A Lender’s Guaranty from the Settlor/Trustee of a Trust on a Purchase Money Loan to the Trust was held Unenforceable as a Sham Guaranty

May 9, 2023by admin

A Lender’s guaranty from Settlor/Trustee of a Trust on a Purchase Money Loan to the Trust was held Unenforceable as a Sham Guaranty

A Lender’s Guaranty from the Settlor/Trustee of a Trust on a Purchase Money Loan to the Trust was held Unenforceable as a Sham Guaranty

In Cadle Co. II v Harvey (2000) 83 CA4th 927, 100 CR2d 150 the Court held that a lender’s guaranty from the settlor/trustee of the Trust on a purchase money loan to the trust was unenforceable as a sham guaranty.

The facts of the case are as follows:

“The D. Neil Harvey Family Trust (the trust), an inter vivos revocable trust settled by respondent D. Neil Harvey, purchased real property from a bank. As part of the purchase price, the trust gave the bank a purchase money note secured by a deed of trust encumbering the real property. Harvey also signed a guaranty purporting to personally guarantee the secured purchase money note. The trust later defaulted on the note, and the bank’s successor in interest nonjudicially foreclosed and purchased the real property by credit bid at the foreclosure sale for less than the amount owed on the note, leaving an unpaid balance (the deficiency).

. . . The Cadle Company II (Cadle), assignee of the note and the guaranty, sued Harvey on the guaranty to collect the deficiency. The trial court sustained Harvey’s demurrer without leave to amend, concluding the guaranty was a nullity under Torrey Pines Bank v. Hoffman (1991) 231 Cal.App.3d 308 [282 Cal.Rptr. 354] (Torrey Pines).’

Harvey argued the guaranty “was unenforceable as a sham guaranty because he was the primary obligor on the note and therefore his guaranty added nothing to the principal obligation.”

The Court agreed with Harvey and cited to Torrey Pines.  “[W}hen an intervivos revocable trust is the principal obligor on a debt subject to the antideficiency laws, a guaranty of that debt by the individual who is the trustee and settlor of the trust is ineffective because the individual and the trust are essentially the same; accordingly, the individual is deemed the principal obligor for purposes of applying the antideficiency laws.  Harvey was the settlor and trustee of his intervivos revocable trust; the trust was the principal obligor on an obligation governed by the antideficiency laws; and Harvey purported to guarantee that obligation. Torrey Pines compels the conclusion Harvey’s guaranty is ineffective because he was the principal obligor on the note, and therefore Cadle’s ability to pursue Harvey for a deficiency judgment must be assessed by treating Harvey as the principal obligor on the note. (Id. at pp. 323-325.)” 

The Court further held that “[t]o collect a deficiency from a guarantor, he must be a true guarantor and not merely the principal debtor under a different name.”  The guaranty in Harvey was held unenforceable as a sham guaranty.

In addition, the Court held that Harvey as a principal obligor could not waive the protections of Section 580 and therefore could not be held liable personally liable for a deficiency following foreclosure of the secured note. 

In lending to Trusts on any loan, including purchase money loans, Lenders should be cognizant that the sham guaranty doctrine will preclude recovery of a deficiency against the settlor/trustee.  In addition on a purchase money loan to a trust, the protections of Section 580 preclude the recovery of deficiency judgments against the settlor/trustee as a principal obligor following foreclosure of the purchase money secured obligation.

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