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Guarantor Liability 101

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GUARANTOR LIABILITY:A PRACTICAL PERSPECTIVE

Carl D. CiochonWendel Rosen LLPOakland, California

www.wendel.com

PREFACE

My Background: California Litigator More Commonly Represent Guarantors

Caveats: Rules Vary from Jurisdiction to Jurisdiction;

Differences may be Outcome Determinative Guaranties are Creatures of Contract; the Specific

Contract Terms Matter

TODAY’S PROGRAM

I. Guaranty BasicsII. Negotiating & Drafting the GuarantyIII. Advanced TopicsIV. Guaranty Defenses and LitigationV. Recap

GUARANTY BASICS

Guaranty, Defined

Cal. Civ. Code § 2787:

“A surety or guarantor is one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefore.”

Substance Over Form

The substance of the transaction, rather than its form, determines whether an instrument is a Guaranty. No “magic words” are required. Accordingly:

1. Simply labeling a document “Guaranty” will not necessarily create a meaningful obligation.

2. Conversely, a promise may qualify as a guaranty even if it is not expressly labeled as such. The parties may unintentionally create a guaranty and thus invoke the law of suretyship, including suretyship defenses.

Common Guaranty Scenarios

Real Estate Secured Debt (guaranty of Borrower’s repayment) Real Estate Lease (guaranty of Lessee’s performance) Equipment Lease (guaranty of Lessee’s performance)

Terminology

1. Debtor (aka Borrower, Lessee, Buyer)2. Creditor (aka Lender, Lessor, Seller)3. Guarantor

In many situations, the Creditor will – for practical and/or legal reasons – prefer to pursue recovery against the Guarantor before or even in lieu of pursuing the Debtor.

The Creditor’s Preferred Structure*

Debtor: Single Purpose Entity (SPE) which holds Property or Operates Business

Guarantor: SPE’s Principals (primary owners/managers)These are Two Separate Contractual Relationships.

If Required to Perform, the Guarantor will have Equitable Rights (Indemnity, Contribution, Subrogation) against the Debtor. These may be Limited by the Terms of the Guaranty

* But see River Bank v. Diller (supplemental materials)

SURETYSHIP DEFENSES

Suretyship Defenses:

Are creatures of State Law. They may be statutorily enumerated (e.g., Cal. Civil Code §§ 2806-2855) or established by common law.

Will automatically apply to any promise that qualifies as a Guaranty. Are Powerful. They may limit the Guarantor’s liability, or even eliminate it

entirely. May be Waived.

Common Suretyship Defenses:

1. Guarantor may require that Creditor proceed first against the Debtor, before seeking to enforce Guaranty.

2. Guarantor may require that Creditor apply Debtor’s security first, before seeking to enforce Guaranty.

3. Guarantor’s obligation may be neither larger nor more burdensome than the Debtor’s obligation.

4. Alteration of the obligation exonerates the Guarantor.5. Guarantor may be exonerated to the extent Creditor’s actions prejudice

Guarantor’s rights and remedies against Debtor.

Waiver of Suretyship Defenses

Suretyship defenses may, as a matter of contract law, be waived. Two common issues:1. Is the waiver enforceable?2. What is the scope of the waiver?

California. Union Bank v. Gradsky and the Gradsky Waiver (Civ. Code §2856). Is express waiver of equitable defenses also required?

New York: “Absolute and unconditional guaranty,” despite “any other circumstances which might otherwise constitute a defense.”

Waiver of Anti-Deficiency Protections Contrasted. Recent decisions in Arizona (no) and Texas (yes).

SUMMARY OF KEY CONCEPTS

The Guaranty is a contract. State law rules of contract formation, interpretation, and enforceability apply.

The Guaranty is a separate and independent obligation. The Creditor’s preferred deal structure will maximize the ability to

recover from the Guarantor, independent of any claim against the Debtor.

Suretyship defenses will apply unless waived. Creditor’s counsel should take care to ensure the Guaranty contains a broad and effective waiver.

NEGOTIATING & DRAFTINGTHE GUARANTY

Goals:

Creditor’s Counsel:Ensure your client’s ability to recover in full, without obstacle or delay.

Guarantor’s Counsel:Limit your client’s exposure, avoid unlimited, continuing liability, preserve legitimate defenses.

Specific Issues & Terms

Necessity of a Writing

A Guaranty is within the Statute of Frauds and must be in writing.

If the Guaranty is not signed by a Guarantor, it will generally not be enforceable against that Guarantor. E.g., 73-75 Main Ave., LLC v. PP Door Enterprise, Inc., 991 A.2d 650 (Ct. App. 2010) (declining to enforce guaranty where there was no evidence signature was that of the putative guarantor).

Exceptions: Will depend on applicable state law. Guaranties treated no differently from other contracts that must be within the statute. If applicable, the usual exceptions to the statute of frauds will apply.

Consideration

A Guaranty executed at origination does not require independent consideration.

A subsequent Guaranty may require independent consideration. Cf. Restatement of Suretyship & Guaranty § 9 (3d ed.) (guaranty enforceable if it (a) recites “nominal” consideration, or (b) was contemplated at origination).

Best Practice: Recite specific consideration.

The Continuing Guaranty

A Guarantor may be held responsible for future extensions of credit if the Guaranty so provides.

The Guarantor has a right to notice and consent, but this right may be waived.

Compare TH Davidson & Co., Inc. v. Eidola Concrete, LLC, 972 N.E.2d 823 (Ill.App. 2012) (rejecting guarantor’s argument that liability was limited to $1,000) with Levenson v. Haynes, 934 P.2d 300 (N.M. App. 1997) (voiding guaranty due to material alteration of underlying lease).

Termination of The Continuing Guaranty

If the Guaranty is not irrevocable (discussion to follow), the Guarantor may terminate a continuing Guarantor by notifying the Creditor he/she/it will not be responsible for future extensions of credit.

Existing obligations (i.e., monies already owed or advanced) will not be affected.

Example: See 27th Street, Assocs., LLC v. Lehrer, 772 N.Y.S.2d 28 (2004)

The Irrevocable Continuing Guaranty

A contractual provision that the Guaranty may be terminated only by written agreement of the parties, if enforceable, will effectively render the Guaranty irrevocable.

See Central Bldg., LLC v. Cooper, 127 Cal.App.4th 1053, where the Court enforced an irrevocable continuing guaranty of tenant’s lease obligations through a hold-over tenancy.

Possible limitations on an “irrevocable” guaranty based on a rule of reason, implied covenant of good faith and fair dealing, or similar concepts.

Modification or Amendment

Material changes to the underlying obligation will typically exonerate the Guarantor, unless the Guarantor has waived consent. However, most Commercial Guaranties will expressly waive consent.

Compare Levenson v. Haynes, 934 P.2d 306 (N.M. App. 1997) (voiding guaranty based on lack of consent to modification) with Data Sales Co., Inc. v. Diamond Z Mfr’ing, 74 P.3d 268 (Ariz. App. 2003) (enforcing guaranty based on waiver of consent).

Novation Contrasted

Where the Debtor and Creditor enter into a new contract, the Guarantor will be exonerated. E.g., Leeward Isles Resorts, Ltd. v. Hickox, 49 A.D.3d 277 (N.Y. Sup. Ct. 2008) (where loan agreement “superseded and replaced” earlier loan agreement, guarantor released).

Determining whether you have a contract modification or a novation will depend on the contract language – “superseded and replaced” would indicate novation, while “modified” or “amended” would not.

Assignment

Creditor’s rights may generally be assigned. See B.S.G. Foods, Inc. v. Multifoods Distr. Grp., 54 S.W.3d 553 (Ark. App. 2001) (creditor’s rights under guaranty assignable in absence of contractual restriction or public policy or statute to the contrary).

Secondary obligation follows the primary. An assignment of the underlying obligation, is assumed to include assignment of the secondary obligation (i.e., the Guaranty).

Where there is a material variation in the burden or risk to the guarantor, the guarantor may be exonerated. See Restatement § 13(1). Where the obligation is simply to pay money, assignment of right of payment unlikely to constitute a material variation. Where the obligation depends on creditor’s exercise of personal discretion (e.g., whether there has been satisfactory performance), assignment may constitute a material alteration of obligation, exonerating guarantor.

The modern trend is to narrowly construe contractual prohibitions on assignment. Further, most commercial guaranties will waive consent and notice.

Limitation of Guarantor’s Remedies

If Guarantor is required to perform due to Debtor’s default, Guarantor will have equitable rights of subrogation, restitution, contribution, and indemnity against Debtor.

A Commercial Guaranty will commonly include a provision restricting or precluding Guarantor’s exercise of any such remedy until the underlying obligation has been paid in full.

As a practical matter, such a provision may effectively eliminate the Guarantor’s ability to recover from the Debtor.

The Guaranty may also subordinate any separate obligation Debtor owes to Guarantor, to the same effect.

Choice of Law

Creditor will prefer states that favor commercial interests, such as Delaware or New York.

Guarantor may prefer states such as California or Arizona, which are (somewhat) less Creditor-friendly.

State choice of law rules may require some “nexus” with the state whose law has been selected (Note that under Delaware law, the selection of a Delaware forum is a sufficient nexus for the Delaware courts to enforce the selection of forum and apply Delaware law).

ADVANCED TOPICS

1. NONRECOURSE CARVE-OUTS

2. ANTI-DEFICIENCY PROTECTIONS

Nonrecourse Carve-Outs

Nonrecourse financing:The creditor’s recovery is limited to the collateral. Most commercial loans are nonrecourse

Recourse financing: The borrower is personally liable for the obligation, even if the obligation exceeds the value of the collateral. Most residential mortgages are recourse (subject to any applicable anti-deficiency protections).

The Nonrecourse Carve-Out

In an otherwise nonrecourse transaction, the loan documents may contain a “carve-out” for specified acts or events. If one of these occurs, the financing turns recourse, typically against both borrower and guarantor. (This is sometimes known as a “springing recourse” provision.)

Such provisions were originally designed and intended to deter and remedy deliberate misconduct on the part of the borrower, such as fraud or diversion of assets. Leading to adoption of the term “bad boy” guaranty.

Some lenders have aggressively expanded the list of acts or events that will trigger application of these carve-outs such that the supposedly nonrecourse financing is nonrecourse only in name, not in fact.

Aggressive Nonrecourse Carve-Outs

Springing recourse triggered by borrower’s bankruptcy filing. Upheld by several courts against challenge that it interferes with a debtor’s constitutional right to seek bankruptcy protection.

Nonrecourse carve-out triggered by borrower insolvency. Wells Fargo Bank NA v. Cherryland Mall Ltd Partnership, 812 N.W.2d 799 (Mich.Ct.App. 2011; cf. GECCMC 2005-C1 Plummer St. Office LP v. NRFC NNN Holdings, LLC, 204 Cal.App.4th 998 (2012).) In response to Cherryland, the Michigan legislature enacted a retroactive “non-recourse mortgage loan act” which expressly provides that “[a] post closing solvency covenant shall not be used, directly or indirectly, as a non-recourse carve-out or as the basis for any claim or action against a borrower or any guarantor or other surety on a non-recourse loan.” The act was subsequently upheld as applied to the Cherrryland parties (see Supplemental Materials).

Nonrecourse carve-out triggered by borrower’s violation of single purpose entity (SPE) covenants.

Anti-Deficiency Basics

What are Anti-Deficiency Protections?State law rules that limit or bar the creditor’s right to obtain a deficiency judgment when the obligation is secured by real property.

What is a Deficiency Judgment?A judgment for any amount (“deficiency”) that remains owing after the security has been applied to the debt.

History of Anti-Deficiency Rules

Depression-era legislative response to a catastrophic real estate market crash. Millions of homeowners found themselves owing more than their homes were

worth. The broad legislative intent was to place the risk of inadequate security on the

lender, rather than the borrower – Incentivize lenders to make quality underwriting decisions.

Typically, the strongest protections are for homeowners, but some protections apply equally to commercial transactions. E.g., Cal. Code Civ. Proc. 580d (barring deficiency judgment following non-judicial foreclosure of any mortgage or note secured by a deed of trust)

States with Anti-Deficiency Protections

Strong anti-deficiency protection (including states that bar deficiency judgments following a non-judicial foreclosure): Alaska, Arizona, California, Hawaii, Minnesota, Montana, Nevada, North Carolina, North Dakota, Oklahoma, Oregon, Washington

Lesser anti-deficiency protection (typically, a fair value or similar limitation): Arkansas, Connecticut, Colorado, Florida, Georgia, Idaho, Kansas, Louisiana, Michigan, Nebraska, New Jersey, New Mexico, New York, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Vermont, Wisconsin

Examples of Anti-Deficiency Protections

No deficiency judgment on a purchase money obligation (580b) No deficiency judgment following non-judicial foreclosure (580d) The single action rule. (726(a)) The security-first rule (726(a)) “Fair Value” protections (726(b)) Redemption rights (729.010 et seq.)

[All references to California Code of Civil Procedure]

Implications for the Guarantor

Anti-deficiency protections may be non-waivable. In California, they may not be waived as a matter of public policy.

By contrast, Guarantors may lawfully waive all suretyship defenses.

In states with non-waivable anti-deficiency protections, it is therefore much easier for the Creditor to proceed and recover against the Guarantor than against the Borrower.

So the Guarantor is often “secondarily liable” in name only, and will in fact be the Creditor’s primary target.

GUARANTOR DEFENSES

Statute of Limitations

General Rule:The Creditor’s cause of action on the Guaranty accrues, and the statute of limitations begins to run against the Guarantor, upon the Debtor’s default on the underlying obligation.

Exceptions:Delayed accrual rules may preserve the claim against the Guarantor after the statute has run on the Debtor.

Example: Guarantor was absent from the state for thirteen months, which tolled the statute of limitations as to the Guarantor only. As a consequence, the applicable statute of limitations barred the Creditor’s claim against the Debtor, while the claim against the Guarantor survived. Bloom v. Bender, 48 Cal.2d 793 (1957).

The terms of the guaranty itself may mandate a different accrual date. Example: Guarantor agreed to pay all sums owed by Borrower “upon demand of Lender.” Cause of action on the Guaranty did not accrue until Lender actually made demand upon Guarantor. McDonald v. National Enterprises, Inc., 547 S.E.2d 204 (Va. 2001).

Statute of Limitations – Additional PointsThe primary obligation and the Guaranty may, under applicable substantive law, be governed by different statutes of limitation.

Example: Primary obligation subject to five-year statute, Guaranty subject to eight-year statute. Expiration of statute on primary obligation did not bar claim against Guarantor. Mercury Marine v. Monty’s Enterprises, Inc., 892 P.2d 568 (Mont. 1995).Counter -Example: Under California law, a mortgage or deed of trust is subject to a six-year statute of limitations, while a written guaranty agreement is subject to a four-year statute. Compare Cal. Code Civ. Proc. § 336a.2. (action on mortgage or deed of trust) with Cal. Code Civ. Proc. § 337 (action on written contract).

Where the statute of limitations bars the Creditor’s claim on the underlying obligation, but not the Guaranty, the Guarantor may argue that the Creditor’s delay in prosecuting the claim against the Debtor exonerates the Guarantor. See Restatement § 43 (where statute of limitations bars creditor’s claim against debtor, guarantor’s obligation also discharged). As with other suretyship defenses, this defense can be waived.

The Sham Guaranty Rule May apply in states with anti-deficiency protections If the Debtor is a party to the Guaranty, the Guaranty may be

deemed a “sham” designed to evade the anti-deficiency rules, and voided.

Example: River Bank v. Diller, 38 Cal. App. 4th 1400 (1995) (Supplemental Materials)

Sham Guaranty FactorsCourts will look at a number of factors, including: Was the Guarantor originally the Borrower? Was SPE Borrower created at Lender’s insistence? Did entity exist before the loan was contemplated? Did Lender pay attention to Borrower’s credit-worthiness, or focus

solely or primarily on the Guarantor?Likely violations: General Partner as Guarantor of Partnership obligation; Trustee as Guarantor of Trust obligation

Additional Defenses The Secured Guaranty (anti-deficiency states) Defenses to the underlying obligation generally available to the Guarantor The Guarantor “stands in the shoes” of the Debtor Common exceptions: bankruptcy discharge, lack of capacity But: the Guarantor may waive all defenses; waiver may be enforced against a

sophisticated party Fraud (Restatement approach) Misrepresentation by Creditor – Guaranty voidable Misrepresentations by Debtor – Guaranty voidable unless Creditor has given value

in good faith Nondisclosure – may be a basis for voiding the Guaranty

Creditor aware of a material, unknown increase in risk to the Guarantor, but does not disclose However, generally Creditor has no duty to investigate

GUARANTY LITIGATION

Preliminary Litigation Considerations Venue and choice of law State vs. federal court Choice of venue provision. General venue rules apply. Choice of law provisions. Fundamental public policy. Won’t work in California if effect

is to circumvent anti-deficiency protections. Contractual Arbitration Compelling arbitration Pre-judgment remedies in arbitration. Rights typically much more limited – available only to

the extent necessary to avoid rendering arbitral remedy ineffectual Waiver of arbitration through litigation process. Prejudgment Remedies Attachment. This can be a game-ender. Injunction. Prevent dissipation of assets, etc.

Litigation Strategy / Goals Lender:

Resolution on Summary Judgment – No Disputed Issues of Material Fact – Game Over.

Guarantor: Trial by Jury – Jury must resolve Material Fact Disputes; Guarantor gets to tell its Story.

If the Guarantor can survive Summary Judgment, the likelihood of settlement on acceptable (non-Draconian) terms increases.

Bankruptcy ConsiderationsWhat Happens When The Debtor Goes Chapter?

Guarantor as Debtor State notice provisions may effectively require relief from stay

in order to foreclose on property. Inter-corporate guarantees raise potential fraudulent transfer

concerns – if no “value” was provided in exchange for the Guaranty, may be voided as a fraudulent transfer

Borrower as Debtor Under Code, discharge of Debtor does not discharge

Guarantor However, important to monitor proceeding because rights

against Guarantor may be impacted; for example, there may be a release of the Guarantor as part of plan of reorganization

The Most Important Point: Consult Bankruptcy Counsel!!!

RECAP OF KEY POINTS

Creditor’s Counsel: Enhancing Enforceability

1. Broadest Possible Waiver of Suretyship Defenses2. Waiver of Defenses to Underlying Claim3. Waiver of Notice and Consent4. If Post-Origination, Reference Consideration5. Consistency Between Guaranty and Underlying Documents6. Guarantor Separate from Debtor7. Consider Choice of Creditor-Favorable Law (e.g., Delaware)8. In a Anti-Deficiency State, Don’t Secure the Guaranty with Real Property,

be Aware of “Sham Guaranty” Factors9. Waive Jury if State Law Allows10. Be Aware of Any Special Rules in Relevant Jurisdiction

Guarantor’s Counsel: Reducing Exposure

1. The Opposite of What Creditor’s Counsel Wants2. Nonrecourse Carve-Out – Limit List of Acts That Will Trigger

Recourse Liability to “Bad Boy” Behavior. Try to Limit Liability to “Actual Damages” Resulting from the Triggering Act.

3. Try to Cap Guarantor’s Liability4. Try to Protect Rights Against Debtor (Subrogation, Indemnity, etc.)

THANK YOU

CARL D. CIOCHONWENDEL ROSEN LLP

OAKLAND, CALIFORNIA

WWW.WENDEL.COM

Guarantor Liability: A Practical Approach Supplemental Materials

1. Form of Guaranty [California Promissory Note]*

2. Form of Guaranty [California Lease]*

3. Wells Fargo Bank, NA v. Cherryland Mall L.P. (Michigan) (Nonrecourse Carve-Out)

4. River Bank America v. Diller (California) (Sham Guaranty)

* Please note that these forms of guaranty are provided as instructional aids only. Laws vary from state to state. No warranty is made as to the effectiveness, enforceability, or propriety of any such form, or any term contained therein, for any particular transaction or circumstance. The forms themselves, as well as any contractual term contained therein, may not be suitable for use in any particular transaction or circumstance. Counsel must exercise his or her own independent professional judgment in determining whether any particular form or contractual term is, or is not, appropriate in the context of any given transaction or circumstance. Neither this program nor the provision of a form of guaranty as an instructional aid constitutes the offering of legal advice, nor shall it be deemed to create an attorney-client relationship.

014621.0010\5770310.1 1

PERSONAL GUARANTY

This Personal Guaranty (“Guaranty”) is made as of March 2, 2020, by __________ , an individual (“Guarantor”), in favor of __________, a Delaware corporation (“Beneficiary”), on the terms and conditions set forth below.

1. Guaranteed Obligations. In order to induce Beneficiary to loan to __________, a California limited liability company (“Borrower”), the sum of $________, as evidenced by a Promissory Note of even date herewith (the “Note”) executed by Borrower and payable to Beneficiary, Guarantor unconditionally and irrevocably guarantees to Beneficiary and to its successors, endorsees, and assigns, the full and prompt payment of all principal, interest, fees and other amounts owed under the Note when due in accordance with its terms, whether by acceleration or otherwise (the “Guaranteed Obligations”).

2. Absolute Guaranty. This Guaranty is an irrevocable, absolute, present and unconditional continuing guaranty. The obligations of Guarantor under this Guaranty shall not be affected, reduced, modified or impaired upon the happening from time to time of any of the following events, whether or not with notice to (except as notice is otherwise expressly required herein) or the consent of Guarantor:

(a) Failure to Give Notice. The failure to give notice to Guarantor of the occurrence of a default under the terms and provisions of this Guaranty or concerning the Guaranteed Obligations;

(b) Modification or Amendment. The amendment, acceleration, renewal or extension of any obligation, covenant or agreement with respect to the Guaranteed Obligations;

(c) Beneficiary’s Failure to Exercise Rights. Any failure, omission, delay by, or inability on the part of Beneficiary to assert or exercise any right, power or remedy conferred on Beneficiary in this Guaranty or concerning the Guaranteed Obligations;

(d) Change in Borrower. A termination, dissolution, consolidation or merger of Borrower with or into any other entity, the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all of Borrower’s assets, the marshalling of Borrower’s assets and/or liabilities, the receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition with creditors, or readjustment of, or other similar proceedings affecting Borrower, Guarantor, or any of the assets of either;

(e) Subordination or Release of Security. Any subordination or release of any collateral now or hereafter held by Beneficiary for the performance of the Guaranteed Obligations;

(f) Assignment. The assignment of any right, title or interest of Beneficiary herein or concerning the Guaranteed Obligations to any other person, in accordance with Section 17(a) of this Guaranty; or

(g) Extent of Guarantors’ Obligations. Any other cause or circumstance, foreseen or unforeseen, whether similar or dissimilar to any of the foregoing; it is the intent of Guarantors

014621.0010\5770310.1 2

that the obligations hereunder shall not be discharged except by the indefeasible payment of amounts owing pursuant to this Guaranty and/or Guaranteed Obligations, then only to the extent of such payment or payments.

3. Guaranty of Payment. The liability of Guarantor on this Guaranty is a guaranty of payment and not of collectability, and is not conditional or contingent on the genuineness, validity, regularity, or enforceability of the Guaranteed Obligations or the pursuit by Beneficiary of any remedies that it now has or may hereafter have with respect thereto, or the cessation of Borrower’s liability for any reason other than full indefeasible performance of the Guaranteed Obligations.

4. Authorization. Guarantor hereby authorizes Beneficiary, without notice or demand and without affecting its liability hereunder, and without consent of Guarantor or prior notice to Guarantor, from time to time to: (a) make any modifications to the Guaranteed Obligations with the consent of the parties thereto; (b) assign the Guaranteed Obligations and this Guaranty, in accordance with Section 17(a) of this Guaranty; (c) take and hold security for the performance of the obligations guaranteed herein with the consent of the party providing such security; and (d) accept additional guarantors.

5. Waiver and Release By Guarantors.

(a) Enforcement Against Other Parties. Guarantor hereby waives the right to require Beneficiary to: (i) proceed against Borrower or any other person; (ii) proceed or exhaust any security held from any person; (iii) proceed against any other guarantor; or (iv) pursue any other remedy available to Beneficiary.

(b) Subrogation. Until the Guaranteed Obligations have been indefeasibly paid or otherwise discharged in full, Guarantor does hereby waive all rights of subrogation and any right to enforce any remedy which Beneficiary now has, or may have, against Borrower, and Guarantor does hereby waive any benefit of, and any right to participate in, any security now or hereafter held by Beneficiary. Guarantor hereby waives any defense Guarantor may have now or in the future based on any election of remedies by Beneficiary which destroys Guarantor’s subrogation rights or Guarantor’s rights to proceed against Borrower for reimbursement and Guarantor acknowledges that Guarantor will be liable to Beneficiary even though Guarantor may well have no such recourse against Borrower.

(c) Notices. Guarantor hereby waives notice of (i) acceptance and reliance on this Guaranty, (ii) notice of renewal, extension or modification of any of the Guaranteed Obligations, and (iii) notice of default or demand in the case of default.

(d) Release of Third Parties. Guarantor hereby waives any right or defense Guarantor may now or hereafter have based upon (i) Beneficiary’s release of any party who may be obligated to Beneficiary; (ii) Beneficiary’s release or impairment of any collateral for the Guaranteed Obligations; and (iii) the modification or extension of the obligations or agreements guaranteed under this Guaranty.

(e) Guarantor’s Defenses. Guarantor hereby waives, to the maximum extent such wavier is permitted by law, any and all benefits or defenses arising directly or indirectly under

014621.0010\5770310.1 3

(i) California Civil Code Sections 2787 to 2855; (ii) Chapter 2 of Title 14 of the California Civil Code; (iii) California Code of Civil Procedure Sections 580a, 580b, 580c, 580d, 725a and 726; or (iv) California Commercial Code 3605. It is Guarantor’s intent to hereby waive any and all of the rights and defenses described in subdivisions (a) of California Civil Code Section 2856.

(f) Statute of Limitations. Guarantor hereby waives any statute of limitation affecting liability under this Guaranty or the enforceability of this Guaranty.

(g) Cessation of Liability of Borrower. Guarantor hereby waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower.

(h) Duty of Disclosure. Guarantor hereby waives any duty on the part of Beneficiary to disclose to Guarantor any facts Beneficiary may now or hereafter know about Borrower or Borrower’s financial condition regardless of whether Beneficiary has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume, or has reason to believe that such facts are unknown to Guarantor, or has a reasonable opportunity to communicate such facts to Guarantor.

6. Information. Guarantor hereby represents that Guarantor is fully aware of the financial condition and operations of Borrower and is in a position by virtue of their relationship to Borrower to obtain all necessary financial and operational information concerning Borrower. Beneficiary need not disclose to Guarantor any information about: (i) the Guaranteed Obligations or any modification thereto, and any action or non-action in connection therewith; (ii) any other obligation guarantied hereby; (iii) the financial condition or operation of Borrower; or (iv) any other guaranties.

7. Subordination. Until the Guaranteed Obligations have been paid or otherwise discharged in full, Guarantor does hereby subordinate any and all liability or indebtedness of Borrower owed to Guarantor to any obligations of Borrower to Beneficiary concerning the Guaranteed Obligations.

8. Effect of Obligor’s Bankruptcy. The liability of the Guarantor under this Guaranty shall in no way be affected by: (a) the release or discharge of Borrower in any creditor proceeding, receivership, bankruptcy, or other proceeding; (b) the impairment, limitation, or modification of the liability of Borrower or the estate of Borrwer, or of any remedy for the enforcement of Borrower’s liability, which may result from the operation of any present or future provision of the Bankruptcy Code or any insolvency, debtor relief statute (state or federal), or any other statute, or from the decision of any court; (c) the rejection or disaffirmance of the Guaranteed Obligations, or any portion of the Guaranteed Obligations, in any such proceeding; or the cessation, from any cause whatsoever, whether consensual or by operation of law, of the liability of Borrower to Beneficiary resulting from any such proceeding.

9. Claims in Bankruptcy. If Guarantor has not indefeasibly paid Beneficiary the amounts owed under this Guaranty, then Guarantor will file all claims against Borrower in any bankruptcy, liquidation or other proceeding on any indebtedness of Borrower to Guarantor, and will assign to Beneficiary all rights of Guarantor on any such indebtedness until the Guaranteed

014621.0010\5770310.1 4

Obligations have been indefeasibly paid and satisfied in full. If Guarantor does not file any such claim, Beneficiary, as attorney-in-fact for Guarantor, is authorized to do so in the name of Guarantor, or, in Beneficiary’s discretion, to assign the claim and to file a proof of claim in the name of Beneficiary’s nominee. In all such cases, whether in bankruptcy or otherwise, the person or persons authorized to pay such claim shall pay to Beneficiary the full amount on account of any such claim until the Guaranteed Obligations have been indefeasibly paid and satisfied in full, and, to the full extent necessary for that purpose, Guarantor assigns to Beneficiary all of Guarantor’s rights to any such payments or distributions to which Guarantor would otherwise be entitled.

10. Applications of Payments. With or without notice to Guarantor, Beneficiary, in its sole discretion and at any time and from time to time and in such manner and on such terms as it deems fit may: (a) apply any or all payments or recoveries from Borrower, from Guarantor, or from any other guarantor or endorser under this Guaranty or any other instrument, or realized from any security, to the Guaranteed Obligations, in such order or priority as Beneficiary sees fit, whether such indebtedness is guaranteed by this Guaranty or is otherwise secured or is due at the time of such application; and (b) refund to Borrower any payment received by Beneficiary on any Guaranteed Obligations and payment of the amount refunded shall be fully guaranteed hereby. Any recovery realized from any other guarantor under this or any other instrument shall be credited to that portion of the Guaranteed Obligations as determined by Beneficiary in its sole discretion.

11. Representations and Warranties.

Guarantor represents and warrants as follows:

(a) Guarantor has all requisite power, authority and capacity to enter into this Guaranty and to perform the obligations required of them hereunder;

(b) The execution and delivery of this Guaranty, and the consummation of the transactions contemplated herein, have been duly and validly authorized by all necessary action, including any necessary third party and governmental consents and authorizations;

(c) Guarantor’s execution, delivery and performance of this Guaranty does not constitute an event of default under any agreement by which Guarantor is bound or violate any applicable law, regulation or order;

(d) This Guaranty constitutes a valid and legally binding agreement of Guarantor enforceable in accordance with its terms, and no offset, counterclaim or defense exists to the full performance by Guarantor of this Guaranty;

(e) The fair salable value of Guarantor’s assets exceeds the fair value of their liabilities; Guarantor is not left with unreasonably small capital after the transactions in this Guaranty; and Guarantor is able to pay his, her, or its debts (including trade debts) as they mature; and

(f) OFAC; Patriot Act Compliance. Guarantor is not person (i) whose property or interest in property is blocked or subject to blocking pursuant to Section 1 of Executive

014621.0010\5770310.1 5

Order 13224 of September 23, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)), (ii) who engages in any dealings or transactions prohibited by Section 2 of such executive order, or is otherwise associated with any such person in any manner violative of such Section 2, or (iii) who is on the list of Specially Designated Nationals and Blocked Persons or subject to the limitations or prohibitions under any other U.S. Department of Treasury’s Office of Foreign Assets Control regulation or executive order (“OFAC”). Guarantor is in compliance with the Patriot Act.

(g) Full Disclosure. No written representation, warranty or other statement of Guarantor in any certificate or written statement given to Beneficiary contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading.

12. Beneficiary’s Rights and Remedies.

(a) General. After the occurrence and during the continuation of a breach of the Guaranteed Obligations or this Guaranty (each, a “Breach”), Beneficiary shall have the following rights and powers and may, at its option, without notice of its election and without demand, do any one or more of the following: (i) exercise any or all rights and remedies under this Guaranty or applicable law; and (ii) apply all payments made under this Guaranty to the Guaranteed Obligations in such order and amounts as Beneficiary may determine in its sole discretion. The remedies of Beneficiary, as provided herein, shall be cumulative and concurrent, and may be pursued singularly, successively or together, at the sole discretion of Beneficiary, and may be exercised as often as occasion therefor shall arise. Beneficiary’s exercise of one right or remedy is not an election, and Beneficiary’s waiver of any Breach is not a continuing waiver. Any delay by Beneficiary in exercising any remedy is not a waiver, election, or acquiescence, and no waiver is effective unless signed by Beneficiary and then is only effective for the specific instance and purpose for which it was given. Guarantor waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Beneficiary on which Borrower is liable.

13. Notices. Any notice, demand or request required under this Guaranty shall be given in writing (at the addresses set forth below) by any of the following means: (i) personal service; (ii) electronic communication, whether by telecopier or other form of electronic communication; (iii) overnight courier; or (iv) registered or certified, first class U.S. mail, return receipt requested, or to such other addresses as Beneficiary and Guarantor may specify from time to time in writing. Any notice, demand or request sent pursuant to either subsection (i) or (ii) above, shall be deemed received upon such personal service or upon dispatch by electronic means. Any notice, demand or request sent pursuant to subsection (iii) above, shall be deemed received on the business day immediately following deposit with the overnight courier, and, if sent pursuant to subsection (iv) above, shall be deemed received 48 hours following deposit into the U.S. mail. The addresses are: (a) for Beneficiary, _____________________________________________, with a copy to _____________________________________________; and (b) for Guarantor, ____________________________________________________, with a copy to: _________________________________________________________________.

014621.0010\5770310.1 6

14. Choice of Law; Venue. This Guaranty shall be governed by and construed in accordance with the laws of the State of California, and the parties hereto hereby irrevocably agree that the federal or state courts located within Alameda County, California shall have exclusive jurisdiction to hear and determine any claims or disputes arising out of or related to this Guaranty, and consent to venue in Alameda, California.

15. Revival of Guaranty. If a claim (“Claim”) is made upon Beneficiary at any time (whether before or after payment in full of any of the Guaranteed Obligations) for repayment or recovery of any amount or other value received by Beneficiary (from any source) in payment of, or on account of, any of the Guaranteed Obligations and if Beneficiary repays such amount, returns value or otherwise becomes liable for all or part of such Claim by reason of (a) any judgment, decree or order of any court or administrative body or (b) any good faith settlement or compromise of such Claim, Guarantor shall remain liable to Beneficiary hereunder for the amount so repaid or returned or for which Beneficiary is liable to the same extent as if such payments or value had never been received by Beneficiary, notwithstanding any termination of this Guaranty nor the cancellation of any note or other document evidencing the Guaranteed Obligations.

16. Continuing Guaranty. This Guaranty is a continuing guaranty, which shall remain effective without reaffirmation until the Guaranteed Obligations have been indefeasibly paid in full, and to the fullest extent permitted by law, this Guaranty shall not be terminated by Guarantor prior to such time. If notwithstanding the preceding sentence, Guarantor effects a valid termination of this Guaranty, then such termination shall be applicable only to transactions committed to or having their inception after the effective date of termination and upon actual receipt of written notice by Beneficiary and shall not affect rights and obligations arising out of transactions committed to or having their inception prior to such date.

17. General Provisions.

(a) Successors and Assigns. This Guaranty binds and is for the benefit of the successors and permitted assigns of each party. Guarantor may not assign this Guaranty or any rights or obligations under it without Beneficiary’s prior written consent which may be granted or withheld in Beneficiary’s sole discretion. Beneficiary has the right to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Beneficiary’s obligations, rights and benefits under this Guaranty without consent of or notice to Guarantor in conjunction with the sale, transfer, negotiation or participation grant in the Guaranteed Obligations.

(b) Indemnification. Guarantor will indemnify, defend and hold harmless Beneficiary and its directors, officers, employees, agents, attorneys, or any other person affiliated with or representing Beneficiary against: (i) all obligations, demands, claims, and liabilities asserted against Beneficiary by any other party in connection with the Guaranteed Obligations; and (ii) all losses or expenses incurred, or paid by Beneficiary from, following, or consequential to transactions between Beneficiary and Borrower or Guarantor (including reasonable attorneys’ fees and expenses) involving the Guaranteed Obligations, except for obligations, demands, claims, liabilities and losses caused by Beneficiary’s gross negligence or willful misconduct.

014621.0010\5770310.1 7

(c) Time of Essence. Time is of the essence for the performance of all obligations in this Agreement.

(d) Severability of Provisions. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

(e) Amendments in Writing, Integration. Any amendment or waiver relating to this Guaranty shall be in writing, signed by the parties thereto. No oral statement, nor any action, inaction, delay, failure to require performance or course of conduct shall operate as an amendment or waiver or have any other effect on this Guaranty. Any waiver shall be limited to the circumstance described in it, and shall not apply to any other circumstance, or give rise to any obligation to grant any further waiver. This Guaranty represents the entire agreement about this subject matter and supersede prior negotiations or agreements, which merge into this Guaranty.

(f) Counterparts. This Guaranty may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Guaranty.

(g) Survival. All covenants, representations and warranties made in this Guaranty continue in full force while any Obligations remain outstanding. The obligations of Guarantors in Section 17(b) to indemnify Beneficiary will survive until all statutes of limitations for actions that may be brought against Beneficiary have run.

(h) Attorneys’ Fees. On demand, Guarantors shall reimburse Beneficiary for all costs and expenses, including, without limitation, reasonable attorneys’ fees costs and disbursements (and fees and disbursements of Beneficiary’s in-house counsel) (collectively the “Fees and Costs”) expended or incurred by Beneficiary in any way in connection with: (a) the enforcement of this Guaranty; (b) collecting any sum which becomes due Beneficiary pursuant to the Guaranteed Obligations; (c) any proceeding, or any appeal related to the Guaranteed Obligations; or (d) the protection, preservation of enforcement of any rights of Beneficiary under this Guaranty. Fees and Costs shall include, without limitation, attorneys’ Fees and Costs incurred in connection with the following: (1) contempt proceedings; (2) discovery; (3) any motion, adversary proceeding, contested matter, confirmation or opposition to plan of reorganization or any other activity of any kind in connection with a bankruptcy case or relating to any petition under Title 11 of the United States Code; (4) garnishment, levy, and debtor and third party examinations; and (5) postjudgment motions and proceedings of any kind, including without limitation any activity taken to collection or enforce any judgment.

[SIGNATURES ON FOLLOWING PAGE]

014621.0010\5770310.1 8

IN WITNESS WHEREOF, the parties hereto have caused this Continuing Guaranty to be executed as of the Effective Date.

GUARANTOR:

______________________________________

BENEFICIARY:

By: Name: Title:

014621.0010\5770090.1

GUARANTY OF LEASE

This GUARANTY OF LEASE (“Guaranty”) is attached to and made a part of that certain LEASE AGREEMENT dated March _____ , 2020 (“Lease”), between __________, a California corporation (“Landlord”) and __________, a California limited liability company (“Tenant”), covering the real property and improvements situated thereon described in the Lease (“Premises”). The terms used in this Guaranty shall have the same definitions as set forth in the Lease. The provisions of this Guaranty shall supersede any inconsistent or conflicting provisions of the Lease. 1. Guaranty. As an essential inducement to the granting of the Lease from Landlord to Tenant, __________ (“Guarantor”) hereby guarantees unconditionally to Landlord the timely payment and performance of all rent, charges, and obligations of Tenant under the Lease (as such terms are defined under the Lease) and all other documents evidencing or securing the obligations under such Lease, including the obligation to pay all Rent and other charges levied under the Lease and all maintenance and indemnity obligations thereunder (collectively, the “Guarantied Obligations”). Guarantor acknowledges, covenants and agrees that this Guaranty shall survive the termination of the Lease and shall continue in full force and effect with respect to any of Tenant’s obligations under the Lease which are not performed upon and which survive the termination of the Lease.

2. Rights of Landlord. Guarantor authorizes Landlord to release Tenant of its liability for all or any part of the Guarantied Obligations, to participate in any settlement offered by Tenant or any guarantor, whether in liquidation, reorganization, receivership, bankruptcy or otherwise, to release, substitute or add any one or more guarantors or endorses, and to assign this Guaranty in whole or in part. Landlord may take any of the foregoing actions upon any terms and conditions as Landlord may elect, without giving notice to Guarantor or obtaining the consent of Guarantor and without affecting the liability of Guarantor to Landlord.

3. Independent Obligations. Guarantor’s obligations under this Guaranty are independent of those of Tenant or of any other guarantor. Landlord may bring a separate action against Guarantor without first proceeding against Tenant or any other person or any security held by Landlord and without pursuing any other remedy. Landlord’s rights under this Guaranty shall not be exhausted by any action of Landlord until all of the Guarantied Obligations have been fully performed.

4. Waiver of Defenses. Guarantor waives:

4.1. any right to require Landlord to proceed against Tenant or any other person or any security now or hereafter held by Landlord or to pursue any other remedy whatsoever, including any such right or any other right set forth in or arising out of Sections 2845, 2848, 2849 or 2850 of the California Civil Code;

4.2. any defense based upon any legal disability of Tenant or any guarantor, or any discharge or limitation of the liability of Tenant or any guarantor to Landlord, or any restraint or stay applicable to actions against Tenant or any other guarantor, whether such disability,

discharge, limitation, restraint or stay is consensual, or by order of a court or other governmental authority, or arising by operation of law or any liquidation, reorganization, receivership, bankruptcy, insolvency or debtor-relief proceeding, or from any other cause;

4.3. presentment, demand, protest or notice of any kind;

4.4. any defense based upon the modification, renewal, extension or other alteration of the Guarantied Obligations agreed to by Tenant, or of the documents executed in connection therewith;

4.5. any defense based upon the negligence of Landlord, including the failure to record an interest under a lease, sublease, or deed of trust, the failure to perfect any security interest, or the failure to file a claim in any bankruptcy of the Tenant or any guarantor;

4.6. all rights of subrogation, reimbursement, indemnity, all rights to enforce any remedy that Landlord may have against Tenant, and all rights to participate in any security held by Landlord for the Guarantied Obligations, including any such right or any other right set forth in Sections 2845, 2848 or 2849 of the California Civil Code, until the Guarantied Obligations have been performed in full, and any defense based upon the impairment of any subrogation, reimbursement or indemnity rights that Guarantor might have;

4.7. any defense based upon or arising out of any defense which Tenant may have to the performance of any part of the Guarantied Obligations, other than the defense of prior material breach by Landlord of any of its dependent covenants thereto;

4.8. any defense based upon the death, incapacity, lack of authority or termination of existence or revocation hereof by any person or entity or persons or entities, or the substitution of any party hereto;

4.9. any defense based upon or related to Guarantor’s lack of knowledge as to Tenant’s financial condition;

4.10. any defense based upon Section 2809 of the California Civil Code; and

4.11. any and all rights to revoke this Guaranty in whole or in part, and all rights and benefits of Section 2815 of the California Civil Code.

4.12. Without limiting the foregoing, it is the Guarantor's express intent to waive any and all of the rights and defenses described in subsection (a) of California Civil Code Section 2856.

5. Tenant’s Financial Condition. Guarantor is relying upon its own knowledge and is fully informed with respect to Tenant’s financial condition. Guarantor assumes full responsibility for keeping fully informed of the financial condition of Tenant and all other circumstances affecting Tenant’s ability to perform its obligations to Landlord, and agrees that Landlord will have no duty to report to Guarantor any information which Landlord receives about Tenant’s financial condition or any circumstances bearing on Tenant’s ability to perform.

6. Impairment of Subrogation Rights. Upon a default of Tenant, Landlord may elect to foreclose nonjudicially or judicially against any real or personal property security it may hold, if

014621.0010\5770090.1

any, for the Guarantied Obligations or any part thereof, or exercise any other remedy against Tenant or any security. No such action by Landlord will release or limit the liability of Guarantor, even if the effect of that action, by virtue of Section 580d of the California Code of Civil Procedure, or otherwise, is to deprive Guarantor of the right or ability to collect reimbursement from or assert subrogation, indemnity or contribution rights against Tenant or any other guarantor for any sums paid to Landlord, or to obtain reimbursement by means of any security held by Landlord for the guaranteed obligations. 7. Default.

7.1. Each of the following shall constitute a default of Guarantor under this Guaranty:

7.1.1 the failure of Guarantor to perform any of its obligations under this

Guaranty; 7.1.2 the commencement of any bankruptcy, insolvency, arrangement,

reorganization, or other debtor-relief proceeding under any federal or state law by Tenant or Guarantor, whether now existing or hereafter enacted; or

7.1.3 the failure of any representation or warranty contained herein or in the Lease to be accurate and complete in all material respects.

7.2. Upon an occurrence of a default under this Guaranty as specified above, Landlord may, at its option, without notice or demand upon Guarantor or Tenant, declare the Guarantied Obligations (or such portion thereof as may be designated by Landlord) immediately due and payable by Guarantor to Landlord.

8. Costs and Expenses. Guarantor agrees to pay Landlord’s reasonable out-of-pocket costs and expenses, including legal fees and disbursements, incurred in any effort to collect or enforce any of the Guarantied Obligations or this Guaranty, whether or not any lawsuit is filed, and in the representation of Landlord in any insolvency, bankruptcy, reorganization or similar proceeding relating to Tenant or Guarantor. Until paid to Landlord, such sums will bear interest from the date such costs and expenses are incurred at the rate set forth in the Lease for past due obligations.

9. Reinstatement. The liability of Guarantor hereunder shall be reinstated and revived, and the rights of Landlord shall continue, with respect to any amount at any time paid on account of the Guarantied Obligations which Landlord shall thereafter be required to restore or return in connection with the bankruptcy, insolvency or reorganization of Tenant or otherwise, all as though such amount had not been paid.

10. Subordination. Any indebtedness of Tenant to Guarantor now or hereafter existing shall be, and such indebtedness hereby is, deferred, postponed and subordinated to payment and performance of the Guarantied Obligations. Any payment made to Guarantor by Tenant or any third party with respect to the indebtedness subordinated hereunder while any Guarantied Obligations remain outstanding shall be held in trust by Guarantor for the benefit of Landlord and shall be turned over to Landlord immediately upon receipt thereof. Any lien, charge or claim which Guarantor now has or hereafter may have on or to any real or personal property of Tenant, including any real property subject of the Lease, the personal property located thereon, any rights

therein and related thereto, and the revenue and/or income realized therefrom, and security for any loans, advances or other indebtedness of Tenant to Guarantor shall be, and any such lien, claim or charge hereby is, subordinated to the payment and performance of the Guarantied Obligations.

11. Representations and Warranties. Guarantor, and each of them individually, makes the following representations and warranties, which shall be deemed to be continuing representations and warranties until payment and performance in full of the Guarantied Obligations:

11.1. Guarantor has all the requisite power and authority to execute, deliver and be legally bound by this Guaranty on the terms and conditions herein stated;

11.2. Guarantor has all the requisite power and authority to transact any other business with Landlord as necessary to fulfill the terms of this Guaranty;

11.3. This Guaranty constitutes the legal, valid and binding obligations of Guarantor enforceable against Guarantor in accordance with its terms;

11.4. Neither the execution and delivery of this Guaranty nor the consummation of the transaction contemplated hereby will, with or without notice and/or lapse of time, constitute a breach of any of the terms and provisions of any note, contract, document, agreement or undertaking, whether written or oral, to which Guarantor is a party or to which Guarantor’s property is subject, accelerate or constitute any event entitling the holder of any indebtedness of Guarantor to accelerate the maturity of any such indebtedness, conflict with or result in a breach of any writ, order, injunction or decree against Guarantor of any court or governmental agency or instrumentality, or conflict with or be prohibited by any federal, state, local or other governmental law, statute, rule or regulation;

11.5. No consent of any other person not heretofore obtained and no consent, approval or authorization of any person or entity is required in connection with the valid execution, delivery or performance by Guarantor of this Guaranty; and

11.6. Neither this Guaranty nor any other statement furnished by Guarantor to Landlord in connection with the transactions contemplated hereby contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein true and not misleading.

11.7. Guarantor hereby represents and warrants that, as of the date of the execution of this Guaranty, there is no action or proceeding pending or, to Guarantor's knowledge after due inquiry, threatened against Guarantor before any court or administrative agency which could adversely affect Guarantor's financial condition. The foregoing representation and warranty shall survive the execution and delivery of this Guaranty and is expressly made for the benefit of Landlord and its representatives, successors and assigns.

11.8. All representations and warranties by Guarantors contained herein or made in writing pursuant to this Guaranty are intended to and shall remain true and correct as of the time of execution of this Guaranty, shall be deemed to be material, shall survive the execution and delivery of this Guaranty, and shall be relied upon by Landlord and its representatives, successors and assigns.

014621.0010\5770090.1

12. Joint and Several Liability. The obligations, promises, representations and warranties set forth herein shall be the joint and several undertakings of each of the persons executing this Guaranty as a Guarantor. Landlord may proceed hereunder against any one or more of said persons without waiving its rights to proceed against any of the others.

13. Inducement. Guarantor acknowledges that the undertaking given hereunder is given in consideration of Landlord’s entering into the Lease and that Landlord would not consummate the Lease but for the execution and delivery of this Guaranty.

14. Miscellaneous. No provision of this Guaranty or Landlord’s rights hereunder may be waived or modified nor can Guarantor be released from its obligations hereunder except by a writing executed by Landlord. No such waiver shall be applicable except in the specific instance for which given. No delay or failure by Landlord to exercise any right or remedy against Tenant or Guarantor will be construed as a waiver of that right or remedy. All remedies of Landlord against Tenant and Guarantor are cumulative. The invalidity or unenforceability of any one or more provisions of this Guaranty will not affect the validity or enforceability of any other provision. This Guaranty shall be governed by and construed under the laws of the State of California. The provisions of this Guaranty will bind and benefit the heirs, executors, administrators, legal representatives, successors and assigns of Guarantor and Landlord. The term “Tenant” will mean both the named Tenant and any other person or entity at any time assuming or otherwise becoming primarily liable for all or any part of the Guarantied Obligations. The term “Landlord” will mean both the Landlord named herein and any future owner or holder of the Lease, or any interest therein. This Guaranty constitutes the entire agreement between Guarantor and Landlord with respect to its subject matter, and supersedes all prior or contemporaneous agreements, representations and understandings. All headings in this Guaranty are for convenience only and shall be disregarded in construing the substantive provisions of this Guaranty. 15. Termination / Release. Within a reasonable time after expiration of the Term of the Lease and satisfaction of all Guaranteed Obligations, Landlord agrees to execute a termination and release of this Guaranty, evidencing satisfaction of the Guaranteed Obligations.

IN WITNESS WHEREOF, this Guaranty is executed as of the date set forth below.

Dated: ______________________ GUARANTOR

Name:

Caution

As of: February 28, 2020 4:40 PM Z

Wells Fargo Bank, NA v. Cherryland Mall L.P. Court of Appeals of Michigan

April 9, 2013, Decided

No. 304682

Reporter 300 Mich. App. 361 *; 835 N.W.2d 593 **; 2013 Mich. App. LEXIS 651 ***; 2013 WL 1442053

WELLS FARGO BANK, NA, Plaintiff-Appellee, v CHERRYLAND MALL LIMITED PARTNERSHIP and DAVID SCHOSTAK, Defendants-Appellants, and SCHOSTAK BROTHERS & CO., INC., Defendant, and ATTORNEY GENERAL, Intervenor.

Subsequent History: Motion granted by, Remanded by, Stay granted by Wells Fargo Bank, N.A. v. Cherryland Mall Ltd. P'ship, 2014 Mich. LEXIS 2142 (Mich., Nov. 19, 2014)

Prior History: [***1] Grand Traverse Circuit Court. LC No. 2010-028149-CH. Wells Fargo Bank, N.A. v. Cherryland Mall Ltd. P'ship, 493 Mich. 859, 820 N.W.2d 901, 2012 Mich. LEXIS 1646 (2012)

Case Summary

Procedural Posture The Grand Traverse Circuit Court, Michigan, found that defendant guarantor was liable for the entire loan deficiency on the basis that insolvency was a violation of defendant mall partnership's single

purpose entity status on plaintiff bank's foreclosure action. The appellate court affirmed. The partnership and guarantor sought leave to appeal in the Michigan Supreme Court, which remanded the case for reconsideration by the appellate court.

Overview

The bank argued that the Nonrecourse Mortgage Loan Act, MCL 445.1591 et seq. (NMLA), did not invalidate the guaranty because in the guaranty the guarantor relinquished his right to future defenses and waived any statutory rights regarding the invalidity, illegality, or unenforceability of the guaranty. The appellate court noted that to the extent provisions in the guaranty, which was one of the documents for a nonrecourse loan, purported to impose liability on the guarantor as a guarantor based on the post closing solvency covenant, they were invalid and unenforceable. There was a significant and legitimate public purpose for the NMLA and the remedy provided by the legislature was appropriate. They rationally addressed the identified problem. There was no substantive due process violation. The legislation may have the effect of invalidating the bank's entitlements based on the contract, but if so it would be because the courts applied the new law, not because the Legislature had directly dictated the outcome in the case. On remand, the trial court had to determine

Wells Fargo Bank, NA v. Cherryland Mall L.P.

Page 2 of 12

whether the bank was entitled costs, expenses, and attorney fees.

Outcome The judgment was reversed and remanded for further proceedings.

Counsel: For WELLS FARGO BANK NA, PLAINTIFF-APPELLEE: JAMES L. ALLEN, DENNIS G. BONUCCHI, TROY, MI; LARRY J. SAYLOR, DETROIT, MI; CLIFFORD W. TAYLOR, ONE MICHIGAN AVENUE, LANSING, MI.

For CHERRYLAND MALL LIMITED PARTNERSHIP, DEFENDANT-APPELLANT: I W. WINSTEN, DETROIT, MI.

For MICHIGAN ASSN OF REALTORS, AMICUS CURIAE: GREGORY L. MCCLELLAND, LANSING, MI.

For MICHIGAN CHAMBER OF COMMERCE, AMICUS CURIAE: ROBERT S. LABRANT, LANSING, MI.

For ATTORNEY GENERAL, INTERVENOR: CHRISTOPHER W. BRAVERMAN, LANSING, MI.

For BUILDING OWNERS AND MANAGERS ASSN INTERNATIONAL, AMICUS CURIAE: MATTHEW W. SCHLEGEL, DETROIT, MI.

Judges: Before: CAVANAGH, P.J., and

SAWYER and METER, JJ.

Opinion

[*366] [**596] ON REMAND

PER CURIAM.

This case is before us on remand from our Supreme Court for reconsideration of our prior decision in this matter in light of the Legislature's recent passage of the Nonrecourse Mortgage Loan Act, 2012 PA 67, MCL 445.1591 et seq. (the NMLA or Act 67). Wells Fargo Bank, NA v Cherryland Mall Ltd Partnership, 493 Mich 859; 820 NW2d 901 (2012). On reconsideration, we reject plaintiff's constitutional challenges to the NMLA and hold that it bars plaintiff's claims.

I. FACTS AND PROCEDURAL [***2] HISTORY

The facts are set forth at length in our original opinion, Wells Fargo Bank, NA v Cherryland Mall Ltd Partnership, 295 Mich App 99; 812 NW2d 799 (2011). Briefly, defendant Cherryland Mall Limited Partnership secured an $8.7 million commercial mortgage-backed securities (CMBS) loan using a mall it owned as collateral. Defendant David Schostak signed a guaranty. Generally, CMBS financing involves the lender agreeing not to pursue recourse liability against the borrower or its owner; in return, the asset used as collateral, which [*367] is known as "a single purpose entity," as well as money that flows from that asset, is isolated pursuant to "separateness covenants" and narrow limitations on the lender's agreement not to pursue recourse liability. These limitations are set forth in "limited recourse provisions," are referred to as "recourse [**597] triggers" or "carveouts," and are generally related to "bad acts."

In this case, plaintiff ultimately commenced foreclosure by advertisement when defendant


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Cherryland failed to make a payment or payments. Plaintiff successfully bid $6 million, leaving a roughly $2.1 million deficiency. It sued defendants seeking to recover the deficiency. Relative to the deficiency, [***3] defendants appealed the trial court's holding that defendant Schostak, "as guarantor, was liable for the entire loan deficiency on the basis of the trial court's conclusion that insolvency was a violation of Cherryland's [single purpose entity] status . . . ." Id. at 107.

This Court affirmed, concluding that Cherryland's failure to remain solvent "breached the covenant to maintain its status as [a single purpose entity] and triggered the full recourse provision of the mortgage." Id. at 126. Paragraph 13 of the note provides:

Notwithstanding anything to the contrary in this Note or any of the Loan Documents, . . . the Debt shall be fully recourse to Borrower in the event that . . . Borrower fails to maintain its status as a single purpose entity as required by, and in accordance with the terms and provisions of the Mortgage . . . . [Id. at 110.]

Paragraph 9 of the mortgage provides, in pertinent part:

Single Purpose Entity/Separateness. Mortgagor covenants and agrees as follows: * * *

[*368] (f) Mortgagor is and will remain solvent and Mortgagor will pay its debts and liabilities (including, as applicable, shared personnel and overhead expenses) from its assets as the same shall become due.

Defendant [***4] Schostak had signed a guaranty that included the following provision:

Notwithstanding anything to the contrary in the Note or any of the Loan Documents, . . . (B) Guarantor shall be liable for the full amount of the Debt and all obligations of Borrower to Lender under the Loan Documents in the event that: . . . (iii) Borrower fails to maintain its status as a single purpose entity as required by,

and in accordance with the terms and provisions of the Mortgage . . . .

This Court concluded, consistent with the trial court, that ¶ 9(f) was a single purpose entity requirement and that insolvency was a violation of single purpose entity status. Wells Fargo Bank, NA, 295 Mich App at 114-125. Further, any failure to remain solvent, regardless of the reason, was a violation. Id. at 125.

This Court acknowledged the argument that its holding would "indicate economic disaster for the business community in Michigan," but concluded that its job was not "to save litigants from their bad bargains or their failure to read and understand the terms of a contract." Id. at 126. Moreover, in response to the argument that the contracts should not be enforced because they are against public policy, we noted that [***5] it was up to the Legislature to address matters of public policy. Id. at 127.

Defendants sought leave to appeal in the Supreme Court. While the application was pending, the Legislature passed the NMLA.

II. THE NMLA

The NMLA applies "to the enforcement and interpretation of all nonrecourse loan documents in existence [*369] on, or entered into on or after, the effective date of [the NMLA]," which was immediately effective on March 29, 2012. MCL 445.1595. 2012 [**598] PA 67, enacting § 1, provides, in pertinent part:

The legislature recognizes that the use of a post closing solvency covenant as a nonrecourse carveout, or an interpretation of any provision in a loan document that results in a determination that a post closing solvency covenant is a nonrecourse carveout, is inconsistent with this act and the nature of a nonrecourse loan; is an unfair and deceptive business practice and against public policy; and should not be enforced.


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MCL 445.1593, the operative provision at issue, provides:

(1) A post closing solvency covenant shall not be used, directly or indirectly, as a nonrecourse carveout or as the basis for any claim or action against a borrower or any guarantor or other surety on a nonrecourse loan.

(2) A provision [***6] in the documents for a nonrecourse loan that does not comply with subsection (1) is invalid and unenforceable.

"Post closing solvency covenant" is defined as

any provision of the loan documents for a nonrecourse loan, whether expressed as a covenant, representation, warranty, or default, that relates solely to the solvency of the borrower, including, without limitation, a provision requiring that the borrower maintain adequate capital or have the ability to pay its debts, with respect to any period of time after the date the loan is initially funded. The term does not include a covenant not to file a voluntary bankruptcy or other voluntary insolvency proceeding or not to collude in an involuntary proceeding. [MCL 445.1592(d).]

III. ANALYSIS

Plaintiff argues that the NMLA did not invalidate the guaranty because in the guaranty defendant Schostak [*370] relinquished his right to future defenses and waived any statutory rights regarding the invalidity, illegality, or unenforceability of the guaranty. Further, plaintiff argues that the NMLA violates: (1) the Contract Clauses of the United States and Michigan Constitutions, U.S. Const, art I, § 10 and Const 1963, art 1, § 10, (2) the due process protections [***7] of U.S. Const, Am XIV and Const 1963, art 1, § 17, and (3) the separation of powers doctrine, Const 1963, art 3, § 2. We conclude that the guaranty provisions are invalid and unenforceable under the NMLA and that the constitutional challenges to the act must fail.

A. THE GUARANTY

Plaintiff argues that defendant Schostak agreed that

his liabilities and obligations were "unconditional," "irrevocable," and "absolute" in §§ 1.1 and 1.3 of the guaranty. Further, Schostak relinquished his right to "any existing or future offset, claim or defense" in §§ 1.4 and 2.10 of the guaranty, including a defense based on any statutory right. In article II and § 2.4 of the guarantee, Schostak waived any statutory rights regarding the "invalidity, illegality or unenforceability of . . . any document or agreement executed in connection with the Guaranteed Obligations," agreeing that his obligations regarding same would not be "released, diminished, impaired, reduced or adversely affected" even if Cherryland had valid defenses. Assuming for purposes of analysis that these provisions would contractually bind defendant Schostak, we nonetheless conclude that they are invalid and unenforceable.

The guaranty is being invoked because, since [***8] it became insolvent, Cherryland "fail[ed] to maintain its status as a single purpose entity" as required by the mortgage. Again, MCL 445.1593(1) and (2) of the [*371] NMLA provides that "[a] post closing [**599] solvency covenant shall not be used, directly or indirectly, as a nonrecourse carveout or as the basis for any claim or action against . . . any guarantor" and that any provision in the documents for a nonrecourse loan that purports to use a nonrecourse carveout as the basis for a claim against a guarantor "is invalid and unenforceable." (Emphasis added.) To the extent that provisions in the guaranty, which is one of the documents for a nonrecourse loan, purport to impose liability on defendant Schostak as guarantor based on the basis of the postclosing solvency covenant, they are invalid and unenforceable.

B. CONTRACT CLAUSES

Preliminarily, we note that "'[s]tatutes are presumed to be constitutional, and courts have a duty to construe a statute as constitutional unless its unconstitutionality is clearly apparent.'" In re Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38, 490 Mich 295, 307; 806 NW2d 683 (2011), quoting Taylor v Gate


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Pharm, 468 Mich 1, 6; 658 NW2d 127 (2003). U.S. Const, art I, § 10 [***9] states, in part: "No State shall . . . pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility." Similarly, Const 1963, art 1, § 10 provides: "No bill of attainder, ex post facto law or law impairing the obligation of contract shall be enacted." The "state constitutional provision is not interpreted more expansively than its federal counterpart." Attorney General v Michigan Pub Serv Comm, 249 Mich App 424, 434; 642 NW2d 691 (2002); see also AFT Mich v Michigan, 297 Mich App 597, 609; 825 NW2d 595 (2012) ("the two provisions are interpreted similarly"). "It has been said that the purpose of the Contract Clause is to protect bargains reached by [*372] parties by prohibiting states from enacting laws that interfere with preexisting contractual arrangements." In re Certified Question, 447 Mich 765, 777; 527 NW2d 468 (1994).

In arguing that the NMLA is an unconstitutional impairment of contract, plaintiff relies primarily on Sturges v Crowninshield, 17 U.S. (4 Wheat) 122, 199-201; 4 Wheat 122; 4 L Ed 529 (1819), and Walker v Whitehead, 83 U.S. (16 Wall) 314, 318; 16 Wall 314; 21 L Ed 357 (1873), which held that states could change a [***10] remedy if no substantial contract rights were impaired but could not discharge the obligations of a debtor. However, in Blue Cross & Blue Shield of Mich v Governor, 422 Mich 1; 367 NW2d 1 (1985), the Court recognized that there has been a movement away from this absolute bar to contract impairment. The Court stated, id. at 20:

Beginning with the landmark case of Home Building & Loan Ass'n v Blaisdell, 290 U.S. 398; 54 S Ct 231; 78 L Ed 413 (1934), the modern United States Supreme Court has construed the Contract Clause as not prohibiting a state from exercising its police power to abrogate private or public contracts if reasonably related to remedying a social or economic need of the community. Under modern Contract Clause analysis, a balancing

approach has been adopted by the courts, weighing the degree of the impairment of the contractual rights and obligations of the parties against the justification for the impairment as an act of the state's police power to implement legislation for a legitimate public purpose. Michigan courts have followed this lead. See Van Slooten v Larsen, 410 Mich 21; 299 NW2d 704 (1980) (see in particular Justice LEVIN's dissenting opinion); Metropolitan Funeral System Ass'n v Ins Comm'r, 331 Mich 185, 194; 49 NW2d 131 (1951), [***11] and federal cases cited therein.

Plaintiff maintains that the balancing test applies only to retroactive state [**600] laws that "impair contractual obligations not involving the impairment of debts," and [*373] that Sturges and Walker still control when the issue is debt relief. However, in Keystone Bituminous Coal Ass'n v DeBenedictis, 480 U.S. 470, 503; 107 S Ct 1232; 94 L Ed 2d 472 (1987), the Court noted that, while the primary focus of the Contract Clause was "pre-existing debtor-creditor relationships that obligors were unable to satisfy," "[e]ven in such cases, the Court has refused to give the Clause a literal reading." Currently, whether a state statute violates the Contract Clause is determined by reference to a three-step inquiry set forth in Energy Reserves Group, Inc v Kansas Power & Light Co, 459 U.S. 400; 103 S Ct 697; 74 L Ed 2d 569 (1983).1 First, courts must determine whether the state law has operated as a substantial impairment of a contractual relationship. Id. at 411. If it constitutes a substantial impairment, the court must look at whether the justification for the state law is based on a significant and legitimate public purpose. Id. at 411-412. [***12] If a legitimate public purpose can be identified, the court looks at whether the

1 See also In re Certified Question, 447 Mich at 777. Plaintiff maintains that the obligations at issue in Energy Reserves Group, Inc, did not involve the impairment of debts but, in setting forth the framework for analysis of Contract Clause issues, the Court did not qualify application on the basis of the nature of the contract right impaired.


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adjustment of "'the rights and responsibilities of contracting parties [is based] upon reasonable conditions and [is] of a character appropriate to the public purpose justifying [the legislation's] adoption.'" Id. at 412, quoting United States Trust Co of New York v New Jersey, 431 U.S. 1, 22; 97 S Ct 1505; 52 L Ed 2d 92 (1977). With respect to this third inquiry, "'[as] is customary in reviewing economic and social regulation, . . . courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure'" unless the state is one of the contracting [*374] parties. Energy Resources Group, Inc, 459 U.S. at 412-413, quoting United States Trust Co of New York, 431 U.S. at 22-23.

1. SUBSTANTIAL IMPAIRMENT

Defendants assert [***13] that the original parties to the CMBS loan at issue understood and intended at the time of contracting that the loan would be nonrecourse in the event of insolvency. In Energy Reserves Group, Inc, 459 U.S. at 411, the Court noted that "state regulation that restricts a party to gains it reasonably expected from the contract does not necessarily constitute a substantial impairment." However, despite indications that this may have been the original parties' intent, this Court previously concluded that "the mortgage, as incorporated into the note, unambiguously required Cherryland to remain solvent in order to maintain its [single purpose entity] status." Wells Fargo Bank, NA, 295 Mich App at 128. Moreover, defendant Schostak unambiguously agreed that he would "be liable for the full amount of the Debt and all obligations of Borrower to Lender under the Loan Documents" if Cherryland failed "to maintain its status as a single purpose entity as required by, and in accordance with the terms and provisions of the Mortgage . . . ." We question the sufficiency of the evidence to summarily state that plaintiff's reasonable expectation, despite unambiguous contract language to the contrary, was that [***14] the loan would remain nonrecourse in the event of insolvency. Moreover, we note the absence of guidance on whether the assignee's reliance on

the contract would give way to the original parties' intent for purposes of discerning whether there has been a substantial impairment within the meaning of the [**601] Contract Clause. However, for the reasons that follow we conclude that there was a significant and legitimate public purpose for the NMLA and that the [*375] remedy provided by the legislation was appropriate. Accordingly, we need not reach a conclusion on the substantial impairment question.

2. SIGNIFICANT AND LEGITIMATE PUBLIC PURPOSE

On February 29, 2012, there was a meeting of the Senate Economic Development Committee at which Senate Bill 992, the precursor to the NMLA, was discussed.2 At the meeting, it was represented that the original opinion in this case had changed the nature of nonrecourse mortgage loans. It was also represented that: (1) the proposed act would "set the course where it was intended to be," (2) allowing nonrecourse loans to become recourse due to insolvency "would irreparably harm the, the current environment for investment in Michigan," (3) the legislation would maintain the [***15] status quo, and (4) the failure to pass the proposed act "would basically eliminate nonrecourse loans in Michigan," leading to a collapse of nonrecourse lending, a decrease in tax revenues, and "a major foreclosure issue." Transcript of hearing on SB 992, Senate Economic Development Committee (February 29, 2012), pp 5, 8, 12, 18-19. Further, a commercial mortgage banking firm representative testified that over 50 percent of its $2.8 billion in current nonrecourse loans could qualify as insolvent, making loans recourse, which would be catastrophic. Id. at 19.

2 The minutes of the February 29, 2012, committee meeting can be found at <http://www.senate.michigan.gov/committees/Default.aspx?commid=50>. The minutes indicate that there was an audio recording of the meeting "available upon request for a minimum fee." Defendants have provided an unofficial transcript of the meeting. Plaintiff has not raised any issue regarding the accuracy of this transcript.


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Plaintiff characterizes this reaction and defendants' representations as the "'Sky is Falling' Hyperbole." [*376] Plaintiff asserts that not all nonrecourse loans have nonrecourse carveouts for insolvency, and that defendants "have manufactured this trumped-up [***16] industry crisis" "to rescue [defendant] Schostak." However, as noted in the original opinion in this case, "'the Legislature possesses superior tools and means for gathering facts, data, and opinion and assessing the will of the public.'" Wells Fargo Bank, NA, 295 Mich App at 127, quoting Woodman v Kera LLC, 486 Mich 228, 246; 785 NW2d 1 (2010) (opinion by YOUNG, J.). Moreover, while the NMLA will benefit defendant Schostak, we have found no evidence that the act was intended solely for his benefit.

At the hearing before the Senate Economic Development Committee, there was no quantification of the actual number of CMBS loans that might have language making a loan recourse in the event of insolvency. However, the testimony suggested that the affected loans would by no means be limited to those currently involved in litigation. For example, developers testified that they would be unable to get necessary financing for continued development because, when applying for financing, they would have to list contingent liabilities based on potential deficiencies arising from postclosing solvency covenants. Transcript of Hearing on SB 992, Senate Economic Development Committee (February 29, 2012), pp [***17] 12, 14, 18. Moreover, Senator Arlan Meekhof, who sponsored the bill, testified:

Many of the loans that are existing, that have already been written, even if they change the language in the future in nonrecourse loans will make many of the borrowers unfinanceable because [**602] there will be a concern by the lenders that there would be a stringing liability that was never expected on their financial statement. [Id. at 10.]

Further, there was testimony indicating that loan documents for CMBS loans were standardized and

routinely [*377] included the problematic language. Given this testimony, there is no support for plaintiff's contention that the loans affected by this legislation were relatively limited. We have no reason to question the representations that there will be a collapse of nonrecourse lending in Michigan if CMBS loans routinely become recourse and that tax revenues, as well as foreclosures, will be affected. And we note that Energy Reserves Group, Inc, 459 U.S. at 412, identifies "remedying of a broad and general social or economic problem" as a "significant and legitimate public purpose . . . ."

Nonetheless, Energy Reserves Group, Inc, 459 U.S. at 412 also indicates that "[t]he requirement of a legitimate [***18] public purpose guarantees that the State is exercising its police power, rather than providing a benefit to special interests." Id. This legislation benefits defendant Schostak. Plaintiff suggests that defendant Schostak used political influence to get the legislation passed for his individual advantage.3 If true, this would militate in favor of a finding that the bill was intended to benefit special interests. However, the testimony before the Senate Economic Development Committee suggests that the legislation would have far greater impact than just benefiting defendant Schostak.4

3 Plaintiff represents that defendant David Schostak is cochief executive officer of defendant Schostak Brothers & Co., Inc., and that Robert Schostak is cochairman and cochief executive officer. Plaintiff further represents that Robert Schostak is "a high ranking Republican Party leader in Michigan, with many years of involvement in assisting the party's candidates to gain election in the legislature." We note that Robert Schostak has been chairman of the Michigan Republican Party since January 2011, was finance chairman through the 2010 election cycle, and has served on campaign fundraising teams for prominent [***19] Republicans. See <http://www.migop.org/index.php/about/party-leadership/>. 4 It is noteworthy that the legislation was opposed in the Senate by five senators: two (of 12) democrats and three (of 26) republicans. 2012 Journal of the Senate 23 (March 7, 2012), p 321. In the House, it was passed by 97 votes to 12 votes; the nays were from 10 republicans and two democrats. 2012 Journal of the House 29 (March 20, 2012), p 427. The legislation had bipartisan support.


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[*378] The legislation does benefit commercial developers generally, a group that would constitute a "special interest." However, it appears that the Legislature was motivated by a broad and general economic problem, one alluded to in our prior opinion:

We recognize that our interpretation seems incongruent with the perceived nature of a nonrecourse debt and are cognizant of the amici curiae's arguments and calculations that, if accurate, indicate economic disaster for the business community in Michigan . . . . [Wells Fargo Bank, NA, 295 Mich App at 126]

That developers benefited when the Legislature took action to stabilize the CMBS industry will not undermine the legislation because the purpose was not to benefit developers but to avert a [***20] broader economic problem of immense proportion in the interest of the public good. This was a legitimate public purpose that shows that the Legislature was properly exercising its police power.

3. REASONABLE AND APPROPRIATE CONDITIONS

In Energy Reserves Group, Inc, the Supreme Court held that "'courts properly defer to legislative judgment as to the [**603] necessity and reasonableness of a particular measure'" when the contract is between private parties. Energy Reserves Group, Inc, 459 U.S. at 412-413 (citation omitted); see also Keystone Bituminous Coal Ass'n, 480 U.S. at 504-505. In the present case, the concern was that economic development in this market would significantly diminish because lenders would not extend loans to those commercial developers with contingent liabilities arising from [*379] existing CMBS loans with the provision allowing them to become recourse in the event of insolvency. The legislation in effect erased the concern by making the provision invalid and unenforceable. The holding in Energy Reserves Group, Inc, included that the adjustment to "'the rights and responsibilities of contracting parties

[must be based] upon reasonable conditions and [be] of a character appropriate to the public purpose [***21] justifying [the legislation's] adoption.'" Energy Reserves Group, Inc, 459 U.S. at 412, quoting United States Trust Co of New York, 431 U.S. at 22. While this measure invalidates the provisions that gave rise to plaintiff's entitlement to the deficiency, we note that the remaining provisions of the lending documents remain in effect. Plaintiff has not proposed any lesser measure that could have accomplished the legislative objective. Thus, in deference to the Legislature, we conclude that the Contract Clauses allow for such legislation.

C. SUBSTANTIVE DUE PROCESS

The Fourteenth Amendment to the United States Constitution states that no "State [shall] deprive any person of life, liberty, or property, without due process of law . . . ." Similarly, Const 1963, art 1, § 17 provides that no person shall "be deprived of life, liberty or property, without due process of law."

[A]lthough the text of the Due Process Clauses provides only procedural protections, due process also has a substantive component that protects individual liberty and property interests from arbitrary government actions regardless of the fairness of any implementing procedures. . . . The right to substantive due process is violated [***22] when legislation is unreasonable and clearly arbitrary, having no substantial relationship to the health, safety, [*380] morals, and general welfare of the public. [Bonner v City of Brighton, 298 Mich App 693, 705-706; 828 NW2d 408, (2012).5

In General Motors Corp v Romein, 503 U.S. 181; 112 S Ct 1105; 117 L Ed 2d 328 (1992), the Court stated: "Retroactive legislation presents problems

5 When a state law is challenged on substantive due process grounds, the plaintiff need not demonstrate a deprivation of a liberty or property interest. See American Express Travel Related Servs Co, Inc v Kentucky, 641 F3d 685, 688-689 (CA 6, 2011).


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of unfairness that are more serious than those posed by prospective legislation, because it can deprive citizens of legitimate expectations and upset settled transactions. For this reason '[t]he retroactive aspects of [economic] legislation, as well as the prospective aspects, must meet the test of due process': a legitimate legislative purpose furthered by rational means." Id. at 191, quoting Pension Benefit Guaranty Corp v R A Gray & Co, 467 U.S. 717, 730; 104 S Ct 2709; 81 L Ed 2d 601 (1984). Similarly, Michigan Courts "analyze whether a plaintiff's due process rights have been violated [by determining] 'whether the legislation bears a reasonable relation to a permissible legislative objective.'" Phillips v Mirac, Inc, 470 Mich 415, 436; 685 NW2d 174 (2004), [***23] quoting Detroit v Qualls, 434 Mich 340, 366-367 n 49; 454 NW2d 374 (1990). In Kentucky [**604] Div, Horsemen's Benevolent & Protective Ass'n, Inc v Turfway Park Racing Ass'n, Inc, 20 F3d 1406, 1414 (CA 6, 1994), the court stated:

Because "legislative Acts adjusting the burdens and benefits of economic life come to the Court with a presumption of constitutionality," Usery v. Turner Elkhorn Mining Co, 428 U.S. 1, 15, 49 L Ed 2d 752, 96 S Ct 2882 (1976), "judgments about the wisdom of such legislation remain within the exclusive province of the legislative and executive branches," Pension Benefit Guaranty Corp[, 467 U.S. [*381] at 729], if the "statute is supported by a legitimate legislative purpose furthered by rational means." Id. In fact, Congress has "absolutely no obligation to select the scheme that a court later would find to be the fairest, but simply one that was rational and not arbitrary." National R.R. Passenger Corp v. Atchison, Topeka & Santa Fe Ry Co, 470 U.S. 451, 477, 84 L Ed 2d 432, 105 S Ct 1441 (1985).

The party challenging the legislation on due process grounds bears the burden of rebutting the presumption that there was a rational basis. Qualls, 434 Mich at 366. [***24] Moreover, "'where the

legislative judgment is supported by "any state of facts either known or which could reasonably be assumed," although such facts may be "debatable," the legislative judgment must be accepted. Carolene Products Co v Thompson, 276 Mich 172, 178; 267 NW 608 (1936).'" Qualls, 434 Mich at 366, quoting Shavers v Attorney General, 402 Mich 554, 613-614; 267 NW2d 72 (1978) ). Stated more emphatically:

[T]he party challenging a legislative enactment subject to rational basis review must "'negative every conceivable basis which might support it.'" See, e.g., Lehnhausen v. Lake Shore Auto Parts Co, 410 U.S. 356, 364, 93 S Ct 1001, 35 L Ed 2d 351 (1973) (quoting Madden v. Kentucky, 309 U.S. 83, 88, 60 S Ct 406, 84 L Ed 590 (1940)). "Under rational basis review, it is 'constitutionally irrelevant [what] reasoning in fact underlay the legislative decision.'" Craigmiles [ v Giles, 312 F3d 220, 224 (CA 6, 2002)] (alteration in original) (quoting R.R. Ret Bd. v Fritz, 449 U.S. 166, 179, 101 S Ct 453, 66 L Ed 2d 368 (1980)). "[W]e will be satisfied with the government's 'rational speculation' linking the regulation to a legitimate purpose, even 'unsupported [***25] by evidence or empirical data.'" Id. (quoting FCC v. Beach Commc'ns, Inc, 508 U.S. 307, 313, 113 S Ct 2096, 124 L Ed 2d 211 (1993). Thus, if a statute can be upheld under any plausible justification offered by the state, or even hypothesized by the court, it survives rational-basis scrutiny. See Berger [ v City of Mayfield Heights, 154 F3d 621, 624-626 (CA 6, 1998)] (speculating as [*382] to the City Council's possible motivations for passing the challenged ordinance). [American Express Travel Related Servs Co, Inc v Kentucky, 641 F3d 685, 690 (CA 6, 2011).]

Here, there were concerns that existing CMBS loans with postclosing solvency covenants would result in commercial developers not qualifying for financing to pursue continued economic development in Michigan, that tax revenues would


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be affected, and that foreclosures would increase, all during a period of economic recovery in this state. The means chosen to address these concerns, declaring [***26] the covenants invalid and unenforceable, were not arbitrary. Rather, they rationally addressed the identified problem. There was no substantive due process violation.

D. SEPARATION OF POWERS

Plaintiff argues that the NMLA violates the Separation of Powers Clause, [**605] Const 1963, art 3, § 2, by depriving this Court of its exclusive power to interpret and enforce the contract in the case pending before it. Const 1963, art 3, § 2 states that "[t]he powers of government are divided into three branches: legislative, executive and judicial. No person exercising powers of one branch shall exercise powers properly belonging to another branch except as expressly provided in this constitution." In Kyser v Kasson Twp, 486 Mich 514, 535; 786 NW2d 543 (2010) (finding that the judiciary had interfered with the legislative zoning powers of a township), the Court quoted Massachusetts v Mellon, 262 U.S. 447, 488; 43 S Ct 597; 67 L Ed 1078 (1923), explaining that

"[t]he functions of government under our system are apportioned. To the legislative department has been committed the duty of making laws; to the executive the duty of executing them; and to the judiciary the duty of interpreting and [***27] applying them in cases properly brought before [*383] the courts. The general rule is that neither department may invade the province of the other and neither may control, direct or restrain the action of the other."

In Detroit Mayor v Arms Technology, Inc, 258 Mich App 48; 669 NW2d 845 (2003), the plaintiffs brought public nuisance and negligence actions against the defendants relative to the marketing and distribution of firearms. The trial court dismissed the negligence claims, but held that the nuisance claims were viable and that MCL 123.1102, which prohibits local regulation of firearms, did not

prohibit the plaintiffs' claims. While the actions were pending, the Legislature passed MCL 28.435, subsection (9) of which reserved the bringing of such actions to the state and expressly barred a political subdivision from bringing such an action. Further, subsection (13) provided:

Subsections (9) through (11) are intended only to clarify the current status of the law in this state, are remedial in nature, and, therefore, apply to a civil action pending on the effective [***28] date of this act.

This Court held:

At its core, plaintiffs' separation-of-powers challenge hinges on the fact that the enactment of MCL 28.435(9)-(13) effectively overrides the trial court's finding that plaintiffs are not prohibited by MCL 123.1102 from bringing this action. Plaintiffs vigorously assert that this statutory enactment "overturns a judicial decision" or, alternatively, "seeks to compel a judicial decision in favor of defendants." We find plaintiffs' arguments to be misplaced.

First, we note that the trial court's ruling regarding MCL 123.1102 did not constitute a final judgment because it did not dispose of all claims and adjudicate all the rights and liabilities of the parties. MCR 7.202(7)(a)(i); Allied Electric Supply Co, Inc v Tenaglia, 461 Mich 285, 288; 602 NW2d 572 (1999). Because the trial court's order was not a final judgment that the statute required to be reopened, [*384] the order was subject to revision by the Legislature[.] [Detroit Mayor, 258 Mich App at 65.]

Quoting Plaut v Spendthrift Farm, Inc, 514 U.S. 211, 226-227; 115 S Ct 1447; 131 L Ed 2d 328 (1995), the Court explained:

"Congress can always revise the judgments of Article III courts in one sense: When [***29] a new law makes clear that it is retroactive, an appellate court must apply that law in reviewing judgments still on appeal that were


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rendered before the law was enacted, and must alter the outcome accordingly. See United States v. Schooner Peggy, 5 U.S. 103, 1 Cranch 103, 2 L Ed 49 (1801); Landgraf v. USI Film Products, 511 U.S. 244, 273-280, 128 L Ed 2d 229, 114 S. Ct. 1483 [**606] (1994). . . [A] distinction between judgments from which all appeals have been foregone or completed, and judgments that remain on appeal (or subject to being appealed), is implicit in what Article III creates: not a batch of unconnected courts, but a judicial department composed of 'inferior Courts' and 'one supreme Court.' Within that hierarchy, the decision of an inferior court is not (unless the time for appeal has expired) the final word of the department as a whole. It is the obligation of the last court in the hierarchy that rules on the case to give effect to Congress's latest enactment, even when that has the effect of overturning the judgment of an inferior court, since each court, at every level, must 'decide according to existing laws.' Schooner Peggy, supra, at 109." [Detroit Mayor, 258 Mich App at 65-66.]

This [***30] Court concluded, id. at 66,

consistent with the principles articulated in Plaut, that plaintiffs cannot show that the enactment of MCL 28.435 violates the Michigan Constitution simply because it was enacted after the trial court ruled on the applicability of MCL 123.1102.

Plaintiff suggests that Plaut is inapplicable because it involved Article III federal courts. However, Detroit Mayor indicates that a state court would be required to [*385] apply retroactive legislation to a pending case as long as the appeal process is ongoing.

Plaintiff also argues that, to the extent that the Legislature can pass retroactive legislation clarifying a law it previously enacted, it cannot retroactively interpret a private contract it had no role in drafting. Plaintiff points out that defendants have cited no cases "in which a Michigan court

blessed a statute directing the outcome of an appeal of a judgment enforcing a private contract right." However, the legislation does not "interpret" the contract or direct this Court or any court to do anything. It declares that the postclosing solvency covenant is invalid, unenforceable, and against public policy. This may have the effect of invalidating plaintiff's entitlements [***31] based on the contract, but if so it will be because the courts apply the new law, not because the Legislature has directly dictated the outcome in this case.

IV. ATTORNEY FEES AND COSTS

The parties reached a stipulation regarding the amount of damages should defendants lose on appeal. The stipulation provided for a $260,000 award for costs and expenses, including attorney fees, but defendants claimed that they agreed to pay this amount only if plaintiff prevailed on the claim for the roughly $2.1 million deficiency. The trial court agreed with plaintiff that, pursuant to the stipulation, plaintiff was entitled to the award of $260,000 based on the basis of the success with "Motion No. 4"; this motion dealt with an entitlement to $61,958 from defendant Schostak for a misapplication of rents. In the original opinion in this case, we determined that it was unnecessary to address this issue because we held that plaintiff was entitled to the deficiency. Because we have concluded on remand that [*386] plaintiff is not entitled to the deficiency, we must now reach the merits of this issue.

"A 'stipulation,' . . . is an agreement, admission, or concession made in a judicial proceeding by the parties or their attorneys, respecting [***32] some matter incident thereto. Its purpose is generally stated to be the avoidance of delay, trouble, and expense." [Eaton Co Bd of Co Rd Comm'rs v Schultz, 205 Mich App 371, 378-379; 521 NW2d 847 (1994), quoting 73 Am Jur 2d, Stipulations, § 1, p 536.]

[**607] "Stipulated orders that are accepted by the trial court are generally construed under the same


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rules of construction as contracts." Phillips v Jordan, 241 Mich App 17, 21; 614 NW2d 183 (2000). "'[W]hen parties have freely established their mutual rights and obligations through the formation of unambiguous contracts, the law requires this Court to enforce the terms and conditions contained in such contracts, if the contract is not "contrary to public policy."'" Holmes v Holmes, 281 Mich App 575, 594; 760 NW2d 300 (2008), quoting Bloomfield Estates Improvement Ass'n, Inc v Birmingham, 479 Mich 206, 213; 737 NW2d 670 (2007). "A contract must be interpreted according to its plain and ordinary meaning." Holmes, 281 Mich App at 593.

"Under ordinary contract principles, if contractual language is clear, construction of the contract is a question of law for the court. If the contract is subject to two reasonable interpretations, factual development is necessary [***33] to determine the intent of the parties and summary disposition is therefore inappropriate. If the contract, although inartfully worded or clumsily arranged, fairly admits of but one interpretation, it is not ambiguous. The language of a contract should be given its ordinary and plain meaning." [Id. at 594, quoting Meagher v Wayne State Univ, 222 Mich App 700, 721-722; 565 NW2d 401 (1997) (citations omitted).]

[*387] In this case, the stipulation was placed on the record. The first paragraph established the deficiency amount as being $2,142,697.86 and provided "that the sum of $260,000 is the reasonable amount of legal costs and expenses, including reasonable attorneys fees in prosecuting this action through the date of entry of the judgment only." The next paragraph established that judgment on count I would be entered against defendant Cherryland in the same amount as against the guarantor and summarized the dispositions of counts II through V, including the disposition of count IV regarding the "assignment of rents." Paragraph 3 addressed the disposition of

count VI and in ¶ 4, there was an agreement "not to make any claims to the receiver for recovery of any or all portion of the fees ordered to be [***34] disgorged under motion Number 5 ruled by the Court" and that "this amount shall be credited against the judgment upon payment."

Considering the stipulation in its entirety, we conclude that the language is unambiguous. The parties agreed to an amount of $260,000 relative to the entire action and made no stipulation regarding the amount due for any of the individual counts. Indeed, the issue of costs, expenses, and attorney fees was addressed at the outset before any of the individual counts were mentioned. There is simply nothing in this stipulation that indicates an agreement to $260,000 in costs, expenses, and attorney fees for count IV. Consequently, the trial court erred by providing for an award of $260,000 in costs, expenses, and attorney fees in the order granting summary disposition with regard to count IV. Because there was no stipulation on that issue, we remand for a determination of whether plaintiff is entitled to costs, expenses, and attorney fees with respect to count IV.

[*388] Reversed and remanded for proceedings consistent with this opinion. We do not retain jurisdiction.

/s/ Mark J. Cavanagh

/s/ David H. Sawyer

/s/ Patrick M. Meter

End of Document

Caution

As of: February 28, 2020 4:33 PM Z

River Bank America v. Diller Court of Appeal of California, First Appellate District, Division Three

October 3, 1995, Decided

No. A066477, No. A068152.

Reporter 38 Cal. App. 4th 1400 *; 45 Cal. Rptr. 2d 790 **; 1995 Cal. App. LEXIS 970 ***; 95 Cal. Daily Op. Service 7844; 95 Daily Journal DAR 13372

RIVER BANK AMERICA, Plaintiff, Cross-defendant and Appellant, v. SANFORD N. DILLER et al., Defendants, Cross-complainants and Appellants; HACIENDA GARDENS VENTURE, Cross-complainant and Appellant. RIVER BANK AMERICA, Plaintiff and Appellant, v. HACIENDA GARDENS VENTURE et al., Defendants and Respondents.

Subsequent History: [***1] Rehearing Denied November 1, 1995, Reported at: 1995 Cal. App. LEXIS 1082. Review Denied January 18, 1996, Reported at: 1996 Cal. LEXIS 377.

Prior History: Superior Court of Alameda County, No. 688633-2, James R. Lambden, Judge.

Disposition: The final judgment entered in favor of defendants is reversed. The order denying River Bank's motion for summary adjudication is affirmed as to the sham guaranty defense and reversed as to the estoppel defense. The order granting summary adjudication against defendants

on their cross-claim is affirmed. The order awarding attorney fees is reversed. Each party to bear its own costs on appeal.

Case Summary

Procedural Posture Plaintiff bank appealed summary judgment entered by the Superior Court of Alameda County (California) in favor of defendant guarantors in its suit to enforce guaranty agreements, arguing that the trial court erred in concluding that the agreements were unenforceable.

Overview

Plaintiff bank brought suit to enforce guaranties executed by defendant guarantors that secured construction loans to the principal debtor. After concluding that the guaranties were unenforceable because they imposed upon defendants an obligation more burdensome than that undertaken by the principal debtor, the trial court entered summary judgment in favor of defendants. Plaintiff appealed the adverse judgment. In reversing

River Bank America v. Diller

Page 2 of 16

summary judgment in favor of defendants, the appellate court concluded that defendants had, as a matter of law, waived any defense under Cal. Civ. Code § 2809, which precluded agreements imposing greater obligations upon sureties than that imposed upon the principal debtor. A defense under § 2809 was waivable and could be waived by the very language of the guaranty agreement itself. Where the defendants acknowledged in the agreements that their obligations on the guaranties were wholly separate from and unaffected by the security provisions in the promissory note, the contract language adequately expressed a waiver of the defense under Cal. Civ. Code § 2809.

Outcome Summary judgment in favor of defendant guarantors was reversed, as the defendants had waived the defense that the guaranty agreements were unenforceable in imposing a greater obligation upon the guarantors than that imposed upon the principal debtor, for their agreements acknowledged that their guaranties were separate from and unaffected by the security provisions in the debtor's promissory note.

Counsel: Gibson, Dunn & Crutcher, Joel A. Feuer and Richard Pachter for Plaintiff, Cross-defendant and Appellant and for Plaintiff and Appellant.

Miller, Starr & Regalia, Edmund L. Regalia and Lewis J. Soffer for Defendants, Cross-complainants and Appellants, for Cross-complainant and Appellant, and for Defendants and Respondents.

Judges: Opinion by Parrilli, J., with Chin, P. J., and Corrigan, J., concurring.

Opinion by: PARRILLI, J.

Opinion

[*1406] [**792] PARRILLI, J.

We dispose of two related appeals in this opinion. In appeal No. A066477, River [***2] Bank America (River Bank) appeals from a summary judgment granted in favor of defendants Sanford N. Diller and Helen P. Diller (individually and as trustees of the DNS Trust) and Prometheus Development Company, Inc. (Prometheus Development). In the underlying action, River Bank sought to enforce guaranties the Dillers and Prometheus Development had executed. The guaranties secured a portion of River Bank's nonrecourse construction loans to Hacienda Gardens Venture, a limited partnership (Hacienda). River Bank made the loans--totaling $38 million--to finance the construction of a large apartment complex in Pleasanton, California. The trial court concluded the guaranties were unenforceable because they imposed upon the guarantors obligations "larger in amount [*1407] [or] in other respects more burdensome" than the nonrecourse obligations undertaken by the principal obligor (Hacienda). ( Civ. Code, § 2809.) 1 [***3] In a cross-appeal, defendants 2 contend the trial court erred when it granted River Bank's motion for summary adjudication on defendants' claim of negligent misrepresentation against River Bank.

We reverse the summary judgment entered in favor of the guarantors, and affirm the summary adjudication of defendants' cross-claim for

1 Unless otherwise noted, subsequent statutory references are to the Civil Code. 2 We refer to Hacienda, the Dillers, the DNS Trust, and Prometheus Development collectively as "defendants."


Page 3 of 16

negligent misrepresentation. In addition, we affirm in part and reverse in part an order denying River Bank's motion for summary adjudication.

In appeal No. A068152, River Bank appeals from an order entered after judgment awarding defendants $241,874.22 in attorney fees and costs. Because we reverse the summary judgment, the award of attorney fees as prevailing party is also reversed.

I. FACTS

Sanford Diller is a real estate developer based in Northern California. He and his wife Helen are the trustees of the DNS Trust, a revocable family trust, which owns all of the stock in Prometheus Development, the Dillers' principal development company. Sanford Diller is the principal officer of Prometheus Development.

In the spring of 1987 Prometheus Development had nearly completed the planning and approval process for a 456-unit apartment complex [***4] on property it owned in Pleasanton. To obtain capital for construction, Prometheus Development initially entered into negotiations with River Bank to form a joint venture to develop the property. However, those negotiations never resulted in a final joint venture agreement. Instead, River Bank ultimately agreed to make "participating construction loans" 3 to Prometheus Development.

In October 1987 River Bank made two construction loans to Hacienda, which is a limited partnership the Dillers formed for the specific purpose of [*1408] obtaining the construction loans. 4 The

3 Generally, a participating loan allows the lender to share in any profits from the leasing or sale of the real property during a specified period of time. 4 The Dillers have effective control over the entire partnership. Hacienda's general partner is a corporation, Prom XX, Inc. (Prom XX) which the Dillers own through their revocable trust. The DNS revocable trust and another limited partnership, the Prometheus/Hacienda Gardens partnership, were Hacienda's limited partners. Prometheus Development is the general partner of the Prometheus/Hacienda Gardens partnership, but owns only 1 percent of that partnership.

loans were for $36 million and $2 million, respectively, and were secured by first and second deeds of trust on the development property. A separate note evidenced each loan. Each note contained a "nonrecourse" CLAUSE THAT PROVIDED: "Notwithstanding anything to the contrary [***5] contained in this Note or any of the Security [**793] Documents, neither Maker [Hacienda], nor any partner in Maker, any legal representative, heir, estate, successor or assign of any such partner or any officer, director, shareholder or partner in any such partner, shall have personal liability for (i) the payment of any sum of money which is or may be payable hereunder or under any of the Security Documents, or (ii) the performance or discharge of any covenants or undertakings of Borrower hereunder or under any of the Security Documents; provided, however, that the foregoing shall not limit the personal liability of any such entity or person in its capacity as a guarantor under any guaranty of the Note or of guaranty of completion of the construction. The holder shall proceed solely against the premises and any other collateral given as security for the loan (including any guaranties), and it is expressly understood and agreed by and between Maker and the holder that no separate liability is assumed by, nor shall at any time be asserted or enforceable against Maker, under this Note or any other Security Document." (Italics added.) This nonrecourse clause was added to the [***6] notes at the insistence of Sanford Diller.

As further security for the construction loans, the Dillers and Prometheus Development (collectively the guarantors) executed four separate guaranty agreements. The Dillers executed two of the guaranty agreements on behalf of themselves and the DNS Trust. Each agreement guaranteed payment of 10 percent ($3.6 million and $200,000, respectively) of the two notes. Similarly, Sanford Diller executed two guaranty agreements on behalf of Prometheus Development. Again, each agreement guaranteed payment of 10 percent [***7] ($3.6 million and $200,000, respectively) of the two notes. The net effect of the


Page 4 of 16

guaranty agreements was that the Dillers personally guaranteed $3.8 million of the construction loans, and Prometheus Development separately and independently guaranteed an additional $3.8 million of the construction loans. Thus, between them, the Dillers and Prometheus Development guaranteed 20 percent ($7.6 million) of the aggregate construction loan.

River Bank funded the construction loans and Hacienda completed the apartment complex in late 1988. However, the rental income from the [*1409] project was insufficient to pay all debt service on the property. Consequently, by October 10, 1991, Hacienda was delinquent in the amount of $830,445.

On October 15, 1991, River Bank commenced this action to foreclose on the property, to appoint a receiver, and to enforce the guaranty agreements. Defendants filed a cross-complaint alleging a cause of action for negligent misrepresentation against River Bank. The court appointed a receiver, and River Bank completed a nonjudicial foreclosure sale of the property on February 24, 1993. At the time of foreclosure, the outstanding debt was $42.9 million, [***8] but the property sold for only $30 million, leaving a $12.9 million deficiency. The receivership estate terminated on May 7, 1993.

After the foreclosure, River Bank proceeded against the guarantors to recoup a portion of the $12.9 million deficiency. In December 1993 River Bank filed a motion for summary adjudication on its cause of action to enforce the guaranty agreements against the Dillers and the DNS Trust (but did not file a similar motion as to Prometheus Development). In response, the Dillers and Prometheus Development filed their own motion for summary judgment as to the guaranty causes of action on the ground section 2809 provided a complete defense which the guarantors had not expressly or impliedly waived. While these motions were pending, River Bank also filed a motion for summary adjudication on the negligent misrepresentation causes of action in the cross-

complaint. In addition, River Bank filed a motion to amend its complaint to add a cause of action to reform the guaranty agreements to reflect that the parties had intended that the guarantors would waive any defense based on section 2809.

On February 15, 1994, the trial court granted the Dillers' and Prometheus [***9] Development's motion for summary judgment on the causes of action to enforce the guaranties, and denied River Bank's motion for summary adjudication on those causes of action. On that same date, the trial court [**794] granted River Bank's motion for summary adjudication on defendants' crossclaim for negligent misrepresentation, and denied River Bank's motion for leave to file an amended complaint. On May 12, 1994, the trial court entered judgment disposing of the entire case. River Bank filed a timely notice of appeal from that judgment and Hacienda, the Dillers and Prometheus Development filed a cross-appeal from the portion of the judgment granting summary adjudication on their cause of action for negligent misrepresentation.

On August 26, 1994, the trial court granted defendants' motion for award of attorney fees and ordered River Bank to pay defendants $241,874 in [*1410] attorney fees and other costs. River Bank filed a separate notice of appeal from that postjudgment order ( Code Civ. Proc., § 904.1, subd. (a)(2)).

II. DISCUSSION

A. Section 2809

The threshold issue in this case is whether section 2809 provides the Dillers and Prometheus Development with [***10] a complete defense to enforcement of their guaranties. Section 2809 states: "The obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; and if in its terms it exceeds it, it is reducible in proportion to the principal obligation." In granting summary judgment, the trial court relied on this section, and


Page 5 of 16

concluded that "the obligation purportedly assumed by [the guarantors] under their 'guaranties' was 'larger in amount [or] in other respects more burdensome than that of the principal,' in that under the terms of the loan documents, and particularly the 'nonrecourse' provisions thereof, the principal obligor, [Hacienda], had from the inception no exposure to personal liability." (Italics and second bracketed text in original.) The court also concluded that the Dillers and Prometheus Development had not waived their section 2809 defense.

In our view, it is a difficult question whether the guarantors' $7.6 million personal obligation is "more burdensome" than Hacienda's $38 million nonrecourse obligation. However, we need not decide that issue in this case. Instead, we conclude that, as a matter of law, the [***11] Dillers and Prometheus Development waived any defense based on section 2809. Consequently, we reverse the summary judgment on this issue.

1) Standard of Review

A moving party is entitled to summary judgment "if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." ( Code Civ. Proc., § 437c, subd. (c).) The law in effect in 1993 (when the summary judgment motion was filed) provided that "[a] defendant . . . has met his or her burden of showing that a cause of action has no merit if that party has shown that one or more elements of the cause of action . . . cannot be established, or that there is a complete defense to that cause of action. Once the defendant . . . has met that burden, the burden shifts to the plaintiff . . . to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto." ( Code Civ. Proc., § 437c, subd. (o)(2); [*1411] Jambazian v. Borden (1994) 25 Cal. App. 4th 836, 843-844 [30 Cal. Rptr. 2d 768].) (1) On appeal, we determine de novo whether there is a triable issue of material fact and whether the [***12] moving party is entitled to

summary judgment as a matter of law. ( Jambazian v. Borden, supra, at p. 844; Villa v. McFerren (1995) 35 Cal. App. 4th 733, 741 [41 Cal. Rptr. 2d 719]; Union Bank v. Superior Court (1995) 31 Cal. App. 4th 573, 579 [37 Cal. Rptr. 2d 653]; Fidelity Mortgage Trustee Service, Inc. v. Ridgegate East Homeowners Assn. (1994) 27 Cal. App. 4th 503, 508-509 [32 Cal. Rptr. 2d 521].)

2) Because the Guarantors Waived Their Section 2809 Defense, We Need Not Decide Whether the Guaranties Imposed Obligations on the Guarantors Which Were More Burdensome Than That of the Principal

The first issue the parties ask us to address is whether section 2809 provides a defense to a guarantor who has personally [**795] guaranteed a contractual nonrecourse obligation. As indicated, we need not decide this issue because we conclude below that the guarantors waived any defense based on section 2809. Nevertheless, as background to the waiver issue, we briefly outline the arguments on both sides of this issue.

(2) (See fn. 5.) As noted, section 2809 provides that "[t]he obligation of a surety must be neither larger in amount nor in other respects more burdensome [***13] than that of the principal" 5 and if it is, it will be reduced to match the principal's obligation. (Italics added.) (3) In determining whether the guarantor's obligation is larger in amount or "in other respects more burdensome," courts focus on the scope of the principal's liability at the time the guarantor executes his agreement. Bloom v. Bender, supra, 48 Cal. 2d 793 (Bloom) makes this point clear.

5 Although section 2809 speaks in terms of "sureties," and the Dillers and Prometheus Development are described as "guarantors," these labels are synonymous under current California law. In 1939, the Legislature amended section 2787 to eliminate any distinction between "sureties" and "guarantors." ( Bloom v. Bender (1957) 48 Cal. 2d 793, 795, fn. 1, 797 [313 P.2d 568]; Rintala, California's Anti-Deficiency Legislation and Suretyship Law: The Transversion of Protective Statutory Schemes (1969) 17 UCLA L.Rev. 245, fn. 1, 263-264 (Rintala).)


Page 6 of 16

There, the California Supreme Court explained that section 2809 has its roots in the Napoleonic Code. In particular, section 2013 of the Napoleonic Code provided that " 'The security must not exceed what is due from the debtor, nor be contracted under conditions more burthensome.' " (Bloom, supra, at p. 802.) The Supreme Court stated: "This rule of the civil law appears to relate to conditions at the time of the execution of a guarantee agreement, and to provide that at the time of the contracting of the surety's obligations he cannot agree to perform higher and greater obligations than those then imposed on the principal debtor." (Ibid., italics added.)

[***14] [*1412] Here, at the time they signed the guaranties, it is unclear whether the Dillers and Prometheus Development "agree[d] to perform higher and greater obligations than those then imposed on the principal debtor [Hacienda]." (Bloom, supra, 48 Cal. 2d at p. 802, italics added.) Hacienda signed notes stating that it and its partners would have no "personal liability" under the notes, and that River Bank would "proceed solely against the premises and any other collateral given as security for the loan (including any guaranties), and it is expressly understood and agreed by and between Maker and the holder that no separate liability is assumed by, nor shall at any time be asserted or enforceable against Maker, under this Note or any other Security Document."

Thus, from the time Hacienda signed the notes, it and its partners had absolutely no personal liability for the $38 million loan. From the outset, the lender could only proceed against "the premises." If the proceeds from sale of "the premises" were insufficient to satisfy the outstanding debt (as turned out to be the case), River Bank had no recourse against other assets not connected to the apartment complex. [***15] 6

6 Under a separate security agreement, River Bank also had a security interest in Hacienda's personal property "used on or in connection with the Property . . . ." In addition, Hacienda executed an assignment of leases and rents in connection with the property.

By contrast, under the terms of the guaranties, the Dillers and Prometheus Development "absolutely and unconditionally jointly and severally guarantee[d]," and "independently assume[d] liability" for a portion (20 percent) of the notes. Thus, although the guarantors assumed personal liability and thus subjected all of their assets to risk, they limited their exposure to an aggregate 20 percent of the face amount of the notes.

Clearly, the guarantors' obligations in this case were not "larger in amount" than that of the principal. However, in our view, it is difficult--if not impossible--to say which of these obligations is "more burdensome." 7 [***17] [**796] From a developer's perspective, a loan that subjects his or her entire net worth [***16] to risk may be viewed as "more burdensome" than a loan that puts only the assets of a specific project at risk. Here, however, the developers personally guaranteed only a small portion (20 percent) of the amount borrowed, and were thus able to limit exposure of their personal assets. By [*1413] contrast, although Hacienda and its partners had no personal liability for the $38 million loan, they did risk everything they put into the project, including the land. We are hard pressed to say which of these obligations is "more burdensome": a personal obligation which is limited to $3.6 million, or a "nonrecourse" $38 million construction loan which puts at risk everything the borrower sinks into the project. Fortunately, in this case we need not answer this question. 8

7 River Bank devotes a substantial portion of its opening brief to a nonissue; namely, whether the promissory notes Hacienda signed created an "obligation" for purposes of section 2809. Defendants have never argued that Hacienda had no "obligation" to River Bank under the promissory notes and security agreements. Instead, they argue that Hacienda's nonrecourse "obligation" is less burdensome than the guarantors' personal obligation. We agree with defendants that this entire line of argument is "an irrelevant attack upon a strawman," and therefore do not respond to the arguments in detail.

8 River Bank cites a trio of cases in which River Bank claims the courts have refused to apply the section 2809 defense in circumstances analogous to this case. (See Loeb v. Christie (1936) 6 Cal. 2d 416 [57 P.2d 1303]; Katz v. Haskell (1961) 196 Cal. App. 2d


Page 7 of 16

3) The Guarantors Waived Their Section 2809 Defense

(4a) (5) (See fn. 9.) Assuming, for the purpose of argument, that section 2809 could provide the guarantors with [***18] a defense in this case, we nevertheless conclude that, as a matter of law, the guarantors waived any defense based on section 2809 when they signed the guaranty agreements. 9

(4b) In Bloom, supra, the Supreme Court concluded section 2809 is not only waivable, but that it could be waived on the basis of a very vague clause in the guaranty agreement. (48 Cal. 2d. at p. 804; Rintala, supra, 17 UCLA L.Rev. at pp. 328-329; see also Comment, Issues in the [***19] Enforcement of Carry Guarantees and Completion Guarantees: Anti-Deficiency Rules, Suretyship Statutes, and Common Law (1989) 37 UCLA L.Rev. 225, 254-255 (Comment).) No subsequent case has overruled or even criticized Bloom on this point. In Bloom, the defendant argued that "a surety contract wherein the surety agrees to remain liable even though the principal is released [by his creditors] is a contract which imposes greater obligations on the surety than on the principal" and thus comes within the ambit of section 2809. (48 Cal. 2d at pp. 801-802.) The Supreme Court noted that such a construction of section 2809 would be

144 [16 Cal. Rptr. 453]; Heckes v. Sapp (1964) 229 Cal. App. 2d 549 [40 Cal. Rptr. 485].) In particular, River Bank claims those cases stand for the broad proposition that section 2809 does not apply to guaranty agreements for loans secured by real property. However, those cases do not support such a broad proposition, and we do not find them persuasive on the issue before us. None of the cases compel a conclusion that a personal guaranty is not "more burdensome" than a contractual nonrecourse obligation. Indeed, Loeb v. Christie, supra, suggests that the absence of personal liability is an important factor in determining whether an obligation is more burdensome.

9 "[I]t is 'solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence.' " ( U.S. Leasing Corp. v. DuPont (1968) 69 Cal. 2d 275, 284 [70 Cal. Rptr. 393, 444 P.2d 65], quoting Parsons v. Bristol Dev. Co. (1965) 62 Cal. 2d 861, 865 [44 Cal. Rptr. 767, 402 P.2d 839].) Here, defendants have not offered any extrinsic evidence to aid in interpreting the waiver provisions in the guaranty agreements. Consequently, we may resolve this issue as a question of law.

"inharmonious" with section 2819, which contemplates continuing liability of the surety when he consents to the principal's [*1414] discharge. Moreover, the court noted that section 2809 applies to "conditions at the time of the execution of a guarantee agreement," and that nothing in the rule prevents the surety from agreeing that his liability will remain even though some future event eliminates the principal's obligation. (48 Cal. 2d at pp. 802-803.)

The Bloom court then turned to the issue of waiver. The court first noted that we must construe [***20] surety contracts using the same rules that apply to the interpretation of other contracts. (48 Cal. 2d at p. 803; § 2837, 3268.) In particular, the Bloom court relied on section 3268, which provides that the statutory rules regarding contracts, including those which apply specifically [**797] to surety contracts, " 'are subordinate to the intention of the parties, when ascertained in the manner prescribed [for] the interpretation of contracts; and the benefit thereof may be waived by any party entitled thereto, unless such waiver would be against public policy.' " (Bloom, supra, at p. 803, italics added.) In concluding that the Bloom defendant had waived the benefit of section 2809, the Supreme Court stated: "The parties by their contract specifically agreed that the liability of the surety was not to be terminated by the discharge of the debtor through a composition of creditors. This expressed intention alone might well be controlling under the provisions of sections 3268 and 2837, but even if a waiver of the limitation of section 2809 is necessary, the language of the contract adequately expresses such a waiver." (48 Cal. 2d at p. 804, italics [***21] added.)

In Bloom, the court relied on the following clause in the guaranty agreement to find that the guarantor had waived section 2809: " 'The liability hereby assumed shall not be affected by any forbearance by you, or by the giving of any extension of time or by any other modification of any sale, contract, account or obligation or instrument in connection therewith, or by the acceptance of any settlement or


Page 8 of 16

composition offered by . . . [the debtor] either in liquidation, readjustment, receivership, bankruptcy or otherwise.' " (48 Cal. 2d at p. 796.) As one commentator has noted, the Supreme Court found waiver despite the absence of any reference in the agreement to section 2809 or any other suretyship provision, and the lack of any language indicating an intent to "waive" the statutory rights accorded a guarantor. (Rintala, supra, 17 UCLA L.Rev. at p. 329, fn. 304.)

It is against this backdrop that we must measure the "waiver" provisions of the present guaranty agreements. (6) (See fn. 10.) (4c) We conclude that, pursuant to the standard established by the Supreme Court in Bloom, the [*1415] language in the present guaranty agreements is sufficient to constitute a waiver of a defense [***22] based on section 2809. 10

10 In a supplemental brief, defendants suggest they are protected by section 2810 as well as by section 2809 and that the guarantors had to waive the protections of both sections. We need not separately consider whether the guarantors waived the protection of section 2810 as that section is not applicable in this case. As is pertinent here, section 2810 provides that a guarantor is "not liable if for any [reason other than the personal disability of the principal] there is no liability upon the part of the principal at the time of the execution of the contract, or the liability of the principal thereafter ceases, unless the surety has assumed liability with knowledge of the existence of the defense." Here, however, the nonrecourse provision in the notes did not relieve the principal of all "liability" within the meaning of section 2810. Rather, the nonrecourse provision merely deprived River Bank of a remedy to enforce that liability. Although the nonrecourse provision precluded the principal's "personal" liability, it did not absolve it of all liability. The nonrecourse provision specifically provided that the "holder shall proceed solely against the premises and any other collateral given as security for the loan . . . and it is expressly understood and agreed by and between Maker and the holder that no separate liability is assumed by, nor shall at any time be asserted as enforceable against Maker . . . ." Thus, the notes contemplated that, although Hacienda was "liable" to the extent permitted under the notes, Hacienda did not assume any separate "personal" liability. This is not equivalent to finding that Hacienda had no liability for the notes. The court in Gottschalk v. Draper Companies (1972) 23 Cal. App. 3d 828 [100 Cal. Rptr. 434] reached a similar conclusion. There the court concluded that Code of Civil Procedure section 580b (prohibiting deficiency judgments in certain purchase money transactions) did not provide the guarantors with a defense under section 2810. The court stated: "[The principal debtor] has remained liable after the foreclosure sale and section 580b has

[***23] (7) Again, guaranty contracts are construed according to the same rules as those used for other contracts, with a view to ascertaining the intent of the parties. (Bloom, supra, 48 Cal. 2d at p. 803; Airlines Reporting Corp. v. United States Fidelity & Guaranty Co. (1995) 31 Cal. App. 4th 1458, 1461 [37 Cal. Rptr. 2d 563].) Guaranty contracts "may be explained by [**798] reference to the circumstances under which they were made and the matter to which they relate, the main object being to ascertain and effectuate the intention of the parties." ( Bank of America v. Waters (1962) 209 Cal. App. 2d 635, 638 [26 Cal. Rptr. 9].)

(4d) Here, the guaranty agreements contain several provisions which, taken together, indicate the guarantors waived any defense based on section 2809. First, the guaranty agreements provide that "Guarantors hereby absolutely and unconditionally . . . guarantee to Lender, and independently assume liability to Lender, without any requirement whatsoever of resort by Lender to any other party . . . . The joint and several obligations of Guarantors shall be limited to [either $3.6 million or $200,000, depending on [*1416] which note is being [***24] guaranteed]; provided that no amounts shall be credited against the foregoing limitation by reason of . . . (v) the application of any foreclosure proceeds." (Italics added.) In other words, the guarantors understood that their obligation would not be terminated (or even reduced) by River Bank's receipt of foreclosure proceeds from the secured property.

Second, the guaranty agreements provide: "The guaranty by Guarantors provided for in this Agreement is an absolute and unconditional joint and several guaranty of payment and performance; and is not a guaranty of collection. The liability of Guarantors hereunder is independent of the

barred only respondents' remedy against it, [consequently,] appellant cannot avail themselves of a defense based upon Civil Code section 2810, which requires the nonexistence or cessation of the principal's liability to make the surety also exempt." (23 Cal. App. 3d. at p. 831, italics in original.) Consequently, section 2810 does not provide the guarantors with a defense in this case.


Page 9 of 16

aforesaid obligations to pay which are hereby guaranteed . . . and of the liabilities of any other guarantors of the Obligations." (Italics added.)

Third, the guaranty agreements provide: "Lender may bring and prosecute a separate action against Guarantors, or any of them, to enforce their liabilities hereunder, whether or not any action is brought against Borrower or any other person and whether or not Borrower or any other person is joined in any such action or actions. Nothing shall prohibit Lender from exercising its rights against [***25] Guarantors, Borrower, the security . . . for the Obligations, and any other person simultaneously, jointly and/or severally." (Italics added.)

Finally, the agreements provide that "Guarantors shall not be discharged, released or exonerated, in any way, from their absolute, unconditional and independent joint and several liabilities hereunder, even though any rights or defenses which Guarantors may have against . . . Lender or others may be destroyed, diminished or otherwise affected, by . . . (d) The sale or enforcement of, or realization upon . . . any security for any of the Obligations, even though (i) recourse may not thereafter be had against Borrower for any deficiency . . . ." (Italics added.)

Taken together, these provisions indicate the following: (1) the guarantors knew their guaranties were separate and independent from Hacienda's obligation; (2) the guarantors agreed River Bank could proceed directly against the guarantors without first proceeding against the security; (3) even if River Bank did first proceed against the security, the guarantors understood that the receipt of foreclosure proceeds would not terminate or reduce their obligations under the [***26] guaranties. In short, the guarantors understood that their personal obligations on the guaranties were completely separate from, and not affected by, the security provisions in the notes. To paraphrase Bloom: The parties by their contract specifically agreed that the liability of the surety was not to be

affected by the security provisions in the notes. This expressed intention alone might well be controlling under the provisions of sections 3268 and 2837, but even if a waiver of the limitation of section [*1417] 2809 is necessary, the language of the contract adequately expresses such a waiver.

The undisputed facts concerning the circumstances under which the parties made the guaranties support our finding of waiver. ( Bank of America v. Waters, supra, 209 Cal. App. 2d at p. 638.) First, all parties to this transaction--including the guarantors--were sophisticated business persons with special expertise in real estate development. 11 Moreover, all parties--including [**799] the guarantors--were represented by counsel in negotiations. Finally, and perhaps most important, Sanford Diller signed both the guaranties and the notes obligating Hacienda on its [***27] principal obligation. Thus, although he was acting in different capacities when he signed the notes and guaranties, he was nevertheless personally aware of the terms of the notes. As indicated above, one of the terms of the notes was that the nonrecourse provision "shall not limit the personal liability of any . . . entity or person in its capacity as a guarantor under any guaranty of the Note or of guaranty of completion of the construction . . . ." Thus, if guaranty contracts "may be explained by reference to the circumstances under which they were made and the matter to which they relate" ( Id. at p. 638) and our primary purpose is to ascertain the intent of the parties (Bloom, supra, 48 Cal. 2d at p. 803; § 2837, 3268), it seems clear the parties intended that the guarantors would remain personally liable on the guaranties despite the nonrecourse provision in the notes.

[***28] We do not find defendants' cases on waiver persuasive. Defendants contend that, to be

11 It is unclear how much expertise Helen Diller has as a real estate developer. She is an officer in Prom XX, but it is unclear whether she takes an active role in her husband's business. In any event, we assume that Sanford Diller, who clearly has such expertise, was primarily responsible for negotiating the guaranties on behalf of the Dillers.


Page 10 of 16

effective, a written waiver of section 2809 must state the precise nature of the guarantor's defense and the fact that it is being waived. They further contend that, under this standard, the present guaranty agreements are insufficient to constitute a waiver of their rights under section 2809. Defendants' primary authority for this position is Cathay Bank v. Lee (1993) 14 Cal. App. 4th 1533 [18 Cal. Rptr. 2d 420]. In Cathay Bank, the court had to determine whether the defendant had waived the judicially created "Gradsky defense" when he executed a guaranty on a bank loan. The Gradsky defense is based on Union Bank v. Gradsky (1968) 265 Cal. App. 2d 40 [71 Cal. Rptr. 64]. Gradsky held that a lender is estopped from recovering a deficiency judgment against a guarantor when the lender elects to proceed against the security by nonjudicial foreclosure, because this election cuts off the guarantor's subrogation rights against the debtor. Thus, even though the pertinent antideficiency statute ( Code Civ. Proc., § 580d) does not directly protect guarantors, as a practical matter [***29] the "Gradsky defense" prevents the [*1418] lender from obtaining a deficiency judgment against the guarantor unless the lender elects the more cumbersome remedy of judicial foreclosure. (Cathay Bank, supra, at p. 1535.)

In deciding that the language in the guaranty agreement before it did not constitute an adequate waiver of the Gradsky defense, the Cathay Bank court surveyed the cases that had addressed this precise issue; i.e., cases that considered whether contractual language was sufficient to waive the Gradsky defense. ( Cathay Bank v. Lee, supra, 14 Cal. App. 4th at p. 1537.) The Cathay Bank court did not look to other cases--such as Bloom, supra, 48 Cal. 2d 793--which considered the waiver of other statutory surety defenses. Cathay Bank concluded that, in order to waive the Gradsky defense, the waiver must explain that (1) the guarantor has a defense to a deficiency judgment based on the destruction of its subrogation rights through nonjudicial foreclosure; and (2) the guarantor is waiving that specific defense. (14 Cal. App. 4th at pp. 1538-1539.)

In apparent response to Cathay Bank's strict holding, the Legislature [***30] enacted section 2856, effective January 1, 1995. That section provides in pertinent part: "(a) Any guarantor, including a guarantor of an obligation secured by real property or any interest therein, may waive the guarantor's rights of subrogation and reimbursement and any other rights and defenses available to the guarantor by reason of Sections 2787 to 2855, inclusive, including, without limitation, (1) any defenses the guarantor may have to the guaranty obligation by reason of an election of remedies by the creditor . . . . [P] (b) Any language that expressly sets forth a waiver of suretyship rights or defenses described in subdivision (a) . . . shall be effective whether or not it contains references to statutory [**800] provisions or judicial decisions." 12 (Italics added.) In addition, the statute which enacted these provisions states [*1419] that the new provisions do "not represent a change in, but are merely

12 Section 2856 provides in full: "(a) Any guarantor, including a guarantor of an obligation secured by real property or any interest therein, may waive the guarantor's rights of subrogation and reimbursement and any other rights and defenses available to the guarantor by reason of Sections 2787 to 2855, inclusive, including, without limitation, (1) any defenses the guarantor may have to the guaranty obligation by reason of an election of remedies by the creditor and (2) any rights or defenses the guarantor may have by reason of protection afforded to the principal with respect to the obligation so guaranteed pursuant to the antideficiency or other laws of this state limiting or discharging the principal's indebtedness, including, without limitation, Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure. [P] (b) Any language that expressly sets forth a waiver of suretyship rights or defenses described in subdivision (a), or any of them, shall be effective whether or not it contains references to statutory provisions or judicial decisions. The following language shall be an effective waiver of the guarantor's defense to a recovery by the creditor by reason of the creditor's election of remedies: [P] Guarantor waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed the guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise. [P] (c) Subdivision (b) shall not apply to a guaranty of a loan to an individual primarily for personal, family, or household purposes, secured by a deed of trust or mortgage on a dwelling for not more than four families when the dwelling is occupied, entirely or in part, by the borrower."


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declarative of, existing law." (Stats. 1994, ch. 1204, § 2.)

[***31] We decline to apply Cathay Bank's strict waiver requirements in this case. First, Cathay Bank did not purport to set out a waiver standard applicable to all surety defenses. To the contrary, Cathay Bank focused on the narrow issue of whether there was a sufficient waiver of the Gradsky defense. Other courts have found waiver of other suretyship rights and defenses on the basis of language which would not meet Cathay Bank's strict knowledge and waiver requirements. (See Bloom, supra, 48 Cal. 2d at p. 804 [§ 2809]; American Security Bank v. Clarno (1984) 151 Cal. App. 3d 874, 882 [199 Cal. Rptr. 127] [§ 2819]; Union Bank v. Ross (1976) 54 Cal. App. 3d 290, 294 [126 Cal. Rptr. 646] [§ 2819, 2845].) Second, unlike Bloom, Cathay Bank did not address the precise issue which concerns us in this case: namely, the waiver of a defense based on section 2809. Third, although it purports to be "declarative of existing law" it is clear the Legislature enacted section 2856 to ameliorate the strict rule laid down in Cathay Bank. Thus, under section 2856, subdivision (b), a guarantor may waive a surety defense using "[a]ny language that [***32] expressly sets forth a waiver . . . ."

In sum, we choose to follow Bloom, supra, on the waiver issue. Bloom is a Supreme Court case that directly addresses the precise issue we are considering here. We do not believe Cathay Bank is controlling, as it does not address the precise issue before us, and has arguably been eroded by the recently enacted legislation. We therefore conclude that, as a matter of law, the guarantors waived any defense based on section 2809.

B. River Bank's Motion for Summary Adjudication

River Bank contends that if section 2809 does not provide a defense in this case, we must reverse the trial court's order denying River Bank's motion for summary adjudication of its cause of action to enforce the guaranties against Sanford Diller, Helen Diller and the DNS Trust (collectively the Dillers).

13 Defendants counter that, even if the Dillers did waive their rights under section 2809, summary adjudication in favor of River [*1420] Bank would be improper because triable issues of material fact exist regarding the Dillers' "sham guaranty" and "estoppel" defenses.

[***33] [**801] 1) The Sham Guaranty Defense

(8a) In addition to arguing below that their guaranties were unenforceable under section 2809, the Dillers also argued that their guaranties were unenforceable "sham guaranties" because River Bank actually looked to the guarantors as the primary obligors, and structured the loan to avoid the protections of the antideficiency legislation. (See Valinda Builders, Inc. v. Bissner (1964) 230 Cal. App. 2d 106 [40 Cal. Rptr. 735].) (9a) Section 2787 provides that "[a] surety or guarantor is one who promises to answer for the debt . . . of another . . . ." (Italics added.) "That the names 'on the dotted line' are different on the promissory note and trust deed, on the one hand, and on the guarantee agreement, on the other hand, is not enough to qualify under section 2787, since 'the supposed guarantors against whom suit has been brought [could be] nothing more than principal obligors under another name.' " (Comment, supra, 37 UCLA L.Rev. at p. 231, quoting Union Bank v. Dorn (1967) 254 Cal. App. 2d 157, 159 [61 Cal. Rptr. 893], bracketed text in original.) Importantly, if the guarantor is actually the principal obligor, he is entitled [***34] to the unwaivable protection of the antideficiency statutes, including Code of Civil Procedure section 580d, which prohibits a deficiency judgment after nonjudicial foreclosure of real property under a power of sale (as occurred here). ( Union Bank v. Dorn, supra, at pp. 158-159; Valinda Builders, Inc. v. Bissner, supra, at p. 112.)

13 We note that River Bank moved for summary adjudication only on the third cause of action, which alleged a breach of guaranty as to the Dillers only. River Bank did not move for summary adjudication on its cause of action to enforce the guaranties against Prometheus Development. Consequently, River Bank does not raise this issue on appeal as to Prometheus Development.


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(8b) In denying River Bank's motion for summary adjudication, the trial court specifically found there were triable issues of material fact regarding the Dillers' "sham guaranty" defense. 14 We agree with this finding, and therefore refuse to reverse the trial court's order on this point.

[***35] Because River Bank was the moving party in this instance, we must view the evidence on this issue in the light most favorable to the Dillers to determine if there is a triable issue of fact. Viewed in that light, the record shows the following pertinent facts: As originally contemplated, Sanford [*1421] Diller intended to acquire and develop the Hacienda Gardens Apartments using a limited partnership (Prometheus Hacienda Gardens) under which Prometheus Development was the general partner and Prom XX, as the nominee for the DNS Trust, was the original limited partner. Prom XX is a closely held California corporation, wholly owed by the DNS Trust. Diller is its president and only director. According to Sanford Diller, "[e]ver since its inception, PROM XX, Inc. has been used as a 'shell' or 'shelf' corporation, and essentially served the role of a 'place marker' in the initial structuring of real estate development operations." 15 Prom XX

14 In particular, the trial court found that "the facts are in dispute as to whether (1) the entire transaction appears to have been structured to avoid the antideficiency preclusion of Code of Civil Procedure section 580d, (2) the lender intended from the outset to look to the real property security for collection of the debt, released the purported 'principal obligor' from any personal liability by virtue of the nonrecourse provisions of the loan instruments, and intended to look to the purported 'guarantors' exclusively for collection of any deficiency after foreclosure, and (3) the general partner of the purported 'principal obligor' was an undercapitalized corporation, entirely owned by defendants, whose financial wherewithal plaintiff never investigated." 15 In explaining the meaning of a "place marker," SANFORD DILLER EXPLAINED: ". . . Prometheus would acquire the rights to certain real property, with the intent to obtain equity financing through a private limited partnership offering or syndication, and then to acquire and develop the property with both that equity financing and acquisition and development loans secured by the real property. A limited partnership would then be structured, often bearing a name including the word 'Prometheus' together with the property's name, and having as its initial limited partner Prom XX.

has never had substantial capital or assets.

[***36] After it acquired the rights to the Hacienda Gardens property, Prometheus Development [**802] entered into negotiations with River Bank to form a joint venture to develop the property. Sanford Diller believes that by June 1987 those negotiations resulted in a final, enforceable joint venture agreement, in which Prometheus Development would be the general partner and River Bank a limited partner. However, in late July 1987 River Bank informed Prometheus Development that it had decided unilaterally to change the entire structure of the proposed agreement. Instead of the joint venture agreement originally contemplated, River Bank restructured the deal to its present form as a participating loan with accompanying guarantees. According to Diller, he and his wife executed the documents memorializing the loan and guarantees "[u]nder economic duress."

Importantly, according to Sanford Diller: "During the course of drafting this final set of documentation, counsel for River Bank insisted that in order to render 'enforceable' the 'guaranty' being given by Prometheus, a new 'borrower' should be brought into existence. That is, instead of creating a general partnership consisting of Prometheus [***37] and River Bank, as the parties had originally agreed to do, or even lending money to a 'borrower' entity of which Prometheus was the general partner, River Bank now [*1422] required that the 'borrower' be a limited partnership, of which the general partner was an entity other than Prometheus. Faced with that requirement, Prometheus suggested that Prom XX be inserted as such new general partner. So far as [Sanford Diller

"In every instance of which I am aware, once a private offering or syndication was accomplished, and equity investments were obtained from various investors who became the limited partners of the partnership formed to [develop a particular parcel of land], Prom XX was removed as the initial limited partner, and had no further role in the acquisition or development of the real property. Prom XX has never maintained substantial capital or assets of its own. Prom XX never made any substantial investment of funds in any of these limited partnership structures."


Page 13 of 16

knew] River Bank never inquired about the financial standing of Prom XX during the loan application process, or even up to the closing of the 'loan,' . . . Rather, River Bank relied upon the extensive financial statements which it required to be provided reflecting the financial strength of Prometheus, the DNS Trust, Helen Diller and [Sanford Diller], since it was these persons (nominally the 'guarantors') [to] which River Bank at all times actually looked as the 'borrowers.' "

Ultimately, River Bank made the loans to this newly formed partnership, which we have called "Hacienda" throughout this opinion. The Dillers have effective ownership and control of the entire Hacienda partnership. As indicated, Hacienda's general partner is Prom XX, which the Dillers [***38] own through their revocable trust.

Had the Dillers themselves been the general partners of Hacienda, and had they attempted to guarantee Hacienda's debt, there is no question such guaranty would have been a sham. In those circumstance, the Dillers would have been treated as primary obligors and would be entitled to the unwaivable protection of Code of Civil Procedure section 580d, which prohibits a deficiency judgment after nonjudicial foreclosure under a power of sale. ( Union Bank v. Dorn, supra, 254 Cal. App. 2d at pp. 158-159 [guarantors who were general partners of primary obligor are "principal obligors . . . entitled to the full protection of Code of Civil Procedure, section 580d . . . ."]; Riddle v. Lushing (1962) 203 Cal. App. 2d 831 [21 Cal. Rptr. 902]; Valinda Builders, Inc. v. Bissner, supra, 230 Cal. App. 2d at p. 112 [waiver of Code of Civil Procedure section 580d invalid as against public policy].) However, that is not our case. Instead, the general partner of the primary obligor (Hacienda) is a corporation (Prom XX) which the Dillers fully own and control. Nevertheless, we believe that, for the purpose of summary adjudication, this is a distinction [***39] without a difference.

(9b) It is a factual question whether a person is a true guarantor or a principal obligor in guarantor's

guise. ( Younker v. Reseda Manor (1967) 255 Cal. App. 2d 431, 438 [63 Cal. Rptr. 197].) In this regard, the court in Torrey Pines Bank v. Hoffman (1991) 231 Cal. App. 3d 308, 320 [282 Cal. Rptr. 354], stated: "The correct inquiry set out by the authority is whether the purported debtor is anything other than an instrumentality used by the individuals who guaranteed the debtor's obligation, and whether such instrumentality actually removed the individuals from their status and obligations as debtors. (Valinda, supra, at p. 110.) Put another way, are the supposed guarantors [*1423] nothing more than the principal obligors under another name? (Dorn, supra, at p. 159.) (10) As stated in Union [**803] Bank v. Brummell [(1969)] 269 Cal. App. 2d 836, 838 [75 Cal. Rptr. 234], the legislative purpose of the antideficiency law may not be subverted by attempting to separate the primary obligor's interests by making a related entity the debtor while relegating the true principal obligors to the position of guarantors. [Citation [***40] and fn. omitted.] 16 [P] (9c) To determine whether the [purported guarantors] as individuals were primary obligors . . . such that their guaranties must be considered ineffective, we apply the approach of Commonwealth Mortgage Assurance Co. v. Superior Court [(1989)] 211 Cal. App. 3d 508, 515 [259 Cal. Rptr. 425], and look to the purpose and effect of the agreements to determine whether they are attempts to recover deficiencies in violation of section 580d." (Italics added.)

[***41] (8c) In our view, the Dillers have raised a triable issue of fact whether, by structuring the loan transaction as it did, River Bank subverted the purpose of the antideficiency laws "by making a related entity the debtor while relegating the

16 Those purposes are: " '(1) to prevent a multiplicity of actions, (2) to prevent an overvaluation of the security, (3) to prevent the aggravation of an economic recession which would result if creditors lost their property and were also burdened with personal liability, and (4) to prevent the creditor from making an unreasonably low bid at the foreclosure sale, acquir[ing] the asset below its value, and also recover[ing] a personal judgment against the debtor.' [Citations.]" ( Torrey Pines Bank v. Hoffman, supra, 231 Cal. App. 3d 308, 318.)


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principal obligors to the position of guarantors." According to Sanford Diller's declaration, River Bank never inquired about the financial standing of Prom XX, Hacienda's nominal general partner. Instead, River Bank relied upon extensive financial statements reflecting the financial strength of the guarantors: Prometheus Development, the DNS Trust, Helen Diller and Sanford Diller, since it was these persons to which River Bank at all times actually looked to as the "borrowers."

Moreover, there is evidence that the "purpose and effect" of the agreements were to recover deficiencies in violation of Code of Civil Procedure section 580d. Indeed, according to Sanford Diller, this is the reason River Bank insisted that Prometheus Development be removed as general partner, and another entity, Prom XX, be inserted, even though it was a mere "shell" corporation. As the trial court put it, there is a triable issue of fact whether the entire transaction was [***42] structured to avoid the antideficiency preclusion of Code of Civil Procedure section 580d.

Nor is it conclusive, as River Bank contends, that the general partner in this case was a long-standing corporation that adhered to all formalities. Even where a corporation is the nominal primary obligor, and the debt is [*1424] guaranteed by its officers and shareholders, the guarantors may nevertheless be considered the primary obligors. This is true even though the corporation's debt does not directly obligate the shareholders and officers. ( Valinda Builders, Inc. v. Bissner, supra, 230 Cal. App. 2d at pp. 107-108, 111; Union Bank v. Brummell (1969) 269 Cal. App. 2d 836, 837-838 [75 Cal. Rptr. 234].) Union Bank v. Brummell, supra, involves facts similar to those alleged in this case. There, individual investors originally intended to purchase the property in their own names. The bank advised or required them instead to have a corporation take title, and required two corporate officers to execute personal guaranties. This structure was allegedly for the purpose of avoiding the effect of the antideficiency legislation. As in the present case, the corporation which [***43] took title was in

existence at the time of execution of the note and deed of trust, and was not formed for the purpose of taking title. Nevertheless, the court concluded the arrangement violated the purpose of the antideficiency legislation, and that such purpose "may not be subverted by use of a corporation with the true principal obligor relegated to the position of guarantor." (269 Cal. App. 2d at p. 838.)

In sum, we conclude that the Dillers have raised a triable issue of fact concerning their "sham guaranty" defense.

2) Estoppel Defense

In addition to finding there were triable issues of fact concerning the "sham guaranty" defense, the trial court also found that there were triable issues of fact concerning [**804] the Dillers' estoppel defense. We disagree with this conclusion, and reverse the order denying summary adjudication of the estoppel defense to the extent it is based on economic duress. However, we do not intend to preclude defendants from raising an estoppel defense based on other factual theories.

(11) The Dillers contend River Bank was estopped to enforce the guaranties because River Bank initially agreed to a joint venture, but then changed the structure [***44] of the transaction at the last moment to a loan and guaranties. According to Sanford Diller, after he reached a tentative joint venture agreement with River Bank (a point which River Bank disputes), Prometheus Development began development of the property and incurred expenses and other obligations. After this time, River Bank "unilaterally" changed the structure of the deal to loans and guaranties. Because of the difficulty in finding alternative financing, defendants executed the loans and guaranties "[under] economic duress." Even if these facts are true, they do not establish a defense based on economic duress.

[*1425] This case is controlled by London Homes, Inc. v. Korn (1965) 234 Cal. App. 2d 233 [44 Cal. Rptr. 262]. There, the court held there was no


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"duress" or "business compulsion" as a matter of law, where a plaintiff voluntarily agreed to pay more for land than it had originally agreed. At the time the sellers demanded more money per acre than had originally been agreed in the deposit receipt, the buyer/plaintiff could have brought suit against them for damages, but for what seemed good business reasons, elected not to do so. Instead, the buyer/plaintiff [***45] paid the higher price, even though it was not required to do so. "It is not duress . . . to take a different view of contract rights, even though mistaken, from that of the other contracting party, and it is not duress to refuse, in good faith, to proceed with a contract, even though such refusal might later be found to be wrong. [P] . . . 'A mere threat to withhold a legal right for the enforcement of which a person has an adequate [legal] remedy is not duress.' " ( Id. at p. 240.)

This case falls squarely within the holding of Korn. Consequently, there was no "economic duress" upon which an estoppel can be based. If defendants believed they had in fact reached a "joint venture" agreement with River Bank, they could have immediately sued to enforce that agreement once River Bank reneged. As it was, after considering other alternatives, including finding other financial partners, defendants made a business decision to accept the loan and guaranty agreement. In a single paragraph, defendants make a half-hearted attempt to distinguish Korn on the ground that, in that case, the theory of "economic duress" was presented by the plaintiff, while here it is asserted as a [***46] defense. The distinction makes no difference. Defendants' estoppel theory is based on economic duress. Korn found that economic duress cannot be established upon facts sufficiently like those before us. ( London Homes, Inc. v. Korn, supra, 234 Cal. App. 2d 233.) This case cannot be distinguished meaningfully.

C. Hacienda's Cross-appeal

(12) In their cross-appeal, defendants contend the trial court erred when it granted summary adjudication on the cause of action for negligent

misrepresentation alleged in their cross-complaint. We affirm this order.

Although defendants do not cite a single case or other legal authority to support their argument on cross-appeal, they do set out the facts which they claim support the cause of action for negligent misrepresentation. According to defendants, after the project opened and it became clear revenues would not meet expenses, the parties commenced discussions as to how to deal with the cash shortfall. These discussions involved Robert Wagner on behalf of [*1426] the borrowers and guarantors (Sanford Diller later became directly involved in the process) and Richard Olrich on behalf of River Bank Financial Group (RFG), which [***47] at all times acted as River Bank's agent. RFG and River Bank were aware of the significant cash shortfall. Defendants supplemented the project's cash flow by injecting additional cash to pay debt service and to keep the loans current. RFG and River Bank were aware that defendants [**805] were putting additional equity into the project. RFG and River Bank allegedly tied the continuing equity infusions by defendants to their own willingness to talk about a modification in loan terms. There is no direct evidence River Bank or RFG ever promised to provide a reduction in interest payments. Nevertheless, defendants contend we may infer from the foregoing facts that River Bank promised to conclude a reduction in interest payments. However, we may not do so on this record. The trial court found that defendants "have admitted in their testimony tha[t] no one on behalf of River Bank represented that River Bank would provide interest reductions on the loans to Hacienda . . . ." The trial court's conclusion on this point is amply supported by the record. Wagner and Diller both testified that no one from River Bank ever promised debt relief in exchange for further cash infusions. We will [***48] not draw an inference that is contrary to the defendants' own testimony in order to create a triable issue of fact. ( Thomspon v. Williams (1989) 211 Cal. App. 3d 566, 573-574 [259 Cal. Rptr. 518]; Preach v. Monter Rainbow (1993) 12 Cal. App. 4th 1441,


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1451 [16 Cal. Rptr. 2d 320].) The trial court properly granted summary adjudication of defendants' cross-claim for negligent misrepresentation.

D. Appeal No. A068152 (Attorney Fees)

As indicated in a postjudgment motion, the trial court awarded $241,874 in attorney fees to defendants. Each of the guaranty agreements contained an attorney fee clause, and the court awarded the fees to defendants as the "prevailing party" under section 1717. In light of our reversal of the summary judgment, defendants can no longer be considered the prevailing party. Consequently, we reverse the award of attorney fees.

III. DISPOSITION

The final judgment entered in favor of defendants is reversed. The order denying River Bank's motion for summary adjudication is affirmed as to the sham guaranty defense and reversed as to the estoppel defense. The order granting summary adjudication against defendants on their cross-claim is [*1427] [***49] affirmed. The order awarding attorney fees is reversed. Each party to bear its own costs on appeal.

Chin, P. J., and Corrigan, J., concurred.

Petitions for a rehearing were denied November 1, 1995, and the petition of all appellants for review by the Supreme Court was denied January 18, 1996.

End of Document