NOTE COURSE BONUS LESSON
Published: Mon, 02/16/09
February 16, 2009
In This Issue:
* PAPER SOURCE Registry of Investors 2009
* Why You Probably DON'T Want A Note Seller
To Guarantee The Payments
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Hello again ,
You would think that a note seller offering to guarantee the
payments on the note would be a good thing, right? In this Bonus
Lesson, Lorelei Stevens, President of Wall Street Brokers, tells us
why it may NOT be.
Cheers,
Bill
W. J. Mencarow
President, The Paper Source, Inc.
www.PaperSourceOnline.com
www.cashflows.org
P.S. The 18th annual print edition of THE PAPER SOURCE REGISTRY OF
NOTE INVESTORS will be published in March and sent to all PAPER
SOURCE JOURNAL subscribers. As anyone who has been in the cashflow
industry for more than a hour knows, the Registry is where note
buyers and sellers meet. It was the first compilation of note
investors and remains the largest and most accurate
listing of TRUE end-investors.
Over 10,000 copies are in circulation. It is also on the
Internet and features direct links to investors' e-mails and
websites for on-line submission of notes.
If your firm buys notes with your own sources of funds unavailable
to note brokers OR offers a product or service to the industry,
you should be in the Registry. If your firm is already in the
Registry you may need to renew for 2009. Go to:
www.PaperSourceOnline.com/reg-form.html for an application. THE
DEADLINE IS FEBRUARY 28.
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RISKY RECOURSE
by Lorelei Stevens, President of Wall Street Brokers
In the early 1980's our firm, Wall Street Brokers, considered the
purchase of a risky note from a Mr. Baxter. The risk stemmed from
the property that secured the note, which was not up to our
standards. We felt that the only way we could protect our
money was to have Mr. Baxter sell us the note "with recourse."
"With recourse" means that in the event the payor defaults,
the note seller will step in and pay. Mr. Baxter was agreeable,
but a question arose about a legal point in such a note purchase:
If a note seller sells us a note with recourse, does the law
consider that a loan from us to the note seller?
It might be considered a loan because the note seller has
the final liability for paying us back.
The legal question was this: If it was a loan, and our
yield on the note was higher than our State's usury laws allowed,
would we in effect be charging illegal interest?
Since our yield on the note would be higher than our
State's usury laws allowed, we asked our lawyer. He searched the
law and told us there was no case law on our subject in Washington
State, but in his opinion it was obvious that the purchase of a
note guaranteed by the note seller was not a loan, and our yield
by definition could not be usury.
Our lawyer wrote to us:
"The holder of the note who sells same and who is obligated
on recourse is subject to a portion of the Uniform Commercial Code,
which states the endorser 'will pay the instrument according to its
tenor at the time of his endorsement to the holder, or to any
subsequent endorser who takes it up.' Thus, it appears that the
endorser's debt would be that shown on the face amount of the Note.
Usury applies only to loans. Sale of a note at discount, assuming a
bona fide sale, cannot, therefore, be usury by definition."
So we quit worrying about it and bought the note from Mr.
Baxter. We even wrote into the documents a safety clause: "SALE:
It is understood and agreed that this transaction is not a loan."
Mr. Baxter also clearly knew that he had to pay us if the payor
didn't pay. We had no reason to believe there was any legal problem.
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The payor paid for about two years, but then the payments
stopped. We asked Mr. Baxter to pay. Mr. Baxter refused, and
brought a lawsuit against us for usury. Mr. Baxter complained that
his sale of the note with recourse was a loan of money by us to him,
and that we had charged him an illegal rate of interest.
We hired a lawyer who was expert in litigation and usury and
felt confident that Mr. Baxter's claims would not stand up in court.
The case went to trial. Mr. Baxter claimed to be a borrower - we
argued that he was not a borrower. We won! The trial court found
that there was no subterfuge or scheme by us to collect usurious
interest from Mr. Baxter. We won a judgment against Mr. Baxter for
more than $50,000.00 plus attorney fees and costs.
Mr. Baxter filed an appeal. The Court of Appeals of the
State of Washington reversed the trial court's decision. The Court
of Appeals came to the opposite conclusion and ruled against us.
Now the court awarded Mr. Baxter a judgment against us for
nearly $50,000.00. The judgment we had obtained earlier against
Mr. Baxter was canceled. Instead of him owing us money, we now
owed him.
We appealed to the Supreme Court of Washington State. But
the Supreme Court denied our request and refused to hear our case.
There was no further appeal. We had to pay Mr. Baxter. So
we paid him. When we handed over the cashier's check to Mr. Baxter's
lawyers, we were unhappy about the loss, but glad to have the case
over with.
We lost a lot of money on this note. We lost the money we
were forced to pay Mr. Baxter. We lost the money we paid to our
lawyer for his fees and court costs. We also lost a portion of the
money we'd originally paid Mr. Baxter for the note. Mr. Baxter also
got the note back from us!
People have asked us if we sued our original lawyer for
giving us bad advice. No, we didn't sue our lawyer. He is a friend
and we don't sue our friends. Besides, many lawyers since have told
us they would have given us the same advice. Many lawyers have also
told us that the Baxter appeal decision was a bad one, but that
doesn't change anything about the case.
We learned a hard lesson. When there is no case law on an
issue, lawyers can only give us their best guess. A substantial
portion of the business of buying, brokering and selling notes is in
gray areas of the law. This is definitely a tricky and risky
business, and not for the fainthearted.
We also learned that it is not necessarily a good thing to
make case law. Case law in the State of Washington says that the
sale of a note with recourse is subject to the usury laws of the
State as between the note seller and note buyer. Unless there is an
exemption, any recourse sale of a note could subject a note buyer
to serious usury penalties.
When you hear a note seller offering to guarantee the
payments, you should consult more than one lawyer, especially if
you are in a 'usury-sensitive" state. Otherwise, if you don't want
usury worries, avoid having sellers guarantee notes.
Baxter vs. Stevens 54 Wn. App. 456 is available upon
request to Wall Street Brokers.
SEE ALSO: Western Auto vs. Vick, 303 North Carolina 30,
277 S.E. 2d 360 (1981).
Copyright 2009. ALL RIGHTS RESERVED
Lorelei Stevens is the President of Wall Street Brokers,
Inc. in Seattle, WA. She would like to buy some notes from you.
Please contact her at: 206-448-1160, fax (206) 448-8476, e-mail
lorelei@eskimo.com. Visit her website at
http://www.wallstreetbrokers.com
Lorelei is the author of "LORELEI'S LEGAL LESSONS, THE
ESSENTIAL GUIDE FOR SUCCESSFUL NOTE BROKERS. Learn the
little-known rules and requirements that can make or break you,
written in a clear, concise and easy-to-understand style. For
information, see www.PaperSourceOnline.com/lll.htm
or call 1-800-542-2270.