Court Opinion

ID: 2684733
Source: CourtListenerOpinion
Date Created: 2014-07-17 23:01:04.760742+00
Date Added: 2024-06-11T13:14:18.804474
License: Public Domain

Filed 7/17/14 Winchester Property v. Nevis CA3
                                          NOT TO BE PUBLISHED
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

           IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
                                     THIRD APPELLATE DISTRICT
                                                    (San Joaquin)
                                                            ----

WINCHESTER PROPERTY COMPANY,                                                             C072926
LLC,
                                                                                (Super. Ct. No.
                   Plaintiff and Respondent,                            39-2010-00252259-CU-OR-STK)

         v.

ALFRED NEVIS et al.,

                   Defendants and Appellants.

         While it is against public policy for the primary debtor on a real property purchase
loan (secured by the real property) to waive statutory antideficiency protection for an
unpaid loan, a “true guarantor” of the loan, and not the primary debtor in disguise as a
guarantor, may waive such protection. (Cadle Co. II v. Harvey (2000) 83 Cal.App.4th
927, 932 (Cadle).)

                                                             1
       In this summary judgment appeal, we conclude that defendant loan guarantors
have raised a triable issue of material fact to support their sham guaranty affirmative
defense—i.e., have raised a triable issue that they were actually the primary debtors—by
presenting evidence that there was no legal separation between them and the primary
debtors, and that the lender structured the loan in a manner to circumvent the
antideficiency law. (California Bank & Trust v. Lawlor (2013) 222 Cal.App.4th 625,
628, 638 (Lawlor).) Accordingly, we reverse the summary judgment in favor of the
lender’s assignee; and, as a consequence, we also reverse the separately appealed from
postjudgment discovery order involving financial information concerning the loan
“guarantors” (this order included sanctions).1

                 FACTUAL AND PROCEDURAL BACKGROUND

       This lawsuit concerns two loans that were used to purchase a 38-unit apartment
complex in Lodi (that straddles two property parcels). Plaintiff Winchester Property
Company, LLC, is the assignee of Redwood Mortgage Investors VII (collectively
hereafter, “Lender”), which made the two loans and held the promissory notes and deeds
of trust securing them. After the primary debtors defaulted on both loans, Lender
nonjudicially foreclosed on the two real properties, and then filed this lawsuit to make the
loan guarantors cover the loan balance deficiencies.

       The relevant details of the two loans are as follows.
Loan 1
       Primary debtors: Santa Barbara Holding Company (SB Holding Co.), a general
partnership, and McCoy North, LLC (McCoy).

       Guarantors: Alfred Nevis (Nevis) and Port Kihei Investments, Inc. (PK
Investments) (collectively, Guarantors).

1 We consolidated the two appeals.

                                             2
Loan 2
        Primary debtor: McCoy.

        Guarantors: Nevis and PK Investments (collectively, Guarantors).

        Nevis presented evidence that, at all relevant times, he was the general and
controlling partner of primary debtor SB Holding Co.; the chief executive officer and sole
shareholder of primary debtor McCoy; and the chief executive officer and owner of
guarantor PK Investments. (Lender concedes on appeal that Nevis, as a general partner,
is entitled to antideficiency protection for SB Holding Co., but not for McCoy.)

        The trial court granted summary judgment to Lender, finding no triable issue of
fact that Guarantors breached their guaranties on Loans 1 and 2. In these guaranties,
Guarantors waived antideficiency protection.

                                         DISCUSSION

        “The aim of the summary judgment procedure is to determine, through the use of
declarations and evidence disclosed in discovery, whether the parties possess conflicting
evidence on a material issue that requires a trial to sort out—in short, whether a triable
issue of material fact exists. [Citation.] [¶] . . . [¶] We review independently from the
trial court the summary judgment papers. We do not resolve factual issues but ascertain
whether there are any to resolve.” (Yanez v. Plummer (2013) 221 Cal.App.4th 180, 185-
186.) “Because a successful summary judgment motion denies the losing party a trial,
the papers of the moving party are strictly construed while those of the losing party are
liberally construed.” (Id. at p. 183.)

        A plaintiff seeking summary judgment must present evidence sufficient to
establish every element of its cause of action. If the plaintiff clears this hurdle, the
burden shifts to the defendant to show that a triable issue of material fact exists as to that
cause of action or an affirmative defense. (Lawlor, supra, 222 Cal.App.4th at pp. 630-
631.)

                                               3
       The parties here agree that Lender has met its summary judgment burden as
plaintiff, and that it is up to defendant Guarantors to raise a triable issue of material fact
as to their affirmative defense of a sham guaranty. As we shall explain, Guarantors have
risen to the occasion.

       The antideficiency protection afforded primary debtors on real property secured
promissory notes (loans) is found in Code of Civil Procedure section 580d, subdivision
(a), which states as pertinent, “[N]o deficiency judgment shall be rendered for a
deficiency on a note secured by a deed of trust . . . on real property . . . in any case in
which the real property . . . has been sold by the . . . trustee under power of sale contained
in the . . . deed of trust [(i.e., sold in nonjudicial foreclosure)].” It is against public policy
for a primary debtor to waive this protection, but not for a guarantor to do so. (Cadle,
supra, 83 Cal.App.4th at p. 932.)

       However, if a guarantor of a real property secured note (loan) is actually the note’s
primary debtor in disguise, that “guarantor” is entitled to this unwaivable antideficiency
protection. (River Bank America v. Diller (1995) 38 Cal.App.4th 1400, 1420 (River
Bank).)

       In determining whether Guarantors here have raised a triable issue of material fact
on their sham guaranty affirmative defense, we examine whether they have presented
evidence that the legal relationship between them as guarantors and the purported
primary debtor did not separate them from the primary obligation, and whether the lender
required or structured the loan transaction in a manner designed to disguise the primary
debtor as a guarantor so as to circumvent the antideficiency law. (Lawlor, supra,
222 Cal.App.4th at p. 638.)

       In a declaration opposing Lender’s motion for summary judgment, Nevis declared
that, at all relevant times, he was the general and controlling partner of SB Holding Co.
(coprimary debtor on Loan 1); the chief executive officer and sole shareholder of McCoy

                                                4
(coprimary debtor on Loan 1, and primary debtor on Loan 2); and the chief executive
officer and owner of PK Investments (guarantor on Loans 1 and 2, along with Nevis
individually).

       Nevis additionally declared:

        “[Primary debtor McCoy] was and is a single property LLC owned by
[Guarantor Nevis] and formed strictly for [the] purpose of this lending transaction.”

        “At all times, [Lender] was aware that [primary debtor McCoy] was formed
strictly to hold title to the property. [Lender] for its own financial purposes required a
separate and distinct entity be formed to hold title and manage the subject property.
[Lender] required both [Guarantors—i.e., Nevis and PK Investments] to execute
guarantees on the two loans affecting the subject property.”

        “[Lender] required this (setting up a new LLC [(i.e., McCoy, as primary debtor
on Loans 1 & 2)]) for this project and every other project which they provided financing
to [Nevis] (e.g., Somerfield North LLC, a Sacramento project; Lincoln Village North
HSP, LLC, a Yuba City project). [Lender] required [Nevis] to guarantee each of the
loans. [Nevis] was [in reality] the primary [debtor] on all of these loans including the
loans which are the subject of this litigation.”

        “Prior to granting [Loans 1 and 2], [Lender] only sought financial information
regarding qualifications and payback of loan ability from [Guarantors—i.e., Nevis and
PK Investments]. [Lender] issued the loan[s] based upon the credit worthiness of [Nevis
and PK Investments] (see attached discovery[-]disclosed documents [(Exhibit[s] A-F)]
received from [Lender] which are incorporated herein by reference).” (Italics added.)

       The question whether a guarantor is a true guarantor or a disguised primary debtor
is generally a question of fact. (River Bank, supra, 38 Cal.App.4th at p. 1422.) There is

                                              5
nothing “special” about the present case in this respect; thus, the question here is one of
fact.

        The sufficiency of Nevis’s declaration in raising a triable issue of material fact
concerning Guarantors’ sham guaranty affirmative defense is best illustrated by
comparing this evidence to the lack of such evidence in Lawlor; the Lawlor court upheld
summary adjudications against the guarantors there, who had alleged a sham guaranty
defense.

        In Lawlor, the guarantors failed to offer any evidence (1) showing “a unity of
interest” between them and the primary debtors on the loans; (2) showing the lender there
“requested, required, or otherwise had any involvement in selecting the entities, or the
form of the entities, that were the . . . primary [debtors]”; and (3) showing the lender
there “did not also require financial information regarding” the primary debtors.
Moreover, in Lawlor, there was evidence (4) suggesting that the Lawlor guarantors
formed the primary debtors “for their own purposes independent of the loans.” (Lawlor,
supra, 222 Cal.App.4th at pp. 638-640.)

        Nevis’s declaration concerning a sham guaranty contrasts “on all fours” with the
Lawlor guarantors’ evidence (or lack thereof). And, interestingly, Nevis did not have the
benefit of Lawlor as an evidentiary template to follow (nor did the trial court); Lawlor
was decided more than a year after the trial court granted summary judgment to Lender
here.

        Realizing the significance of Nevis’s declaration, Lender argues that Guarantors’
“claim of sham guaranty is based upon unsubstantiated, conclusionary statements by
Nevis, which have no foundation other than speculation. The statements by Nevis not
only lack foundation, but represent complete speculation and conclusionary statements
which tracts [sic] Lawlor.” Lender is referring to the Lawlor guarantors’ suggestion that
there was no legal separation between them and the Lawlor primary debtors because the

                                               6
guarantors owned and controlled the debtors, the “ ‘principal purpose’ ” of the debtors
was to hold title to the real property security for the loans, and the real property security
was “ ‘the [debtors’] principal asset.’ ” (Lawlor, supra, 222 Cal.App.4th at p. 639.)
Lawlor stated that “[t]hese conclusory statements . . . fail to establish there was no legal
separation between” the guarantors and the primary debtors. (Ibid.) In contrast, in the
present case, the unity of interest between Guarantors and the primary debtors disclosed
in Nevis’s declaration is tighter than in Lawlor (“principal” purpose and asset in Lawlor
versus “sole” purpose and asset here); and, more importantly, there is evidence Lender
structured Loans 1 and 2 in a manner designed to disguise the primary debtors as
guarantors—i.e., in a manner designed to circumvent the antideficiency law.

       Furthermore, Lender’s criticisms of Nevis’s declaration as unsubstantiated,
conclusionary, and speculative ring hollow given that Nevis was the most involved,
pivotal figure in the Loan 1 and 2 transactions on the borrower’s side. And Lender’s two
technical objections to Nevis’s declaration—which Lender has waived in any event by
not raising them in the trial court (Code Civ. Proc., § 437c, subds. (b)(5), (d); Cal. Rules
of Court, rule 3.1352)—do not ring at all. Lender asserts the declaration does not
technically set forth (1) the location of its signing, or (2) that Nevis is qualified to sign a
declaration for the various corporations and partnership. (See ARB 8-9) Nevis made his
declaration under penalty of perjury, signed the declaration both individually and in all
his relevant corporate and partnership capacities (explaining those capacities), and stated
he could testify with personal knowledge and competently to all the matters contained
therein.

       We conclude that Guarantors have raised a triable issue of material fact
concerning their sham guaranty affirmative defense. This necessitates a reversal of the
summary judgment, which in turn necessitates a reversal of the separately appealed

                                               7
postjudgment discovery order (including sanctions) arising from Lender’s requests for
financial documents from Guarantors (i.e., Nevis and PK Investments).2

2 Lender’s requests for documents were directed to Nevis, PK Investments, and those
acting on behalf of these two. Should they ultimately fail to prevail in this action, Nevis
and PK Investments would be well advised to drop their discovery objection that
Lender’s document requests “are void ab initio [(from the beginning)] and ad infinitum
[(without limit)]” because the requests are improperly “directed to multiple [third] parties
[given the “behalf” basis] rather than specifically to the parties to this litigation.” At a
minimum, Nevis and PK Investments, in this situation, would be obligated to produce
their financial documents. (See Code Civ. Proc., §§ 2031.210-2031.240.)
 Two other housekeeping matters deserve attention.
  First, contrary to Nevis’s claim, Civil Code section 1543 does not “state[] indirectly”
that a mere guarantor (Nevis) of two or more joint debtors (SB Holding Co. and McCoy
on Loan 1) is released from any liability for the guarantee as to McCoy since the parties
agree Nevis was released from any liability on the guarantee as to SB Holding Co.
Section 1543’s language is limited in scope, stating, as pertinent, that “[a] release of one
of two or more joint debtors does not extinguish the obligations of any of the others,
unless they are mere guarantors . . . .” In other words, a release of joint debtor SB
Holding Co. does not release joint debtor McCoy, unless McCoy was a mere guarantor,
which it is not (it is a debtor); section 1543 has nothing to do with guarantor Nevis.
  Second, Guarantors cannot maintain the “trial court committed reversible error in
holding that there [was no triable issue of material fact] whether [Lender] by its less than
fair market value bids at the foreclosure sale of both properties breached its duty of good
faith and fair dealing owed to [Guarantors] as directly implied in the guarantee contracts
(breach of good faith and fair dealing affirmative defense).” For Guarantors to assert
successfully a breach of the covenant of good faith and fair dealing, they must have done
all, or substantially all, of the significant things that the guarantee contracts required them
to do, or they must have been excused from doing so. (See CACI No. 325 [setting forth
the essential elements of breach of covenant of good faith and fair dealing].) But
Guarantors claim their guarantee contracts are unenforceable because they (the
Guarantors) and the primary debtors are one and the same; and the Guarantors’ primary
debtors did not pay their obligations.

                                              8
                                       DISPOSITION

       The judgment is reversed. The postjudgment discovery order of June 5, 2013, is
reversed. Nevis and PK Investments are awarded their costs on appeal. (Cal. Rules of
Court, rule 8.278 (a)(1), (2).)

                                                        BUTZ              , J.

We concur:

      RAYE                   , P. J.

      MAURO                  , J.

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