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.