It’s interesting how badly guaranties can get screwed up in California commercial real estate loans. You wouldn’t think it would be that hard: the basic idea of a guaranty is fairly simple, and, after all, lots of loan documents started with forms written by reasonably competent lawyers. Piece of cake, right? Unfortunately, no: in fact, when reviewing loan papers I almost always check the guarantees first. The California case law on guarantees is a snake pit, and has been for many years: it seems the courts just don't like them, and set up all sorts of tricks and defenses. Also, for some reason, guarantees seem to bring out the “clever” side of would-be creative drafters. Often, they're a little too clever, and the instrument might not be enforceable or, even if technically enforceable, may not meet the lender's goals.

The bottom line concept of guaranties is not complex: a person or entity who is not the borrower, but has some interest in the borrower’s success, can guarantee a loan to the borrower. The guarantor will have to pay the loan if the borrower doesn’t. The guarantor then will have a “subrogation” right: the right to go after the borrower itself for reimbursement. (Unfortunately, that right often is worthless – if the borrower cannot pay the lender, it usually cannot pay the guarantor either.)

From the lender’s point of view, the ideal California commercial real estate enforcement situation is one where, first, it can foreclose nonjudicially (through a fairly rapid trustee’s sale) on the real property, taking ownership of the real property or selling it to the highest bidder, and, second, go after a creditworthy guarantor for the deficiency – that is, the shortfall, if any, between what was owed under the loan and what price the property produced at the trustee’s sale. So loan documents usually are designed to permit that. Which they can – if carefully crafted. And that’s where mistakes can be made.