The Fourth District Court of Appeal recently held that guarantors are not entitled to the “fair value” protections of CCP §580a under existing case law and that individual guarantors who were the (a) sole members of a limited liability company that was the trustee, (b) settlors, and (c) secondary beneficiaries of a trust were “true” guarantors of the indebtedness of such trust.
In Talbott v. Hustwit, a lender made a loan to a trust that was secured by real property. Repayment of the loan was guaranteed by the settlors (and secondary beneficiaries) of the trust. A limited liability company owned by the guarantors was the trustee of the trust. When the loan went into default, the lender acquired the real property pursuant to a partial credit bid at a nonjudicial foreclosure sale. Thereafter, the lender sought recovery from the guarantors for the unpaid balance of the loan.
The guarantors argued that they were not liable for the unpaid balance of the loan because the fair market value of the real property on the date of the foreclosure sale exceeded the outstanding balance of the loan, such that the lender had been made whole by the acquisition of the real property at the foreclosure sale and any recovery against the guarantors would violate a general state policy against secured creditors obtaining excess recoveries. Furthermore, under such circumstances, the “fair value” protections of CCP §580a would prevent the lender from recovering the deficiency between the amount of the winning bid at the foreclosure sale and the outstanding balance of the loan. However, the Court of Appeal, in affirming the judgment against the guarantors entered by the lower court, noted that 60 years of case law has uniformly held that CCP §580a has no application to an action against guarantors and that the general state policy was not significant enough to justify abandoning Supreme Court precedent.
While consistent with existing case law, this opinion does have a certain amount of additional significance in that it is the first published opinion of a Court of Appeal with this holding after the Supreme Court ordered a contrary holding in Bank of Southern California v. Dombrow depublished in 1995.
The guarantors also argued that they were not “true” guarantors as there was an insignificant degree of separation of interest between the individual guarantors and the trust borrower such that the trust borrower was a “mere instrumentality” of the individual guarantors and the individual guarantors were, “in reality,” the “primary obligor” (and, therefore, were entitled to the “fair value” protections of CCP §580a). An earlier Court of Appeal opinion had reached this conclusion with respect to individual guarantors who were also the trustors, trustees and primary beneficiaries of a trust borrower. In Talbott, however, the Court of Appeal determined that the use of a limited liability company as the trustee of the trust borrower sufficiently limited the liability of the individual guarantors for the obligations of the trust borrower (i.e., that the individual guarantors would not have been personally liable for the loan made to the trust borrower absent the guaranty), but otherwise made it clear that the determination of a party’s status as a true guarantor or a primary obligor is primarily factual in nature to be determined on a case-by-case basis.
The decision also included a concurring opinion that focused on the disconnect between courts’ refusal to afford guarantors the protections of CCP §580a and the goal of Civil Code Section 2809 to protect guarantors from incurring obligations “more burdensome” than those of a principal debtor, but review of the case was denied by the Supreme Court.
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