Cal. Bank & Trust v. Lawlor

 

 

 

 

 

 

 

 

 

 

 

Filed 11/25/13  Cal. Bank & Trust v. Lawlor
CA4/3

 

 

 

 

 

 

 

 

 

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

 

California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b).  This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.

 

 

IN THE COURT OF
APPEAL OF THE STATE OF CALIFORNIA

 

FOURTH APPELLATE DISTRICT

 

DIVISION THREE

 

 
>

CALIFORNIA BANK & TRUST, etc.,         Plaintiff and Respondent,               v.   DAVID LAWLOR et al.,         Defendants and Appellants.	G047899 (consol. w/ G047910)   (Super. Ct. Nos. 30-2010-00379838 & 30-2010-00389709)   O P I N I O N
CALIFORNIA BANK & TRUST, etc.         Plaintiff and Respondent,               v.   COVENANT MANAGEMENT GROUP, LLC, et al.,         Defendants and Appellants.

 

Appeal
from judgments of the Superior Court
of href="http://www.adrservices.org/neutrals/frederick-mandabach.php">Orange
County, William M. Monroe, Judge.  Affirmed.

Grobaty
& Pitet, Christopher L. Pitet and Erica P. Herczeg for Defendants and
Appellants.

Bryan
Cave, Ren R. Hayhurst, H. Mark
Mersel and Lana Encheff for Plaintiff and Respondent.

*                      *                      *

Defendants
and appellants appeal from the deficiency judgments the trial court entered
after it granted plaintiff and respondent’s motions for summary adjudication on
their breach of guaranty claims.href="#_ftn1"
name="_ftnref1" title="">[1]  In opposing those motions, Defendants did not
dispute any of the facts offered to establish the underlying loans, the
guaranties Defendants signed, the loan defaults, Defendants’ refusal to pay
under the guaranties, or the amounts due and owing after California B&T
nonjudicially foreclosed on the real property security for the loans.  Instead, Defendants argued their close
relationship with the borrowers made Defendants primary obligors on the loans
rather than true guarantors, and therefore California’s antideficiency law
prevented California B&T from obtaining deficiency judgments against
Defendants.  In granting the summary
adjudication motions, however, the trial court refused to consider Defendants’
“sham guaranty” defense because Defendants failed to allege it as an href="http://www.fearnotlaw.com/">affirmative defense in their answers.

We
affirm because Defendants failed to present sufficient evidence to create a
triable issue on their sham guaranty defense, and therefore we do not reach California
B&T’s contention that Defendants waived this issue because they failed to
allege it as an affirmative defense.  As
explained below, Defendants failed to create a triable issue because they presented
insufficient evidence to show there was no legal separation between them and
the primary obligors on the loans, or that the lender who made the loan
structured it in a manner to circumvent the antideficiency law.

I

Facts and Procedural History

Smith
and Lawlor are real estate investors and developers.  Along with Smith’s wife, they formed several
entities they used for different development projects, including Cartwright
Properties, LLC, Heritage Orcas Partners, LP, Heritage Orcas VL Partners, LP, Covenant
Management, and Heritage Capital.  Smith,
his wife, and Lawlor effectively were the only members or partners in these
entities either in their own name or through one of the other entities.  For example, Smith and Lawlor owned and
controlled Covenant Management, which owned and controlled Heritage Capital,
which was the general partner of Heritage Orcas Partners and Heritage Orcas VL
Partners (collectively, Heritage Orcas). 


Alliance
made an approximately $2 million loan to Cartwright Properties in December
2004, and an approximately $1.4 million loan to Cartwright Properties in
October 2006.  Cartwright Properties
signed a business loan agreement, commercial security agreement, and promissory
note for each loan.  To secure the loans,
Cartwright Properties gave Alliance trust deeds on its office building.  Alliance required Smith, his wife, and Lawlor
to execute separate commercial guaranties for each loan, and also required Covenant
Management to execute a commercial guaranty for the second loan.  Defendants contend Alliance required Smith,
his wife, and Lawlor to submit extensive information on their individual
financial resources before it made either loan. 


In
June 2008, Alliance loaned Heritage Orcas approximately $10.5 million pursuant
to a business loan agreement and promissory note.  As security for the loan, Heritage Orcas gave
Alliance a trust deed on two parcels of real property.  In making the loan, Alliance required Smith,
Lawlor, Covenant Management, and Heritage Capital to execute a continuing guaranty.  Defendants contend Alliance required Smith
and Lawlor to submit extensive information about their individual financial
resources before it authorized the loan. 


California
B&T acquired Alliance’s assets from the FDIC in February 2009.  Shortly thereafter, Cartwright Properties and
Heritage Orcas both defaulted on their loans and Defendants refused to pay on
their guaranties.  In June 2010,
California B&T filed an action against Cartwright Properties, Smith, Smith’s
wife, Lawlor, and Covenant Management to (1) recover on the loans to Cartwright
Properties; (2) judicially foreclose on the real property security for the
loans; and (3) enforce the commercial guaranties.  In July 2010, California B&T filed a
similar action against Heritage Orcas, Smith, Lawlor, Covenant Management, and
Heritage Capital to (1) recover on the loan to Heritage Orcas; (2) judicially
foreclose on the real property security for the loan; and (3) enforce the continuing
guaranty Defendants signed.  Defendants
filed their answers to the two actions in September 2010. 

During
the first half of 2011, California B&T conducted nonjudicial foreclosure
sales under the trust deeds that secured the loans to Cartwright Properties and
Heritage Orcas.  California B&T
purchased the property Cartwright Properties pledged for a credit bid that left
an outstanding balance on the two loans of nearly $2 million.  California B&T also purchased the
property that secured the Heritage Orcas loan for a credit bid that left an
outstanding balance on its loan of more than $13 million. 

In
July 2012, California B&T filed a motion in each action seeking summary
adjudication on its breach of guaranty claims, which would entitle it to deficiency
judgments against Defendants for the outstanding balances on all loans.  Defendants did not dispute that they signed
the guaranties, nor did they challenge the balances California B&T claimed
were due on the loans after it foreclosed on the security.  Instead, Defendants argued the guaranties
were sham guaranties and therefore they were actually the primary obligors on
the loans, not true guarantors.  As
primary obligors, Defendants claimed they were entitled to the protection of
California’s antideficiency statutes and California B&T could not obtain a
judgment against them for the difference between the value of the security and
the outstanding loan balances. 

The
trial court granted the motions on the grounds that California B&T met its
initial burden to produce evidence establishing the elements of its breach of
guaranty claims, and Defendants could not create a triable issue based on their
sham guaranty defense because Defendants failed to allege it as an affirmative
defense in their answers.  After the
trial court entered judgment in both actions, Defendants timely appealed and we
consolidated the two appeals. 

II

Discussion

A.        Relevant >Summary Adjudication Standards

“‘“The
purpose of a summary judgment proceeding is to permit a party to show that
material factual claims arising from the pleadings need not be tried because
they are not in dispute.”  [Citation.]’”  (Affholder,
Inc. v. Mitchell Engineering, Inc. (2007) 153 Cal.App.4th 510, 516.)  A party may seek summary adjudication on
whether a cause of action, affirmative defense, or punitive damages claim has
merit or whether a defendant owed a duty to a plaintiff.  (Code Civ. Proc., § 437c,
subd. (f)(1).)href="#_ftn2" name="_ftnref2"
title="">[2]  “A motion for summary adjudication
. . . shall proceed in all procedural respects as a motion for
summary judgment.”  (§ 437c,
subd. (f)(2).)

The
moving party “bears an initial burden of production to make a prima facie
showing of the nonexistence of any triable issue of material fact.”  (Aguilar
v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850-851.)  To meet that burden, a plaintiff seeking
summary adjudication on a cause of action must present evidence sufficient to
establish every element of that cause of action.  A plaintiff’s initial burden, however, does
not include disproving any affirmative defenses the defendant asserts.  “Once the plaintiff . . . has met [its]
burden, the burden shifts to the defendant . . . to show that a
triable issue of one or more material facts exists as to that cause of action
or a defense thereto.”  (§ 437c,
subd. (p)(1); Oldcastle Precast,
Inc. v. Lumbermens Mutual Casualty Co. (2009) 170 Cal.App.4th 554,
564-565.)

A
triable issue of material fact exists “‘if, and only if, the evidence would
allow a reasonable trier of fact to find the underlying fact in favor of the
party opposing the motion in accordance with the applicable standard of
proof.’  [Citation.]  Thus, a party ‘cannot avoid summary
[adjudication] by asserting facts based on mere speculation and conjecture, but
instead must produce admissible evidence raising a triable issue of fact.  [Citation.]’ 
[Citation.]”  (>Dollinger DeAnza Associates v. Chicago Title
Ins. Co. (2011) 199 Cal.App.4th 1132, 1144-1145 (Dollinger).)

We
review de novo a trial court’s ruling on a summary adjudication motion.  (Eriksson
v. Nunnink (2011) 191 Cal.App.4th 826, 848.)  “‘[I]n practical effect, we assume the role
of a trial court and apply the same rules and standards that govern a trial court’s
determination of a motion for summary [adjudication].’  [Citation.]  â€˜Regardless of how the trial court reached its
decision, it falls to us to examine the record de novo and independently
determine whether that decision is correct.’ 
[Citation.]”  (>Carnes v. Superior Court (2005)
126 Cal.App.4th 688, 694; Dollinger,
supra, 199 Cal.App.4th at
p. 1144 [“the reviewing court ‘. . . reviews the trial court’s
ruling, not its rationale’”].)

B.        California’s
Antideficiency Statutes and the Sham Guaranty Defense

“The
courts have repeatedly recognized that the antideficiency laws embodied in
sections 580a through 580d and 726 reflect a legislative policy that strictly
limits the right to recover deficiency judgments for the amount the debt
exceeds the value of the security.”  (>Cadle Co. II v. Harvey (2000)
83 Cal.App.4th 927, 932 (Cadle).)  Indeed, “[these provisions,] 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.”  (Talbott
v. Hustwit (2008) 164 Cal.App.4th 148, 151 (Talbott).)  These
antideficiency statutes “bar[] a deficiency judgment following nonjudicial
foreclosure of real property (. . . § 580d) or following
foreclosure of a purchase money deed of trust on a residence (. . . § 580b).”  (Trust
One Mortgage Corp. v. Invest America Mortgage Corp. (2005)
134 Cal.App.4th 1302, 1309.)

“[T]he
[antideficiency] legislation is designed to accomplish several public policy
objectives:  [¶]  ‘(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, acquire the asset below its value, and also recover a
personal judgment against the debtor.’ 
[Citations.]”  (>Torrey Pines Bank v. Hoffman (1991)
231 Cal.App.3d 308, 318 (Torrey
Pines).)  Because the antideficiency
legislation was established for a public purpose “[t]he debtor cannot be
compelled to waive the antideficiency protections in advance . . .
and [the protections] cannot be contravened by a private agreement.”  (Cadle,
supra, 83 Cal.App.4th at
p. 932; Torrey Pines, at
pp. 318-319.)

“[T]he
protections afforded to debtors under the antideficiency legislation do not
directly protect guarantors from liability for deficiency judgments. . . .  [I]f a guarantor expressly waives the
protections of the antideficiency laws, a lender may recover the deficiency
judgment against the guarantor even though the antideficiency laws would bar
the lender from collecting that same deficiency from the primary obligor.”  (Cadle,
supra, 83 Cal.App.4th at
p. 932.)

To
be subject to a deficiency judgment, however, a guarantor must be a true
guarantor, not merely the principal obligor under a different name.  (Cadle,
supra, 83 Cal.App.4th at
p. 932; River Bank America v. Diller
(1995) 38 Cal.App.4th 1400, 1420 (River
Bank).)  Indeed, Civil Code section
2787 defines a guarantor as “one who promises to answer for the debt, default,
or miscarriage of another . . . .”  (Civ. Code, § 2787, italics added; >River Bank, at p. 1420.)  Where the principal obligor purports to take
on additional liability as a guarantor, the guaranty adds nothing to the
principal obligation and the antideficiency legislation bars a deficiency
judgment based on the guaranty because it is not a promise to answer for the
debt of another.  (Cadle, supra,
83 Cal.App.4th at p. 932; River
Bank, at p. 1420 [“if the guarantor is actually the principal obligor,
he is entitled to the unwaivable protection of the antideficiency statutes”]; >Torrey Pines, supra, 231 Cal.App.3d at p. 319-320 [“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”].)

To
decide whether a guarantor is a true guarantor or merely the principal obligor
under a different name, “[t]he 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.  [Citation.]  . . .  [T]he 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.] 
[¶]  To determine whether the
[purported guarantors] as individuals were primary obligors . . .
such that their guaranties must be considered ineffective, we . . .
look to the purpose and effect of the agreements to determine whether they are
attempts to recover deficiencies in violation of [the antideficiency law].  Similarly, . . . we may look to the
contract between the parties to find the relationship of these individuals to
the entire enterprise.”  (>Torrey Pines, supra, 231 Cal.App.3d at p. 320; see also >Talbott, supra, 164 Cal.App.4th at p. 152; Cadle, supra,
83 Cal.App.4th at pp. 932-933; River
Bank, supra, 38 Cal.App.4th
at pp. 1422-1423.)

In
Torrey Pines, the appellate court
applied these standards to affirm the trial court’s ruling that the personal
guaranty on a construction loan was a sham guaranty because the legal
relationship between the guarantors and the borrower made the guarantors
primary obligors on the loan.  (>Torrey Pines, supra, 231 Cal.App.3d at p. 321.)  The borrower in Torrey Pines was a revocable living trust that a husband and wife
formed several years before the loan was made. 
The husband and wife were the trust’s settlors, beneficiaries, and
trustees, and they personally guaranteed the loan to the trust.  When the trust defaulted, the lender sued the
husband and wife on their guaranty to recover the difference between the outstanding
loan balance and the amount the lender received when it nonjudicially
foreclosed on the real property security for the loan.  Both the trial and appellate courts concluded
the antideficiency statutes prevented the lender from obtaining a deficiency
judgment because the guaranty was a sham. 
(Id. at pp. 313‑316.) 

Significantly,
trust law at the time of the transaction made trustees personally liable for the
contracts they executed on the trust’s behalf. 
Based on that law and the husband and wife’s status as the trust’s
settlers, beneficiaries, and trustees, the Torrey
Pines court concluded:  “There is a
significant identity between these individuals and their inter vivos trust
during their lifetimes, such that their trust should be deemed to be a ‘mere
instrumentality’ [citation] through which they operated, but which never served
to remove them from the status of primary obligors.  Accordingly, they must be considered to be
primary obligors along with their trust.” 
(Torrey Pines, >supra, 231 Cal.App.3d at
p. 321.) 

In
contrast, we concluded in Talbott
that a husband and wife who personally guaranteed a loan to a trust they formed
were true guarantors, rather than primary obligors, and therefore were not
entitled to the antideficiency law’s protection:  “Here, the trust arrangement provided the [husband
and wife] a significantly greater degree of separation than that in >Torrey Pines.  Although the [husband and wife] are the
settlors of the Trust, they are secondary, not primary, beneficiaries.  More importantly, [they] are not trustees of
the Trust; instead, [they] used a limited liability company as trustee, thus
limiting their personal liability for the Trust’s obligations.  The [husband and wife] became true guarantors
because [their] trust arrangement ‘actually removed the[m] from their status
and obligations as debtors.’  [Citation.]
 Accordingly, we conclude the trial court
did not err in holding the protections of section 580a inapplicable in the
present case.”  (Talbott, supra,
164 Cal.App.4th at p. 153.)

In
Valinda Builders, Inc. v. Bissner
(1964) 230 Cal.App.2d 106 (Valinda
Builders), the appellate court applied the foregoing standards to conclude
a guaranty in a land purchase agreement was not a true guaranty and therefore the
antideficiency law prevented a deficiency judgment against the purported guarantors.  The borrowers were two individuals who purchased
a large parcel of land to develop as a residential subdivision.  They paid a portion of the purchase price up
front and agreed to give the seller a promissory note and trust deed as
security.  The purchase agreement
provided the individuals guaranteed performance under the agreement and payment
of the outstanding balance.  After
entering into the purchase agreement, the individuals formed a corporation in
which they were the only stockholders, directors, and officers.  They used that corporation to take title to
the property and to execute the promissory note and trust deed, although the
agreement required the individuals to do so. 
The seller sought a deficiency judgment against the two individuals
based on the guaranty when they defaulted on the loan and the real property
security failed to cover the outstanding balance.  (Id.
at pp. 107-108.) The trial court entered a deficiency judgment against the
two individuals based on the guaranty, but the Court of Appeal reversed.  (Id.
at pp. 112‑113.)

The
Valinda Builders court explained the
individuals were the primary obligors under the purchase agreement and were entitled
to the antideficiency law’s protections because the individuals contracted with
the seller in their own names and personally assumed the obligation to pay the
purchase price.  The purchase agreement
did not authorize them to form a corporation to take title to the property or
give the seller the required promissory note and trust deed.  Moreover, the individuals and the seller
never agreed a corporation or anyone other than the individuals would assume
liability for the purchase price, and the seller never released the individuals
from their personal and primary liability for the purchase price.  The appellate court therefore concluded the
corporation was a mere instrumentality the individuals used to conduct business
and it did not separate them from the liability they originally assumed as the
primary obligors under the purchase agreement. 
(Valinda Builders, >supra, 230 Cal.App.2d at
pp. 108‑109.) 

>Roberts v. Graves (1969)
269 Cal.App.2d 410 (Roberts),
presented a factual scenario very similar to Valinda Builders, but reached the opposite result.  In Roberts,
an individual purchased a parcel of land for development and agreed to give the
seller a promissory note and trust deed as security.  After entering into the agreement, the
individual formed a corporation that took title to the property and gave the
seller the note and trust deed the agreement required.  In doing so, the individual signed the note as
the corporation’s officer and also individually as a guarantor.  When the corporation defaulted on the loan
and the real property security proved insufficient to cover the outstanding
balance, the seller sought a deficiency judgment against the individual based
on his signature as a guarantor.  The
trial court found the antideficiency law did not apply to the guaranty and entered
a deficiency judgment against the individual. 
(Id. at pp. 412‑414.)  The Court of Appeal affirmed.  (Id.
at p. 419.)

The
Roberts court explained the
individual was a true guarantor who could not claim protection under the
antideficiency law because the evidence showed the seller and the individual
agreed to modify the original purchase agreement to change the personal obligation
to a corporate obligation.  This
modification removed the individual from his status as the primary obligor on
the purchase agreement and made him a true guarantor when he signed the note
individually as a guarantor.  The >Roberts court concluded this legal
separation of the primary obligation and the guaranty obligation distinguished
the case from Valinda Builders.  (Roberts,
supra, 269 Cal.App.2d at
pp. 417-418.)

Finally,
in River Bank, the Court of Appeal applied
the foregoing standards to conclude triable issues of material fact existed on a
sham guaranty defense and defeated a lender’s summary judgment motion on it
breach of guaranty claim.  A developer
sought a construction loan to build an apartment complex on land he already
owned.  (River Bank, supra,
38 Cal.App.4th at pp. 1407-1408.) 
The developer intended to use his closely-held corporation as the
borrower, but the bank required the developer to form a new limited partnership
to act as the borrower, with the developer and his corporation guaranteeing the
loan.  The developer testified the bank insisted
his corporation could not be the borrower or the borrower’s general partner so the
bank could enforce the corporation’s guaranty. 
(Id. at pp. 1421-1422.)  In making the loan, the bank never examined the
financial condition of the entity that served as the borrower’s general
partner, but rather relied exclusively on the financial condition of the
developer and his corporation because it considered them the true borrowers.  (Id.
at p. 1423.)  The court of appeal
affirmed the trial court’s conclusion these facts created a triable issue on
whether the guaranties were sham guaranties designed to subvert the purpose of
the antideficiency statutes.  (>Id. at p. 1420.)

The
River Bank court explained the bank would
have created sham guaranties if it required the developer and his corporation
to be general partners in the borrower. 
In that situation, the developer and his corporation would have been
primary obligors on the loans under the law governing limited partnerships and
therefore entitled to protection under the antideficiency law.  (River
Bank, supra, 38 Cal.App.4th
at p. 1422.)  Accordingly, the
evidence showing the bank specifically structured the loan to require another
layer of separation between the primary obligor on the loan, and the developer
and his corporation as guarantors, created a triable issue on whether the bank acted
to “subvert[] the purpose of the antideficiency laws ‘by making a related
entity the debtor while relegating the principal obligors to the position of
guarantors.’”  (Id. at p. 1423; see also Union
Bank v. Brummell (1969) 269 Cal.App.2d 836, 837-838 (>Union Bank) [antideficiency laws prevented
lender from obtaining deficiency judgment against individual guarantor based on
loan to corporation because lender required individual to act as guarantor
rather than borrower to avoid antideficiency laws].)

C.        Defendants Failed to
Establish Triable Issues on Their Sham Guaranty Defense

To
meet its initial burden on the motions, California B&T presented evidence
showing (1) Alliance made the loans to Cartwright Properties and Heritage
Orcas; (2) Defendants signed the guaranties promising to pay the outstanding
loan balances if Cartwright Properties and Heritage Orcas defaulted;
(3) Cartwright Properties and Heritage Orcas defaulted on the loans;
(4) Defendants refused to pay the outstanding loan balances under the
guaranties; (5) California B&T acquired Alliance’s assets, including
the loans and guaranties; (6) California B&T nonjudicially foreclosed
on the real property security for the loans; and (7) the amount due and
owing on the loans after the nonjudicial foreclosure sales.  Defendants do not dispute any of these facts
and we conclude California B&T met its initial burden on the summary
adjudication motions.

Defendants
attempted to create triable issues on both motions by arguing the guaranties
they signed were sham guaranties. 
According to Defendants, their relationships with Cartwright Properties
and Heritage Orcas made them primary obligors on the loans rather than true
guarantees, and therefore the antideficiency law applied to protect them from the
deficiency judgments sought by California B&T.

In
the action on the loans to Cartwright Properties, Defendants submitted Smith’s
declaration to show (1) Cartwright Properties was formed to acquire title
to the real property that secured the two loans it received;
(2) Cartwright Properties had no business activities other than holding
title to that real property and the real property was its only asset;
(3) Lawlor, Smith, and his wife were Cartwright Properties’ only members,
managers, and owners; (4) before making the loans, Alliance required
extensive financial information from Lawlor, Smith, and his wife; and
(5) Alliance relied on that information in making the loans.  Defendants’ separate statement, however, failed
to offer any facts or evidence on Covenant Management Group’s relationship to
Cartwright Properties or the loans. 

In
the action on the loan to Heritage Orcas, Defendants submitted Smith’s
declaration to show (1) Heritage Orcas’s “principal purpose” was to hold
title to the real property security for the loan; (2) Smith and Lawlor
owned and controlled Covenant Management, which owned and controlled Heritage
Capital, which was Heritage Orcas’s general partner; (3) the real property
securing the loan was Heritage Orcas’s “principal asset”; (4) before
making the loan, Alliance required extensive financial information from Lawlor
and Smith; and (5) Alliance relied on that information in making the
loan. 

The
trial court, however, sustained California B&T’s evidentiary objections to
all the evidence Defendants offered to establish these facts and Defendants do
not challenge any of those evidentiary rulings on appeal.  Specifically, the trial court sustained the
evidentiary objections to the portions of Smith’s declarations offered to
support each of the foregoing facts on the grounds his testimony lacked
foundation and was barred by the secondary evidence rule.  The court also found the evidence to be irrelevant
and conclusory.  Even if we assume the
relevancy objection should have been overruled and decide the matter on the
merits rather than Defendants’ failure to allege their sham guaranty defense,href="#_ftn3" name="_ftnref3" title="">[3]
Defendants’ failure to challenge the other evidentiary rulings require us to exclude
Defendants’ evidence.  Consequently,
Defendants have no evidence to create a triable issue on either motion.  (State
Dept. of Health Services v. Superior Court (2003) 31 Cal.4th 1026,
1035 [we review trial court ruling granting summary judgment based on all
evidence in the moving and opposing papers except
evidence to which objections were sustained]; Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 334
[same].)  This failure to challenge the
trial court’s evidentiary rulings provides an adequate and independent ground
for affirming the trial court’s decision granting the motions.

Nonetheless,
the result is the same if we consider Defendants’ evidence because the facts
they identified in their separate statements fail to establish a triable issue
on their sham guaranty defense.  To
determine whether Defendants’ guaranties are sham guaranties we must look to
the purpose and effect of the parties’ agreement to determine whether the
guaranties constitute an attempt to circumvent the antideficiency law and
recover deficiency judgments when those judgments otherwise would be
prohibited.  (River Bank, supra,
38 Cal.App.4th at pp. 1422-1423; Torrey
Pines, supra, 231 Cal.App.3d
at p. 320.)  This requires us to
examine whether the legal relationship between the guarantor and the purported
primary obligor truly separated the guarantor from the principal underlying
obligation, and whether the lender required or structured the transaction in a
manner designed to cast a primary obligor in the appearance of a guarantor.  (River
Bank, at p. 1423 [“the legislative purpose of the antideficiency law
may not be subverted by attempting to separate the primary obligor’s interest
by making a related entity the debtor while relegating the true principal
obligors to the position of guarantors” (italics omitted)]; >Torrey Pines, at p. 320.)

Here,
Defendants failed to offer any evidence that showed a lack of legal separation between
them and the primary obligors on the loans, Cartwright Properties and Heritage
Orcas.  In Torrey Pines, there was no legal separation between the husband and
wife guarantors and the trust that was the primary obligor on the loan because
the husband and wife also were the trust’s trustees and trust law made trustees
personally liable for the contracts they executed on the trust’s behalf.  (Torrey
Pines, supra, 231 Cal.App.3d
at p. 321.)  In Valinda Builders, there was no legal separation between the
guarantors and the primary obligors because they were the same people.  Indeed, the individuals who guaranteed
performance under the purchase agreement also were the individuals who entered
into the purchase agreement as the primary obligors.  The individuals remained the primary obligors
even after they formed a corporation to perform their obligations because the
seller never authorized them to do so nor released them from their obligations
as the primary obligors.   (Valinda
Builders, supra, 230 Cal.App.2d
at pp. 107-109; see also Roberts,
supra, 269 Cal.App.2d at 412,
418 [where guarantor and primary obligor are the same person, there is no legal
separation between them unless and until the other contracting party agrees to
substitute a new person or entity as primary obligor].)

In
contrast to the borrowers in Valinda
Builders and Roberts, Defendants
are not the primary obligors on the loans because they did not enter into the
business loan agreements or execute the promissory notes with Alliance.  Moreover, in contrast to Torrey Pines, Cartwright Properties’s and Orcas’s legal status as a
limited liability company and a limited partnership provide legal separation
between those entities as the primary obligors and Defendants as the
guarantors.  On the Heritage Orcas loans,
an additional layer of separation existed between Smith and Lawlor and the
primary obligors because there was both a limited partnership and a limited
liability company between them and the primary obligors.

Defendants
suggest there was no legal separation between them, on the one hand, and
Cartwright Properties and Heritage Orcas, on the other, because Defendants
owned and controlled those entities, the “principal purpose” of those entities
was to hold title to the real property security for the loans, and the real
property security was “the entities’ principal asset.”  These conclusory statements, however, fail to
establish there was no legal separation between those entities and Defendants.  Defendants presented no evidence to show these
entities were not properly formed or failed to observe the necessary
formalities that usually protect their owners from corporate liabilities. 

Individuals
may structure their own business dealings to limit their personal liability,
but they must accept the risks that accompany the benefits of incorporation.  For example, in Talbott, the husband and wife structured their trust to separate
themselves from the trust’s debts by making their limited liability company the
trustee.  (Talbott, supra,
164 Cal.App.4th at pp. 150, 153.) 
That structure separated them from personal liability on the loan to the
trust, which made the trust the primary obligor.  But that separation also made them true
guarantors when they personally guaranteed the trust’s loan and they could not
obtain protection from a deficiency judgment under the antideficiency law.  (Id.
at p. 153.)  The husband and wife
offered no evidence to show the lender required that structure, and therefore
there was no basis to conclude the lender structured the loan to subvert the href="http://www.fearnotlaw.com/">antideficiency law.

Here,
Defendants failed to offer any evidence showing that Alliance, as California
B&T’s predecessor in interest, requested, required, or otherwise had any
involvement in selecting the entities, or the form of the entities, that were
the borrowers and primary obligors. 
Defendants offered no evidence showing they were the primary obligors on
the loans or that Alliance attempted to separate Defendants’ interests in the
loans by making Cartwright Properties and Heritage Orcas the borrowers while
relegating Defendants to the position of guarantors.  (See River
Bank, supra, 38 Cal.App.4th
at p. 1423; Torrey Pines, >supra, 231 Cal.App.3d at p. 320.)  In River
Bank, the evidence showed the bank required the developer to form a new
entity to act as the borrower so the developer and his corporation could be
characterized as guarantors who were unprotected by the antideficiency
law.  (River Bank, at pp. 1421-1423.) 
Similarly, in Union Bank, the
lender required the individual to use a corporation as the borrower so the
individual could be characterized as a guarantor who was unshielded by the
antideficiency law.  (>Union Bank, supra, 269 Cal.App.2d at pp. 837-838.)  Without some evidence to show Alliance had a
role in structuring the transactions to make Defendants appear as guarantors
rather than primary obligors, this case is indistinguishable from >Talbott. 
Indeed, without that evidence, the record shows Defendants formed
Cartwright Properties and Heritage Orcas to protect themselves from those entities’
liabilities.  In now arguing we should
disregard the legal separation those entities provided, Defendants seek to
obtain the benefits of a course of action they did not follow.

Defendants
also contend Cartwright Properties and Heritage Orcas were formed to hold title
to the real property security for the loans and that shows they were formed to
make Defendants appear as guarantors rather than primary obligors.  We disagree. 
Without evidence showing Alliance had some role in the formation of
Cartwright Properties and Heritage Orcas, there is no basis for the conclusion
those entities were designed to conceal Defendants’ status as the primary
obligors.  Moreover, the evidence
suggests Defendants formed Cartwright Properties and Heritage Orcas for their
own purposes independent of the loans. 
Indeed, Defendants formed Cartwright Properties eight months before the
first loan and over two and one-half years before the second loan.  Defendants offer no evidence on when Heritage
Orcas was formed.

Defendants
next contend that Alliance’s demand they submit extensive information about their
financial resources before it would issue the loans shows Alliance relied on
Defendants as the primary obligors.  Not
so.  There is nothing unusual about a
bank asking for financial information from a person or entity that is
guaranteeing a loan.  Defendants offer no
evidence to show Alliance did not also require financial information regarding
Cartwright Properties and Heritage Orcas. 
In River Bank, the Court of
Appeal noted the bank required extensive financial information from the
guarantors, but it also noted the bank did not require any financial
information from the entity that was acting as the borrower.  This was significant because the bank
required the guarantors to form the entity that served as the borrower and
therefore these facts supported the conclusion the bank considered the
guarantors as the primary obligors and therefore attempted to circumvent the
antideficiency law.  (>River Bank, supra, 38 Cal.App.4th at p. 1423.)  As explained above, there is no evidence to
support that conclusion here.

Finally,
Defendants contend that whether they are true guarantors rather the disguised
primary obligors is a question of fact that cannot be decided on summary
judgment.  Their status as true
guarantors is generally a question of fact (River
Bank, supra, 38 Cal.App.4th
at p. 1422), but that does not change the outcome here because Defendants
failed to present sufficient evidence to create a triable issue.  Indeed, assuming all of the evidence
Defendants submitted is true, there is still insufficient evidence to allow a
reasonable trier of fact to find Defendants executed sham guaranties.  (See Dollinger,
supra, 199 Cal.App.4th at
p. 1144 [“‘There is a triable issue of material fact if, and only if, the
evidence would allow a reasonable trier of fact to find the underlying fact in
favor of the party opposing the motion in accordance with the applicable
standard of proof’”].)

III

Disposition

The judgments are
affirmed.  California B&T shall
recover its costs on appeal. 

 

 

                                                                                   

                                                                                    ARONSON,
J.

 

WE CONCUR:

 

 

 

RYLAARSDAM,
ACTING P. J.

 

 

 

BEDSWORTH, J.