Loan Assignment and Assumption

Case Study

Fred Whitaker of Cummins & White, LLP, successfully represented the owner of a multi-family residential building in gaining approval from the lender for the assignment and assumption of the loan from one of the owner’s corporate entities to another.

The transaction was complicated by the fact that approval of the loan transfer was being done several years after the fact, and that without the lender’s consent, the transaction had the potential to trigger a loan default. Cummins & White worked closely with the owner, the loan servicer, and the lender to prepare legal documents and secure approval of the loan assignment and assumption, and the loan remains in good standing.

Background

In January 2002, as part of the purchase of a 296-unit apartment building in Nevada, the buyer secured an $8.4 million multi-family loan from Fannie Mae under one of her corporate entities, Seaport Villas, Inc.

Subsequently, in 2005, the owner transferred by grant deed the property to another corporate entity, Sahara Villas, LLC. However, she did not realize that she needed Fannie Mae’s consent to transfer the property—doing so triggered a default under the loan agreement, and Fannie Mae could have called for full payment of the loan. This transaction was further complicated by the fact that the original entity, Seaport Villas, Inc., had been dissolved two years before the loan transfer.

(The grant deed stated that the transfer was effective beginning in 2003. However, it was not executed or recorded until 2005.)

In 2009, the owner retained Cummins & White based on its expertise in financing for real property and corporate governance to prepare the required documents and secure Fannie Mae’s approval of the loan assignment and assumption.

Legal Strategy

Cummins & White, working proactively with the loan servicer, Wells Fargo, prepared and submitted numerous documents to Fannie Mae, including:

• An Opinion Letter, stating that Sahara Villas, LLC, was in good standing, had the authority to assume the loan, and that the proposed assignment and assumption of the loan would be valid, legal, and enforceable against the parties
• The Articles of Organization and Certificate of Good Standing for Sahara Villas, LLC
  Organizational documents for Sahara Villas, LLC, including its Operating Agreement that lists members of the entity and sets forth the financial and managerial rights of each member and manager, as well as the operational structure of the entity
• A Corporate Resolution formally approving the assignment and assumption of the loan
• A report of all Uniform Commercial Code, tax lien, and judgment searches filed against Seaport Villas, Inc., and Sahara Villas, LLC
• An executed Assignment and Assumption Agreement by Seaport Villas, Inc., and Sahara Villas, LLC
• An executed Certificate of Borrower and Key Principal by Sahara Villas, LLC, certifying the truth and accuracy of the documents being provided

Cummins & White also consulted with a Nevada-based attorney to provide a legal opinion as to the validity of the transaction under Nevada law.

Finally, to address concerns from Wells Fargo that the transfer was invalid because the original corporate entity had been dissolved when the transfer was completed, the firm provided an opinion as to the validity of the transfer under applicable California statutes stating that a corporation that is dissolved nevertheless can continue to exist for the purpose of finalizing its affairs and distributing its property and assets.

Importantly, Cummins & White also worked with the title insurance company to provide a “bring down” title endorsement on Fannie Mae’s lender’s policy ensuring that its first lien position remained enforceable notwithstanding the transfer from Seaport Villas, Inc., to Sahara Villas, LLC.

Result/Implication

Cummins & White assisted its client in preparing and executing numerous documents required by Wells Fargo, which in turn were presented to Fannie Mae in order to secure approval of the loan transfer. The documents were reviewed, and Fannie Mae approved the loan assignment and assumption without contingencies.

According to the apartment owner, Carmela Esani, Cummins & White skillfully handled all details of the transaction, and she is pleased with the final result. “Though the circumstances were complicated, Cummins & White expertly prepared all of the required documentation and quickly secured approval of the loan transfer,” Ms. Esani said. “The expert legal services provided and the end results speak for themselves—I was delighted to be able to continue with business as usual.”