Enforcing Personal Guarantees Under California Law

By Grant K. Riley, Esq., Riley & Associates CA/NV

The successful work out of a problem loan secured by California real estate is oftentimes the function of multiple variables. A practical assessment of the borrower's financial situation, the value of the underlying collateral and borrower integrity are all factors that can spell the difference between a payoff and a loss. But what about those loans where the borrower and its principals have decided to snub their noses at the bank in lieu of repayment? 

The non-judicial foreclosure or judicial foreclosure of the real property securing the loan is obviously the first step in facilitating a recovery. However, it is oftentimes painfully clear that a non-judicial foreclosure sale and subsequent sale of the property as REO will not result in a payoff. As a result, in those cases where the bank anticipates a sizable deficiency and holds a personal guarantee, the bank may have no force but to make demand on and pursue the guarantor for repayment.  In those instances, any bank which intends to recover on a personal guarantee against a California guarantor must keep the following issues in mind: 

Review the Language of the Guarantee.  In the past 20 years, the banking industry has done a very good job of drafting comprehensive guarantees that result in a waiver of the guarantor's suretyship defenses. However, there are still instances where a guarantee is less than perfect. As a result, the bank must first determine whether the guarantor has properly waived its rights to object to the bank's decision to conduct a non-judicial foreclosure as well as the guarantor's right of subrogation. In doing so, the lender should be guided by Civil Code, Section 2856. This section simplifies the waiver process and makes clear that no magic language is required to effectuate a waiver. However, absent the appropriate waivers, a guarantor may be able to escape liability by relying on an indirect application of the anti-deficiency protections afforded California borrowers following a non-judicial foreclosure. 

Offer to Tender the Note and Deed of Trust to the Guarantor in Return for Payment in Full.  A lender should always tender the note and deed of trust to the guarantor and, in doing so, make demand on the guarantor for payment of all sums due under the loan. 

The Guarantor Can be Sued Before or After the Commencement of Foreclosure Proceedings.  Assuming a guarantee with the appropriate waivers, a lender can sue the guarantor either before or after the bank's trustee sale. Whereas, a borrower in a judicial foreclosure is protected by the security first rule codified in Code of Civil Procedure, Section 726, a guarantor is not afforded those same rights under California law. As a result, a lender which intends to aggressively seek repayment can file an action against the guarantor concurrent with the commencement of foreclosure proceedings. 

Do Not Hesitate to Seek the Issuance of a Writ of Attachment.   It goes without saying that the value of a lawsuit is the leverage it provides a lender to force a payoff or settlement. With that in mind, the most effective tool available to a lender to force repayment is a writ of attachment. A writ of attachment gives the successful applicant an involuntary lien against a defendant's non-exempt assets. Given that a guarantor cannot raise fair value limitations as a defense and cannot rely on the anti-deficiency and security first protections applicable to the bank's borrower, the lender has the right and ability to seek the issuance of a writ attachment for the full amount of the debt prior to a trustee's sale. Following a trustee's sale, the amount of a writ of attachment is equal to the total amount of the debt less the amount that the property is sold for at foreclosure. 

Credit Bid Less than Fair Value.  Civil Code, Section 2856 is clear: a lender's claim against a guarantor is not measured based on the "fair value" of the collateral. This favorable language dictates that a lender should always bid significantly less than the fair value of the collateral. This rule is critical to effective enforcement of a guarantee and allows a lender to recover the value of the property plus a money judgment in excess of a "fair value" deficiency. 

The resolution of a problem loan is no easy feat. However, given the substantial rights afforded banks in asserting claims against California guarantors, a lender who acts quickly can, in many cases, force a guarantor to make good on his promise of repayment.  

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