Suit Against Bank Tells Cautionary Tale : Real estate: Nearly $264,000 later, a home is in foreclosure, and an investor holds what may be a worthless second trust deed. The moral: Read all the paperwork.

Nathan Weiss hoped to swell his retirement fund by investing in Southern California real estate. So in February, 1990, the manufacturer’s representative from Los Angeles invested $30,000 in a trust deed on a luxury home being built by speculators in Sun Valley.

Now, 17 months later, financially ailing Mission Valley Bank in San Clemente has nearly $264,000 of Weiss’ money, and the Sun Valley home is in foreclosure.

And Weiss, 67, who thought he had protected his investment by buying the principal mortgage from Mission Valley Bank late last year, instead has what may be a worthless second trust deed on a home whose value has deflated in a stale real estate market.

He also has a fraud suit against the bank and a lot of questions about a banking system that let it happen.

His suit, filed in Orange County Superior Court, lays out a horror story that is must reading for any novice real estate investor. The moral: Never take anyone’s word for anything and always demand to see the paperwork.

Weiss alleges that Mission Valley Bank defrauded him by selling him what it said was the first trust deed on the property, a 4,000-square-foot, single-family residence on an acre of land. It turned out to be a second trust deed, which would be paid off only after the first mortgage was paid.

Weiss said he believed bank officials and never asked to see the documents backing up their comments.

He also made what seasoned investors say is a cardinal mistake by not obtaining his own title insurance policy, which would have itemized all loans on the property.

Mission Valley Bank officials acknowledged their error after the actual first trust deed holder foreclosed on the property earlier this year, said Weiss’ attorney, Joan M. Price.

Neither Mission Valley officials nor the attorney representing the bank responded to The Times’ requests for comments on the case, which Price said had been all but resolved in mid-June, when the bank suddenly refused to sign a proposed settlement agreement.

According to the suit Weiss filed in April, he first invested $30,000 in early 1990 with a limited partnership building the home in an upscale equestrian area of Sun Valley, a hillside community about 15 miles northwest of downtown Los Angeles. In return, Weiss received a junior trust deed that made him a creditor of the partnership.

In the next six months, Weiss received copies of two foreclosure notices filed against the property by Mission Valley Bank. In each case, according to the suit, he contacted the bank, was assured that Mission Valley held the first trust deed and was persuaded to protect his initial investment by paying off the builder’s debt.

In the first instance, the suit alleges, Weiss paid Mission Valley $11,247.40 to catch up on overdue mortgage payments. In the second instance, Mission Valley Vice President Daniel L. Perl persuaded Weiss that buying the bank’s trust deed for $252,597.09 would protect his original investment and be a good deal because the property was worth more than twice the amount owed.

The deal boosted Weiss’ total investment to $293,826.49 but, he thought, made him sole owner of a luxury home worth more than $600,000 on the open market.

Then, on Dec. 5, 1990, Weiss received a copy of a default and foreclosure notice filed against the property by Executive Savings & Loan Assn. in Los Angeles. Executive, it seems, has all along held the real first trust deed, in the amount of $282,000.

In an interview Tuesday, Weiss’ attorney said that she had spoken with Perl before filing suit and that he had acknowledged telling Weiss that the bank held the first trust deed “because he had a letter in the files from Executive releasing (its claim) and reconveying” the first trust position to Mission Valley.

But that letter, according to the suit, does not exist. Instead, the suit alleges, Mission Valley Bank’s files contain a title insurance report dated Aug. 18, 1989, showing Executive Savings as holder of the first trust deed on the property.

Price said she and Weiss met with the bank’s attorney and its consultant, Wade Francis, just after the suit was filed and worked out a proposed settlement calling for the bank to repurchase the second trust deed from Weiss for $160,000 before the foreclosure sale scheduled by Executive Savings.

Weiss was to receive $160,000 more from proceeds of the foreclosure sale--for a $26,000 profit--if it generated enough money to pay off the debt to Executive with cash left over for Mission Valley, Price said.

Francis was introduced as a consultant specializing in aiding troubled financial institutions. Price said Francis told her that Mission Valley wanted to settle “because they were in financial trouble and didn’t want the adverse publicity connected with the suit.”

A draft of the settlement agreement was passed back and forth between the two attorneys for more than a month, Price said, then on June 13, just three days before the foreclosure sale, Francis called her and announced that the bank would not honor the proposed settlement agreement.

“That was it; they didn’t give us a reason.” Price said.

The June 16 foreclosure auction failed to attract bids in excess of the amount owed to Executive, so the S&L; kept the property and is still seeking a buyer.

As for Weiss, “the only recourse seems to be to press on with the suit,” Price said.

Weiss has also set aside retirement plans. His little real estate investment has eaten up about 85% of his savings.

“Now I’m going to have to go back to work,” he said.