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Let the Wholesaler Beware: Make Sure Your Seller Is Who They Say They Are!

You’re a wholesaler or similar real estate investor (REI).  Your wholesale contracts are simple affairs.  You find a good deal with a seller, send someone to the property, and sign them up.  He or she signs the contract as the “executor” or “administrator” of an estate, or a “trustee” of a trust.  You turn around to your buyer, ink that contract, and open escrow.  You go back to your seller to close the deal only to find out they were never appointed executor or administrator of the estate, or that they were not in fact a trustee for the trust.  They tell you they’re backing out of the deal.  You contact your attorney to file suit for specific performance and to record a lis pendens.  It’s a headache, but otherwise no big deal, right?

Wrong.  The purported sale of estate property by one who has not yet been duly appointed to represent it by the Probate Court is void, even if the Probate Court later orders the sale to proceed.  This has been so since 1875 in California and won’t be changing any time soon. (Pryor v. Downey (1875) 50 Cal. 388, 400; Texas Co. v. Bank of Am. Nat’l Trust & Sav. Ass’n. (1935) 5 Cal.2d 35, 40; Lamkin v. Vierra (1961) 198 Cal.App.2d 123, 125.)  In the case of a trust, the trust beneficiaries can sue you or the trustee at their option to enjoin the sale, and potentially even reverse it if it already occurred. (Estate of Bowles (2008) 169 Cal.App.4th 684, 693 [suing third party]; Pierce v. Lyman (1991) 1 Cal.App.4th 1093, 1103 [suing trustees]; Wolf v. Mitchell, Silberberg & Knupp (1999) 76 Cal.App.4th 1030, 1038 [recovering property or its proceeds].)

Whatever the result, your wholesale plans are most likely sunk.  What can a REI do in the future to prevent this avoidable (and potentially costly) result in wholesale transactions?

What You Need to Get

Before you assign your wholesale contract to your buyer, check your contract with the seller.  If the seller’s name says something like “executor,” “administrator with will annexed,” or “administrator” of some estate, or “trustee” of a trust, immediately ask for the following:

  1. If the seller is the “executor,” “administrator with will annexed,” or “administrator,” you should ask for court-stamped letters testamentary or letters of administration.  In California, these must appear on Letters (Probate) (DE-150), a form found online at www.courts.ca.gov.  Make sure these “letters” appear on this form (its use is mandatory) and were approved by the court.
  2. If the seller is the “trustee,” ask for the most recent, notarized trust document appointing him or her as the trustee, and if necessary, for an order from a court doing the same. Have your lawyer inspect the trust document to ensure the trustee has the authority to sell you the property.

Closing Your Wholesale Deal

After you’ve confirmed your seller has requisite authority to sell you the property, what happens next depends on whether it is an estate or a trust.

  1. If you’re buying from an executor or administrator of the estate, the executor/administrator ordinarily will need to provide notice to and seek confirmation from the Probate Court.  This is itself a long and, in many cases, complicated process.  Just know this: if you’re buying from the estate of a deceased person, you should be prepared to be in it for the long haul.
  2. If you’re buying from a trustee, no court intervention is required.  So long as the trustee has the power to dispose of trust property, he or she can contract and sell you the property quickly and efficiently like any other seller.  However, this is where you need your attorney to review the trust document first!  Your attorney can advise you what powers the trustee has.

What to Do If You Didn’t Check First

If you find yourself in the unfortunate situation described above, and your seller had no authority to enter into the transaction to begin with, all hope is not necessarily lost (though it’s pretty close).  In the dicta[1] of the case Lamkin v. Vierra (1961) 198 Cal.App.2d 123, 128, the Court stated:

“The courts should not sanction conduct undertaken in disregard of the provisions of the Probate Code except to avoid injustice. And the doctrine of relation-back, to whatever extent it may exist in this state consistent with our codified probate laws, can have no application [here].”

(Id. [emphasis added].)  If you can convince a court, whether the Probate Court or the Superior Court, that you were somehow defrauded by the putative executor or administrator, you may be able to set up a fraud claim.  However, since the property never transferred, your claim to monetary damages will be extremely limited.  And even in the case of fraud, you won’t be able to make out a claim for specific performance. 

In the end, you’ve lost your wholesale, but may be able to recoup some minor expenses.

Conclusion

“Talk to your lawyer before you do that” is always good advice.  It applies in full force to a REI or wholesaler in California dealing with a seller acting as an executor or administrator of an estate, or trustee of a trust.

[1]           A fancy legal word for “non-binding extra writing.”