Reminder: Guarantor on Real Estate-Secured Loan Can Remain Liable Even When the Borrower is Not
California’s anti-deficiency statutes provide robust protection for borrowers where the loan is secured by real estate. For example, following a nonjudicial foreclosure sale (aka trustee’s sale), the creditor is barred from seeking a deficiency judgment against the borrower. The anti-deficiency protections afforded to borrowers cannot be waived.
But guarantors — not so much.
An opinion recently filed by California’s First Appellate District — Temple View Capital Funding, LP v. Garnicki — provides a guarantor liability reminder. While the opinion is unpublished and therefore not binding precedent, it provides an accurate snapshot of settled California law.
Facts: LLC borrows money; LLC’s manager signs personal guaranty
In November 2018, borrower Ocean Avenue Real Estate Fund, LLC (“Ocean Avenue”) obtained a $1.8 million loan from Temple View Capital Funding, LP (“Temple View”). The loan was documented by a promissory note and secured by a deed of trust on real property located in San Francisco giving Temple View a first priority lien.
Tony Garnicki, Ocean Avenue’s manager, signed a personal guaranty of the loan. The guaranty contained a standard waiver of California’s anti-deficiency protections. As to guarantors, it is settled California law that such waivers are valid and enforceable.
Ocean Avenue defaulted on the loan. Temple View sold the property at a trustee’s sale pursuant to its deed of trust. After the sale, a deficiency of approximately $1 million remained owing.
Temple View sued Garnicki for the deficiency based on the guaranty.
Trial court: lender “estopped” from pursuing deficiency against guarantor
Temple View and Garnicki reached a settlement shortly before trial, under which Garnicki would make scheduled payments. Garnicki failed to make the payments, and Temple View filed a motion to enforce the settlement, which sought payment of the current deficiency amount including attorney fees — over $1.6 million.
The trial court applied a long-outdated version of California law, holding Temple View was “estopped” from pursuing a deficiency judgment against Garnicki, and awarded $0.
Garnicki appealed.
Court of Appeal: reversed; guarantor liable for full deficiency amount
The Court of Appeal reversed in an easy decision.
The court started with the principle that a guaranty is “a separate and independent obligation from that of the principal debt” and the “antideficiency statutes’ protections generally do not extend to guarantors.”
The court then noted that following a 1968 opinion in which the court applied the doctrine of “estoppel” to prevent a creditor from recovering against a guarantor, California law clearly evolved and for decades has allowed guarantors to waive all anti-deficiency protections, as Garnicki did here. This concept was enshrined in Civil Code section 2856, under which a guarantor can waive anti-deficiency protections, and no “particular language” is required.
The court vacated the trial court’s judgment and directed the trial court to reconsider Temple View’s motion to enforce the settlement in light of its holding.
Lesson
California’s anti-deficiency statutes provide borrowers with protection that cannot be waived. As shown by the Temple View opinion, guarantors are treated differently and can generally be pursued for a deficiency judgment.