Need advice, is this illegal?

48 Replies

This is going to be long, hope it makes sense. 9.5 years ago 6 investors got together and purchased a 42 door condo complex. 3m cash was put it and a 3m loan was taken out. Rents have paid down the loan and it will be paid in full next month. Recently we sold a unit and when we went to do the title work we realized that one of the investors (a RE Broker and developer) took out a loan for a different project and put our entire project up as collateral. We now have a second lien on the property which will still be in place next month when we finish paying off the first loan. I have called the bank that put the lien on the property and they refuse to talk to me. The investor who took out the loan refuses to do anything. The operating agreement in place specifically prevents the property from being used as collateral without written consent of all members. What are my options?

Attorney

A lot depends on what the other partners want to see happen here. Review the Operating Agreement closely. It should have provisions regarding dispute resolution, expelling members, buy-outs, etc.

Unfortunately it's probably time to lawyer up... interesting that Bank2 was able to obtain their lien against your project without all the members being notified.

I hope the other investor has enough cash to pay off the lien.  Get a lawyer.

If you are correct about the facts, I would suggest filing suit against the bank.

That will almost certainly make them file criminal charges against the person that used the property as collateral if he cannot pay off the lien.

Thanks guys. Im going to reread the OA line by line and start looking for an independent attorney. Would the real estate commission care that their broker acted in this manner? The thought of losing my license would make me nervous. 

Originally posted by @Michelle L. :

Thanks guys. Im going to reread the OA line by line and start looking for an independent attorney. Would the real estate commission care that their broker acted in this manner? The thought of losing my license would make me nervous. 

Nothing you've described yet is illegal ... it's a breach of your OA.

But I would certainly want to have a look at the loan docs where your project was pledged as collateral. 

Real Estate commission here in Texas exists to protect its industry and agents and make it look like they are protecting the public.Did the broker do any of this in his / her capacity as a broker? If not, probably no reason to go there. 

@Tom Gimer @Michael Biggs   guys I think this is a title company claim.

IF the bank got title insurance on the cross collateral.. I suspect they may have.. but then again they may not.

if they got title insurance the title co. should have balked once the operating agreement was read. If they went against that document then I think the other investors have a title claim.

If no title insurance was gotten.. then I believe the bank still has a legit lien and the beef is with the person who put the lien on the property in violation of the operating agreement.

I am dealing with the same thing on a dead beat partner right now that did that to me.. only worse he assigned my interest in a option that I had 42% of and 500k of money into.. to an entity of his own without paying me or my consent.. its just a transfer doc.. no deed so its not as tough as this.. we are just going to write him ( my attorney ) and tell him the transfer is null and void and we are not honoring it..

 Get a RE lawyer asap hopefully the realtor is still around.  I did not realize until I read that developer is an investor also. Sorry,

@Sam Shueh   how is this a licesne issue ?  this is a contract issue has zero to do with licensing from the description above.. and I will bet it could be a title claim..

@Jay Hinrichs Good points, Jay... I wasn't even thinking about a title company screw-up! 

(But I will add that some 2nd/collateral lenders don't require insurance... just a title report confirming current liens.)

To be honest I was thinking this partner told the bank -- presumably one he is quite familiar with -- that he was the sole member. "Nobody else needs to be involved here, folks! Where do I sign???"

Thanks for your thoughts guys. The investor that took out the loan and put the property up for collateral is a broker and did collect a commission at the time of the original sale. In addition he has been charging ongoing management fees and as part of the agreement will collect 25% of the profit over 8% annual return as a carried interest holder. I do not know if the second bank did a title search before they put a lien on the property. They refused to talk to me today but aknowledged that they were familiar with the property and seemed surprised? that I was telling them I was part owner. Their only response was to go talk to this investor. Wasn't there a fiduciary responsibility to do what was best for all of the investors? This person also has a property management license and gaming license. Why risk all that for a loan? And how do I find out how much that loan is?

Originally posted by @Michelle L. :

Thanks for your thoughts guys. The investor that took out the loan and put the property up for collateral is a broker and did collect a commission at the time of the original sale. In addition he has been charging ongoing management fees and as part of the agreement will collect 25% of the profit over 8% annual return as a carried interest holder. I do not know if the second bank did a title search before they put a lien on the property. They refused to talk to me today but aknowledged that they were familiar with the property and seemed surprised? that I was telling them I was part owner. Their only response was to go talk to this investor. Wasn't there a fiduciary responsibility to do what was best for all of the investors? This person also has a property management license and gaming license. Why risk all that for a loan? And how do I find out how much that loan is?

So they seemed surprised that you were a part owner. Ah hah. 

Yes, your partner has duties to you/the other partners. Unfortunately they appear to have been breached.

The title company already discovered the lien. Get a copy. It should state clearly on its face how much of an interest your partner pledged without your consent.

this is NOT a license issue.. this is a breach of contract issue and as you state fiduciary duties. 

@Tom Gimer   I know my banks here in Oregon would not just TAKE MY WORD for it.. LOL.. they would order at least a pre lim.. and read the operating agreement.

that all said if the bank did just did cross this up with no insurance etc.. then this is simply a breach claim and if the other person went dark then it needs to be litigated..

This same bozo who assigned my interest in my option did the exact same thing to his partners on another piece of property.. Only they were not members of an LLC they were investors in a PPM .. liens are good but they are suing him for securities violations and misrepresentation of the PPM.. Although one of the liens put on this property was done after he was removed as manager and he sweet talked FAtco into putting another lien on the property 1 of 5 he did.. and I believe that that one there will be a title claim..

AS this lady has laid this out unless there Is title insurance the bank got.. I believe this is simply a lawsuit waiting to happen .. and get a lawyer is kind of comical.. not like they can waive a magic wand.. it will have to go through the court system.. Bad partners are like Bad brother in laws.. your kind of stuck with them whether you like it or not.

Is the partner that pledged for the loan the managing member? Some may only require that. I recall a few years ago when I sold a business, and even as managing member they REQUIRED me to get affidavits from the other members that I had their consent to sell.

If this guy is the managing member, the bank and title company may not have had the duty to notify the other members. This is an interesting case.

Personally, I would contact an attorney immediately before the partner digs any deeper.

If he is hired as the property manager, it may also be a violation of ethics and license law. I would go add this to the discussion with your attorney and deal with it as a secondary issue.

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@Michelle L. When you pull the DoT to see the lien amount, have a look at the signature page. If the capacity for your partner is incorrect (e.g., it says he signed as Managing Member when that was not accurate) then he misrepresented his authority. If it says something else, such as "duly authorized Member" then the plot thickens because an LLC Resolution would have been required (and the other members would have been asked to sign it).

For the amount of money in this deal, how would you not contact an attorney? I can understand trying to save a couple bucks on a smaller deal, but we are talking about a multimillion dollar asset.

@Jay Hinrichs "Bad partners are like Bad brother in laws.. your kind of stuck with them whether you like it or not." That is a great line and so true.

@Michelle L. Like everyone else has suggested, attorneys will most likely be involved in this. 

That being said, a low probability play, if this is a small community bank where you have a chance to speak with the leadership, is to go to the bank in person.

 Looking at this from the bank's shoes, someone called and told them: "Hey you screwed up by securing a loan without doing your job". Their first reaction: say nothing. When you said they seemed surprised means the are most likely trying to get their heads around this as well. 

The pitch is your "partner" wronged both your partnership and the bank so you are on the same side of this and can help each other.  They clear the lien and you keep them from being named a co defendant in costly litigation and possibly losing the revenue from whatever loan you "partner" has taken out. People who are getting sued tend to pay their lawyers before their loans. Focus on mutually supporting solutions instead of assigning blame, at least when you are talking to the bank. 

If the loan is through a national or regional bank it wouldn't waste my time with this option, but a few hours of your time could save months of litigation. Common sense isn't so common, yet some people have it; maybe they guy you talk has some.

Originally posted by @John K. :

For the amount of money in this deal, how would you not contact an attorney? I can understand trying to save a couple bucks on a smaller deal, but we are talking about a multimillion dollar asset.

 OH for sure this headed to lawyer land..  NO question about it..  my only comment on lawyers is its obvious.. why even come on Bp to have half those responding say get a lawyer.. :)  this is clearly a contract breach and or as

Tom stated a title claim if the title company did not verify who had the authority to bind the company.. I deal with this literally every day of the week... title companies just don't record documents without crossing their Tees and dotting their eyes.. and on top of it.. even if you have clear and concise language in the operating agreement that allows a specific person to sign for the company ( like I do in all my LLC operating agreements) they still want other members to sign or sign resolutions.. they don't bother to read the operating agreement they just default to having all members sign.. and for me with off shore members that is impossible 99% of the time.. its quite funny how we argue this like I said every single week.. I even have my attorney in my operating agreements make that statement 2 ponts bigger in Italic and bold.. and they still miss it..

Originally posted by @John K. :

For the amount of money in this deal, how would you not contact an attorney? I can understand trying to save a couple bucks on a smaller deal, but we are talking about a multimillion dollar asset.

Now as Tom might have stated the bank may have prepped their own deed and recorded it outside of escrow..

and if that's the case well.. then again litigation.. and case law.  

@Bill F.  Perfecto advice.. if small community bank walk in and ask to talk to the head credit officer. lay out your paper work and then explain what you just layed out for her.  big bank forget about it..

@Jay Hinrichs I'm still trying to figure out a way conceptually to extricate the title company from this mess. It's in my nature! This would be lenders title insurance coverage so the LLC/members would not be insured. Ultimately I don't see a title claim being paid. If anything on the title side it would be the title company's E&O.

@Tom Gimer   bank if they paid for title insurance would release and make a claim I am thinking.

but you know title insurance darn hard to get .. I got a biggee going right now on a land locked.

if they cant get me my right a way to the highway they gots to cut me a 600k check.. and you know how willing they are going to be to do that.. they are suing for the easement... but its not clear cut you CAN be landlocked in America.. all those that think you can't are mistaken.. we will see if they prevail..

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