Opinion ID: 580334
Heading Depth: 1
Heading Rank: 2

Heading: Sham Guaranties

Text: 22 Even if section 580b does not directly apply to the guaranty, Enterprises argues that it should apply because the guaranty was a sham. Enterprises contends that the district court should have at least permitted a trial on this issue. 23 California law does not define sham guaranties. The cases which have found a guaranty to be a sham, and upon which Enterprises relies, do not enunciate a test but instead mention certain facts and conclude that the guarantor was actually the true purchaser-debtor. In order to determine which of these facts was central to the disposition of the cases, we now turn to the purposes of section 580b. 24 Section 580b was part of a group of Depression-era statutes which were enacted to protect purchasers of real property. The section serves two primary purposes. First, barring deficiency judgments on purchase-money secured obligations discourages sellers from overpricing real property. Second, section 580b serves to prevent the aggravation of an economic downturn by limiting the purchaser's loss to her purchased land thus protecting her from personal liability. See Roseleaf Corp. v. Chierighino, 59 Cal.2d 35, 42, 27 Cal.Rptr. 873, 378 P.2d 97 (1963). 25 All four of the sham guaranty cases upon which Enterprises relies have at least two facts in common. First, they all involved a guarantor who is an individual. In re Wilton-Maxfield Management Co., 117 F.2d 913, 914 (9th Cir.1941); Younker v. Reseda Manor, 255 Cal.App.2d 431, 432, 63 Cal.Rptr. 197 (1967); Valinda Builders, Inc. v. Bissner, 230 Cal.App.2d 106, 108, 40 Cal.Rptr. 735 (1964); Riddle v. Lushing, 203 Cal.App.2d 831, 833, 21 Cal.Rptr. 902 (1962). Second, the purchaser-debtor in each case was a dummy controlled by the guarantor, possessing no real interest in the purchased property. Wilton-Maxfield, 117 F.2d at 914 (purchaser-debtor was dummy individual with no real interest in the property); Younker, 255 Cal.App.2d at 438, 63 Cal.Rptr. 197 (purchaser-debtor corporation allegedly formed solely for the purpose of the transaction); Valinda, 230 Cal.App.2d at 110, 40 Cal.Rptr. 735 (shell corporation formed for purposes of the transaction); Riddle, 203 Cal.App.2d at 833, 21 Cal.Rptr. 902 (purchaser-debtor was partnership; guarantors were the partners). 26 These two facts are relevant to the purposes behind section 580b. One of those purposes concerns the harmful effect of unlimited personal liability in times of economic downturn. Finding an individual guarantor to be the true purchaser-debtor is consistent with this concern. The concern is not as strong where the guarantor is a corporation whose owners are protected by the central feature of corporations: limited liability. Even more relevant to the purposes of section 580b are factual scenarios in which the purchaser-debtor is a dummy. Permitting avoidance of section 580b through such a facile setup would nullify the central purposes of the section. Would-be purchasers with little bargaining power, who are by definition those most subject to over-pricing, could be persuaded to act as the nominal guarantor, thereby negating section 580b. 27 The sham guaranty cases upon which Enterprises relies do not help it. In this case, the guarantor is a corporation, not an individual. More importantly, for the purposes of section 580b and this transaction, neither Herb, Don, nor Enterprises is a dummy. Enterprises is a long-standing corporation of substantial assets. Herb, Don, Enterprises, and Land & Cattle each purchased separate undivided interests in the Paradise ranch. Enterprises contributed land and cash. Herb and Don contributed, presumably, their ranching expertise. 28 Finally, Enterprises contends that this case presents a new type of sham guaranty situation because of Enterprises' role as co-purchaser and the underlying facts of the transaction. Granting Enterprises' request to treat the guaranty in this case as a sham of its own confection would cut a substantial swath through the principle that section 580b does not cover guaranties. All of the sham guaranty decisions concerned straw-man setups and at least an implication that the object of the setup was to avoid section 580b. These considerations lie at the heart of those cases. 29 In this case, there is no straw-man and no evidence that the parties contemplated section 580b. Enterprises concedes that it was replaced as primary purchaser at the suggestion of its own counsel. Only after the suggestion was made did Paradise ask that Enterprises act as guarantor. Moreover, counsel for Enterprises not only failed to discuss the guaranty with his clients before they signed it, but he does not even remember his conversation with counsel for Paradise concerning the guaranty. The district court noted that the McWilliams' may have some sort of claim against [their counsel] related to the transaction. We express no opinion on that point, but Enterprises' effort to avoid its undertaking by crying sham is unpersuasive.