Contribution Rights Among Co-Guarantors: Liability Must Be Proportional
In reviewing notable guaranty cases from 2017 while preparing this year’s updates and edits for CEB’s top-notch treatise, California Mortgages, Deeds of Trust, and Foreclosure Litigation, we came across an opinion that escaped our attention when it was published in November.
In Duke v. Superior Court, California’s Fifth District Court of Appeal addressed the contribution rights of a lease co-guarantor after entry of judgment.
Facts: back-stabbing among co-guarantors
Rebecca Duke was the founder and CEO of a company called Skinsation. Gregory Klis and David Lewis were investors with Duke and members of Skinsation’s board of directors.
Duke, Klis, and Lewis all personally guaranteed a commercial lease signed by Skinsation.
The landlord sued Skinsation and the guarantors, and obtained a judgment in the amount of $385,072.10, for which Skinsation and the guarantors were jointly and severally liable. The guarantors could not agree on their respective contributions to satisfy the judgment.
Then, according to Duke’s complaint, the shenanigans began.
Klis and Lewis convened a shareholder meeting without notice to Duke, removed her as a director, and terminated her employment with the company. Next, Klis and Lewis signed a settlement agreement with the landlord, under which Klis and Lewis took an assignment of the landlord’s judgment, and the landlord released Klis and Lewis from liability under the judgment. Klis and Lewis then served Duke with a notice of levy on all of her capital stock in Skinsation, claiming that with interest the judgment debt had risen to $448,028.90.
The levy resulted in a sheriff’s sale, at which Klis and Lewis purchased all of Duke’s shares. According to Duke, those shares were worth approximately $700,000.
Duke sued Klis and Lewis for conversion, among other claims. She contended that the sheriff’s sale enforcing the full amount of the judgment against her was improper because she only had a proportional share of liability under the guaranty. She claimed that her levied stock was far more valuable than her proportional share of liability.
Trial court’s ruling: conversion claim dismissed
The trial court sustained a demurrer and dismissed Duke’s claim for conversion, holding that the assignment of the judgment and the sheriff’s sale were proper.
Duke appealed.
Court of Appeal’s opinion: conversion claim reinstated; co-guarantor’s liability must be proportional
The Court of Appeal reversed, siding with Duke and holding that Klis and Lewis “had only a right of contribution from Duke.”
The court held there was nothing wrong with Klis and Lewis taking an assignment of the judgment from the landlord. But that assignment did not give Klis and Lewis the right to enforce the entire judgment against their co-debtor, Duke. Instead, they could only recover contribution for Duke’s proportional share of liability under the judgment. Klis and Lewis, the court held, “were not entitled to over-enforce the judgment against Duke.”
The proper procedure for Klis and Lewis to follow, the court held, would have been to apply to the court for a determination of Duke’s proportionate share of liability under Code of Civil Procedure sections 882 and 883 before attempting a levy. The court held that Duke stated a proper claim for conversion, since it appeared from Duke’s allegations that Klis and Lewis “intentionally over-enforced the judgment to divest Duke of all control and ownership in Skinsation.”
Lesson
Facing liability under a guaranty is never an easy situation. But the Duke opinion at least confirms that a guarantor has important rights of contribution against co-guarantors, such that the liability is enforced proportionally.