Talbott v. Hustwit

164 Cal. App. 4th 148, 78 Cal. Rptr. 3d 703, 2008 Cal. App. LEXIS 939

• Court: California Court of Appeal
• Decided: June 20, 2008
• Docket: G037424
• Status: Published

Opinions

Opinion

ARONSON, J.

Defendants William and Janyce Hustwit challenge a judgment entered against them on a guaranty agreement after the lender foreclosed on real property securing a loan made to the Hustwits’ trust. The Hustwits contend the trial court erred in refusing to apply Code of Civil Procedure section 580a,¹ which requires an appraisal of the real property security before the court may issue a deficiency judgment. The Hustwits assert that the general policy against excess recovery by creditors following the foreclosure of real property requires applying section 580a to guarantors as well as principal debtors. Alternatively, the Hustwits argue they were not true guarantors because they were closely related to the debtor as settlors and beneficiaries of the trust.

We conclude the trial court did not err. Case law uniformly holds that section 580a does not apply to guarantors. Moreover, the Hustwits structured the trust to separate themselves from the trust’s debts. They are therefore not principal obligors to the loan, but true guarantors. Accordingly, we affirm.

I

Factual and Procedural Background

The Hustwits are guarantors of a loan plaintiff Cynthia D. Talbott, trustee of the Cynthia D. Talbott Separate Property Trust (Talbott), made to Pacific West Investment Trust (Trust). A trust deed against certain Newport Beach real property secured the Trust’s loan obligations. The Trust defaulted and Talbott instituted a nonjudicial foreclosure under the power of sale provision in the trust deed. A trustee sale was held in March 2005. Talbott purchased the property with a $900,000 credit bid, subject to a senior loan. Talbott then sued the Hustwits under their guaranty agreements for the difference between the $900,000 credit bid and the unpaid balance of the loan, $1,288,042.36, plus interest. After a bench trial on stipulated facts, the court issued a written statement of decision awarding Talbott $432,628.40, plus interest. The Hustwits now appeal.

II

Discussion

A. Section 580a Does Not Apply to Guarantors

California’s antideficiency statutes (§§ 580a, 580b, 580d, 726), enacted during the Depression, limit or prohibit lenders from obtaining personal judgments against borrowers where the lender’s sale of real property security produces proceeds insufficient to cover the amount of the debt. (See Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 600-602 [125 Cal.Rptr. 557, 542 P.2d 981].) Section 580a provides in relevant part: “Whenever a money judgment is sought for the balance due upon an obligation for the payment of which a deed of trust or mortgage with power of sale upon real property or any interest therein was given as security, following the exercise of the power of sale in such deed of trust or mortgage, the plaintiff shall set forth in his or her complaint the entire amount of the indebtedness which was secured by the deed of trust or mortgage at the time of sale, the amount for which the real property or interest therein was sold and the fair market value thereof at the date of sale and the date of that sale. . . . Before rendering any judgment the court shall find the fair market value of the real property, or interest therein sold, at the time of sale. The court may render judgment for not more than the amount by which the entire amount of the indebtedness due at the time of sale exceeded the fair market value of the real property or interest therein sold at the time of sale with interest thereon from the date of the sale . . . .”

The Hustwits contend section 580a applied to them, and the trial court erred in failing to consider evidence that the property’s fair market value exceeded the total amount owed Talbott. We disagree.

The Hustwits were held liable as guarantors of the Trust’s loan obligation to Talbott. A guarantor is one who promises to answer for the debt or perform the obligation of another when the person ultimately liable fails to pay or perform. (Civ. Code, § 2787.) “A contract of guaranty gives rise to a separate and independent obligation from that which binds the principal debtor.” (Security-First Nat. Bank v. Chapman (1940) 41 Cal.App.2d 219, 221 [106 P.2d 431].) “Since section 580a has to do solely with actions for recovery of deficiency judgments on the principal obligation [it] has no application to an action against a guarantor [citations] . . . .” (Mariners Sav. & Loan Assn. v. Neil (1971) 22 Cal.App.3d 232, 234 [99 Cal.Rptr. 238] (Mariners); see Bank of America etc. Assn. v. Hunter (1937) 8 Cal.2d 592 [67 P.2d 99]; Loeb v. Christie (1936) 6 Cal.2d 416 [57 P.2d 1303]; see also Dreyfuss v. Union Bank of California (2000) 24 Cal.4th 400, 407 [101 , 11 P.3d 383] [“a creditor’s resort to any and all security on a debt does not implicate the antideficiency provisions”].)

The Hustwits do not address the case law holding that guarantors cannot claim the protection of section 580a, and concede they were unable to discover any case law to the contrary. Instead, they cite two cases that recognize a general state policy to prevent secured creditors from obtaining excess recoveries. (See Bank of Hemet v. United States (9th Cir. 1981) 643 F.2d 661; Walter E. Heller Western, Inc. v. Bloxham (1985) 176 Cal.App.3d 266 [221 Cal.Rptr. 425].) Neither of these cases concerns guarantors, and the general policy statements contained in them does not persuade us to abandon Supreme Court precedent.² Accordingly, we conclude section 580a has no application to guarantors.

B. The Hustwits Are True Guarantors

Although case law is uniform in holding section 580a does not apply to guarantors, the question remains whether the Hustwits were true guarantors. Courts have recognized a distinction between true, independent contracts of guaranty and guaranties executed by the primary obligor. (Mariners, supra, 22 Cal.App.3d at p. 234.) “It is well established that where a principal obligor purports to take on additional liability as a guarantor, nothing is added to the primary obligation. [Citations.] 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.” (Torrey Pines Bank v. Hoffman (1991) 231 Cal.App.3d 308, 319-320 [282 Cal.Rptr. 354] (Torrey Pines); see Cadle Co. II v. Harvey (2000) 83 Cal.App.4th 927, 933 [100 Cal.Rptr.2d 150].)

In Torrey Pines, a bank sued a husband and wife on personal guaranties signed in connection with a construction loan the bank made to a revocable living trust in which the defendants were the trustors, trustees, and primary beneficiaries. The court determined the structure of the trust made any distinction between the guarantors and the debtor insignificant, thus barring the bank from recovering on the guaranties. Specifically, the court noted that under the trust law at the time, trustees were personally liable on contracts entered into on behalf of their trusts. Accordingly, the trust was deemed a “ ‘mere instrumentality.’ ” (Torrey Pines, supra, 231 Cal.App.3d at p. 321.) The court, however, did not enunciate a blanket rale applying to all living trusts, clarifying: “We emphasize that our holding is necessarily limited to these facts. While it would be possible in a living trust to create a greater degree of separation of interest between settlor, trustee, and beneficiary (e.g., by the use of a separate trustee), this particular trust device did not accomplish enough division between these interests to enable us to say that the purpose of the antideficiency law would be served by enforcing these personal guaranties as ‘true’ guaranties, as opposed to ‘purported’ guaranties.” (Id. at p. 323.)

Similarly, Riddle v. Lushing (1962) 203 Cal.App.2d 831, 836 [21 Cal.Rptr. 902], involved a situation in which partners had individually guaranteed a partnership note. Because the partners were already jointly and severally liable on the note as general partners, the court held the guaranty did not change the partners’ status as principal obligors. (Ibid.)

In contrast, Mariners, supra, 22 Cal.App.3d 232, involved a situation where the wife took out a loan secured by her separately owned real property, and the husband signed a personal guaranty. The court recognized that in many ways a husband and wife are partners, but nonetheless held the husband became a true guarantor because he would not have been personally liable for the loan made to the wife absent the guaranty. (Id. at p. 235.)

Here, the trust arrangement provided the Hustwits a significantly greater degree of separation than that in Torrey Pines. Although the Hustwits are the settlors of the Trust, they are secondary, not primary, beneficiaries. More importantly, the Hustwits are not trustees of the Trust; instead, the Hustwits used a limited liability company as trustee, thus limiting their personal liability for the Trust’s obligations. The Hustwits became true guarantors because the Hustwits’ trust arrangement “actually removed the[m] from their status and obligations as debtors.” (Torrey Pines, supra, 231 Cal.App.3d at p. 320.) Accordingly, we conclude the trial court did not err in holding the protections of section 580a inapplicable in the present case.

Ill

Disposition

The judgment is affirmed. Talbott is entitled to costs on appeal.

O’Leary, L, concurred.

1 All statutory references are to the Code of Civil Procedure, unless other noted.

2 As the concurrence recognizes, the case law supporting liability here has remained unchanged for over 60 years. We can thus safely assume virtually all of the loan guaranties now in existence were made in reliance upon the current state of the law. Although we share our concurring colleague’s observations and concerns, we believe any change in the law affecting liability of guarantors for deficiency judgments should originate with the Legislature, which is better able to measure the impact of altering commercial arrangements by taking into account the views of experts and affected parties.