Guarantor Liability 101

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Linkedln: www.linkedin.com/company/lawpracticecle Twitter: www.twitter.com/LawPracticeCLE GUARANTOR LIABILITY: A PRACTICAL PERSPECTIVE

Carl D. Ciochon Wendel Rosen LLP Oakland, 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 Basics II. Negotiating & Drafting the Guaranty III. Advanced Topics IV. Guaranty Defenses and Litigation V. 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 & DRAFTING THE 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. Novation Contrasted

. 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 nonrecourse 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 Points

The 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 Factors

Courts 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 Considerations

What 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 Defenses 2. Waiver of Defenses to Underlying Claim 3. Waiver of Notice and Consent 4. If Post-Origination, Reference Consideration 5. Consistency Between Guaranty and Underlying Documents 6. Guarantor Separate from Debtor 7. 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” Factors 9. Waive Jury if State Law Allows 10. Be Aware of Any Special Rules in Relevant Jurisdiction Guarantor’s Counsel: Reducing Exposure

1. The Opposite of What Creditor’s Counsel Wants 2. 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 Liability 4. Try to Protect Rights Against Debtor (Subrogation, Indemnity, etc.) THANK YOU

CARL D. CIOCHON WENDEL 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.

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 1

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 2

(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 3

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 4

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 5

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 6

(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 7

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\5770310.1 8

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,

014621.0010\5770090.1

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

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

014621.0010\5770090.1

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.

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:

014621.0010\5770090.1

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 purpose entity status on plaintiff bank's foreclosure WELLS FARGO BANK, NA, Plaintiff-Appellee, v action. The appellate court affirmed. The CHERRYLAND MALL LIMITED partnership and guarantor sought leave to appeal in PARTNERSHIP and DAVID SCHOSTAK, the Michigan Supreme Court, which remanded the Defendants-Appellants, and SCHOSTAK case for reconsideration by the appellate court. BROTHERS & CO., INC., Defendant, and

ATTORNEY GENERAL, Intervenor.

Overview Subsequent History: Motion granted by, Remanded by, Stay granted by Wells Fargo Bank, The bank argued that the Nonrecourse Mortgage N.A. v. Cherryland Mall Ltd. P'ship, 2014 Mich. Loan Act, MCL 445.1591 et seq. (NMLA), did not LEXIS 2142 (Mich., Nov. 19, 2014) 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 Prior History: [***1] Grand Traverse Circuit guaranty. The appellate court noted that to the Court. LC No. 2010-028149-CH. extent provisions in the guaranty, which was one of the documents for a nonrecourse loan, purported to Wells Fargo Bank, N.A. v. Cherryland Mall Ltd. impose liability on the guarantor as a guarantor P'ship, 493 Mich. 859, 820 N.W.2d 901, 2012 based on the post closing solvency covenant, they Mich. LEXIS 1646 (2012) 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 Case Summary identified problem. There was no substantive due

process violation. The legislation may have the Procedural Posture effect of invalidating the bank's entitlements based The Grand Traverse Circuit Court, Michigan, found on the contract, but if so it would be because the that defendant guarantor was liable for the entire courts applied the new law, not because the loan deficiency on the basis that insolvency was a Legislature had directly dictated the outcome in the violation of defendant mall partnership's single case. On remand, the trial court had to determine

Wells Fargo Bank, NA v. Cherryland Mall L.P. whether the bank was entitled costs, expenses, and SAWYER and METER, JJ. attorney fees.

Opinion

Outcome The judgment was reversed and remanded for [*366] [**596] ON REMAND further proceedings. 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 Counsel: For WELLS FARGO BANK NA, passage of the Nonrecourse Mortgage Loan Act, PLAINTIFF-APPELLEE: JAMES L. ALLEN, 2012 PA 67, MCL 445.1591 et seq. (the NMLA or DENNIS G. BONUCCHI, TROY, MI; LARRY J. Act 67). Wells Fargo Bank, NA v Cherryland Mall SAYLOR, DETROIT, MI; CLIFFORD W. Ltd Partnership, 493 Mich 859; 820 NW2d 901 TAYLOR, ONE MICHIGAN AVENUE, (2012). On reconsideration, we reject plaintiff's LANSING, MI. constitutional challenges to the NMLA and hold

that it bars plaintiff's claims. For CHERRYLAND MALL LIMITED I. FACTS AND PROCEDURAL PARTNERSHIP, DEFENDANT-APPELLANT: I [***2] HISTORY W. WINSTEN, DETROIT, MI. The facts are set forth at length in our original For MICHIGAN ASSN OF REALTORS, opinion, Wells Fargo Bank, NA v Cherryland Mall AMICUS CURIAE: GREGORY L. Ltd Partnership, 295 Mich App 99; 812 NW2d 799 MCCLELLAND, LANSING, MI. (2011). Briefly, defendant Cherryland Mall Limited Partnership secured an $8.7 million commercial mortgage-backed securities (CMBS) loan using a For MICHIGAN CHAMBER OF COMMERCE, mall it owned as collateral. Defendant David AMICUS CURIAE: ROBERT S. LABRANT, Schostak signed a guaranty. Generally, CMBS LANSING, MI. financing involves the lender agreeing not to pursue recourse liability against the borrower or its owner; For ATTORNEY GENERAL, INTERVENOR: in return, the asset used as collateral, which [*367] CHRISTOPHER W. BRAVERMAN, LANSING, is known as "a single purpose entity," as well as MI. money that flows from that asset, is isolated pursuant to "separateness covenants" and narrow limitations on the lender's agreement not to pursue For BUILDING OWNERS AND MANAGERS recourse liability. These limitations are set forth in ASSN INTERNATIONAL, AMICUS CURIAE: "limited recourse provisions," are referred to as MATTHEW W. SCHLEGEL, DETROIT, MI. "recourse [**597] triggers" or "carveouts," and are

generally related to "bad acts."

In this case, plaintiff ultimately commenced Judges: Before: CAVANAGH, P.J., and foreclosure by advertisement when defendant

Page 2 of 12

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

Cherryland failed to make a payment or payments. and in accordance with the terms and Plaintiff successfully bid $6 million, leaving a provisions of the Mortgage . . . . roughly $2.1 million deficiency. It sued defendants seeking to recover the deficiency. Relative to the This Court concluded, consistent with the trial deficiency, [***3] defendants appealed the trial court, that ¶ 9(f) was a single purpose entity court's holding that defendant Schostak, "as requirement and that insolvency was a violation of guarantor, was liable for the entire loan deficiency single purpose entity status. Wells Fargo Bank, NA, on the basis of the trial court's conclusion that 295 Mich App at 114-125. Further, any failure to insolvency was a violation of Cherryland's [single remain solvent, regardless of the reason, was a purpose entity] status . . . ." Id. at 107. violation. Id. at 125.

This Court affirmed, concluding that Cherryland's This Court acknowledged the argument that its failure to remain solvent "breached the covenant to holding would "indicate economic disaster for the maintain its status as [a single purpose entity] and business community in Michigan," but concluded triggered the full recourse provision of the that its job was not "to save litigants from their bad mortgage." Id. at 126. Paragraph 13 of the note bargains or their failure to read and understand the provides: terms of a contract." Id. at 126. Moreover, in response to the argument that the contracts should Notwithstanding anything to the contrary in not be enforced because they are against public this Note or any of the Loan Documents, . . . policy, we noted that [***5] it was up to the the Debt shall be fully recourse to Borrower in Legislature to address matters of public policy. Id. the event that . . . Borrower fails to maintain its at 127. status as a single purpose entity as required by, and in accordance with the terms and Defendants sought leave to appeal in the Supreme provisions of the Mortgage . . . . [Id. at 110.] Court. While the application was pending, the Paragraph 9 of the mortgage provides, in pertinent Legislature passed the NMLA. part: II. THE NMLA

Single Purpose Entity/Separateness. The NMLA applies "to the enforcement and Mortgagor covenants and agrees as follows: interpretation of all nonrecourse loan documents in * * * existence [*369] on, or entered into on or after, the effective date of [the NMLA]," which was [*368] (f) Mortgagor is and will remain immediately effective on March 29, 2012. MCL solvent and Mortgagor will pay its debts and 445.1595. 2012 [**598] PA 67, enacting § 1, liabilities (including, as applicable, shared provides, in pertinent part: personnel and overhead expenses) from its The legislature recognizes that the use of a post assets as the same shall become due. closing solvency covenant as a nonrecourse Defendant [***4] Schostak had signed a guaranty carveout, or an interpretation of any provision that included the following provision: in a loan document that results in a Notwithstanding anything to the contrary in the determination that a post closing solvency Note or any of the Loan Documents, . . . (B) covenant is a nonrecourse carveout, is Guarantor shall be liable for the full amount of inconsistent with this act and the nature of a the Debt and all obligations of Borrower to nonrecourse loan; is an unfair and deceptive Lender under the Loan Documents in the event business practice and against public policy; and that: . . . (iii) Borrower fails to maintain its should not be enforced. status as a single purpose entity as required by,

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

MCL 445.1593, the operative provision at issue, his liabilities and obligations were "unconditional," provides: "irrevocable," and "absolute" in §§ 1.1 and 1.3 of (1) A post closing solvency covenant shall not the guaranty. Further, Schostak relinquished his be used, directly or indirectly, as a nonrecourse right to "any existing or future offset, claim or carveout or as the basis for any claim or action defense" in §§ 1.4 and 2.10 of the guaranty, against a borrower or any guarantor or other including a defense based on any statutory right. In surety on a nonrecourse loan. article II and § 2.4 of the guarantee, Schostak waived any statutory rights regarding the (2) A provision [***6] in the documents for a "invalidity, illegality or unenforceability of . . . any nonrecourse loan that does not comply with document or agreement executed in connection subsection (1) is invalid and unenforceable. with the Guaranteed Obligations," agreeing that his "Post closing solvency covenant" is defined as obligations regarding same would not be "released, diminished, impaired, reduced or adversely any provision of the loan documents for a affected" even if Cherryland had valid defenses. nonrecourse loan, whether expressed as a Assuming for purposes of analysis that these covenant, representation, warranty, or default, provisions would contractually bind defendant that relates solely to the solvency of the Schostak, we nonetheless conclude that they are borrower, including, without limitation, a invalid and unenforceable. provision requiring that the borrower maintain adequate capital or have the ability to pay its The guaranty is being invoked because, since debts, with respect to any period of time after [***8] it became insolvent, Cherryland "fail[ed] to the date the loan is initially funded. The term maintain its status as a single purpose entity" as does not include a covenant not to file a required by the mortgage. Again, MCL 445.1593(1) voluntary bankruptcy or other voluntary and (2) of the [*371] NMLA provides that "[a] insolvency proceeding or not to collude in an post closing [**599] solvency covenant shall not involuntary proceeding. [MCL 445.1592(d).] be used, directly or indirectly, as a nonrecourse III. ANALYSIS carveout or as the basis for any claim or action against . . . any guarantor" and that any provision in Plaintiff argues that the NMLA did not invalidate the documents for a nonrecourse loan that purports the guaranty because in the guaranty defendant to use a nonrecourse carveout as the basis for a Schostak [*370] relinquished his right to future claim against a guarantor "is invalid and defenses and waived any statutory rights regarding unenforceable." (Emphasis added.) To the extent the invalidity, illegality, or unenforceability of the that provisions in the guaranty, which is one of the guaranty. Further, plaintiff argues that the NMLA documents for a nonrecourse loan, purport to violates: (1) the Contract Clauses of the United impose liability on defendant Schostak as guarantor States and Michigan Constitutions, U.S. Const, art based on the basis of the postclosing solvency I, § 10 and Const 1963, art 1, § 10, (2) the due covenant, they are invalid and unenforceable. process protections [***7] of U.S. Const, Am XIV B. CONTRACT CLAUSES and Const 1963, art 1, § 17, and (3) the separation of powers doctrine, Const 1963, art 3, § 2. We Preliminarily, we note that "'[s]tatutes are presumed conclude that the guaranty provisions are invalid to be constitutional, and courts have a duty to and unenforceable under the NMLA and that the construe a statute as constitutional unless its constitutional challenges to the act must fail. unconstitutionality is clearly apparent.'" In re A. THE GUARANTY Request for Advisory Opinion Regarding Constitutionality of 2011 PA 38, 490 Mich 295, Plaintiff argues that defendant Schostak agreed that 307; 806 NW2d 683 (2011), quoting Taylor v Gate

Page 4 of 12

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

Pharm, 468 Mich 1, 6; 658 NW2d 127 (2003). U.S. approach has been adopted by the courts, Const, art I, § 10 [***9] states, in part: "No State weighing the degree of the impairment of the shall . . . pass any Bill of Attainder, ex post facto contractual rights and obligations of the parties Law, or Law impairing the Obligation of Contracts, against the justification for the impairment as or grant any Title of Nobility." Similarly, Const an act of the state's police power to implement 1963, art 1, § 10 provides: "No bill of attainder, ex legislation for a legitimate public purpose. post facto law or law impairing the obligation of Michigan courts have followed this lead. See contract shall be enacted." The "state constitutional Van Slooten v Larsen, 410 Mich 21; 299 NW2d provision is not interpreted more expansively than 704 (1980) (see in particular Justice LEVIN's its federal counterpart." Attorney General v dissenting opinion); Metropolitan Funeral Michigan Pub Serv Comm, 249 Mich App 424, 434; System Ass'n v Ins Comm'r, 331 Mich 185, 194; 642 NW2d 691 (2002); see also AFT Mich v 49 NW2d 131 (1951), [***11] and federal Michigan, 297 Mich App 597, 609; 825 NW2d 595 cases cited therein. (2012) ("the two provisions are interpreted similarly"). "It has been said that the purpose of the Plaintiff maintains that the balancing test applies Contract Clause is to protect bargains reached by only to retroactive state [**600] laws that "impair [*372] parties by prohibiting states from enacting contractual obligations not involving the laws that interfere with preexisting contractual impairment of debts," and [*373] that Sturges and arrangements." In re Certified Question, 447 Mich Walker still control when the issue is debt relief. 765, 777; 527 NW2d 468 (1994). However, in Keystone Bituminous Coal Ass'n v DeBenedictis, 480 U.S. 470, 503; 107 S Ct 1232; In arguing that the NMLA is an unconstitutional 94 L Ed 2d 472 (1987), the Court noted that, while impairment of contract, plaintiff relies primarily on the primary focus of the Contract Clause was "pre- Sturges v Crowninshield, 17 U.S. (4 Wheat) 122, existing debtor-creditor relationships that obligors 199-201; 4 Wheat 122; 4 L Ed 529 (1819), and were unable to satisfy," "[e]ven in such cases, the Walker v Whitehead, 83 U.S. (16 Wall) 314, 318; Court has refused to give the Clause a literal 16 Wall 314; 21 L Ed 357 (1873), which held that reading." Currently, whether a state statute violates states could change a [***10] remedy if no the Contract Clause is determined by reference to a substantial contract rights were impaired but could three-step inquiry set forth in Energy Reserves not discharge the obligations of a debtor. However, Group, Inc v Kansas Power & Light Co, 459 U.S. in Blue Cross & Blue Shield of Mich v Governor, 400; 103 S Ct 697; 74 L Ed 2d 569 (1983).1 First, 422 Mich 1; 367 NW2d 1 (1985), the Court courts must determine whether the state law has recognized that there has been a movement away operated as a substantial impairment of a from this absolute bar to contract impairment. The contractual relationship. Id. at 411. If it constitutes Court stated, id. at 20: a substantial impairment, the court must look at whether the justification for the state law is based Beginning with the landmark case of Home on a significant and legitimate public purpose. Id. Building & Loan Ass'n v Blaisdell, 290 U.S. at 411-412. [***12] If a legitimate public purpose 398; 54 S Ct 231; 78 L Ed 413 (1934), the can be identified, the court looks at whether the modern United States Supreme Court has construed the Contract Clause as not prohibiting a state from exercising its police 1 power to abrogate private or public contracts if See also In re Certified Question, 447 Mich at 777. Plaintiff maintains that the obligations at issue in Energy Reserves Group, reasonably related to remedying a social or Inc, did not involve the impairment of debts but, in setting forth the economic need of the community. Under framework for analysis of Contract Clause issues, the Court did not modern Contract Clause analysis, a balancing qualify application on the basis of the nature of the contract right impaired.

Page 5 of 12

Wells Fargo Bank, NA v. Cherryland Mall L.P. adjustment of "'the rights and responsibilities of the contract would give way to the original parties' contracting parties [is based] upon reasonable intent for purposes of discerning whether there has conditions and [is] of a character appropriate to the been a substantial impairment within the meaning public purpose justifying [the legislation's] of the [**601] Contract Clause. However, for the adoption.'" Id. at 412, quoting United States Trust reasons that follow we conclude that there was a Co of New York v New Jersey, 431 U.S. 1, 22; 97 S significant and legitimate public purpose for the Ct 1505; 52 L Ed 2d 92 (1977). With respect to this NMLA and that the [*375] remedy provided by third inquiry, "'[as] is customary in reviewing the legislation was appropriate. Accordingly, we economic and social regulation, . . . courts properly need not reach a conclusion on the substantial defer to legislative judgment as to the necessity and impairment question. reasonableness of a particular measure'" unless the 2. SIGNIFICANT AND LEGITIMATE PUBLIC state is one of the contracting [*374] parties. PURPOSE Energy Resources Group, Inc, 459 U.S. at 412-413, quoting United States Trust Co of New York, 431 On February 29, 2012, there was a meeting of the U.S. at 22-23. Senate Economic Development Committee at 1. SUBSTANTIAL IMPAIRMENT which Senate Bill 992, the precursor to the NMLA, was discussed.2 At the meeting, it was represented Defendants assert [***13] that the original parties that the original opinion in this case had changed to the CMBS loan at issue understood and intended the nature of nonrecourse mortgage loans. It was at the time of contracting that the loan would be also represented that: (1) the proposed act would nonrecourse in the event of insolvency. In Energy "set the course where it was intended to be," (2) Reserves Group, Inc, 459 U.S. at 411, the Court allowing nonrecourse loans to become recourse due noted that "state regulation that restricts a party to to insolvency "would irreparably harm the, the gains it reasonably expected from the contract does current environment for investment in Michigan," not necessarily constitute a substantial (3) the legislation would maintain the impairment." However, despite indications that this [***15] status quo, and (4) the failure to pass the may have been the original parties' intent, this proposed act "would basically eliminate Court previously concluded that "the mortgage, as nonrecourse loans in Michigan," leading to a incorporated into the note, unambiguously required collapse of nonrecourse lending, a decrease in tax Cherryland to remain solvent in order to maintain revenues, and "a major foreclosure issue." its [single purpose entity] status." Wells Fargo Transcript of hearing on SB 992, Senate Economic Bank, NA, 295 Mich App at 128. Moreover, Development Committee (February 29, 2012), pp defendant Schostak unambiguously agreed that he 5, 8, 12, 18-19. Further, a commercial mortgage would "be liable for the full amount of the Debt and banking firm representative testified that over 50 all obligations of Borrower to Lender under the percent of its $2.8 billion in current nonrecourse Loan Documents" if Cherryland failed "to maintain loans could qualify as insolvent, making loans its status as a single purpose entity as required by, recourse, which would be catastrophic. Id. at 19. 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 2 The minutes of the February 29, 2012, committee meeting can be contract language to the contrary, was that found at [***14] the loan would remain nonrecourse in the . The minutes indicate that there was an audio recording of the meeting "available upon request for a minimum fee." Defendants of guidance on whether the assignee's reliance on have provided an unofficial transcript of the meeting. Plaintiff has not raised any issue regarding the accuracy of this transcript.

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

Plaintiff characterizes this reaction and defendants' routinely [*377] included the problematic representations as the "'Sky is Falling' Hyperbole." language. Given this testimony, there is no support [*376] Plaintiff asserts that not all nonrecourse for plaintiff's contention that the loans affected by loans have nonrecourse carveouts for insolvency, this legislation were relatively limited. We have no and that defendants "have manufactured this reason to question the representations that there trumped-up [***16] industry crisis" "to rescue will be a collapse of nonrecourse lending in [defendant] Schostak." However, as noted in the Michigan if CMBS loans routinely become original opinion in this case, "'the Legislature recourse and that tax revenues, as well as possesses superior tools and means for gathering foreclosures, will be affected. And we note that facts, data, and opinion and assessing the will of the Energy Reserves Group, Inc, 459 U.S. at 412, public.'" Wells Fargo Bank, NA, 295 Mich App at identifies "remedying of a broad and general social 127, quoting Woodman v Kera LLC, 486 Mich 228, or economic problem" as a "significant and 246; 785 NW2d 1 (2010) (opinion by YOUNG, J.). legitimate public purpose . . . ." Moreover, while the NMLA will benefit defendant Schostak, we have found no evidence that the act Nonetheless, Energy Reserves Group, Inc, 459 U.S. was intended solely for his benefit. at 412 also indicates that "[t]he requirement of a legitimate [***18] public purpose guarantees that At the hearing before the Senate Economic the State is exercising its police power, rather than Development Committee, there was no providing a benefit to special interests." Id. This quantification of the actual number of CMBS loans legislation benefits defendant Schostak. Plaintiff that might have language making a loan recourse in suggests that defendant Schostak used political the event of insolvency. However, the testimony influence to get the legislation passed for his suggested that the affected loans would by no individual advantage.3 If true, this would militate in means be limited to those currently involved in favor of a finding that the bill was intended to litigation. For example, developers testified that benefit special interests. However, the testimony they would be unable to get necessary financing for before the Senate Economic Development continued development because, when applying for Committee suggests that the legislation would have financing, they would have to list contingent far greater impact than just benefiting defendant liabilities based on potential deficiencies arising Schostak.4 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 3 Plaintiff represents that defendant David Schostak is cochief sponsored the bill, testified: executive officer of defendant Schostak Brothers & Co., Inc., and that Robert Schostak is cochairman and cochief executive officer. Many of the loans that are existing, that have Plaintiff further represents that Robert Schostak is "a high ranking already been written, even if they change the Republican Party leader in Michigan, with many years of involvement in assisting the party's candidates to gain election in the language in the future in nonrecourse loans will legislature." We note that Robert Schostak has been chairman of the make many of the borrowers unfinanceable Michigan Republican Party since January 2011, was finance because [**602] there will be a concern by the chairman through the 2010 election cycle, and has served on lenders that there would be a stringing liability campaign fundraising teams for prominent [***19] Republicans. See . that was never expected on their financial statement. [Id. at 10.] 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, Further, there was testimony indicating that loan it was passed by 97 votes to 12 votes; the nays were from 10 documents for CMBS loans were standardized and republicans and two democrats. 2012 Journal of the House 29 (March 20, 2012), p 427. The legislation had bipartisan support.

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

[*378] The legislation does benefit commercial [must be based] upon reasonable conditions and developers generally, a group that would constitute [be] of a character appropriate to the public purpose a "special interest." However, it appears that the [***21] justifying [the legislation's] adoption.'" Legislature was motivated by a broad and general Energy Reserves Group, Inc, 459 U.S. at 412, economic problem, one alluded to in our prior quoting United States Trust Co of New York, 431 opinion: U.S. at 22. While this measure invalidates the provisions that gave rise to plaintiff's entitlement to We recognize that our interpretation seems the deficiency, we note that the remaining incongruent with the perceived nature of a provisions of the lending documents remain in nonrecourse debt and are cognizant of the effect. Plaintiff has not proposed any lesser amici curiae's arguments and calculations that, measure that could have accomplished the if accurate, indicate economic disaster for the legislative objective. Thus, in deference to the business community in Michigan . . . . [Wells Legislature, we conclude that the Contract Clauses Fargo Bank, NA, 295 Mich App at 126] allow for such legislation. That developers benefited when the Legislature C. SUBSTANTIVE DUE PROCESS took action to stabilize the CMBS industry will not undermine the legislation because the purpose was The Fourteenth Amendment to the United States not to benefit developers but to avert a Constitution states that no "State [shall] deprive any [***20] broader economic problem of immense person of life, liberty, or property, without due proportion in the interest of the public good. This process of law . . . ." Similarly, Const 1963, art 1, § was a legitimate public purpose that shows that the 17 provides that no person shall "be deprived of Legislature was properly exercising its police life, liberty or property, without due process of power. law." 3. REASONABLE AND APPROPRIATE [A]lthough the text of the Due Process Clauses CONDITIONS provides only procedural protections, due process also has a substantive component that In Energy Reserves Group, Inc, the Supreme Court protects individual liberty and property held that "'courts properly defer to legislative interests from arbitrary government actions judgment as to the [**603] necessity and regardless of the fairness of any implementing reasonableness of a particular measure'" when the procedures. . . . The right to substantive due contract is between private parties. Energy process is violated [***22] when legislation is Reserves Group, Inc, 459 U.S. at 412-413 (citation unreasonable and clearly arbitrary, having no omitted); see also Keystone Bituminous Coal Ass'n, substantial relationship to the health, safety, 480 U.S. at 504-505. In the present case, the [*380] morals, and general welfare of the concern was that economic development in this public. [Bonner v City of Brighton, 298 Mich market would significantly diminish because App 693, 705-706; 828 NW2d 408, (2012).5 lenders would not extend loans to those commercial developers with contingent liabilities arising from In General Motors Corp v Romein, 503 U.S. 181; [*379] existing CMBS loans with the provision 112 S Ct 1105; 117 L Ed 2d 328 (1992), the Court allowing them to become recourse in the event of stated: "Retroactive legislation presents problems insolvency. The legislation in effect erased the concern by making the provision invalid and unenforceable. The holding in Energy Reserves 5 When a state law is challenged on substantive due process grounds, Group, Inc, included that the adjustment to "'the the plaintiff need not demonstrate a deprivation of a liberty or rights and responsibilities of contracting parties property interest. See American Express Travel Related Servs Co, Inc v Kentucky, 641 F3d 685, 688-689 (CA 6, 2011).

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Wells Fargo Bank, NA v. Cherryland Mall L.P. of unfairness that are more serious than those posed legislative judgment is supported by "any state of by prospective legislation, because it can deprive facts either known or which could reasonably be citizens of legitimate expectations and upset settled assumed," although such facts may be "debatable," transactions. For this reason '[t]he retroactive the legislative judgment must be accepted. aspects of [economic] legislation, as well as the Carolene Products Co v Thompson, 276 Mich 172, prospective aspects, must meet the test of due 178; 267 NW 608 (1936).'" Qualls, 434 Mich at process': a legitimate legislative purpose furthered 366, quoting Shavers v Attorney General, 402 Mich by rational means." Id. at 191, quoting Pension 554, 613-614; 267 NW2d 72 (1978) ). Stated more Benefit Guaranty Corp v R A Gray & Co, 467 U.S. emphatically: 717, 730; 104 S Ct 2709; 81 L Ed 2d 601 (1984). Similarly, Michigan Courts "analyze whether a [T]he party challenging a legislative enactment plaintiff's due process rights have been violated [by subject to rational basis review must "'negative determining] 'whether the legislation bears a every conceivable basis which might support reasonable relation to a permissible legislative it.'" See, e.g., Lehnhausen v. Lake Shore Auto objective.'" Phillips v Mirac, Inc, 470 Mich 415, Parts Co, 410 U.S. 356, 364, 93 S Ct 1001, 35 436; 685 NW2d 174 (2004), [***23] quoting L Ed 2d 351 (1973) (quoting Madden v. Detroit v Qualls, 434 Mich 340, 366-367 n 49; 454 Kentucky, 309 U.S. 83, 88, 60 S Ct 406, 84 L NW2d 374 (1990). In Kentucky [**604] Div, Ed 590 (1940)). "Under rational basis review, it Horsemen's Benevolent & Protective Ass'n, Inc v is 'constitutionally irrelevant [what] reasoning Turfway Park Racing Ass'n, Inc, 20 F3d 1406, in fact underlay the legislative decision.'" 1414 (CA 6, 1994), the court stated: Craigmiles [ v Giles, 312 F3d 220, 224 (CA 6, 2002)] (alteration in original) (quoting R.R. Ret Because "legislative Acts adjusting the burdens Bd. v Fritz, 449 U.S. 166, 179, 101 S Ct 453, 66 and benefits of economic life come to the Court L Ed 2d 368 (1980)). "[W]e will be satisfied with a presumption of constitutionality," Usery with the government's 'rational speculation' v. Turner Elkhorn Mining Co, 428 U.S. 1, 15, linking the regulation to a legitimate purpose, 49 L Ed 2d 752, 96 S Ct 2882 (1976), even 'unsupported [***25] by evidence or "judgments about the wisdom of such empirical data.'" Id. (quoting FCC v. Beach legislation remain within the exclusive Commc'ns, Inc, 508 U.S. 307, 313, 113 S Ct province of the legislative and executive 2096, 124 L Ed 2d 211 (1993). Thus, if a branches," Pension Benefit Guaranty Corp[, statute can be upheld under any plausible 467 U.S. [*381] at 729], if the "statute is justification offered by the state, or even supported by a legitimate legislative purpose hypothesized by the court, it survives rational- furthered by rational means." Id. In fact, basis scrutiny. See Berger [ v City of Mayfield Congress has "absolutely no obligation to Heights, 154 F3d 621, 624-626 (CA 6, 1998)] select the scheme that a court later would find (speculating as [*382] to the City Council's to be the fairest, but simply one that was possible motivations for passing the challenged rational and not arbitrary." National R.R. ordinance). [American Express Travel Related Passenger Corp v. Atchison, Topeka & Santa Servs Co, Inc v Kentucky, 641 F3d 685, 690 Fe Ry Co, 470 U.S. 451, 477, 84 L Ed 2d 432, (CA 6, 2011).] 105 S Ct 1441 (1985). Here, there were concerns that existing CMBS The party challenging the legislation on due loans with postclosing solvency covenants would process grounds bears the burden of rebutting the result in commercial developers not qualifying for presumption that there was a rational basis. Qualls, financing to pursue continued economic 434 Mich at 366. [***24] Moreover, "'where the development in Michigan, that tax revenues would

Page 9 of 12

Wells Fargo Bank, NA v. Cherryland Mall L.P. be affected, and that foreclosures would increase, prohibit the plaintiffs' claims. While the actions all during a period of economic recovery in this were pending, the Legislature passed MCL 28.435, state. The means chosen to address these concerns, subsection (9) of which reserved the bringing of declaring [***26] the covenants invalid and such actions to the state and expressly barred a unenforceable, were not arbitrary. Rather, they political subdivision from bringing such an action. rationally addressed the identified problem. There Further, subsection (13) provided: was no substantive due process violation. Subsections (9) through (11) are intended only D. SEPARATION OF POWERS to clarify the current status of the law in this state, are remedial in nature, and, therefore, Plaintiff argues that the NMLA violates the apply to a civil action pending on the effective Separation of Powers Clause, [**605] Const 1963, [***28] date of this act. art 3, § 2, by depriving this Court of its exclusive This Court held: power to interpret and enforce the contract in the case pending before it. Const 1963, art 3, § 2 states At its core, plaintiffs' separation-of-powers that "[t]he powers of government are divided into challenge hinges on the fact that the enactment three branches: legislative, executive and judicial. of MCL 28.435(9)-(13) effectively overrides No person exercising powers of one branch shall the trial court's finding that plaintiffs are not exercise powers properly belonging to another prohibited by MCL 123.1102 from bringing branch except as expressly provided in this this action. Plaintiffs vigorously assert that this constitution." In Kyser v Kasson Twp, 486 Mich statutory enactment "overturns a judicial 514, 535; 786 NW2d 543 (2010) (finding that the decision" or, alternatively, "seeks to compel a judiciary had interfered with the legislative zoning judicial decision in favor of defendants." We powers of a township), the Court quoted find plaintiffs' arguments to be misplaced. Massachusetts v Mellon, 262 U.S. 447, 488; 43 S Ct 597; 67 L Ed 1078 (1923), explaining that First, we note that the trial court's ruling regarding MCL 123.1102 did not constitute a "[t]he functions of government under our final judgment because it did not dispose of all system are apportioned. To the legislative claims and adjudicate all the rights and department has been committed the duty of liabilities of the parties. MCR 7.202(7)(a)(i); making laws; to the executive the duty of Allied Electric Supply Co, Inc v Tenaglia, 461 executing them; and to the judiciary the duty of Mich 285, 288; 602 NW2d 572 (1999). Because interpreting and [***27] applying them in the trial court's order was not a final judgment cases properly brought before [*383] the that the statute required to be reopened, courts. The general rule is that neither [*384] the order was subject to revision by the department may invade the province of the Legislature[.] [Detroit Mayor, 258 Mich App at other and neither may control, direct or restrain 65.] the action of the other." Quoting Plaut v Spendthrift Farm, Inc, 514 U.S. In Detroit Mayor v Arms Technology, Inc, 258 211, 226-227; 115 S Ct 1447; 131 L Ed 2d 328 Mich App 48; 669 NW2d 845 (2003), the plaintiffs (1995), the Court explained: brought public nuisance and negligence actions against the defendants relative to the marketing and "Congress can always revise the judgments of distribution of firearms. The trial court dismissed Article III courts in one sense: When [***29] a the negligence claims, but held that the nuisance new law makes clear that it is retroactive, an claims were viable and that MCL 123.1102, which appellate court must apply that law in prohibits local regulation of firearms, did not reviewing judgments still on appeal that were

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

rendered before the law was enacted, and must blessed a statute directing the outcome of an appeal alter the outcome accordingly. See United of a judgment enforcing a private contract right." States v. Schooner Peggy, 5 U.S. 103, 1 Cranch However, the legislation does not "interpret" the 103, 2 L Ed 49 (1801); Landgraf v. USI Film contract or direct this Court or any court to do Products, 511 U.S. 244, 273-280, 128 L Ed 2d anything. It declares that the postclosing solvency 229, 114 S. Ct. 1483 [**606] (1994). . . [A] covenant is invalid, unenforceable, and against distinction between judgments from which all public policy. This may have the effect of appeals have been foregone or completed, and invalidating plaintiff's entitlements [***31] based judgments that remain on appeal (or subject to on the contract, but if so it will be because the being appealed), is implicit in what Article III courts apply the new law, not because the creates: not a batch of unconnected courts, but Legislature has directly dictated the outcome in this a judicial department composed of 'inferior case. Courts' and 'one supreme Court.' Within that IV. ATTORNEY FEES AND COSTS hierarchy, the decision of an inferior court is not (unless the time for appeal has expired) the The parties reached a stipulation regarding the final word of the department as a whole. It is amount of damages should defendants lose on the obligation of the last court in the hierarchy appeal. The stipulation provided for a $260,000 that rules on the case to give effect to award for costs and expenses, including attorney Congress's latest enactment, even when that has fees, but defendants claimed that they agreed to pay the effect of overturning the judgment of an this amount only if plaintiff prevailed on the claim inferior court, since each court, at every level, for the roughly $2.1 million deficiency. The trial must 'decide according to existing laws.' court agreed with plaintiff that, pursuant to the Schooner Peggy, supra, at 109." [Detroit stipulation, plaintiff was entitled to the award of Mayor, 258 Mich App at 65-66.] $260,000 based on the basis of the success with "Motion No. 4"; this motion dealt with an This [***30] Court concluded, id. at 66, entitlement to $61,958 from defendant Schostak for a misapplication of rents. In the original opinion in consistent with the principles articulated in this case, we determined that it was unnecessary to Plaut, that plaintiffs cannot show that the address this issue because we held that plaintiff was enactment of MCL 28.435 violates the entitled to the deficiency. Because we have Michigan Constitution simply because it was concluded on remand that [*386] plaintiff is not enacted after the trial court ruled on the entitled to the deficiency, we must now reach the applicability of MCL 123.1102. merits of this issue. Plaintiff suggests that Plaut is inapplicable because "A 'stipulation,' . . . is an agreement, admission, it involved Article III federal courts. However, or concession made in a judicial proceeding by Detroit Mayor indicates that a state court would be the parties or their attorneys, respecting required to [*385] apply retroactive legislation to [***32] some matter incident thereto. Its a pending case as long as the appeal process is purpose is generally stated to be the avoidance ongoing. of delay, trouble, and expense." [Eaton Co Bd Plaintiff also argues that, to the extent that the of Co Rd Comm'rs v Schultz, 205 Mich App Legislature can pass retroactive legislation 371, 378-379; 521 NW2d 847 (1994), quoting clarifying a law it previously enacted, it cannot 73 Am Jur 2d, Stipulations, § 1, p 536.] retroactively interpret a private contract it had no role in drafting. Plaintiff points out that defendants [**607] "Stipulated orders that are accepted by the have cited no cases "in which a Michigan court trial court are generally construed under the same

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Wells Fargo Bank, NA v. Cherryland Mall L.P. rules of construction as contracts." Phillips v count VI and in ¶ 4, there was an agreement "not to Jordan, 241 Mich App 17, 21; 614 NW2d 183 make any claims to the receiver for recovery of any (2000). "'[W]hen parties have freely established or all portion of the fees ordered to be their mutual rights and obligations through the [***34] disgorged under motion Number 5 ruled formation of unambiguous contracts, the law by the Court" and that "this amount shall be requires this Court to enforce the terms and credited against the judgment upon payment." conditions contained in such contracts, if the contract is not "contrary to public policy."'" Holmes Considering the stipulation in its entirety, we v Holmes, 281 Mich App 575, 594; 760 NW2d 300 conclude that the language is unambiguous. The (2008), quoting Bloomfield Estates Improvement parties agreed to an amount of $260,000 relative to Ass'n, Inc v Birmingham, 479 Mich 206, 213; 737 the entire action and made no stipulation regarding NW2d 670 (2007). "A contract must be interpreted the amount due for any of the individual counts. according to its plain and ordinary meaning." Indeed, the issue of costs, expenses, and attorney Holmes, 281 Mich App at 593. fees was addressed at the outset before any of the individual counts were mentioned. There is simply "Under ordinary contract principles, if nothing in this stipulation that indicates an contractual language is clear, construction of agreement to $260,000 in costs, expenses, and the contract is a question of law for the court. If attorney fees for count IV. Consequently, the trial the contract is subject to two reasonable court erred by providing for an award of $260,000 interpretations, factual development is in costs, expenses, and attorney fees in the order necessary [***33] to determine the intent of granting summary disposition with regard to count the parties and summary disposition is IV. Because there was no stipulation on that issue, therefore inappropriate. If the contract, we remand for a determination of whether plaintiff although inartfully worded or clumsily is entitled to costs, expenses, and attorney fees with arranged, fairly admits of but one respect to count IV. interpretation, it is not ambiguous. The [*388] Reversed and remanded for proceedings language of a contract should be given its consistent with this opinion. We do not retain ordinary and plain meaning." [Id. at 594, jurisdiction. quoting Meagher v Wayne State Univ, 222 Mich App 700, 721-722; 565 NW2d 401 (1997) /s/ Mark J. Cavanagh (citations omitted).] /s/ David H. Sawyer [*387] In this case, the stipulation was placed on the record. The first paragraph established the /s/ Patrick M. Meter deficiency amount as being $2,142,697.86 and provided "that the sum of $260,000 is the End of Document 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

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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 on their cross-claim is affirmed. The order RIVER BANK AMERICA, Plaintiff, Cross- awarding attorney fees is reversed. Each party to defendant and Appellant, v. SANFORD N. bear its own costs on appeal. DILLER et al., Defendants, Cross-complainants and Appellants; HACIENDA GARDENS VENTURE, Cross-complainant and Appellant. RIVER BANK AMERICA, Plaintiff and Case Summary Appellant, v. HACIENDA GARDENS VENTURE et al., Defendants and Respondents. Procedural Posture Plaintiff bank appealed summary judgment entered by the Superior Court of Alameda County Subsequent History: [***1] Rehearing Denied (California) in favor of defendant guarantors in its November 1, 1995, Reported at: 1995 Cal. App. suit to enforce guaranty agreements, arguing that LEXIS 1082. Review Denied January 18, 1996, the trial court erred in concluding that the Reported at: 1996 Cal. LEXIS 377. agreements were unenforceable.

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

Plaintiff bank brought suit to enforce guaranties executed by defendant guarantors that secured construction loans to the principal debtor. After Disposition: The final judgment entered in favor of concluding that the guaranties were unenforceable defendants is reversed. The order denying River because they imposed upon defendants an Bank's motion for summary adjudication is obligation more burdensome than that undertaken affirmed as to the sham guaranty defense and by the principal debtor, the trial court entered reversed as to the estoppel defense. The order summary judgment in favor of defendants. Plaintiff granting summary adjudication against defendants appealed the adverse judgment. In reversing

River Bank America v. Diller 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 Opinion by: PARRILLI, J. imposing greater obligations upon sureties than that imposed upon the principal debtor. A defense under § 2809 was waivable and could be waived by the Opinion 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 [*1406] [**792] PARRILLI, J. security provisions in the promissory note, the We dispose of two related appeals in this opinion. contract language adequately expressed a waiver of In appeal No. A066477, River [***2] Bank the defense under Cal. Civ. Code § 2809. 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 Outcome Development). In the underlying action, River Summary judgment in favor of defendant Bank sought to enforce guaranties the Dillers and guarantors was reversed, as the defendants had Prometheus Development had executed. The waived the defense that the guaranty agreements guaranties secured a portion of River Bank's were unenforceable in imposing a greater nonrecourse construction loans to Hacienda obligation upon the guarantors than that imposed Gardens Venture, a limited partnership (Hacienda). upon the principal debtor, for their agreements River Bank made the loans--totaling $38 million-- acknowledged that their guaranties were separate to finance the construction of a large apartment from and unaffected by the security provisions in complex in Pleasanton, California. The trial court the debtor's promissory note. 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 Counsel: Gibson, Dunn & Crutcher, Joel A. Feuer (Hacienda). ( Civ. Code, § 2809.) 1 [***3] In a and Richard Pachter for Plaintiff, Cross-defendant cross-appeal, defendants 2 contend the trial court and Appellant and for Plaintiff and Appellant. erred when it granted River Bank's motion for summary adjudication on defendants' claim of negligent misrepresentation against River Bank. Miller, Starr & Regalia, Edmund L. Regalia and Lewis J. Soffer for Defendants, Cross-complainants We reverse the summary judgment entered in favor and Appellants, for Cross-complainant and of the guarantors, and affirm the summary Appellant, and for Defendants and Respondents. adjudication of defendants' cross-claim for

1 Unless otherwise noted, subsequent statutory references are to the Civil Code. Judges: Opinion by Parrilli, J., with Chin, P. J., 2 and Corrigan, J., concurring. We refer to Hacienda, the Dillers, the DNS Trust, and Prometheus Development collectively as "defendants."

Page 2 of 16

River Bank America v. Diller negligent misrepresentation. In addition, we affirm loans were for $36 million and $2 million, in part and reverse in part an order denying River respectively, and were secured by first and second Bank's motion for summary adjudication. deeds of trust on the development property. A separate note evidenced each loan. Each note In appeal No. A068152, River Bank appeals from contained a "nonrecourse" CLAUSE THAT an order entered after judgment awarding PROVIDED: "Notwithstanding anything to the defendants $241,874.22 in attorney fees and costs. contrary [***5] contained in this Note or any of Because we reverse the summary judgment, the the Security [**793] Documents, neither Maker award of attorney fees as prevailing party is also [Hacienda], nor any partner in Maker, any legal reversed. representative, heir, estate, successor or assign of I. FACTS any such partner or any officer, director, shareholder or partner in any such partner, shall Sanford Diller is a real estate developer based in have personal liability for (i) the payment of any Northern California. He and his wife Helen are the sum of money which is or may be payable trustees of the DNS Trust, a revocable family trust, hereunder or under any of the Security Documents, which owns all of the stock in Prometheus or (ii) the performance or discharge of any Development, the Dillers' principal development covenants or undertakings of Borrower hereunder company. Sanford Diller is the principal officer of or under any of the Security Documents; provided, Prometheus Development. however, that the foregoing shall not limit the In the spring of 1987 Prometheus Development had personal liability of any such entity or person in its nearly completed the planning and approval process capacity as a guarantor under any guaranty of the for a 456-unit apartment complex [***4] on Note or of guaranty of completion of the property it owned in Pleasanton. To obtain capital construction. The holder shall proceed solely for construction, Prometheus Development initially against the premises and any other collateral given entered into negotiations with River Bank to form a as security for the loan (including any guaranties), joint venture to develop the property. However, and it is expressly understood and agreed by and those negotiations never resulted in a final joint between Maker and the holder that no separate venture agreement. Instead, River Bank ultimately liability is assumed by, nor shall at any time be agreed to make "participating construction loans" 3 asserted or enforceable against Maker, under this to Prometheus Development. Note or any other Security Document." (Italics added.) This nonrecourse clause was added to In October 1987 River Bank made two construction the [***6] notes at the insistence of Sanford Diller. loans to Hacienda, which is a limited partnership the Dillers formed for the specific purpose of As further security for the construction loans, the [*1408] obtaining the construction loans. 4 The Dillers and Prometheus Development (collectively the guarantors) executed four separate guaranty agreements. The Dillers executed two of the 3 Generally, a participating loan allows the lender to share in any guaranty agreements on behalf of themselves and profits from the leasing or sale of the real property during a specified the DNS Trust. Each agreement guaranteed period of time. payment of 10 percent ($3.6 million and $200,000, 4 The Dillers have effective control over the entire partnership. respectively) of the two notes. Similarly, Sanford Hacienda's general partner is a corporation, Prom XX, Inc. (Prom Diller executed two guaranty agreements on behalf XX) which the Dillers own through their revocable trust. The DNS revocable trust and another limited partnership, the of Prometheus Development. Again, each Prometheus/Hacienda Gardens partnership, were Hacienda's limited agreement guaranteed payment of 10 partners. Prometheus Development is the general partner of the percent [***7] ($3.6 million and $200,000, Prometheus/Hacienda Gardens partnership, but owns only 1 percent respectively) of the two notes. The net effect of the of that partnership.

Page 3 of 16

River Bank America v. Diller guaranty agreements was that the Dillers personally complaint. In addition, River Bank filed a motion to guaranteed $3.8 million of the construction loans, amend its complaint to add a cause of action to and Prometheus Development separately and reform the guaranty agreements to reflect that the independently guaranteed an additional $3.8 parties had intended that the guarantors would million of the construction loans. Thus, between waive any defense based on section 2809. them, the Dillers and Prometheus Development guaranteed 20 percent ($7.6 million) of the On February 15, 1994, the trial court granted the aggregate construction loan. Dillers' and Prometheus [***9] Development's motion for summary judgment on the causes of River Bank funded the construction loans and action to enforce the guaranties, and denied River Hacienda completed the apartment complex in late Bank's motion for summary adjudication on those 1988. However, the rental income from the causes of action. On that same date, the trial court [*1409] project was insufficient to pay all debt [**794] granted River Bank's motion for summary service on the property. Consequently, by October adjudication on defendants' crossclaim for 10, 1991, Hacienda was delinquent in the amount negligent misrepresentation, and denied River of $830,445. Bank's motion for leave to file an amended complaint. On May 12, 1994, the trial court entered On October 15, 1991, River Bank commenced this judgment disposing of the entire case. River Bank action to foreclose on the property, to appoint a filed a timely notice of appeal from that judgment receiver, and to enforce the guaranty agreements. and Hacienda, the Dillers and Prometheus Defendants filed a cross-complaint alleging a cause Development filed a cross-appeal from the portion of action for negligent misrepresentation against of the judgment granting summary adjudication on River Bank. The court appointed a receiver, and their cause of action for negligent River Bank completed a nonjudicial foreclosure misrepresentation. sale of the property on February 24, 1993. At the time of foreclosure, the outstanding debt was $42.9 On August 26, 1994, the trial court granted million, [***8] but the property sold for only $30 defendants' motion for award of attorney fees and million, leaving a $12.9 million deficiency. The ordered River Bank to pay defendants $241,874 in receivership estate terminated on May 7, 1993. [*1410] attorney fees and other costs. River Bank filed a separate notice of appeal from that After the foreclosure, River Bank proceeded postjudgment order ( Code Civ. Proc., § 904.1, against the guarantors to recoup a portion of the subd. (a)(2)). $12.9 million deficiency. In December 1993 River Bank filed a motion for summary adjudication on II. DISCUSSION its cause of action to enforce the guaranty A. Section 2809 agreements against the Dillers and the DNS Trust (but did not file a similar motion as to Prometheus The threshold issue in this case is whether section Development). In response, the Dillers and 2809 provides the Dillers and Prometheus Prometheus Development filed their own motion Development with [***10] a complete defense to for summary judgment as to the guaranty causes of enforcement of their guaranties. Section 2809 action on the ground section 2809 provided a states: "The obligation of a surety must be neither complete defense which the guarantors had not larger in amount nor in other respects more expressly or impliedly waived. While these motions burdensome than that of the principal; and if in its were pending, River Bank also filed a motion for terms it exceeds it, it is reducible in proportion to summary adjudication on the negligent the principal obligation." In granting summary misrepresentation causes of action in the cross- judgment, the trial court relied on this section, and

Page 4 of 16

River Bank America v. Diller concluded that "the obligation purportedly assumed summary judgment as a matter of law. ( Jambazian by [the guarantors] under their 'guaranties' was v. Borden, supra, at p. 844; Villa v. McFerren 'larger in amount [or] in other respects more (1995) 35 Cal. App. 4th 733, 741 [41 Cal. Rptr. 2d burdensome than that of the principal,' in that under 719]; Union Bank v. Superior Court (1995) 31 Cal. the terms of the loan documents, and particularly App. 4th 573, 579 [37 Cal. Rptr. 2d 653]; Fidelity the 'nonrecourse' provisions thereof, the principal Mortgage Trustee Service, Inc. v. Ridgegate East obligor, [Hacienda], had from the inception no Homeowners Assn. (1994) 27 Cal. App. 4th 503, exposure to personal liability." (Italics and second 508-509 [32 Cal. Rptr. 2d 521].) bracketed text in original.) The court also concluded that the Dillers and Prometheus 2) Because the Guarantors Waived Their Section Development had not waived their section 2809 2809 Defense, We Need Not Decide Whether the defense. Guaranties Imposed Obligations on the Guarantors Which Were More Burdensome Than That of the In our view, it is a difficult question whether the Principal guarantors' $7.6 million personal obligation is "more burdensome" than Hacienda's $38 million The first issue the parties ask us to address is nonrecourse obligation. However, we need not whether section 2809 provides a defense to a decide that issue in this case. Instead, we conclude guarantor who has personally [**795] guaranteed that, as a matter of law, the [***11] Dillers and a contractual nonrecourse obligation. As indicated, Prometheus Development waived any defense we need not decide this issue because we conclude based on section 2809. Consequently, we reverse below that the guarantors waived any defense based the summary judgment on this issue. on section 2809. Nevertheless, as background to the waiver issue, we briefly outline the arguments on 1) Standard of Review both sides of this issue.

A moving party is entitled to summary judgment "if (2) (See fn. 5.) As noted, section 2809 provides all the papers submitted show that there is no that "[t]he obligation of a surety must be neither triable issue as to any material fact and that the larger in amount nor in other respects more moving party is entitled to a judgment as a matter burdensome [***13] than that of the principal" 5 of law." ( Code Civ. Proc., § 437c, subd. (c).) The and if it is, it will be reduced to match the law in effect in 1993 (when the summary judgment principal's obligation. (Italics added.) (3) In motion was filed) provided that "[a] defendant . . . determining whether the guarantor's obligation is has met his or her burden of showing that a cause larger in amount or "in other respects more of action has no merit if that party has shown that burdensome," courts focus on the scope of the one or more elements of the cause of action . . . principal's liability at the time the guarantor cannot be established, or that there is a complete executes his agreement. Bloom v. Bender, supra, defense to that cause of action. Once the defendant 48 Cal. 2d 793 (Bloom) makes this point clear. . . . 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 5 Although section 2809 speaks in terms of "sureties," and the Dillers or a defense thereto." ( Code Civ. Proc., § 437c, and Prometheus Development are described as "guarantors," these subd. (o)(2); [*1411] Jambazian v. Borden (1994) labels are synonymous under current California law. In 1939, the 25 Cal. App. 4th 836, 843-844 [30 Cal. Rptr. 2d Legislature amended section 2787 to eliminate any distinction 768].) (1) On appeal, we determine de novo between "sureties" and "guarantors." ( Bloom v. Bender (1957) 48 Cal. 2d 793, 795, fn. 1, 797 [313 P.2d 568]; Rintala, California's whether there is a triable issue of material fact and Anti-Deficiency Legislation and Suretyship Law: The Transversion whether the [***12] moving party is entitled to of Protective Statutory Schemes (1969) 17 UCLA L.Rev. 245, fn. 1, 263-264 (Rintala).)

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River Bank America v. Diller

There, the California Supreme Court explained that By contrast, under the terms of the guaranties, the section 2809 has its roots in the Napoleonic Code. Dillers and Prometheus Development "absolutely In particular, section 2013 of the Napoleonic Code and unconditionally jointly and severally provided that " 'The security must not exceed what guarantee[d]," and "independently assume[d] is due from the debtor, nor be contracted under liability" for a portion (20 percent) of the notes. conditions more burthensome.' " (Bloom, supra, at Thus, although the guarantors assumed personal p. 802.) The Supreme Court stated: "This rule of liability and thus subjected all of their assets to risk, the civil law appears to relate to conditions at the they limited their exposure to an aggregate 20 time of the execution of a guarantee agreement, and percent of the face amount of the notes. to provide that at the time of the contracting of the surety's obligations he cannot agree to perform Clearly, the guarantors' obligations in this case higher and greater obligations than those then were not "larger in amount" than that of the imposed on the principal debtor." (Ibid., italics principal. However, in our view, it is difficult--if added.) not impossible--to say which of these obligations is "more burdensome." 7 [***17] [**796] From a [***14] [*1412] Here, at the time they signed the developer's perspective, a loan that subjects his or guaranties, it is unclear whether the Dillers and her entire net worth [***16] to risk may be viewed Prometheus Development "agree[d] to perform as "more burdensome" than a loan that puts only higher and greater obligations than those then the assets of a specific project at risk. Here, imposed on the principal debtor [Hacienda]." however, the developers personally guaranteed only (Bloom, supra, 48 Cal. 2d at p. 802, italics added.) a small portion (20 percent) of the amount Hacienda signed notes stating that it and its partners borrowed, and were thus able to limit exposure of would have no "personal liability" under the notes, their personal assets. By [*1413] contrast, and that River Bank would "proceed solely against although Hacienda and its partners had no personal the premises and any other collateral given as liability for the $38 million loan, they did risk security for the loan (including any guaranties), and everything they put into the project, including the it is expressly understood and agreed by and land. We are hard pressed to say which of these between Maker and the holder that no separate obligations is "more burdensome": a personal liability is assumed by, nor shall at any time be obligation which is limited to $3.6 million, or a asserted or enforceable against Maker, under this "nonrecourse" $38 million construction loan which Note or any other Security Document." puts at risk everything the borrower sinks into the project. Fortunately, in this case we need not Thus, from the time Hacienda signed the notes, it answer this question. 8 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 7 River Bank devotes a substantial portion of its opening brief to a proceeds from sale of "the premises" were nonissue; namely, whether the promissory notes Hacienda signed insufficient to satisfy the outstanding debt (as created an "obligation" for purposes of section 2809. Defendants turned out to be the case), River Bank had no have never argued that Hacienda had no "obligation" to River Bank under the promissory notes and security agreements. Instead, they recourse against other assets not connected to the argue that Hacienda's nonrecourse "obligation" is less burdensome apartment complex. [***15] 6 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.

6 Under a separate security agreement, River Bank also had a 8 River Bank cites a trio of cases in which River Bank claims the security interest in Hacienda's personal property "used on or in courts have refused to apply the section 2809 defense in connection with the Property . . . ." In addition, Hacienda executed circumstances analogous to this case. (See Loeb v. Christie (1936) 6 an assignment of leases and rents in connection with the property. Cal. 2d 416 [57 P.2d 1303]; Katz v. Haskell (1961) 196 Cal. App. 2d

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River Bank America v. Diller

3) The Guarantors Waived Their Section 2809 "inharmonious" with section 2819, which Defense contemplates continuing liability of the surety when he consents to the principal's [*1414] discharge. (4a) (5) (See fn. 9.) Assuming, for the purpose of Moreover, the court noted that section 2809 applies argument, that section 2809 could provide the to "conditions at the time of the execution of a guarantors with [***18] a defense in this case, we guarantee agreement," and that nothing in the rule nevertheless conclude that, as a matter of law, the prevents the surety from agreeing that his liability guarantors waived any defense based on section will remain even though some future event 9 2809 when they signed the guaranty agreements. eliminates the principal's obligation. (48 Cal. 2d at pp. 802-803.) (4b) In Bloom, supra, the Supreme Court concluded section 2809 is not only waivable, but The Bloom court then turned to the issue of waiver. that it could be waived on the basis of a very vague The court first noted that we must clause in the guaranty agreement. (48 Cal. 2d. at p. construe [***20] surety contracts using the same 804; Rintala, supra, 17 UCLA L.Rev. at pp. 328- rules that apply to the interpretation of other 329; see also Comment, Issues in the [***19] contracts. (48 Cal. 2d at p. 803; § 2837, 3268.) In Enforcement of Carry Guarantees and Completion particular, the Bloom court relied on section 3268, Guarantees: Anti-Deficiency Rules, Suretyship which provides that the statutory rules regarding Statutes, and Common Law (1989) 37 UCLA L.Rev. contracts, including those which apply specifically 225, 254-255 (Comment).) No subsequent case has [**797] to surety contracts, " 'are subordinate to overruled or even criticized Bloom on this point. In the intention of the parties, when ascertained in the Bloom, the defendant argued that "a surety contract manner prescribed [for] the interpretation of wherein the surety agrees to remain liable even contracts; and the benefit thereof may be waived by though the principal is released [by his creditors] is any party entitled thereto, unless such waiver a contract which imposes greater obligations on the would be against public policy.' " (Bloom, supra, at surety than on the principal" and thus comes within p. 803, italics added.) In concluding that the Bloom the ambit of section 2809. (48 Cal. 2d at pp. 801- defendant had waived the benefit of section 2809, 802.) The Supreme Court noted that such a the Supreme Court stated: "The parties by their construction of section 2809 would be contract specifically agreed that the liability of the surety was not to be terminated by the discharge of 144 [16 Cal. Rptr. 453]; Heckes v. Sapp (1964) 229 Cal. App. 2d the debtor through a composition of creditors. This 549 [40 Cal. Rptr. 485].) In particular, River Bank claims those expressed intention alone might well be controlling cases stand for the broad proposition that section 2809 does not under the provisions of sections 3268 and 2837, but apply to guaranty agreements for loans secured by real property. even if a waiver of the limitation of section 2809 is 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 necessary, the language of the contract adequately cases compel a conclusion that a personal guaranty is not "more expresses such a waiver." (48 Cal. 2d at p. 804, burdensome" than a contractual nonrecourse obligation. Indeed, italics [***21] added.) Loeb v. Christie, supra, suggests that the absence of personal liability is an important factor in determining whether an obligation In Bloom, the court relied on the following clause is more burdensome. in the guaranty agreement to find that the guarantor 9 "[I]t is 'solely a judicial function to interpret a written instrument had waived section 2809: " 'The liability hereby unless the interpretation turns upon the credibility of extrinsic assumed shall not be affected by any forbearance evidence.' " ( U.S. Leasing Corp. v. DuPont (1968) 69 Cal. 2d 275, by you, or by the giving of any extension of time or 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 by any other modification of any sale, contract, 839].) Here, defendants have not offered any extrinsic evidence to account or obligation or instrument in connection aid in interpreting the waiver provisions in the guaranty agreements. therewith, or by the acceptance of any settlement or Consequently, we may resolve this issue as a question of law.

Page 7 of 16

River Bank America v. Diller composition offered by . . . [the debtor] either in [***23] (7) Again, guaranty contracts are liquidation, readjustment, receivership, bankruptcy construed according to the same rules as those used or otherwise.' " (48 Cal. 2d at p. 796.) As one for other contracts, with a view to ascertaining the commentator has noted, the Supreme Court found intent of the parties. (Bloom, supra, 48 Cal. 2d at p. waiver despite the absence of any reference in the 803; Airlines Reporting Corp. v. United States agreement to section 2809 or any other suretyship Fidelity & Guaranty Co. (1995) 31 Cal. App. 4th provision, and the lack of any language indicating 1458, 1461 [37 Cal. Rptr. 2d 563].) Guaranty an intent to "waive" the statutory rights accorded a contracts "may be explained by [**798] reference guarantor. (Rintala, supra, 17 UCLA L.Rev. at p. to the circumstances under which they were made 329, fn. 304.) and the matter to which they relate, the main object being to ascertain and effectuate the intention of the It is against this backdrop that we must measure the parties." ( Bank of America v. Waters (1962) 209 "waiver" provisions of the present guaranty Cal. App. 2d 635, 638 [26 Cal. Rptr. 9].) agreements. (6) (See fn. 10.) (4c) We conclude that, pursuant to the standard established by the Supreme (4d) Here, the guaranty agreements contain several Court in Bloom, the [*1415] language in the provisions which, taken together, indicate the present guaranty agreements is sufficient to guarantors waived any defense based on section constitute a waiver of a defense [***22] based on 2809. First, the guaranty agreements provide that section 2809. 10 "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 . . 10 In a supplemental brief, defendants suggest they are protected by section 2810 as well as by section 2809 and that the guarantors had . . The joint and several obligations of Guarantors to waive the protections of both sections. We need not separately shall be limited to [either $3.6 million or $200,000, consider whether the guarantors waived the protection of section depending on [*1416] which note is 2810 as that section is not applicable in this case. As is pertinent being [***24] guaranteed]; provided that no 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 amounts shall be credited against the foregoing liability upon the part of the principal at the time of the execution of limitation by reason of . . . (v) the application of the contract, or the liability of the principal thereafter ceases, unless any foreclosure proceeds." (Italics added.) In other the surety has assumed liability with knowledge of the existence of words, the guarantors understood that their the defense." Here, however, the nonrecourse provision in the notes did not relieve the principal of all "liability" within the meaning of obligation would not be terminated (or even section 2810. Rather, the nonrecourse provision merely deprived reduced) by River Bank's receipt of foreclosure River Bank of a remedy to enforce that liability. Although the proceeds from the secured property. nonrecourse provision precluded the principal's "personal" liability, it did not absolve it of all liability. The nonrecourse provision Second, the guaranty agreements provide: "The specifically provided that the "holder shall proceed solely against the premises and any other collateral given as security for the loan . . . guaranty by Guarantors provided for in this and it is expressly understood and agreed by and between Maker and Agreement is an absolute and unconditional joint the holder that no separate liability is assumed by, nor shall at any and several guaranty of payment and performance; time be asserted as enforceable against Maker . . . ." Thus, the notes and is not a guaranty of collection. The liability of contemplated that, although Hacienda was "liable" to the extent permitted under the notes, Hacienda did not assume any separate Guarantors hereunder is independent of the "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 barred only respondents' remedy against it, [consequently,] appellant a similar conclusion. There the court concluded that Code of Civil cannot avail themselves of a defense based upon Civil Code section Procedure section 580b (prohibiting deficiency judgments in certain 2810, which requires the nonexistence or cessation of the principal's purchase money transactions) did not provide the guarantors with a liability to make the surety also exempt." (23 Cal. App. 3d. at p. 831, defense under section 2810. The court stated: "[The principal debtor] italics in original.) Consequently, section 2810 does not provide the has remained liable after the foreclosure sale and section 580b has guarantors with a defense in this case.

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River Bank America v. Diller aforesaid obligations to pay which are hereby affected by the security provisions in the notes. guaranteed . . . and of the liabilities of any other This expressed intention alone might well be guarantors of the Obligations." (Italics added.) controlling under the provisions of sections 3268 and 2837, but even if a waiver of the limitation of Third, the guaranty agreements provide: "Lender section [*1417] 2809 is necessary, the language of may bring and prosecute a separate action against the contract adequately expresses such a waiver. Guarantors, or any of them, to enforce their liabilities hereunder, whether or not any action is The undisputed facts concerning the circumstances brought against Borrower or any other person and under which the parties made the guaranties whether or not Borrower or any other person is support our finding of waiver. ( Bank of America v. joined in any such action or actions. Nothing shall Waters, supra, 209 Cal. App. 2d at p. 638.) First, prohibit Lender from exercising its rights against all parties to this transaction--including the [***25] Guarantors, Borrower, the security . . . guarantors--were sophisticated business persons for the Obligations, and any other person with special expertise in real estate development. 11 simultaneously, jointly and/or severally." (Italics Moreover, all parties--including [**799] the added.) guarantors--were represented by counsel in negotiations. Finally, and perhaps most important, Finally, the agreements provide that "Guarantors Sanford Diller signed both the guaranties and the shall not be discharged, released or exonerated, in notes obligating Hacienda on its [***27] principal any way, from their absolute, unconditional and obligation. Thus, although he was acting in independent joint and several liabilities hereunder, different capacities when he signed the notes and even though any rights or defenses which guaranties, he was nevertheless personally aware of Guarantors may have against . . . Lender or others the terms of the notes. As indicated above, one of may be destroyed, diminished or otherwise the terms of the notes was that the nonrecourse affected, by . . . (d) The sale or enforcement of, or provision "shall not limit the personal liability of realization upon . . . any security for any of the any . . . entity or person in its capacity as a Obligations, even though (i) recourse may not guarantor under any guaranty of the Note or of thereafter be had against Borrower for any guaranty of completion of the construction . . . ." deficiency . . . ." (Italics added.) Thus, if guaranty contracts "may be explained by Taken together, these provisions indicate the reference to the circumstances under which they following: (1) the guarantors knew their guaranties were made and the matter to which they relate" ( Id. were separate and independent from Hacienda's at p. 638) and our primary purpose is to ascertain obligation; (2) the guarantors agreed River Bank the intent of the parties (Bloom, supra, 48 Cal. 2d could proceed directly against the guarantors at p. 803; § 2837, 3268), it seems clear the parties without first proceeding against the security; (3) intended that the guarantors would remain even if River Bank did first proceed against the personally liable on the guaranties despite the security, the guarantors understood that the receipt nonrecourse provision in the notes. of foreclosure proceeds would not terminate or reduce their obligations under the [***26] [***28] We do not find defendants' cases on guaranties. In short, the guarantors understood that waiver persuasive. Defendants contend that, to be their personal obligations on the guaranties were completely separate from, and not affected by, the 11 It is unclear how much expertise Helen Diller has as a real estate security provisions in the notes. To paraphrase developer. She is an officer in Prom XX, but it is unclear whether Bloom: The parties by their contract specifically she takes an active role in her husband's business. In any event, we assume that Sanford Diller, who clearly has such expertise, was agreed that the liability of the surety was not to be primarily responsible for negotiating the guaranties on behalf of the Dillers.

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River Bank America v. Diller effective, a written waiver of section 2809 must In apparent response to Cathay Bank's strict state the precise nature of the guarantor's defense holding, the Legislature [***30] enacted section and the fact that it is being waived. They further 2856, effective January 1, 1995. That section contend that, under this standard, the present provides in pertinent part: "(a) Any guarantor, guaranty agreements are insufficient to constitute a including a guarantor of an obligation secured by waiver of their rights under section 2809. real property or any interest therein, may waive the Defendants' primary authority for this position is guarantor's rights of subrogation and Cathay Bank v. Lee (1993) 14 Cal. App. 4th 1533 reimbursement and any other rights and defenses [18 Cal. Rptr. 2d 420]. In Cathay Bank, the court available to the guarantor by reason of Sections had to determine whether the defendant had waived 2787 to 2855, inclusive, including, without the judicially created "Gradsky defense" when he limitation, (1) any defenses the guarantor may have executed a guaranty on a bank loan. The Gradsky to the guaranty obligation by reason of an election defense is based on Union Bank v. Gradsky (1968) of remedies by the creditor . . . . [P] (b) Any 265 Cal. App. 2d 40 [71 Cal. Rptr. 64]. Gradsky language that expressly sets forth a waiver of held that a lender is estopped from recovering a suretyship rights or defenses described in deficiency judgment against a guarantor when the subdivision (a) . . . shall be effective whether or not lender elects to proceed against the security by it contains references to statutory [**800] nonjudicial foreclosure, because this election cuts provisions or judicial decisions." 12 (Italics added.) off the guarantor's subrogation rights against the In addition, the statute which enacted these debtor. Thus, even though the pertinent provisions states [*1419] that the new provisions antideficiency statute ( Code Civ. Proc., § 580d) do "not represent a change in, but are merely does not directly protect guarantors, as a practical matter [***29] the "Gradsky defense" prevents the 12 [*1418] lender from obtaining a deficiency Section 2856 provides in full: "(a) Any guarantor, including a guarantor of an obligation secured by real property or any interest judgment against the guarantor unless the lender therein, may waive the guarantor's rights of subrogation and elects the more cumbersome remedy of judicial reimbursement and any other rights and defenses available to the foreclosure. (Cathay Bank, supra, at p. 1535.) guarantor by reason of Sections 2787 to 2855, inclusive, including, without limitation, (1) any defenses the guarantor may have to the In deciding that the language in the guaranty guaranty obligation by reason of an election of remedies by the creditor and (2) any rights or defenses the guarantor may have by agreement before it did not constitute an adequate reason of protection afforded to the principal with respect to the waiver of the Gradsky defense, the Cathay Bank obligation so guaranteed pursuant to the antideficiency or other laws court surveyed the cases that had addressed this of this state limiting or discharging the principal's indebtedness, precise issue; i.e., cases that considered whether including, without limitation, Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure. [P] (b) Any language that expressly sets contractual language was sufficient to waive the forth a waiver of suretyship rights or defenses described in Gradsky defense. ( Cathay Bank v. Lee, supra, 14 subdivision (a), or any of them, shall be effective whether or not it Cal. App. 4th at p. 1537.) The Cathay Bank court contains references to statutory provisions or judicial decisions. The did not look to other cases--such as Bloom, supra, following language shall be an effective waiver of the guarantor's defense to a recovery by the creditor by reason of the creditor's 48 Cal. 2d 793--which considered the waiver of election of remedies: [P] Guarantor waives all rights and defenses other statutory surety defenses. Cathay Bank arising out of an election of remedies by the creditor, even though concluded that, in order to waive the Gradsky that election of remedies, such as a nonjudicial foreclosure with defense, the waiver must explain that (1) the respect to security for a guaranteed obligation, has destroyed the guarantor's rights of subrogation and reimbursement against the guarantor has a defense to a deficiency judgment principal by the operation of Section 580d of the Code of Civil based on the destruction of its subrogation rights Procedure or otherwise. [P] (c) Subdivision (b) shall not apply to a through nonjudicial foreclosure; and (2) the guaranty of a loan to an individual primarily for personal, family, or guarantor is waiving that specific defense. (14 Cal. household purposes, secured by a deed of trust or mortgage on a dwelling for not more than four families when the dwelling is App. 4th at pp. 1538-1539.) occupied, entirely or in part, by the borrower."

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River Bank America v. Diller declarative of, existing law." (Stats. 1994, ch. 1204, 13 Defendants counter that, even if the Dillers did § 2.) waive their rights under section 2809, summary adjudication in favor of River [*1420] Bank [***31] We decline to apply Cathay Bank's strict would be improper because triable issues of waiver requirements in this case. First, Cathay material fact exist regarding the Dillers' "sham Bank did not purport to set out a waiver standard guaranty" and "estoppel" defenses. applicable to all surety defenses. To the contrary, Cathay Bank focused on the narrow issue of [***33] [**801] 1) The Sham Guaranty Defense whether there was a sufficient waiver of the Gradsky defense. Other courts have found waiver (8a) In addition to arguing below that their of other suretyship rights and defenses on the basis guaranties were unenforceable under section 2809, of language which would not meet Cathay Bank's the Dillers also argued that their guaranties were strict knowledge and waiver requirements. (See unenforceable "sham guaranties" because River Bloom, supra, 48 Cal. 2d at p. 804 [§ 2809]; Bank actually looked to the guarantors as the American Security Bank v. Clarno (1984) 151 Cal. primary obligors, and structured the loan to avoid App. 3d 874, 882 [199 Cal. Rptr. 127] [§ 2819]; the protections of the antideficiency legislation. Union Bank v. Ross (1976) 54 Cal. App. 3d 290, (See Valinda Builders, Inc. v. Bissner (1964) 230 294 [126 Cal. Rptr. 646] [§ 2819, 2845].) Second, Cal. App. 2d 106 [40 Cal. Rptr. 735].) (9a) Section unlike Bloom, Cathay Bank did not address the 2787 provides that "[a] surety or guarantor is one precise issue which concerns us in this case: who promises to answer for the debt . . . of another namely, the waiver of a defense based on section . . . ." (Italics added.) "That the names 'on the dotted 2809. Third, although it purports to be "declarative line' are different on the promissory note and trust of existing law" it is clear the Legislature enacted deed, on the one hand, and on the guarantee section 2856 to ameliorate the strict rule laid down agreement, on the other hand, is not enough to in Cathay Bank. Thus, under section 2856, qualify under section 2787, since 'the supposed subdivision (b), a guarantor may waive a surety guarantors against whom suit has been brought defense using "[a]ny language that [***32] [could be] nothing more than principal obligors expressly sets forth a waiver . . . ." under another name.' " (Comment, supra, 37 UCLA L.Rev. at p. 231, quoting Union Bank v. Dorn In sum, we choose to follow Bloom, supra, on the (1967) 254 Cal. App. 2d 157, 159 [61 Cal. Rptr. waiver issue. Bloom is a Supreme Court case that 893], bracketed text in original.) Importantly, if the directly addresses the precise issue we are guarantor is actually the principal obligor, he is considering here. We do not believe Cathay Bank is entitled [***34] to the unwaivable protection of controlling, as it does not address the precise issue the antideficiency statutes, including Code of Civil before us, and has arguably been eroded by the Procedure section 580d, which prohibits a recently enacted legislation. We therefore conclude deficiency judgment after nonjudicial foreclosure that, as a matter of law, the guarantors waived any of real property under a power of sale (as occurred defense based on section 2809. here). ( Union Bank v. Dorn, supra, at pp. 158-159; Valinda Builders, Inc. v. Bissner, supra, at p. 112.) 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 13 We note that River Bank moved for summary adjudication only on trial court's order denying River Bank's motion for the third cause of action, which alleged a breach of guaranty as to the summary adjudication of its cause of action to Dillers only. River Bank did not move for summary adjudication on enforce the guaranties against Sanford Diller, Helen its cause of action to enforce the guaranties against Prometheus Development. Consequently, River Bank does not raise this issue on Diller and the DNS Trust (collectively the Dillers). appeal as to Prometheus Development.

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River Bank America v. Diller

(8b) In denying River Bank's motion for summary has never had substantial capital or assets. adjudication, the trial court specifically found there were triable issues of material fact regarding the [***36] After it acquired the rights to the Dillers' "sham guaranty" defense. 14 We agree with Hacienda Gardens property, Prometheus this finding, and therefore refuse to reverse the trial Development [**802] entered into negotiations court's order on this point. with River Bank to form a joint venture to develop the property. Sanford Diller believes that by June [***35] Because River Bank was the moving 1987 those negotiations resulted in a final, party in this instance, we must view the evidence enforceable joint venture agreement, in which on this issue in the light most favorable to the Prometheus Development would be the general Dillers to determine if there is a triable issue of partner and River Bank a limited partner. However, fact. Viewed in that light, the record shows the in late July 1987 River Bank informed Prometheus following pertinent facts: As originally Development that it had decided unilaterally to contemplated, Sanford [*1421] Diller intended to change the entire structure of the proposed acquire and develop the Hacienda Gardens agreement. Instead of the joint venture agreement Apartments using a limited partnership originally contemplated, River Bank restructured (Prometheus Hacienda Gardens) under which the deal to its present form as a participating loan Prometheus Development was the general partner with accompanying guarantees. According to and Prom XX, as the nominee for the DNS Trust, Diller, he and his wife executed the documents was the original limited partner. Prom XX is a memorializing the loan and guarantees "[u]nder closely held California corporation, wholly owed economic duress." by the DNS Trust. Diller is its president and only director. According to Sanford Diller, "[e]ver since Importantly, according to Sanford Diller: "During its inception, PROM XX, Inc. has been used as a the course of drafting this final set of 'shell' or 'shelf' corporation, and essentially served documentation, counsel for River Bank insisted that the role of a 'place marker' in the initial structuring in order to render 'enforceable' the 'guaranty' being of real estate development operations." 15 Prom XX given by Prometheus, a new 'borrower' should be brought into existence. That is, instead of creating a general partnership consisting of

14 In particular, the trial court found that "the facts are in dispute as to Prometheus [***37] and River Bank, as the parties whether (1) the entire transaction appears to have been structured to had originally agreed to do, or even lending money avoid the antideficiency preclusion of Code of Civil Procedure to a 'borrower' entity of which Prometheus was the section 580d, (2) the lender intended from the outset to look to the general partner, River Bank now [*1422] required real property security for collection of the debt, released the purported 'principal obligor' from any personal liability by virtue of that the 'borrower' be a limited partnership, of the nonrecourse provisions of the loan instruments, and intended to which the general partner was an entity other than look to the purported 'guarantors' exclusively for collection of any Prometheus. Faced with that requirement, deficiency after foreclosure, and (3) the general partner of the Prometheus suggested that Prom XX be inserted as purported 'principal obligor' was an undercapitalized corporation, entirely owned by defendants, whose financial wherewithal plaintiff such new general partner. So far as [Sanford Diller never investigated." 15 In explaining the meaning of a "place marker," SANFORD "In every instance of which I am aware, once a private offering or DILLER EXPLAINED: ". . . Prometheus would acquire the rights to syndication was accomplished, and equity investments were obtained certain real property, with the intent to obtain equity financing from various investors who became the limited partners of the through a private limited partnership offering or syndication, and partnership formed to [develop a particular parcel of land], Prom XX then to acquire and develop the property with both that equity was removed as the initial limited partner, and had no further role in financing and acquisition and development loans secured by the real the acquisition or development of the real property. Prom XX has property. A limited partnership would then be structured, often never maintained substantial capital or assets of its own. Prom XX bearing a name including the word 'Prometheus' together with the never made any substantial investment of funds in any of these property's name, and having as its initial limited partner Prom XX. limited partnership structures."

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River Bank America v. Diller knew] River Bank never inquired about the guise. ( Younker v. Reseda Manor (1967) 255 Cal. financial standing of Prom XX during the loan App. 2d 431, 438 [63 Cal. Rptr. 197].) In this application process, or even up to the closing of the regard, the court in Torrey Pines Bank v. Hoffman 'loan,' . . . Rather, River Bank relied upon the (1991) 231 Cal. App. 3d 308, 320 [282 Cal. Rptr. extensive financial statements which it required to 354], stated: "The correct inquiry set out by the be provided reflecting the financial strength of authority is whether the purported debtor is Prometheus, the DNS Trust, Helen Diller and anything other than an instrumentality used by the [Sanford Diller], since it was these persons individuals who guaranteed the debtor's obligation, (nominally the 'guarantors') [to] which River Bank and whether such instrumentality actually removed at all times actually looked as the 'borrowers.' " the individuals from their status and obligations as debtors. (Valinda, supra, at p. 110.) Put another Ultimately, River Bank made the loans to this way, are the supposed guarantors [*1423] nothing newly formed partnership, which we have called more than the principal obligors under another "Hacienda" throughout this opinion. The Dillers name? (Dorn, supra, at p. 159.) (10) As stated in have effective ownership and control of the entire Union [**803] Bank v. Brummell [(1969)] 269 Hacienda partnership. As indicated, Hacienda's Cal. App. 2d 836, 838 [75 Cal. Rptr. 234], the general partner is Prom XX, which the legislative purpose of the antideficiency law may Dillers [***38] own through their revocable trust. not be subverted by attempting to separate the Had the Dillers themselves been the general primary obligor's interests by making a related partners of Hacienda, and had they attempted to entity the debtor while relegating the true principal guarantee Hacienda's debt, there is no question obligors to the position of guarantors. 16 such guaranty would have been a sham. In those [Citation [***40] and fn. omitted.] [P] (9c) To circumstance, the Dillers would have been treated determine whether the [purported guarantors] as as primary obligors and would be entitled to the individuals were primary obligors . . . such that unwaivable protection of Code of Civil Procedure their guaranties must be considered ineffective, we section 580d, which prohibits a deficiency apply the approach of Commonwealth Mortgage judgment after nonjudicial foreclosure under a Assurance Co. v. Superior Court [(1989)] 211 Cal. power of sale. ( Union Bank v. Dorn, supra, 254 App. 3d 508, 515 [259 Cal. Rptr. 425], and look to Cal. App. 2d at pp. 158-159 [guarantors who were the purpose and effect of the agreements to general partners of primary obligor are "principal determine whether they are attempts to recover obligors . . . entitled to the full protection of Code deficiencies in violation of section 580d." (Italics of Civil Procedure, section 580d . . . ."]; Riddle v. added.) Lushing (1962) 203 Cal. App. 2d 831 [21 Cal. Rptr. [***41] (8c) In our view, the Dillers have raised a 902]; Valinda Builders, Inc. v. Bissner, supra, 230 triable issue of fact whether, by structuring the loan Cal. App. 2d at p. 112 [waiver of Code of Civil transaction as it did, River Bank subverted the Procedure section 580d invalid as against public purpose of the antideficiency laws "by making a policy].) However, that is not our case. Instead, the related entity the debtor while relegating 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 16 Those purposes are: " '(1) to prevent a multiplicity of actions, (2) the purpose of summary adjudication, this is a to prevent an overvaluation of the security, (3) to prevent the distinction [***39] without a difference. 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 (9b) It is a factual question whether a person is a at the foreclosure sale, acquir[ing] the asset below its value, and also true guarantor or a principal obligor in guarantor's 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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River Bank America v. Diller principal obligors to the position of guarantors." existence at the time of execution of the note and According to Sanford Diller's declaration, River deed of trust, and was not formed for the purpose of Bank never inquired about the financial standing of taking title. Nevertheless, the court concluded the Prom XX, Hacienda's nominal general partner. arrangement violated the purpose of the Instead, River Bank relied upon extensive financial antideficiency legislation, and that such purpose statements reflecting the financial strength of the "may not be subverted by use of a corporation with guarantors: Prometheus Development, the DNS the true principal obligor relegated to the position Trust, Helen Diller and Sanford Diller, since it was of guarantor." (269 Cal. App. 2d at p. 838.) these persons to which River Bank at all times actually looked to as the "borrowers." In sum, we conclude that the Dillers have raised a triable issue of fact concerning their "sham Moreover, there is evidence that the "purpose and guaranty" defense. effect" of the agreements were to recover 2) Estoppel Defense deficiencies in violation of Code of Civil Procedure section 580d. Indeed, according to Sanford Diller, In addition to finding there were triable issues of this is the reason River Bank insisted that fact concerning the "sham guaranty" defense, the Prometheus Development be removed as general trial court also found that there were triable issues partner, and another entity, Prom XX, be inserted, of fact concerning [**804] the Dillers' estoppel even though it was a mere "shell" corporation. As defense. We disagree with this conclusion, and the trial court put it, there is a triable issue of fact reverse the order denying summary adjudication of whether the entire transaction was [***42] the estoppel defense to the extent it is based on structured to avoid the antideficiency preclusion of economic duress. However, we do not intend to Code of Civil Procedure section 580d. preclude defendants from raising an estoppel defense based on other factual theories. Nor is it conclusive, as River Bank contends, that the general partner in this case was a long-standing (11) The Dillers contend River Bank was estopped corporation that adhered to all formalities. Even to enforce the guaranties because River Bank where a corporation is the nominal primary obligor, initially agreed to a joint venture, but then changed and the debt is [*1424] guaranteed by its officers the structure [***44] of the transaction at the last and shareholders, the guarantors may nevertheless moment to a loan and guaranties. According to be considered the primary obligors. This is true Sanford Diller, after he reached a tentative joint even though the corporation's debt does not directly venture agreement with River Bank (a point which obligate the shareholders and officers. ( Valinda River Bank disputes), Prometheus Development Builders, Inc. v. Bissner, supra, 230 Cal. App. 2d at began development of the property and incurred pp. 107-108, 111; Union Bank v. Brummell (1969) expenses and other obligations. After this time, 269 Cal. App. 2d 836, 837-838 [75 Cal. Rptr. River Bank "unilaterally" changed the structure of 234].) Union Bank v. Brummell, supra, involves the deal to loans and guaranties. Because of the facts similar to those alleged in this case. There, difficulty in finding alternative financing, individual investors originally intended to purchase defendants executed the loans and guaranties the property in their own names. The bank advised "[under] economic duress." Even if these facts are or required them instead to have a corporation take true, they do not establish a defense based on title, and required two corporate officers to execute economic duress. personal guaranties. This structure was allegedly for the purpose of avoiding the effect of the [*1425] This case is controlled by London Homes, antideficiency legislation. As in the present case, Inc. v. Korn (1965) 234 Cal. App. 2d 233 [44 Cal. the corporation which [***43] took title was in Rptr. 262]. There, the court held there was no

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River Bank America v. Diller

"duress" or "business compulsion" as a matter of misrepresentation alleged in their cross-complaint. law, where a plaintiff voluntarily agreed to pay We affirm this order. more for land than it had originally agreed. At the time the sellers demanded more money per acre Although defendants do not cite a single case or than had originally been agreed in the deposit other legal authority to support their argument on receipt, the buyer/plaintiff could have brought suit cross-appeal, they do set out the facts which they against them for damages, but for what seemed claim support the cause of action for negligent good business reasons, elected not to do so. Instead, misrepresentation. According to defendants, after the buyer/plaintiff [***45] paid the higher price, the project opened and it became clear revenues even though it was not required to do so. "It is not would not meet expenses, the parties commenced duress . . . to take a different view of contract discussions as to how to deal with the cash rights, even though mistaken, from that of the other shortfall. These discussions involved Robert contracting party, and it is not duress to refuse, in Wagner on behalf of [*1426] the borrowers and good faith, to proceed with a contract, even though guarantors (Sanford Diller later became directly such refusal might later be found to be wrong. [P] . involved in the process) and Richard Olrich on . . 'A mere threat to withhold a legal right for the behalf of River Bank Financial Group (RFG), enforcement of which a person has an adequate which [***47] at all times acted as River Bank's [legal] remedy is not duress.' " ( Id. at p. 240.) agent. RFG and River Bank were aware of the significant cash shortfall. Defendants supplemented This case falls squarely within the holding of Korn. the project's cash flow by injecting additional cash Consequently, there was no "economic duress" to pay debt service and to keep the loans current. upon which an estoppel can be based. If defendants RFG and River Bank were aware that defendants believed they had in fact reached a "joint venture" [**805] were putting additional equity into the agreement with River Bank, they could have project. RFG and River Bank allegedly tied the immediately sued to enforce that agreement once continuing equity infusions by defendants to their River Bank reneged. As it was, after considering own willingness to talk about a modification in loan other alternatives, including finding other financial terms. There is no direct evidence River Bank or partners, defendants made a business decision to RFG ever promised to provide a reduction in accept the loan and guaranty agreement. In a single interest payments. Nevertheless, defendants paragraph, defendants make a half-hearted attempt contend we may infer from the foregoing facts that to distinguish Korn on the ground that, in that case, River Bank promised to conclude a reduction in the theory of "economic duress" was presented by interest payments. However, we may not do so on the plaintiff, while here it is asserted as a [***46] this record. The trial court found that defendants defense. The distinction makes no difference. "have admitted in their testimony tha[t] no one on Defendants' estoppel theory is based on economic behalf of River Bank represented that River Bank duress. Korn found that economic duress cannot be would provide interest reductions on the loans to established upon facts sufficiently like those before Hacienda . . . ." The trial court's conclusion on this us. ( London Homes, Inc. v. Korn, supra, 234 Cal. point is amply supported by the record. Wagner and App. 2d 233.) This case cannot be distinguished Diller both testified that no one from River Bank meaningfully. ever promised debt relief in exchange for further cash infusions. We will [***48] not draw an C. Hacienda's Cross-appeal inference that is contrary to the defendants' own (12) In their cross-appeal, defendants contend the testimony in order to create a triable issue of fact. ( trial court erred when it granted summary Thomspon v. Williams (1989) 211 Cal. App. 3d adjudication on the cause of action for negligent 566, 573-574 [259 Cal. Rptr. 518]; Preach v. Monter Rainbow (1993) 12 Cal. App. 4th 1441,

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River Bank America v. Diller

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

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