by Lorelei Stevens, President, Wall Street Brokers
 
What happens when a note seller backs out of your deal?  
 
Anyone who has been a note buyer for long has experienced the
following scenario: You get a frantic call asking for a bid on a
note. You give the bid and the note seller signs up with you.
The note seller calls you frequently wanting to know when they
will get their money. Then they stop calling. Then they won't
return your phone calls. Finally, you find out from some
third party that the note is being sold to someone else. Or,
even worse, the deal mysteriously evaporates and you never know what happened.
 
It's just a part of the note business. The first time this happens
to you, you feel a sense of moral outrage that someone would offer to sell you a note and then back out and not even tell you. You think of the time and effort you have put into your due diligence and writing up the transaction. You think of the lost interest on the cash you reserved to buy the note. You want justice. So whatare your options?
 
Contact The Seller
First, try to contact the backed-out note seller and appeal to
their sense of ethics. Or you can advise them that you may take
court action. Sometimes the note seller will agree to pay you
something for your trouble. However, most note sellers, once
having backed out, don't want to confront the problem and will not
communicate with you or pay you money.
 
Go To Court  
You can take the case to court if you have a signed preliminary
agreement with the note seller and if it is written with "teeth"
in it. Without a written preliminary agreement, you would have
a hard time getting into court in the first place. Assuming you
do have one, its "teeth" may consist of a "specific performance"
clause - forcing the seller to complete the note sale. However, if
the note seller has already sold the note to someone else -
and it's usually the payor - it might be too late.  
 
Other "teeth" consist of a penalty clause which is more likely to
be effective because you could get a judgment from a court
awarding you a penalty payment from the note seller if the note
sale fails for any reason. Another possibility is to ask the court
for damages against the note seller in an amount to be determined by the court.
 
There are a number of these legal remedies available to the harmed note buyer. Each has its merits and problems. Each assumes that
you have written your preliminary agreement in such a manner
that a court is able to rule in your favor. A sloppy or poorly
conceived preliminary agreement can defeat not only your own
purposes, but also the court's power to give you relief. If
your agreement left out something important, the court can't fix
it for you. On the other hand, if you pack your preliminary
agreement with too many self-serving clauses, the court may
conclude that your document isn't fair, and you may not win.
 
But even with the best written assurances, you will still
experience backouts. If you choose to go to court, you must bring
the strongest possible case in order to win a court judgment.
Remember that the note seller will also bring the strongest
possible case and may present brilliant defenses against you.
Note sellers may argue that they haven't received anything of
value from you and thus shouldn't have to pay you anything.
They may argue that your price was lower than the market dictates. Or perhaps you asked for too much private information.
Note sellers can be clever in court.  
 
You may find yourself arguing to the judge that the note seller
cheated you because they didn't want to lose money by accepting
your discounted price. There is a certain lack of dignity in
making such an argument. Consumer-friendly courts may look at
you as taking advantage of the note seller.
 
Even if you do win the case, a court judgment is only as good as
your ability to enforce it. If there are no assets to attach,
no funds to freeze in a bank account, or no wages to garnish,
you may find your judgment was a hollow victory. You still don't
have the money, but you do still have all your legal bills to pay,
not to mention lost time and frustration.  
 
Just because you feel the note seller cheated you does not
necessarily mean the court will be on your side. That old cliché
- no one wins in court except the lawyers - is usually true.

Record Your Agreement
Another approach is to record your agreement with the county recorder. Your reason for doing this is that it may produce results at some future time, but it is subject to so many perils that you may decide it's not worth it.

Here's how it works: You write your preliminary agreement including a clause in which the note seller authorizes you to record the agreement in the county where the mortgage or deed of trust is recorded. (The mortgage or deed of trust is the document which is recorded against the real estate and is the security for the note.) Then you record your agreement with the county and let time pass. Your agreement usually shows up on any title report in the future. That can be a cloud on the title of the real estate. A backed-out note seller then becomes eager to remove that cloud, because a pending transaction usually hinges upon it. Then you can convince the note seller to pay you an appropriate settlement for you to release the agreement.

However, there are many possible ways for this plan to backfire. First, the county recorder may refuse to record such an unusual document as an agreement to sell a note. Second, if the recorder agrees to record your agreement, it must contain the legal description of the real estate securing the note, a detail you must not forget. Finally, county recorders normally only accept notarized documents, so you must get the preliminary agreement notarized, and your note seller may not agree to do that.

Even if you get that far, the title insurance company may decide that your recorded agreement is not a cloud on the title of the real estate - as it has to do with real estate paper and not the real estate itself - and issue title insurance anyway, which defeats your whole purpose.

But the worst backfire comes if the note payor finds that your recorded agreement is interfering with some transaction - buying the note, selling the property, refinancing the property - and becomes angered that you only obtained the permission to record your agreement from the note seller and not from the note payor - the owner of the property. You may face a lawsuit for slander of title unless you release your agreement immediately and/or pay damages to the note payor. That, of course, also defeats your purpose and could put you in legal jeopardy with the note payor.

Even though recording your agreement may produce satisfactory settlements in a few cases, the risks are generally not worth taking.

Hold Hostage
There are two steps note buyers might think of, but must never take: One is to refuse to return an original note to a backed-out note seller on demand. If you haven't paid for it, you are holding someone else's property hostage. Second is to obtain the seller's notarized signature on an Assignment of Mortgage or Assignment of Deed of Trust and record it before the transaction is complete. This amounts to the same thing: you are holding someone else's property hostage. You could face severe legal penalties for either of these acts, which could be considered conversion. Conversion is "any unauthorized act which deprives an owner of his property permanently or for an indefinite time". This could get you into serious trouble.

Having gone through the possible remedies for note sellers who back out, you can see that there is no magic solution. Every possibility has its drawbacks. Of course, there may be some circumstances in which you would want to sue someone or force a settlement. The experience will be interesting and expensive, and take up a lot of your attention.

The wisest and most practical thing to do in most situations, however, is to forget it and go on to the next deal. Put your effort into the positive. You'll feel better and you'll do better.

COPYRIGHT 2009 WALL STREET BROKERS, INC. ALL RIGHTS RESERVED


Lorelei Stevens is president of Wall Street Brokers, a nationwide note investment firm founded in 1971. She would like to buy a note from you.  Contact her at 1-800-423-2114, e-mail: lorelei@eskimo.com Website: www.wallstreetbrokers.com

Lorelei is the author of LORELEI'S LEGAL LESSONS, THE ESSENTIAL GUIDE FOR SUCCESSFUL NOTE BROKERS. In it you'll learn the little-known rules and requirements that can make or break you, written in a clear, concise and easy to understand style.  There is no other book like it.