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Guarantor Remains Liable for Deficiency Where the Guaranty Was Not a Sham

In LSREF2 Clover Property 4 LLC v. Festival Retail Fund 1LP, Case No. BC59937, the California Court of Appeal reversed the Los Angeles County Superior Court to say that a guaranty was not a sham guaranty and as such, the guaranty could be pursued upon a default by the primary obligor based on the guarantor's waiver of the antideficiency statutes. In summary, the facts are as follows: the guarantor entered into a contract to purchase a piece of property but reserved the right to assign its purchase rights to a LLC or single purpose entity; the guarantor then formed the borrower, a SPE owned and controlled by the guarantor; the guarantor then approached the lender about financing the purchase of the property; the guarantor then assigned its rights to purchase the property to the borrower; and finally, the borrower took title to the property and entered into a loan agreement with the lender for a $25 million loan of which the guarantor guaranteed $1.5 million.

Even though the guarantor was an affiliate of the primary obligor and even though the guaranty was a condition to the loan to induce the lender to make the loan, the Court of Appeal found the following persuasive in finding the guaranty was not a sham: the lender was not involved in the ownership structure of the purchase; the terms of the purchase and sale transaction were basically complete by the time the guarantor approached the lender, including that the borrower was formed well before the guarantor approached the bank; there was no evidence the lender structured the transaction to circumvent antideficiency laws; the guarantor was not the alter ego of the obligor; the amount of the guaranty was very small in comparison to the loan amount; and the lender looked not only at the guarantor's ability to pay the guaranty but also at the ability of the borrower to repay the loan. As such, the court found the guaranty was not a sham and the guarantor remained liable on the guaranty.

If you have any questions or would like further information about the antideficiency laws, please contact Melissa Lowe of Shulman Hodges & Bastian LLP at 949-340-3400 or mlowe@shbllp.com.

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