoes a trust file a return or get an EINnumber?number?

4242

Wrapping it UpWrapping it Up……

Questions:Questions:

Bill BronchickBill Bronchick –– [email protected]@bronchicklaw.com

Bryan DunklinBryan Dunklin –– [email protected]@email.com

Questions:Questions:

Bill BronchickBill Bronchick –– [email protected]@bronchicklaw.com

Bryan DunklinBryan Dunklin –– [email protected]@email.com

4343

avoiding due on transfer provisions in land trusts and single...

Documents