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  Second, California law originally made some significant distinctions between sureties and guarantors, and while such distinctions have been eliminated by the legislature, case law in this area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.