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Your Legal Corner - Client Alert Blog

Joint Venture Exception to California's Usury Laws

Written By: Melissa C. Marsh, Esq., California Attorney, November 2011 Add to Favorites
In Junkin v. Golden West Foreclosure Service, Inc.,180 Cal.App.4th 1150 (2009), Gary Bennett (a hard money lender) loaned Donald Junkin III (a licensed real estate agent and investor) $856,000 to purchase a property for $1.975 million. The balance of the purchase price came from a licensed financial institution and both Bennett and Junkin were on title and responsible on the loan and each considered the other a partner in the venture. The additional $865.000 loan made by Bennett to Junkin carried a 12% interest rate, was secured by a deed of trust, and gave Bennett a 10% stake in the property.

Junkin did not make the payments required under either the first or second note. Afraid that his second deed of trust for $960.000 would be wiped out if the owner of the first note foreclosed, Bennett made the payments on the first note himself and also paid the property taxes. Bennett then disassociated himself from Junkin by quitclaiming his 10% interest back to Junkin and Junkin refinanced the first trust deed. After years of not receiving payment on the second, Bennett retained Golden West Foreclosure Service Inc. to foreclose on the property. Junkin filed a complaint to enjoin the pending foreclosure asserting the loan was usurious. Bennett argued that the usury laws did not apply because he and the plaintiff were in a joint venture.

The trial court found the loan Bennett made to Junkin involved a joint venture, and therefore was exempt from California's usury laws. The Court of Appeal affirmed, citing Miller & Starr: "where the relationship between the parties is a bona fide joint venture or partnership, the advance by the partners or joint venturers is an investment and not a loan, and the profit or return earned by the investor is not subject to the statutory maximum limitations of the Usury Law." 8 Miller & Starr, Cal. Real Estate (3d ed. 2001) 21:1, p.48

The Court further explained that to determine whether a transaction is a bona fide joint venture, the Court will consider the following five factors, none of which by itself is conclusive:

  1. Whether there is an absolute obligation of repayment,
  2. Whether the investor is subject to a risk of loss,
  3. Whether the investor has a right to participate in management,
  4. Whether the subject property was purchased from a third party, and
  5. Whether the parties considered themselves to be partners in the transaction.
See, 8 Miller and Starr, Cal. Real Estate (3d ed. 2001) 21.11 and Martin v. Ajax Construction Co,. 124 Cal.App.2d 425 (1954). Whether a transaction is a joint venture, or a loan, is a question of fact to be decided by the trier of fact, but where the relevant facts are undisputed, the proper characterization of a transaction presents a question of law that the court reviews de novo on appeal. See, Ghirardo v. Antonioli, 8 Cal.4th 791, 799 (1994).

In sum, where two individuals consider themselves to be partners such that both have assumed a risk of loss, both are obligated to pay an indebtedness, and both have a right to participate in management of a property purchased from a third party, a loan between the partners will be considered a joint venture exempt from California's usury limits.

Tags: promissory note, usury
Posted In: Business Law Bulletin  Corporate Client Bulletin  Real Estate Reporter 

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.