“Sham guaranties” in California

California courts have consistently held that a guarantor who, by virtue of its corporate position (such as general partner of a partnership borrower), is already fully liable for an entity’s secured CRE debt is entitled to the non-waivable antideficiency and one-action protections of the borrower entity.  (By contrast, in one case, a guaranty from a corporation of an individual’s debts was held not to be a sham, as the guarantor was a genuine entity with its own assets, not merely a shell.)

 Unlike most independent guarantors, such “sham guarantors” are deemed to be equivalent to the borrower and therefore may not waive their protections under the one-action and antideficiency rules.   Note that a finding that a guarantor is actually a principal obligor in guarantor’s guise does not necessarily invalidate a guaranty, but instead only subjects it to the antideficiency and one-action defenses.

 However, any attempt by a lender to allow or insist that the intended borrower finds someone else to take title to the property so that the intended borrower can instead become the guarantor invites trouble, as it may tempt a court to view that guarantor as the “real” borrower and thus able to enjoy the nonwaivable protections discussed elsewhere in this blog.

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4 Responses to ““Sham guaranties” in California”


  1. 1 Joe Forman October 20, 2009 at 4:49 pm

    For clarity purposes, if you have an SPE as the borrower and individuals, who are members of the SPE also acting as guarantors, are these guarantors therefore entitled to the anti-deficiency and one action protections?

    • 2 mauraboconnor October 20, 2009 at 9:49 pm

      Dear Joe:

      Though there is not yet a reported California court case (at least as far as I am aware) that deals with these precise facts, a California court should find that a member of an SPE who guarantees a real estate loan to the SPE, and otherwise would not be liable for the obligation of the SPE entity, would be considered a real guarantor, not a sham guarantor. Then, if it had properly waived the California antideficiency and one-action protections, that member/guarantor would not be entitled to those protections.

      However, a member of an SPE who guarantees a real estate loan to the SPE, and otherwise would be liable for the obligation of the SPE entity (which depends on the terms of the SPE’s organizational documents and applicable state LLC law), should be considered a “sham guarantor” entitled to all of the same one-action and antideficiency protections applicable to the borrower (and any waiver of them would be ineffective).

      The key is whether the person or entity guaranteeing the debt would be liable for the debt even without providing a guaranty. If he, she or it would otherwise be liable for the borrower’s debt, he, she or it is a “sham guarantor”‘ and can’t waive the antideficiency/one-action protections. For the same reason, a guarantor who signs an obligation jointly with the borrower that is secured by a deed of trust, should be treated in the same manner as a borrower entitled to all of the same antideficiency and one-action protections.

      Hope this helps.

      Best regards,

      Maura

  2. 3 Paul Marks November 22, 2009 at 11:24 pm

    Well done! Your articles are informative and timely (not to mention well-written).

    • 4 mauraboconnor November 23, 2009 at 5:36 am

      Dear Paul:

      Many thanks for the kind words, and I’m delighted to hear from you and know you’re doing well.

      Best regards,

      Maura


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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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