Enforceability of Guaranties in California

California courts generally should enforce guaranties (other than “sham” guaranties, which will be discussed in a later blog entry), provided that such guaranties are carefully drafted to conform to California’s complex law in this area.  California courts tend to construe guaranties strictly and against the lender.  California case law generally provides that, in the absence of an effective waiver, a guarantor who is otherwise fully liable for a borrower’s secured debt is entitled to the non-waivable antideficiency and one-action protections provided by California law to borrowers, as discussed below.  [Please note that a person or entity characterized as a “guarantor” whose obligation is secured by an interest in real estate is an obligor entitled to California’s antideficiency and one action protections as if it were the borrower, despite being labelled a “guarantor”.]

 Summary of California guaranty rules:  A note secured by real property may also be guaranteed by a third party (the “guarantor”), giving the lender potential claims against the guarantor on the guaranty, as well as against the property under the deed of trust, and the borrower on the note.  Such guaranties of real estate secured loans are generally enforceable in California subject to the limitations discussed below. 

 The law in this area is complex for two main reasons.  First, the state’s Depression-era antideficiency and one-action protections for borrowers are sometimes also applied to guarantors as well, in a set of inconsistent cases discussed below.  Second, California law originally made some significant distinctions between sureties and guarantors, and while such distinctions have been eliminated by the legislature, case law in this area remains somewhat murky.

 Suretyship waivers and Civil Code Section 2856:  Suretyship and guaranty law gives guarantors many defenses to enforcement and collection and other rights.   Careful waiver of these rights and defenses is essential in California.  Substantial controversy arose over time among the various California courts, and among legal scholars and treatise writers, as to which waivers (of suretyship rights and defenses in general or of “one action” and “antideficiency” protections in particular) by guarantors are enforceable, and how those waivers must be worded in order to be enforceable.  In one particularly controversial case, Cathay Bank v. Lee,  waivers by guarantors were held unenforceable if they were not sufficiently detailed so that the guarantors could understand the consequences of the waivers.

 To ameliorate lending industry concerns about the enforceability of guaranties after Cathay Bank, the California Legislature enacted two different versions of Civil Code Section 2856, one in 1994 and another in 1996.  The 1994 version sought to preserve the validity of guarantors’ waivers of the one-action and antideficiency protections available to borrower.  In 1996, the legislature further amended Section 2856 to clarify the abilities of guarantors to effectively waive certain statutory and common law rights and set forth “safe harbor” language concerning the election of remedies defense and certain other defenses.  Both have broad effects on guaranty enforcement.

 In its current form, Civil Code Section 2856(a) contains three basic rules regarding guarantor waivers: 

  1. A guarantor may waive its rights of subrogation, reimbursement, indemnification and contribution and any other rights and defenses that are or may become available to the guarantor by reason of Civil Code Sections 2787 through 2855.
  2.  A guarantor may waive any rights or defenses the guarantor may have in respect of its obligations as a guarantor by reason of an election of remedies by the creditor.
  3. A guarantor may waive any rights or defenses it may have because the principal’s obligation is secured by real property, including any rights or defenses based on the application of Section 580a, 580b, 580d or 726 of the Code of Civil Procedure to the principal’s obligation.

 Civil Code Section 2856(b) adds that “[a] contractual provision that expresses an intent to waive any or all of the rights and defenses described in [Section 2856(a)] shall be effective to waive these rights and defenses without regard to the inclusion of any particular language or phrases in the contract to waive any rights and defenses or any references to statutory provisions or judicial decisions.”  On the other hand, Civil Code Section 2856(c) and (d) provide specific “safe harbor” language for creating effective waivers.

 The court in Cathay Bank held that for a waiver to be valid, it must sufficiently describe the consequences of each waiver.  The Cathay Bank case was not specifically nullified by the Legislature in Section 2856.  Therefore, if the safe harbor language of Section 2856(c) and (d) is not employed, the validity of the waivers may depend on compliance with the requirements of Cathay Bank and related cases.  The model waivers in Section 2856(c) and (d) do not deal with all of the rights and defenses described in the first of the three Section 2856(a) rules described above.  Accordingly, waivers of the type described the first of these three rules should contain a description of the defenses being waived and arguably may need to include the consequences of such waivers.  (In our experience, the waivers allowed under the first rule are frequently omitted.)

 In making real estate loans in California, lenders often use guaranties as a credit support, but should include the accepted model language of Section 2856 and certain other specific waivers to assure against the risk that a guarantor will assert one of these highly technical defenses.  The exact extent of the enforceability of any waivers of suretyship rights and defenses (including those based on the one-action and antideficiency rules) which are contained in a guaranty is difficult to predict, given (i) the recent vintage of the current form of Section 2856; (ii) the disagreement among the various Courts of Appeal in California about the type of detail and specific wording required for waivers of defenses which do not employ the safe harbor language contained in Section 2856 and when such detailed waivers are required; and (iii) the lack of any appellate or statutory discussion of the exact wording of such a waiver if it is to be effective (as there are few reported cases evaluating lender practices following the adoption of Section 2856).  However, I believe that a court which correctly construes and applies Civil Code Section 2856(c) and (d) should generally enforce such waivers.

[More on sham guaranties later. . . . ]

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8 Responses to “Enforceability of Guaranties in California”


  1. 1 Ral Ndubaku September 28, 2009 at 5:36 pm

    Great information. What has been your experience with regards to enforceability of guaranties pertaining to leases? Thank you.

    Ral Ndubaku
    Commercial Brokers International

    • 2 mauraboconnor September 29, 2009 at 9:55 pm

      Dear Ral:

      Generally, guaranties of leases are enforceable in California, again provided that they are not “sham guaranties” given by someone already liable on the lease. Most guaranties of leases are not secured by interests in real estate, so a landlord seeking to enforce such a guaranty does not have to jump through the hoops of the antideficiency and one-action rules. However, any guaranty that is secured by an interest in real estate would trigger the protection of those rules.

      As with any contract, the precise scope of a guaranty depends on exactly how it is written, so there’s no substitute for a careful review of a lease guaranty by competent new counsel if one is seeking to enforce it. (New counsel is suggested, to make sure that one has fresh eyes reviewing the guaranty.)

      Best regards,

      Maura O’Connor

  2. 3 M.Michael Naim September 30, 2009 at 4:20 am

    Maura,

    Can the lender target the guarantor of the junior loan on a single family house before attempting to take the property or collect from the primary borrower?

    Kind regards,

    Meir

  3. 4 gary rossi October 6, 2009 at 8:10 pm

    Have you seen any litigation where the lender pursues a guaranty against an LLC in its capacity as guarantor where the guaranty LLC is also the member of the LLC which owns the asset on which the recourse loan is security

    • 5 mauraboconnor October 19, 2009 at 6:18 am

      Gary:

      I have not seen litigation involving this fact pattern yet. Maybe one of the readers of this blog has, however; if so, please post a comment and let us know. In California, if a member of an LLC is not otherwise liable to pay the LLC’s obligations, but elects to become the guarantor of the LLC’s loan, that should be enforceable because the member was taking on the additional liability by agreeing to guarantee the loan. (Note, however, that if the guarantor’s obligation is secured by the deed of trust securing the borrower’s note, or if the guarantor co-signs any obligation also signed by the borrower and secured by the real property collateral, then the guarantor would be a co-debtor with the borrower and should be entitled to all the one-action and antideficiency protections available to the borrower. The specific facts in such cases are key to predicting the outcome, and require analysis by an experienced California real estate lawyer knowledgeable about this area.

      Best regards,

      Maura O’Connor

  4. 6 Mandy November 17, 2009 at 12:39 am

    One guarantee enforcement issue I’d be interested in seeing addressed – on a non-recourse cmbs loan, a tenant in a single tenant property fails to pay rent: without checking whether the monthly rent’s been received, servicer funds excess funds to owner anyway, which the borrower uses to make distributions. When the rent default is revealed, borrower refunds not only the excess it distributed but pays the defaulting tenant’s rent for the month in question. 10 days later, the tenant defaults on the r/e tax payment. No notice of non-payment is received from servicer for 60 days, but in the interim, no distributions are made. Guarantor now brings suit against the recourse carve out guarantor alleging “waste”. Carve out guarantee obligates the loan guarantor only for actual waste – not constructive waste. What is the authority for alleging waste under these circumstances?

    • 7 mauraboconnor December 18, 2009 at 7:40 pm

      Mandy:

      This is pretty complicated. I’ll think about your hypothetical, and see if I can address it in a posting soon.

      Best regards,

      Maura

  5. 8 Julia M. Wei, Esq. February 3, 2010 at 7:52 am

    Bravo! Really enjoyed the meaty discussion of a very complex topic. Given the current lending climate, we saw a lot of guaranty situations arise as many borrowers default leaving lenders to look to guarantors to recover.

    -Julia


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Attorney Advertising. This blog is a periodical publication of Maura O'Connor, a partner of Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have. The contents are intended for general information purposes only and represent the individual views of Maura O'Connor only. Any tax information or advice contained herein is not intended to be and cannot be used by any taxpayer to avoid tax penalties that may be imposed on the taxpayer.

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