Unless the guarantor has signed an effective waiver, guarantors of California real estate loans are usually protected by California's antideficiency and one-action rules.As a practical matter, most savvy California lawyers routinely include waivers of the California antideficiency and one-action statutes in guaranty forms, so such guaranties should be enforceable pursuant to Civil Code Section 2856(a)(3). (See the September 23, 2009 blog entry on effective waivers.) However, as the law is not entirely consistent or well-developed in this area, it's easy to mess up. A very careful review of the language and facts surrounding any guarantor waiver is vital to assessing whether it would be enforceable. As with any other obligation secured by real estate collateral, if a guaranty itself is secured by an interest in California real property, then that guaranty is itself an obligation protected by the California antideficiency and one-action rules. (For example, if a guarantor co-signs an obligation also signed by the borrower, and the obligation is secured by California real estate, then the guarantor should be protected by California's antideficiency and one-action rules, and would not be allowed to waive them.) However, if the guaranty itself is not secured by an interest in California real property and only the underlying guaranteed obligation is secured by California real property, then some, if not all, of the antideficiency and one-action protections will probably extend to the guarantor - unless such protections have been effectively waived by the guarantor. California law provides certain (waivable) statutory protections for sureties which were extended to guarantors as well in 1939 in an amendment to Civil Code Section 2787. The extent to which the antideficiency and one-action protections extend to guarantors is a rather muddled area of California law, because of certain old case law which predates the elimination of the former legal distinction between sureties and guarantors.California law starts from the proposition that sureties and guarantors have some specific rights because of their roles as secondary parties providing credit support to someone else's obligations. Such rights can generally be waived, but only if the waiver is specific and clear. Civil Code Section 2809 provides that the obligations of a surety (and per Section 2787, a guarantor) may not be more burdensome than those of a principal. If this rule were to be strictly enforced, then it might be logical to extend to guarantors all of the antideficiency and one-action protections applicable to borrowers of real estate loans. For example, under Civil Code Sections 2845 and 2850, a surety has the right to demand that the lender proceed against the security encumbered by the deed of trust first. Civil Code Section 2787 might be read also to apply these provisions to guarantors in the absence of a waiver, which would give guarantors protection like borrowers' security-first protections under Civil Procedure Code Section 726. Also, in the absence of a waiver by the guarantor, if a lender first enforces its deed of trust by a nonjudicial trustee's sale and then seeks to collect from the guarantor, Civil Procedure Code Section 580d might preclude the lender from obtaining the deficiency from the guarantor because the lender made the choice to enforce its loan through nonjudicial foreclosure. The lender's choice provides the borrower with immunity from a deficiency judgment, whether sought by the lender or by the guarantor seeking reimbursement from the borrower. Because the lender could avoid cutting off the guarantor's rights by foreclosing judicially or by suing the guarantor before the foreclosure, in the absence of an effective waiver by the guarantor, the lender is prevented from pursuing the guarantor for a deficiency after a nonjudicial trustee's sale of the real property collateral (the so-called "Gradsky" rule). It gets more complex: an independent rule of law, such as Civil Procedure Code Section 580b, in some cases might prohibit subrogation or reimbursement no matter which remedy the lender pursued, then the guarantor would be liable to the lender even if the lender foreclosed through a nonjudicial trustee's sale. For the same reason, if the guarantor has previously released its rights against the borrower, the "Gradsky" rule may not apply to preclude the lender from enforcing a guaranty after completing a nonjudicial trustee's sale. You can see how, with this tangle of interlocking suretyship and antideficiency rules, the California courts quickly built up a huge pile of conflicting cases, and the state of the law in this area by the early 1990's was extremely muddled and yielded little guidance and less predictability. After many cases arose that reached inconsistent rulings concerning whether guarantors could waive such protections (and the terms of the guaranties), the California Legislature passed a statute that attempted to create a safe harbor for such waivers. As discussed in the September 23 blog entry, the statute generally permits guarantors to waive most one-action and antideficiency defenses by using careful statutory language. There have been few reported cases challenging the statute or interpreting the law in this area since the statute was passed in 1994 and revised in 1996. Civil Code Section 2856 permits effective waivers of any rights or defenses the guarantor may have by reason of protections provided to the borrower with respect to the obligation so guaranteed, including antideficiency and one-action protections, as well as certain subrogation and other rights of a surety. Note that this safe harbor applies to allow waivers of the antideficiency rights of an unsecured guaranty of a loan secured by California real estate. Importantly, the statute also sets out certain non mandatory "safe harbor" waiver language.Guaranties that include conforming waivers should be enforceable by California courts. Unfortunately, many guaranties routinely used are incomplete and do not fully waive all of the guarantors' suretyship or subrogation rights. I've been constantly surprised by the number of commercial loans where lawyers (frequently, but not always, non-California counsel) omit these waivers, or provide incomplete versions, with the result that the guaranty may not be enforceable. All guaranties of California real estate loans should cover this issue carefully. One caveat, however: as there is little reported case law construing such waivers, a possibility remains that certain courts seeking expansive enforcement of obligated parties' antideficiency and one-action rights may find some way to construe even a guaranty with appropriate Section 2856 waivers in unexpected ways to protect guarantors from enforcement.

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Guarantors and the California antideficiency and one-action protections

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