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California Real Property Journal

Official Publication of the Real Property Law Section

Vol. 28, No. 3, 2010

State Bar of California

www.calbar.ca.gov/rpsection

Secured Guaranties and Third Party Deeds of Trust . . . . . . . . . . . . . . . . . . . . . 3


By Michael T. Andrew
This article examines issues raised when a third party encumbers its real property to support credit extended to a borrower, in the form of
either a deed of trust directly securing the borrowers obligation or a guaranty secured by a deed of trust. The article focuses on suretyship
law and the one-action and antideficiency rules.

California Law on Contract Zoning, Conditional Zoning, and Spot Zoning: An


Analysis of Recent Case Law and Contours of Permitting Agencies' Powers to
Settle Land Use Disputes Without Contracting Away Their Police Powers . . . . 15
By Mark A. Rothenberg
An explanation of unlawful contract zoning and its impact on the ability of developers and local governments to settle land use disputes.

MCLE Self-Study Article: When Real Property Can Mean Real (Prison) Time:
A Brief Overview of the Federal Prosecution of Real Estate-Related
White Collar Crimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
By Jeffrey Rabkin
This article provides a broad overview of the basic statutory framework for the federal prosecution of white collar cases, briefly describes
emerging trends in fraudulent real estate schemes and finally reviews several federal cases involving real estate-related crimes recently
charged in the Northern District of California.

Arbitration: Determining the Collateral Estoppel Effect of a Private Arbitration


Award On Non-Parties In Subsequent Litigation . . . . . . . . . . . . . . . . . . . . . . 33
By Zachary D. Schorr
California is one of the few jurisdictions that does not recognize the collateral estoppel effect of a private arbitration award on non-parties
to the arbitration in subsequent litigation. This article discusses the nuances of the res judicata and collateral estoppel effect of private
arbitration awards on subsequent litigation.

Black Hills Revisited: Repercussions and Defenses . . . . . . . . . . . . . . . . . . . . . 39


By Robert Miller
The 2007 decision in Black Hills Investments, Inc., v. Albertsons , Inc. established that a purchase contract was void if it permitted either
party to waive a condition requiring that any portion of the subject parcel be made into a separate legal parcel prior to closing. This
article explores the impact of that case in the wake of the dramatic decline in real estate prices since it was decided and how contracts can
be structured in the future to comply with the requirements of the Black Hills decision.

Distributed at no extra charge to members of


the real property law section of the state bar of california
The statements and opinions herein are those of the contributors and not necessarily those of the State Bar of
California, the Real Property Law Section, or any government body.

Secured Guaranties and Third Party Deeds of Trust


By Michael T. Andrew
2010 All Rights Reserved.

As a condition to making or modifying a loan, lenders often


require credit support from a person or entity other than the
borrower. That support sometimes takes the form of an unsecured guaranty from the third party, which is simply a promise
to pay the debt if the borrower defaults. But a lender may
require more substantial support, in the form of real or personal
property collateral pledged by the third party.
This article addresses, in Q&A form, issues raised when
a third party encumbers California real property with a deed
of trust to support credit extended to a borrower. The focus in
particular is on suretyship law1 and the one-action and antideficiency rules.2
Q1:
WHEN A THIRD PARTY ENCUMBERS ITS
REAL PROPERTY, HOW IS THE TRANSACTION
STRUCTURED?
There are two basic approaches. The third partys deed of
trust can directly secure the borrowers obligation. The deed
of trust in this structure is often referred to as a third party
deed of trust (or third party mortgage). Alternatively, the
third party can execute a guaranty of the borrowers obligation
and secure that guaranty, rather than the borrowers obligation, with the deed of trusta secured guaranty structure.
The secured guaranty might provide for full, limited, or no
recourse to the third party beyond the property encumbered
by the deed of trust.
A variant is also sometimes seen, in which the third party
executes both a deed of trust directly securing the borrowers
obligation and a separate guaranty of that obligation, with the
guaranty not secured by the deed of trust.
Q2: CAN A THIRD PARTY DEED OF TRUST
ENFORCEABLY SECURE THE BORROWERS
OBLIGATION DIRECTLY, EVEN THOUGH THE
THIRD PARTY IS NOT A CO-BORROWER, DID
NOT RECEIVE ANY LOAN PROCEEDS, AND DID
NOT EXECUTE A GUARANTY?
Yes. By virtue of its deed of trust, the third party is a surety.
Under Civil Code section 2787, a guarantor or surety is one
who promises to answer for the debt, default, or miscarriage
of another, or hypothecates property as security therefor.3 As
the disjunctive or in this definition reflects, hypothecation of
property for the debt of another need not be accompanied or
supported by an explicit promise to pay that debt.4 A third party
who merely hypothecates property, but does not promise to pay
the debt, has no personal liability for the debt.5 The third party
is nonetheless a surety, just as if it had executed a guaranty, as in
the secured guaranty structure.6

As with any suretyship obligation, a third party deed of


trust need not be supported by consideration flowing directly
to the third party. If the deed of trust is given at the same time
that the loan is made, the consideration supporting the loan also
supports the suretyship obligation.7 If it comes later, there must
be consideration distinct from that of the original obligation,8
such as the creditors agreement to a loan modification or forbearance.9
Q3: CAN SURETYSHIP STATUS BE AVOIDED BY THE
NOMENCLATURE USED TO DESCRIBE THE THIRD
PARTY IN THE DOCUMENTS, AND BY AVOIDING
GUARANTY AND SURETY TERMINOLOGY?
No. Suretyship status arises when (i) two parties, such as
the borrower and the third party, are under obligation to the
same creditor; (ii) the creditor is entitled to only one satisfaction
of the obligation; and (iii) one of the two parties should bear
the ultimate responsibility for the obligation.10 Normally the
party who receives the direct benefit of the value given by the
creditore.g., the borrower, who receives the loan proceedsis
the one who ought to bear that responsibility, and is therefore
the principal obligor, and the other party is a surety.11 This is
true no matter how the transaction is structured or what nomenclature or terminology is used.12
For example, in Mead v. Sanwa Bank California,13 a 1998
Court of Appeal case, a lender made a construction loan to the
ground lessee of real property. To secure repayment of the loan,
in a single deed of trust the lessee encumbered its leasehold
interest and the lessor encumbered its fee interest in the property
(an arrangement sometimes referred to as a subordinated fee).
The lessor argued that it was a surety, and therefore entitled to
the suretyship rights and defenses discussed in Q4 below. The
lender argued that because the lessor was, like the lessee/borrower, named as a trustor in the deed of trust, the lessor and
lessee were both principal obligors.
The court held that the lessor was indeed a surety, having
hypothecated its property, the fee interest, to secure a debt of
the lessee. Naming the lessor as a trustor was not inconsistent
with suretyship status, [b]ecause sureties include those who
hypothecate their property as security for the debt of another.14
Moreover, by statute [o]ne who appears to be a principal,
whether by the terms of a written instrument or otherwise, may
show that he is in fact a surety, except as against persons who
have acted on the faith of his apparent character of principal.15
It is not necessary that the creditor assent to the third partys
status as a surety.16
Thus, to give rise to suretyship, a third party deed of trust
need not use guaranty or surety terminology. It is enough
that the deed of trust secures the debt of another.

California Real Property Journal Volume 28 Number 3

[I]f a bank has mortgage security for a debt it must


exhaust that security before it can apply in reduction
or cancellation of the debt any money on deposit with
it belonging to the debtor.

Q4: WHY DOES SURETYSHIP STATUS MATTER?


A guarantor or surety has special rights and defenses under
the Civil Code. These include the right to recover from the principal obligor through reimbursement and subrogation, the right
to recover contribution from cosureties, and several rights and
defenses against the creditor.17 For example, a guarantor or surety has the right to require that the creditor first proceed against
the principal obligor.18 And a guarantor or surety is exonerated
by a material modification of the principal obligation to which
it does not consent, even if, in California, unlike in many states,
the modification is not prejudicial to the guarantor or surety.19
These rights and defenses are triggered in both of the structures
described in Q1 abovethe third party deed of trust structure
and the secured guaranty structurebecause in each the third
party is a guarantor or surety.20
Civil Code section 2856(a) broadly validates waivers by a
guarantor or surety of these and all of the Civil Codes other
suretyship rights and defenses.21 That section also enables a
guarantor or surety to waive any defense arising directly or indirectly out of the one-action or antideficiency rules, to the extent
that those defenses would be available to the guarantor or surety
because the principals obligation is secured by real property,22
and to waive any defense arising by reason of any election of
remedies by the creditor.23
From the creditors standpoint, it is essential to obtain these
waivers in any suretyship transaction. Without them, serious
adverse enforcement consequences may result. The waivers are
routinely obtained in a guaranty agreement. But if a creditor fails
to recognize the suretyship status of a third party deed of trust
directly securing the borrowers obligation, it will also likely fail
to obtain the waivers.
Q5: IF A THIRD PARTY DEED OF TRUST DIRECTLY
SECURES THE BORROWERS OBLIGATION, DOES
IT AFFECT THAT OBLIGATION IN ANY WAY?
Yes, significantly. When a third party encumbers its real property to secure the obligation of the borrower, that triggers application of the one-action and antideficiency rules to enforcement of
the obligation against the borrower. The relevant statutes apply by
their literal terms because the borrowers obligation is secured by
real property, and the statutory language (except for the purchasemoney antideficiency rule) makes no distinction based upon
whether the encumbered real property is owned by the borrower
or a third party.24 The borrower cannot waive the one-action and
antideficiency protections, at least at the outset of a transaction,25
and the creditor cannot unilaterally waive the collateral.26 So, as
a consequence of the third party deed of trust securing the borrowers debt, the creditor cannot enforce that debt as an unsecured
obligation, even if the borrower itself has provided no security.
This application of the statutes appears to have originated in
the California Supreme Courts 1912 decision in Gnarini v. Swiss
American Bank,27 in which a third party had encumbered its real
property to secure the borrowers obligation to repay a loan. The
borrower had funds on deposit in an account at the lender bank.
The lender took a setoff against the bank account to recover the
loan. The court held that because the loan was secured by real property, the lenders setoff violated the security-first aspect of Code of
Civil Procedure section 726(a), and the setoff could be recovered:

This is the doctrine, too, where the mortgage was not


given by the debtor himself but by a third party. In
either case the debt is secured by mortgage, and as only
one action may be maintained to enforce a debt thus
secured, it follows that the mortgage security must
be exhausted before recourse can be had to the bank
account or personal responsibility of the debtor. Nor
can the mortgage be waived, and an action brought on
the indebtedness.28
Gnarinis security-first ruling was cited with approval by the
California Supreme Court in 1990, in Security Pacific National
Bank v. Wozab,29 although without specific mention of the third
party mortgage aspect.
The same principle has been applied when a deed of trust
is provided by one of several principal obligors, thereby protecting even the other, non-trustor obligors. The Court of Appeal
so held in Pacific Valley Bank v. Schwenke30 in 1987: the oneaction rule plainly applies to all notes secured by deeds of trust
in California, without regard to whether the mortgagor and the
debtor are one and the same.31
In Indusco Management Corp. v. Robertson32 (discussed further in Q9 below), the Court of Appeal in 1974 took the same
approach to the antideficiency rule of Code of Civil Procedure
section 580d, which precludes recovery of a deficiency after nonjudicial foreclosure on real property securing a note. The court
considered section 580d to be applicable to the borrower even
when the real property collateral foreclosed upon was the third
partys, not the borrowers.
It is difficult to rationalize applying the one-action and
antideficiency rules to the borrower as a consequence of the third
partys collateralization of the debt. That point is discussed in the
Concluding Comment at the end of this article, together with a
possible alternative approach to the statutes. Present law, though,
is as reflected in the cases above.
Consequently, a lender whose loan is directly secured by
a third partys real property must proceed in enforcing its loan
against the borrower just as if the borrower itself had provided
the real property collateral. That may well be at odds with what
the lender intended. The lender may have obtained the third
partys deed of trust with the expectation that it only added to
the lenders enforcement options, taking nothing away. But that
is not the case. Assuming that the borrower itself has not also
provided real property collateral, the third party deed of trust
eliminates the lenders ability to take such actions as setting off
against a borrowers unpledged bank account, obtaining a money
judgment and enforcing it against other assets without judicially
foreclosing under the deed of trust, and exercising other remedies denied a lender whose loan is secured by real property.33
Q6: CAN THOSE LIMITATIONS ON ENFORCEMENT
AGAINST THE BORROWER BE AVOIDED BY
USING THE ALTERNATIVE STRUCTURE OF A
SECURED GUARANTY?

California Real Property Journal Volume 28 Number 3

Very likely yes. If the third party executes a separate guaranty, and the deed of trust secures that guaranty rather than the
borrowers underlying obligation, then the borrowers obligation
is not secured by real property (assuming that the borrower itself
has not provided real property collateral). The limitations triggered by real property collateral will not apply to enforcement
of the borrowers obligation.
That conclusion assumes, of course, that securing the guaranty with real property does not somehow cause the underlying
obligation to be considered secured by that real property. Passing
comments in dicta in two California Supreme Court cases,
Security Pacific National Bank v. Wozab34 in 1990 and Bayless v.
Ames35 in 1929, are consistent with that assumption, although,
as discussed in Q7 below, those cases were focused on a different issue.36
One might argue to the contrary that a guaranty should
be conceived of as obligating the guarantor with the principal
obligor on the underlying obligation, rather than constituting
a truly separate obligation, and therefore that security for the
guaranty also effectively secures the underlying obligation. The
Nevada Supreme Court took that view in a 1985 case, applying
what the court believed to be California law to conclude that
the personal guaranties and the underlying corporate debts are
to be treated as one obligation.37
However, reported California cases have very consistently
treated guaranty and surety obligations as separate from the
principal obligation for purposes of the one-action and antideficiency rules.38 With the exception of a 1995 Court of Appeal
opinion subsequently depublished by the California Supreme
Court,39 the cases uniformly reflect the view, in holding or in
dicta, that if a borrowers real property secures the borrowers
obligation, the one-action and antideficiency rules do not
directly protect a guarantor of that obligation.40 So, conversely,
it seems highly unlikely that a California court would hold that
if the guarantors real property secures the guarantors obligation,
the one-action and antideficiency rules protect the borrower. No
reported California case appears to have taken the approach of,
and none has mentioned, the Nevada case.41
As a result, absent a significant change in the law in
California, the secured guaranty structure offers greater flexibility to a lender than a third party deed of trust directly securing
the borrowers obligation, because the secured guaranty preserves
more enforcement options against the borrower. If the intent is
that the third party will have no personal liability beyond the
real property collateral, that can be accomplished by simply
including a non-recourse provision in the guaranty.
Q7: IN THE SECURED GUARANTY STRUCTURE, DO
THE ONE-ACTION AND ANTIDEFICIENCY RULES
APPLY TO THE THIRD PARTY?
Code of Civil Procedure section 726(a), with its one-action,
security-first and one-form-of-action rules, clearly applies by its
express terms to a guaranty secured by real property, because
it governs the recovery of any debt or the enforcement of any
right secured by mortgage upon real property. That was the case
in Security Pacific National Bank v. Wozab,42 in which a guaranty
was secured by a deed of trust. The bank took a setoff against
the guarantors deposit account. The California Supreme Court
held that this violated the security-first rule, which requires that

the creditor first proceed against the real property security before
enforcing the debt personally against the borrower.
In Bayless v. Ames,43 the California Supreme Court held to
similar effect in 1929 that when a creditor obtained a judgment
on the secured guaranty, omitting the guarantors real property
collateral from the action, the one-action rule prohibited subsequent foreclosure. This is an application of what is referred to
as the sanction aspect of the one-action rule, discussed further
in Q8 below.44
Although section 726(a) clearly applies to a secured guaranty, the guarantor may not be protected by the antideficiency
rule of section 580d, which normally precludes recovery of a
deficiency after nonjudicial foreclosure. Unlike section 726(a),
which applies to any debt or right secured by real property,
section 580d by its terms applies only to a note secured by
real property.45 No reported case appears to have addressed the
applicability of section 580d to a secured guaranty in actual
holding. In Union Bank v. Gradsky,46 the Court of Appeal commented in dicta that an action on a guaranty would not constitute an action on a note within the meaning of section
580d, even though the underlying obligation was evidenced by
a note.47 A few cases in other contexts have held section 580d
inapplicable to non-note obligations.48
Because of the note limitation in section 580d, a creditor
might be able to foreclose nonjudicially under a deed of trust
securing a guaranty, then obtain a deficiency judgment against
the guarantor. If that is the case, however, the fair-value rule of
Code of Civil Procedure section 580a clearly would apply.49
Section 580a, unlike section 580d, applies to any obligation
secured by real property, not just a note. Under section 580as
fair-value rule, recovery of a deficiency judgment against the
guarantor would be limited to the difference between the guarantors total obligation and the greater of the foreclosure sale
price and the propertys fair market value. In addition, under
section 580a the action must be brought within three months
after the foreclosure sale.
To the extent that one-action and antideficiency rules apply
directly to a guarantor by virtue of its deed of trust securing the
guaranty, they are not waivable by the guarantor, just as they are
not waivable by a borrower when the underlying obligation is
secured by real property.50 Civil Code section 2856(a)(3), the
broad authorization of one-action and antideficiency waivers by
a guarantor or surety, is by its terms inapplicable. It applies to
[a]ny rights or defenses the guarantor or other surety may have
because the principals note or other obligation is secured by real
property.51 Here it is the guaranty, not the principals obligation, that is secured by real property. The normal prohibitions
on one-action and antideficiency waivers apply.
Q8: IF THE THIRD PARTYS DEED OF TRUST
DIRECTLY SECURES THE BORROWERS
OBLIGATION, RATHER THAN A SEPARATE
GUARANTY, DO THE ONE-ACTION AND
ANTIDEFICIENCY RULES BENEFIT THE THIRD
PARTY?
As discussed in Q5 above, a third party deed of trust
securing the borrowers obligation triggers application of the
one-action and antideficiency rules with respect to enforcement
of the obligation against the borrower. The question here is

California Real Property Journal Volume 28 Number 3

whether it triggers those rules only as to the borrower, or as to


the third party as well.
To the extent that the one-action and antideficiency rules
prohibit or limit a deficiency judgment, they are simply moot
with respect to the third party in this context. When the third
party has given only a deed of trust to secure the borrowers
obligation, the third party has not undertaken any liability for
a deficiency.52 As a result, regardless of one-action or antideficiency rules, and regardless of whether foreclosure is judicial or
nonjudicial, the creditor cannot recover a deficiency judgment
against the third party.
However, there are some ways in which a third party might
argue that the one-action or security-first rules of Code of Civil
Procedure section 726(a) impact the enforceability of its deed of
trust, directly or indirectly.
One possibility arises out of the one-action rules sanction
aspect, mentioned in Q7 above. If a creditor sues the borrower
on a debt secured by real property and omits from that action
any real property security for the debt, the borrower can assert
the one-action rule as a defense and require that the creditor
include the real property in the action. That is the rules affirmative defense aspect. But if the borrower does not assert the
defense and the creditor obtains a judgment on the debt, the
rules sanction aspect is triggered. At least when the encumbered real property is the borrowers, the sanction aspect extinguishes the creditors lien on the omitted real property.53
In Murphy v. Hellman Commercial Trust & Savings Bank,54
the Court of Appeal in 1919 held that a different result follows when the real property securing the borrowers obligation
is a third partys, rather than the borrowers own. Even though
the creditor had obtained a judgment on the debt against the
borrower, the court held that the third partys deed of trust
remained enforceable. The court considered this situation to be
governed by the broader principle, referred to in Q6 above, that
a guarantor or surety does not directly benefit from the oneaction rule by virtue of the underlying obligation being secured
by real property.55
However, an 1898 case in the California Supreme Court,
Commercial Bank of Santa Ana v. Kershner,56 which pre-dated
Murphy, did apply the one-action rule to extinguish a mortgage
on which both the borrower and the third party were mortgagors, encumbering jointly owned property, because the creditor
had obtained a judgment on the debt against the borrower. The
court in Kershner did not discuss, and perhaps was not presented
with, the question whether the sanction aspect of the rule
should have been limited to extinguishing only the borrowers
encumbrance of her interest in the property, and not the third
partys. Oddly, Kershner was cited in Murphy, on a different
point, without mention of Kershners treatment of the third
partys mortgaged interest in the property.57
If the sanction aspect of the one-action rule does apply in
this context, its protection appears to be waivable by the third
party. Civil Code section 2856(a)(3) enables a guarantor or
surety to waive [a]ny rights or defenses the guarantor or other
surety may have because the principals note or other obligation
is secured by real property, including any that are based upon,
directly or indirectly, the application of section 726. The third
party deed of trust secures the principals obligation, and section
2856(a)(3) draws no distinction based upon who provided the

real property security, so long as it secures the principals obligation. Such a waiver would apply only to the third partys protection from section 726(a), of course, not to the borrowers.
In addition to that possibility for direct application of section 726(a), two potential indirect applications, arising out of
suretyship law, might be relevant to a third party deed of trust.
First, under Civil Code section 2845, one of the Codes
suretyship provisions, the third party as surety has the right to
require that the creditor proceed first against the borrower as
principal obligor,58 unless the third party has waived that right.
However, because the third partys deed of trust secures the
borrowers obligation, thereby making the protections of section 726(a)s security-first rule applicable to the borrower (Q5
above), the creditor cannot proceed against the borrower without
first proceeding against the third partys real property collateral.
As a result, it is impossible for the creditor to comply with both
section 2845 and section 726(a).
That conundrum was addressed by the California Supreme
Court in the 1898 Kershner case mentioned above. Although
not citing section 2845 specifically, the court made clear that
the creditors compliance with the security-first rule was not
excused by the need to protect the third partys mortgage,
that in any event the third party who encumbers property to
secure the borrowers obligation is charged with knowledge of
section 726(a), and that the creditor should have prosecuted a
foreclosure action under the mortgage rather than taking a judgment against the borrower on the debt.59 Effectively, then, the
security-first rule trumps the third partys section 2845 right to
require first pursuit of the principal obligor. The creditors duty
to comply with the security-first rule is inherent in what the
third party agreed to when it encumbered its property to secure
the borrowers obligation.
A second possible indirect effect of section 726(a) arises
from the impact it might have on the third partys ability
to recover reimbursement from the borrower if the creditor
forecloses on the third partys real property. Such a reimbursement right clearly exists under suretyship law, because the sale
proceeds of the third partys property at foreclosure go toward
payment of the borrowers obligation.60 However, reimbursement in one-action and antideficiency contexts in California is
uncertain.
Under one view, associated most prominently with the
1968 Court of Appeal opinion in Union Bank v. Gradsky,61 if a
creditor is precluded from recovering an amount from the borrower by an antideficiency rule, a guarantor or surety who pays
that amount is also precluded from recovering reimbursement
for it from the borrower.62 Antideficiency rules are not directly
at issue in the present context (because the third party has no
liability for a deficiency), but section 726(a)s security-first rule
might be considered to have similar effect: Because the creditor
cannot recover from the borrower personally amounts that must
be recovered first from the third partys collateral, the third party
might also be precluded from obtaining reimbursement from
the borrower for those amounts.63 If that is indeed the law,
however, it does not provide a defense to enforcement of the
deed of trust. As with the third partys inability to exercise the
section 2845 right, discussed above, the inability to obtain reimbursement would be an inherent consequence of the creditors
compliance with the security-first rule, which the third party is

California Real Property Journal Volume 28 Number 3

charged with knowledge of when encumbering its property to


secure the borrowers obligation.64
It is not at all clear, though, that the security-first rule does
preclude a third partys reimbursement right. The Gradsky view
of reimbursement was specifically criticized by the California
Supreme Court in 1997, in dicta, in Western Security Bank v.
Superior Court, as unnecessary to the cases determination and
suggesting a much broader rule than its holding and analysis
warranted.65 The full significance of that criticism remains an
open question, but it obviously signals that the reimbursement
rights of a guarantor or surety in one-action and antideficiency
contexts may not turn solely upon whether the creditor could
have recovered the same amount from the borrower. In the
present context, denying reimbursement when the third party
has encumbered its property to secure the borrowers debt
would result in an outright windfall to the borrower from the
third partys collateral. If the third partys collateral had secured
a guaranty instead, the right to reimbursement for amounts
recovered from the property would be clear, because one-action
and antideficiency rules would not apply to the borrower (Q6
above). As discussed further in the Concluding Comment
below, there is little to justify a difference in result.
If the third party does have a reimbursement right, and if
the third party has not waived its rights and defenses as discussed
in Q4 above, then the creditor must be mindful that its actions
do not impair reimbursement. Impairing the right of reimbursement could impact enforceability of the deed of trust.66
Q9:
WHAT HAPPENS IF THE THIRD PARTY
EXECUTES NOT ONLY A DEED OF TRUST
SECURING THE BORROWERS OBLIGATION
BUT ALSO A SEPARATE, UNSECURED
GUARANTY OF THAT SAME OBLIGATION?
Ostensibly, this structure gives the creditor two independent sets of remedies with respect to the third party: foreclosure
remedies as a secured creditor under the third partys deed of
trust, and the remedies of an unsecured creditor under that
partys separate guaranty. The question is whether that dualremedy arrangement runs afoul of the one-action and antideficiency rules.
This structure was at issue in Indusco Management Corp.
v. Robertson,67 a 1974 Court of Appeal case. Third parties had
given a deed of trust to directly secure the borrowers obligation,
and also executed a separate unsecured guaranty of that same
obligation. The lender nonjudicially foreclosed under the deed
of trust. It then sought a personal judgment against the third
parties under their guaranty for the deficiency.
The Indusco court approached the situation exactly the
same as if the borrower, rather than the third parties, had
encumbered the real property. In particular, it applied Union
Bank v. Gradsky,68 in which a borrowers real property secured
the debt and the creditor, after foreclosing nonjudicially, sought
a deficiency recovery against the guarantor on an unsecured
guaranty. Consistent with the principle that a guaranty obligation is distinct from the underlying principal obligation, discussed in Q6 above, Gradsky held that the antideficiency rule
of Code of Civil Procedure section580d, which is triggered by
nonjudicial foreclosure, does not directly protect a guarantor.

But it also held that the creditors election of the nonjudicial


foreclosure remedy exonerated a guarantor by estoppel, because
it impaired the guarantors rights of subrogation and reimbursement against the borrower.69
In Indusco, the court determined that the guaranty in question did not include a sufficient waiver of the Gradsky estoppel
defense. For that reasonand not because the guarantors were
also the trustors on the deed of trust securing the borrowers
obligationthe court held that the guaranty could not be
enforced. The courts clear implication was that if the guaranty
had included a Gradsky waiver, it would have been enforceable,
just as if the deed of trust had been given by the borrower. Thus,
the Indusco court did not view the third parties deed of trust
as somehow making one-action or antideficiency rules directly
applicable to enforcement of their unsecured guaranty. This
is consistent with viewing the borrowers obligation and the
guarantors obligation as distinctthe former secured by real
property, the latter not.
A third party might argue to the contrary based on the
California Supreme Courts reasoning in Freedland v. Greco.70 In
Freedland (which did not involve a guaranty), the creditor took
two $7,000 promissory notes for the very same $7,000 obligation, together with a deed of trust purporting to secure only
one of them. The creditor nonjudicially foreclosed, then sued to
recover the remaining balance due under the note ostensibly not
secured by the deed of trust. Finding the redundant notes to be
a manifestly evasive device,71 and simply a form of attempted
waiver of the antideficiency rule of Code of Civil Procedure section 580d, the court held that section 580d barred a deficiency
recovery on both notes after foreclosure of the deed of trust.
In the present context, a third party might argue that taking
an unsecured guaranty for the same underlying obligation that
the third party has also secured with a deed of trust is analogous
to the dual notes in Freedland. This arrangement, it would
be argued, is an attempt by the creditor to have it both ways,
obtaining the benefits of real property security but at the same
time trying to retain a separate right to proceed as an unsecured
creditor, unhindered by one-action and antideficiency rules.
Undoubtedly, Freedland would apply if a third party
executed two separate guaranties of the same obligation and
purported to secure only one of them with a deed of trust.
Permitting enforcement of the purportedly unsecured guaranty
in that situation could have the effect of negating application of
the one-action and antideficiency rules to the guarantor.
But that is not the case when the third partys deed of
trust directly secures the borrowers underlying obligation. As
discussed in Q5 above, under current law such a deed of trust
unwaivably triggers the one-action and antideficiency rules
with respect to the borrower. That consequence would not be
negated by enforcing the guaranty as an unsecured obligation
of the guarantor. In addition, a guarantor is authorized by Civil
Code section2856(a)(3) to waive one-action and antideficiency
defenses that apply because the borrowers note is secured by
real property.
The reasoning of Freedland, then, appears to be distinguishable. But at a minimum it may raise the prospect of confusion,
so a lender should be very circumspect about this structure. If
a lender hopes to recover against other assets of a third party,
beyond the third partys real property collateral, another way to

California Real Property Journal Volume 28 Number 3

do so is to take a security interest in those assets at the outset.72


Indeed, that option should be considered regardless of whether
the third partys deed of trust secures the borrowers obligation
or a separate guaranty.
Q10: HOW DOES THE SHAM GUARANTY DOCTRINE
APPLY TO A THIRD PARTYS DEED OF TRUST IF
THE THIRD PARTY IS, FOR EXAMPLE, A GENERAL
PARTNER IN A BORROWER PARTNERSHIP?
In California it is well established that if a party purports to
guaranty a debt secured by real property, but is already liable for
that debt as a principal, the guaranty will not be given effect if
it serves to evade protection of that party by the one-action and
antideficiency rules. For example, because a general partner already
has joint and several liability as a principal for the debts of a limited
or general partnership,73 a guaranty by a general partner will not
enable the creditor to enforce the debt against the partner free from
those protections.74 Under this doctrine, such a guaranty is often
characterized as a sham, a nullity, or a purported guaranty, as
distinguished from a true guaranty.75
If a general partner gives a deed of trust on the partners
real property to directly secure the borrower partnerships obligation, the sham guaranty doctrine should not apply, even if the
obligation is also secured by the partnerships real property. The
reason is that, to the extent that the partner is already a principal
obligor, the deed of trust is simply not a guaranty or suretyship
obligation. It does not secure the debt of another, as discussed
in Q2 and Q3 above. Rather, it secures an obligation on which
the trustor, the general partner, is already a principal obligor.
Thus, the situation should be no different from any other in
which a principal obligor provides collateral, or additional collateral, to secure the principal obligation.76 No evasion of oneaction or antideficiency rules results.
On the other hand, if a general partner executes what purports to be a guaranty of the partnership debt and secures that
guaranty with a deed of trust, and the partnership obligation is
also secured by partnership real property, the sham guaranty
doctrine is obviously implicated. The guaranty is clearly within
the cases applying the doctrine. A court might readily conclude
that the guaranty fails, and the partners deed of trust, which
secures the guaranty, fails with it.
A more nuanced view of the sham guaranty doctrine
might support a different conclusion, however. Despite the doctrines rhetoric (sham, nullity, purported guaranty, etc.), its
actual substance is not to void the guaranty agreement per se,
but to ensure application of the one-action and antideficiency
rules to all principal obligors on a debt secured by real property, even if a principal obligor has been purportedly recast as a
guarantor. Thus, many cases articulate the doctrine as holding
simply that where a principal obligor purports to take on additional liability as a guarantor, nothing is added to the primary
obligation.77 This is not the same as saying that the guaranty
is void for all purposes.
Conceivably, then, the following distinction might be
made. Because the general partner is not truly a third party, the
partners guaranty is unenforceable to the extent that it would
impose liability on the partner beyond what would already be
the case by virtue of the partners status. However, to the extent
that the guaranty merely recapitulates that already-existing

liability, it is neither void nor is it in fact a guaranty. Taking that


view, the deed of trust securing the guaranty would be valid
for the same reason that a deed of trust directly securing the
partnerships obligation is valid: it simply provides additional
collateral for the principal obligation, and this does not evade
the one-action and antideficiency rules.
In the absence of reported cases supporting that argument,
however, a creditor would be ill-advised to rely on it in structuring a transaction. A deed of trust that directly secures the underlying obligation, rather than a guaranty, avoids the issue.
A CONCLUDING COMMENT
As has been seen, the two approaches to structuring a
transaction involving a third partys real property collateral
described in Q1 abovethe third party deed of trust structure
and the secured guaranty structureboth make the third party
a surety (Q2 and Q3 above), and trigger the same suretyship
law consequences (Q4 above). However, they have significantly
different one-action and antideficiency consequences. That is
because in one structure the third partys real property secures
the borrowers obligation, thereby attaching the one-action and
antideficiency consequences to that obligation (Q5, Q8 and
Q9 above), and in the other structure the real property secures
the third partys guaranty obligation, and that obligation takes
the one-action and antideficiency consequences (Q6 and Q7
above).
It might well be asked whether the resulting difference in
treatment of the two structures truly makes sense. For example,
it does not seem sensible that there is a difference in the oneaction and antideficiency consequences of the following two
transactions, which are functionally identical: (A) the third
party executes a deed of trust securing the borrowers obligation
directly; (B) the third party instead executes a guaranty, secured
by a deed of trust, and the guaranty provides that it is nonrecourse (i.e., that the creditors only recourse is against the real
property collateral). In the A transaction, the creditor could not
exercise the remedies of an unsecured creditor against the borrower, such as setting off against a bank account or suing on the
debt without judicial foreclosure (Q5), but in the B transaction
it could (Q6). In the A transaction, if the third partys collateral
is foreclosed upon, its suretyship right of reimbursement may be
problematic, but in the B transaction it is not (Q8).
The differing treatment of these two transactions seems
compelled by statutory language that, by its explicit terms,
dictates that the one-action and antideficiency rules apply to
any obligation secured by real property.78 The language draws
no distinction based upon whether the obligor of the secured
obligation and the mortgagor of the real property are the same.
That straightforward approach to the statutes is, at present, the
law under the California Supreme Courts 1912 decision in
Gnarini v. Swiss American Bank,79 discussed in Q5 above, which
protected a borrower under the security-first rule because the
borrowers debt was secured by a third partys mortgage. But the
court in Gnarini did not pause to ask whether that result made
sense, or to take into account the third partys suretyship right
of reimbursement from the borrower.80
Gnarinis approach is not the only possible reading of the
statutes. For example, an alternative view would be that, by its
very nature, third party hypothecation of collateral for anothers

California Real Property Journal Volume 28 Number 3

debt is an implied, non-recourse promise to pay the debt,


and that promise is what the third partys collateral should be
considered to secure, not the borrowers underlying debt. This
concept, of an implied, separate promise, can be seen in older
cases that characterize a third partys hypothecation as causing
the mortgaged property itself to become a guarantor.81 As the
Stearns suretyship treatise put it in 1951, [b]y a legal fiction,
the pledged or mortgaged property is considered to have promised to pay the debt if the debtor does not.82 This, of course, is
metaphor and legal shorthand. It is the owner of the land who
is a surety, but his liability is limited to the application of the
land to the payment of a debt for which another person, or his
property, is primarily liable.83
Under that view of third party hypothecation, as securing
a limited-liability promise of the third party to pay the debt,
the two structures discussed in this article would become one.
Both would be secured guaranties. The third partys collateral
would be considered to secure the third partys promise, express
or implied, recourse or non-recourse, to pay the debt. The oneaction and antideficiency rules would simply apply in all cases
to the third party, not to the borrower, unless the borrower had
also encumbered its own real property. That approach would
produce consistent one-action and antideficiency results, and
would also be consonant with suretyship law, which does not
distinguish in the treatment of a surety who promises to pay
anothers debt and one who hypothecates property for anothers
debt.84
At present, however, Gnarini is still controlling. It is therefore essential that, when negotiating or enforcing a transaction,
a lender carefully focus on the differing one-action and antideficiency consequences of the two structures as discussed in this
article. It is also essential that a lender recognize the suretyship
character of both structures, so that, when a transaction is documented, the statutorily-authorized waivers of rights and defenses
are obtained.
I thank Charles Bird, Jerome Grossman and Tony Toranto of Luce
Forward Hamilton & Scripps LLP, Mikel Bistrow of Duane Morris
LLP, and Brian Hulse of Davis Wright Tremaine LLP, for their
comments on earlier drafts. The views expressed in this Article are
those of the author only.
Michael T. Andrew (J.D. Stanford Law School
1979) is of counsel with Luce, Forward,
Hamilton & Scripps LLP in San Diego, practicing and consulting in the areas of real and
personal property secured transactions, real
estate lending, business bankruptcy, and commercial law. Mr. Andrew has been a frequent
lecturer and writer on bankruptcy and commercial law, and has taught at Stanford Law School, the University
of Colorado School of Law, and the University of San Diego
School of Law. Mr. Andrew is a contributing author on two CEB
treatises, California Mortgages, Deeds of Trust & Foreclosure
Litigation, and California Real Estate Finance Practice.

ENDNOTES
1 California suretyship law is set out primarily in Cal. Civ.
Code 2787-2856. See also Restatement (Third) of
Suretyship and Guaranty (1996), and UCC Committee
of the Business Law Section of the State Bar of California,
California Commentary on the Restatement of the Law Third,
Suretyship and Guaranty, 34 Loy. L.A. L. Rev. 231 (2000).
2 This Article uses the phrase one-action and antideficiency
rules as shorthand for several interrelated statutes applicable to obligations secured by real property: Cal. Civ. Proc.
Code 726(a), which, as judicially interpreted, includes
a one-action rule, precluding multiple actions on a debt
secured by real property, a security-first rule, requiring
that the creditor proceed first against the real property
security before enforcing the debt as a personal liability of
the borrower, and a one-form-of-action rule, mandating
judicial foreclosure as the method to judicially enforce a
debt secured by real property; id. 580b, an antideficiency
rule applicable to specified purchase-money transactions;
id. 580d, an antideficiency rule triggered by nonjudicial
foreclosure; and id. 726(b) and 580a, fair-value rules
applicable after judicial and nonjudicial foreclosure, respectively, which limit a deficiency judgment to the difference
between the total obligation and the greater of the foreclosure sale price and the propertys fair value (in 726(b))
or fair market value (in 580a).
3 Cal. Civ. Code 2787 (emphasis added). This section
was amended in 1939 to define guarantor and surety the
same, as quoted in text, and to abolish the prior statutory
distinction between guarantors and sureties. See 2 Roger
Bernhardt, California Mortgages, Deeds of Trust
and Foreclosure Litigation 9.88A, 9.88C (4th ed.
2010).
4 See also Restatement (Third) of Suretyship and
Guaranty 1(1)(a), 1(2)(b)(ii), and 1 cmt. g & illus. 6
(1996).
5 See, e.g., Garretson Inv. Co. v. Arndt, 144 Cal. 64, 65-66
(1904); Carson v. Reid, 137 Cal. 253, 255 (1902); see also
Cal. Civ. Code 2928 (A mortgage does not bind the
mortgagor personally to perform the act for the performance of which it is a security, unless there is an express
covenant therein to that effect.).
6 The hypothecation of property to secure the debt of
another is sometimes referred to as real suretyship, as
distinguished from the personal suretyship that arises
from a promise to pay the debt. See Stearns, The Law of
Suretyship 1.3 (James L. Elder rev., 5th ed. 1951). But
even in the real suretyship context, the principles governing personal suretyship are applied. Id.; see also infra note
20 and accompanying text.
7 Cal. Civ. Code 2792; see also Restatement (Third) of
Suretyship and Guaranty 9 (1996).
8 Cal. Civ. Code 2792.
9 See, e.g., Cal. Bank v. Kenoyer, 2 Cal. App. 2d 367 (1934);
see 2 Bernhardt, supra note 3, 9.88L.
10 Everts v. Matteson, 21 Cal. 2d 437, 447 (1942); see also
Restatement (Third) of Suretyship and Guaranty
1(1) (1996).

California Real Property Journal Volume 28 Number 3

11 See Restatement (Third) of Suretyship and Guaranty


1 cmt. p (1996); Cal. Com. Code 3419(a) (accommodation parties to negotiable instruments).
12 See Restatement (Third) of Suretyship and Guaranty
1(3) (1996), and id. cmt. h (The determination that a
contract establishing the secondary obligation gives rise to
suretyship status is based on substance, not form.); see,
e.g., Superior Wholesale Elec. Co. v. Cameron, 264 Cal. App.
2d 488, 493 (1968) (No particular form of agreement is
required to establish a suretyship contract. So long as the
agreement establishes the intention to create such a contract, no set words and form are required.).
13 61 Cal. App. 4th 561 (1998).
14 Id. at 568.
15 Cal. Civ. Code 2832; Mead, 61 Cal. App. 4th at 570.
16 The last sentence of Cal. Civ. Code 2832 (It is not
necessary for him to show that the creditor accepted him as
surety.) was added in 1939, abrogating prior cases to the
contrary. See Mead, 61 Cal. App. 4th at 569-71. Thus,
[i]f a creditor knows that its obligors have agreed between
themselves that one will be the principal and the other will
be the surety, the latter is bound to the creditor as a surety
only, even though he or she appears from the written instruments to be a principal. Id. at 571. The court in Mead
declined to follow Matthews v. Hinton, 234 Cal. App. 2d
736 (1965), in which a lessor who encumbered the fee to
secure a debt of the lessee was held to be a principal rather
than a surety. Matthews failed to take account of the 1939
change in section2832. See Mead, 61 Cal. App. 4th at 56971.
17 See Cal. Civ. Code 2846-49 (rights against principal),
2848 (contribution from cosureties), 2809-10, 2815, 281922, 2839, 2845, and 2850 (rights and defenses against
creditor). Regarding reimbursement, see infra notes 60-66
and accompanying text. Regarding the suretyship rights
and defenses generally, see 2 Bernhardt, supra note 3,
9.88O-9.88X.
18 Cal. Civ. Code 2845, and see also id. 2850, both
quoted infra note 58.
19 Cal. Civ. Code 2819; see, e.g., Driscoll v. Winters, 122
Cal. 65 (1898) (reduction of principals purchase obligation exonerated surety); and see 2 Bernhardt, supra note
3, 9.88V; cf. Restatement (Third) of Suretyship and
Guaranty 19 (1996). A different rule applies to accommodation parties on negotiable instruments, however,
under Cal. Com. Code 3605(c)-(d) (discharge limited to
loss that is caused by the modification with respect to the
right of recourse).
20 Cal. Civ. Code 2787. The Civil Codes suretyship
provisions do not differently treat third parties who acquire
guarantor or surety status by a promise to answer for
anothers debt and those who acquire it by hypothecating
property for anothers debt. See id. 2787-2856; see also
Restatement (Third) of Suretyship and Guaranty
1(1)(a) (1996) (definition of secondary party includes
one whose property is encumbered to secure the debt of
another, and provisions dealing with secondary parties
apply in the normal fashion).
21 Cal. Civ. Code 2856(a)(1).

10

22 Id. 2856(a)(3).
23 Id. 2856(a)(2).
24 See, e.g., Cal. Civ. Proc. Code 726(a) (applicable to
the recovery of any debt or the enforcement of any right
secured by mortgage upon real property or an estate for
years therein); id. 580a (applicable to an obligation for
the payment of which a deed of trust or mortgage with
power of sale upon real property or any interest therein
was given as security); id. 580d (applicable to a note
secured by a deed of trust or mortgage upon real property
or an estate for years). The purchase-money antideficiency
rule of 580b, however, is only triggered with respect to
an obligation of the purchaser secured by the purchased
property, either in favor of the vendor or, in the case of an
owner-occupied dwelling, a lender.
25 See Cal. Civ. Code 2953; DeBerard Props., Ltd. v. Lim,
20 Cal. 4th 659 (1999); Freedland v. Greco, 45 Cal. 2d 462,
467-68 (1955); 1 Bernhardt, supra note 3, 4.60-4.66,
5.64-5.70.
26 See, e.g., W. Fuel Co. v. Sanford G. Lewald Co., 190 Cal. 25,
27 (1922); Pac. Valley Bank v. Schwenke, 189 Cal. App. 3d
134, 142 (1987).
27 162 Cal. 181 (1912).
28 Id. at 184 (citations omitted). Gnarini cited only Commercial
Bank of Santa Ana v. Kershner, 120 Cal. 495 (1898), for the
proposition that a third partys mortgage has this effect on
enforcement against the borrower. However, in Kershner,
the mortgage was also executed by the borrower, on property jointly owned with the third party. Thus, there was
no occasion in Kershner to consider, and the court did not
discuss, whether a third partys mortgage would trigger the
security-first rule as to the borrower.
29 51 Cal. 3d 991, 999, 1003 (1990). Wozab is discussed infra
notes 34, 36 and 42 and accompanying text.
30 189 Cal. App. 3d 134 (1987).
31 Id. at 142. See also Pajaro Dunes Rental Agency, Inc. v.
Spitters (In re Pajaro Dunes Rental Agency, Inc.), 156 B.R.
263, 268 (N.D. Cal. 1993), aff d, 46 F.3d 1143 (9th Cir.
1995) (unpublished table decision).
32 40 Cal. App. 3d 456 (1974).
33 See, e.g., Cal. Civ. Proc. Code 483.010(b) (precluding pre-judgment attachment where claim is secured by
real property, except to some extent where the security
has become valueless or decreased in value to less than the
claim, without fault of the creditor).
However, if the loan is secured by the third partys deed
of trust and a security interest in personal property of the
borrower, the lender will be able to exercise its remedies
against the personal property collateral in accordance with
the mixed-collateral rules of Cal. Com. Code 9604(a).
Section 9604(a) is triggered when an obligation secured
by a security interest in personal property or fixtures is also
secured by an interest in real property of an estate therein.
That language does not distinguish based upon whether the
personal and real property collateral both came from the
same source. Regarding operation of the mixed-collateral
rules, see 2 Bernhardt, supra note 3, 9.12-9.23.
34 51 Cal. 3d 991 (1990).
35 207 Cal. 54 (1929).

California Real Property Journal Volume 28 Number 3

36 In Wozab, guarantors of a line of credit secured their guaranty with a deed of trust. The bank set off against the borrowers bank accounts and the guarantors bank accounts.
The court commented that [the borrowers] line of credit
with the bank was not secured by real property, and the
banks setoff against [the borrowers] deposit accounts is not
at issue in this appeal. 51 Cal. 3d at 996, n.1.
Bayless also involved a secured guaranty. The court observed
that it would have been permissible for the plaintiff creditors to sue the underlying obligor without proceeding on
the guaranty (and thus on the mortgage securing the guaranty): [T]he [guarantors] would not have been necessary
parties to said action, and the prosecution of said action
against [the principal obligor] alone might not have been a
bar to a subsequent action brought by plaintiffs against [the
guarantors] on their agreement to answer for [the principal
obligors] default. 207 Cal. at 58.
Thus, in both Wozab and Bayless, the court viewed the
underlying obligation as unsecured, notwithstanding that
security had been given for the guaranties. At issue in
both cases, however, was the impact of the creditor having
proceeded against the guarantors (see Q7), not against the
principal obligors.
37 Component Sys. Corp. v. Eighth Judicial Dist. Ct., 692 P.2d
1296, 1301 (Nev. 1985). The guaranties included California
choice-of-law provisions. Real property collateral was located
in Nevada. Some of the several deeds of trust secured the
underlying debt directly, another secured only a guaranty,
and another secured both the underlying debt and a guaranty. The court applied what it believed to be California
law to determine the relationship between the guaranties
and the underlying debt, then applied Nevadas one-action
rule to hold that an action against the underlying borrowers
on the debt extinguished the encumbrances. Given . . . the
fact that pursuant to Cal. Civ. Code 2787 the personal
guarantors are co-obligors of the corporate borrowers, all
the transactions under review should be treated as one loan
for the purposes of the one action rule. 692 P.2d at 1300.
The two California cases cited by the court in support of its
conclusion are discussed infra note 41.
38 See, e.g., Everts v. Matteson, 21 Cal. 2d 437, 444 (1942);
Loeb v. Christie, 6 Cal. 2d 416, 420 (1936); Talbott v.
Hustwit, 164 Cal. App. 4th 148, 151 (2008); Mariners Sav.
& Loan Assn v. Neil, 22 Cal. App. 3d 232, 235 (1971); Katz
v. Haskell, 196 Cal. App. 2d 144, 154-55 (1961).
39 Bank of S. Cal. v. Dombrow, 39 Cal. App. 4th 1457 (1995)
(ordered depublished Mar. 14, 1996) (applying Cal. Civ.
Proc. Code 580a to a guarantor); see also Talbott v.
Hustwit, 164 Cal. App. 4th 148, 154 (2008) (Sills, J., concurring).
40 See 2 R. Bernhardt, supra note 3, 9.88Z-9.89 (collecting and discussing cases); see, e.g., Talbott v. Hustwit, 164
Cal. App. 4th 148, 152 (2008) (case law is uniform in
holding section 580a does not apply to guarantors).

It has been argued that the 1939 statutory abolition of the
distinction between sureties and guarantors (see supra note
3) undermined the principle that guarantors are not directly
protected by the one-action and antideficiency rules when

41

42
43
44
45

46
47
48

49

the underlying obligation is secured by real property, and


that this principle is in any event unsound as a matter of
policy. That topic is beyond the scope of this Article, but a
detailed discussion of it by the present author can be found
at 2 Bernhardt, supra note 3, 9.88Z-9.89C.
In support of its conclusion the Nevada Supreme Court
cited only two California cases, Wiener v. Van Winkle, 273
Cal. App. 2d 774 (1969), and Am. Guar. Corp. v. Stoody,
230 Cal. App. 2d 390 (1964). Component Sys. Corp., 692
P.2d at 1300. In Stoody, the guarantor of a debt secured
by the borrowers real property sought to overturn a writ of
attachment on the guarantors property, on grounds that the
guaranty was, by virtue of the borrowers collateral, a secured
obligation. See former Cal. Civ. Proc. Code 537(1)
(repealed 1974), and current 483.010(b). Holding that the
guarantor had enforceably waived its right under Cal. Civ.
Code 2845 (quoted infra note 58) to require the creditor
to first pursue the borrower, as well as its entitlement under
Cal. Civ. Code 2849 to the benefit of every security
for the performance of the principal obligation held by the
creditor, the court upheld the attachment. In Wiener, the
creditor sued third parties as guarantors and indorsers of a
note secured by the borrowers real property. They argued
that the creditor was estopped because the intent was that
the creditor would first foreclose on the borrowers property.
The court held that the third parties had enforceably waived
their rights as guarantors under sections 2845 and 2849, and
that this precluded the claimed estoppel.
The courts in Stoody, 230 Cal. App. 2d at 393 and Wiener,
273 Cal. App. 2d at 786, both observed that the 1939
abolition of the distinction between guarantors and sureties
changed the pre-1939 concept that guaranties were entirely
separate obligations. But in each case the court appeared
to take that conclusion to mean simply that, post-1939,
guarantors have the same (waivable) rights under sections
2845 and 2849 that, prior to 1939, were available only to
sureties. Neither case involved or discussed a one-action or
antideficiency issue.
51 Cal. 3d 991 (1990).
207 Cal. 54 (1929).
See Wozab, 51 Cal. 3d at 997 (1990); Walker v. Cmty. Bank,
10 Cal. 3d 729, 733-34 (1974); and see text accompanying
note 53 infra.
See Freedland v. Greco, 45 Cal. 2d 462, 468 (1955) (other
sections of the Code of Civil Procedure which deal with
deficiency judgments (Code Civ. Proc., 726, 580a,
580b) refer to debts, obligations, or contracts secured by
a trust deed may be broader than the word note used in
section 580d) (dicta).
265 Cal. App. 2d 40 (1968).
Id. at 44; see also Krueger v. Bank of Am., 145 Cal. App. 3d
204, 212 (1983).
See, e.g., Passanisi v. Merit-McBride Realtors, Inc., 190 Cal.
App. 3d 1496, 1508-09 (1987) (creditors attorneys fee
award in prior injunction action brought by trustor); Willys
of Marin Co. v. Pierce, 140 Cal. App. 2d 826, 831 (1956)
(lease obligations secured by deed of trust).
Cal. Civ. Proc. Code 580as fair-value rule applies to

California Real Property Journal Volume 28 Number 3

11

deficiency judgments after nonjudicial foreclosure. Its


scope of operation is very limited because the later-enacted
section 580d normally bars a deficiency altogether after
nonjudicial foreclosure. See Dreyfuss v. Union Bank, 24
Cal. 4th 400, 407 n.2 (2000).
50 See supra notes 25-26 and accompanying text.
51 Cal. Civ. Code 2856(a)(3) (emphasis added).
52 See supra note 5 and accompanying text.
53 See Sec. Pac. Natl Bank v. Wozab, 51 Cal. 3d 991, 997 (1990);
Walker v. Cmty. Bank, 10 Cal. 3d 729, 733-34 (1974).
54 43 Cal. App. 579 (1919).
55 The court in Murphy wrote:
If [the creditor] first sued the principal debtor,
he was not subsequently barred from bringing
suit in foreclosure [against the third party].
Thus the rule in this state as to section 726
clearly is that this section applies to the primary
debtor and was enacted for his benefit; that
it does not apply to an individual guarantor
or surety, or to a subsequent indorser upon a
promissory note, nor in fact to any case where
there is no privity of contract existing between
the two obligations that is, where the primary debt and the obligation under the mortgage
are separate and distinct obligations.

43 Cal. App. at 586 (citations omitted).
In ONeil v. Gen. Sec. Corp., 4 Cal. App. 4th 587, 598 n.6
(1992), the court described Murphy, in dicta, as merely [holding] that when the primary debtors obligation is unsecured,
entry of judgment on that obligation does not release a third
party guarantor whose guarantee is secured by real property.
In fact, the Murphy opinion is very explicit that the third
partys real property secured the underlying debt, not a separate
guaranty. See Murphy, 43 Cal. App. at 580 and 583 ([T]he
question is put squarely in issue whether, the [third partys]
mortgage having been taken as collateral security for the payment of the purchase price specified in the lease note, the
plaintiff has lost his right to foreclose because of the judgment
against the primary debtor on the contract.).
56 120 Cal. 495 (1898).
57 Murphy, 43 Cal. App. at 584, quoting Kershner, 120 Cal.
at 498 (A debt may be secured by pledge, mechanics lien,
judgment lien, attachment, or otherwise, and yet the security may be reinforced by a mortgage on the same or other
property.). See also Ould v. Stoddard, 54 Cal. 613 (1880).
58 Cal. Civ. Code 2845 provides: A surety may require
the creditor, subject to Section 996.440 of the Code of
Civil Procedure, to proceed against the principal, or to
pursue any other remedy in the creditors power which the
surety cannot pursue, and which would lighten the suretys
burden; and if the creditor neglects to do so, the surety
is exonerated to the extent to which the surety is thereby
prejudiced. See also id. 2850 (Whenever property of a
surety is hypothecated with property of the principal, the
surety is entitled to have the property of the principal first
applied to the discharge of the obligation.).
59 120 Cal. at 500-01. As mentioned previously, the mortgage
in Kershner was executed by both the borrower and the third
party, encumbering jointly owned property. The Court noted

12

that the third party would have been fully protected by the
court if she was only a surety by the sale first of [the borrowers] interest in the property. Id., citing Cal. Civ. Code
2850, quoted supra note 58. Of course, if the sale first of
the borrowers interest left a remaining deficiency, sale of the
third partys interest would then be required before a deficiency
judgment could be taken and enforced against the borrower.
The potential statutory conflict between Cal. Civ. Code
2845 and Cal. Civ. Proc. Code 726(a) was noted
by the district court in Pajaro Dunes Rental Agency, Inc. v.
Spitters (In re Pajaro Dunes Rental Agency, Inc.), 156 B.R. 263,
269 (N.D. Cal. 1993), affd, 46 F.3d 1143 (9th Cir. 1995)
(unpublished table decision), but the court found that the
conflict was not actually present on the facts of the case and
did not address its resolution, noting that it is a problem
better addressed by the California legislature. In its unpublished opinion on appeal, however, the Ninth Circuit considered the issue to have been resolved by Kershner: That case
holds that a surety in California is charged with knowledge
of the one-action rule. Pajaro Dunes Rental Agency, Inc. v.
Spitters (In re Pajaro Dunes Rental Agency, Inc.), 1995 U.S.
App. LEXIS 734, at *5-6 (9th Cir. 1995).
60 See Cal. Civ. Code 2847 (If a surety satisfies the
principal obligation, or any part thereof, . . . the principal
is bound to reimburse what he has disbursed, including
necessary costs and expenses . . . .). By application of the
foreclosure sale proceeds to the debt, the third party has
satisfied the borrowers obligation to at least that extent.
(Alternatively, the third party might pay the debt to free its
property from the encumbrance.)

Similar to section2847, Restatement (Third) of Suretyship
and Guaranty 23(1) (1996) articulates a general rule for
the measure of a suretys reimbursement right as the reasonable cost of performing the secondary [i.e., suretyship] obligation, including incidental expenses. A comment observes:
Performance of the secondary obligation may
involve, among other things, the payment of
money, the performance of a nonmonetary
obligation, or realization by the obligee from
property of the secondary obligor in which the
obligee has a security interest or lien. The secondary obligors reasonable cost of performance
includes the amount of money paid (including
any interest or other charges imposed on the
secondary obligor as a result of the principal
obligors default), the reasonable cost of performing the nonmonetary obligation, or the
value of the property lost to the obligees realization as to collateral.
Id. 23 cmt. a.
61 265 Cal. App. 2d 40 (1968).
62 Id. at 46 (applying Cal. Civ. Proc. Code 580d):
It makes no difference to [the borrowers] purse
whether the recovery is by the original creditor
in a direct action following nonjudicial sale of
the security, or whether the recovery is in an
action by the guarantor for reimbursement of
the same sum.

....

California Real Property Journal Volume 28 Number 3

The Legislature clearly intended to protect the


debtor from personal liability following a nonjudicial sale of the security. No liability, direct
or indirect, should be imposed upon the debtor
following a nonjudicial sale of the security. To
permit a guarantor to recover reimbursement
from the debtor would permit circumvention of
the legislative purpose in enacting section 580d.
See also Heckes v. Sapp, 229 Cal. App. 2d 549, 554-55
(1964) (same, applying Cal. Civ. Proc. Code 580b).
The California Supreme Court later criticized Gradskys
reimbursement analysis. See infra note 65 and accompanying text. Gradskys holding is discussed infra notes 68-69
and accompanying text.
63 Under the California Supreme Courts ruling in Gnarini v.
Swiss Am. Bank, 162 Cal. 181, 184 (1912), discussed supra
notes 27-29 and accompanying text, the security-first rule
of Cal. Civ. Proc. Code 726(a) requires the creditor to
first proceed against the third partys real property collateral
before making any personal recovery against the borrower.
Because of that rule, amounts realized from the third partys
collateral cannot, instead, be obtained by the creditor from
the borrower. (Thus, in Gnarini, the creditor was required
to restore amounts it had set off from the borrowers bank
account in violation of the rule.) Possibly, then, under
a Gradsky-like view, this might mean that amounts realized from foreclosure on the third partys collateral, which
amounts the creditor could not have obtained from the
borrower, also cannot be recovered by the third party from
the borrower.
64 This situation must be distinguished from Gradsky itself, in
which the guarantors inability (or what the court thought
was the guarantors inability) to recover reimbursement
from the borrower did give rise to a defense to enforcement
of the guaranty. In Gradsky, that was because the impairment of the guarantors rights was caused by the creditors
election to foreclose nonjudicially rather than judicially,
thereby triggering the antideficiency rule of Cal. Civ.
Proc. Code 580d. 265 Cal. App. 2d at 45-47. The
inability to obtain reimbursement was not an inherent consequence of guarantying the debt in the first place.
By contrast, in Heckes v. Sapp, 229 Cal. App. 2d 549
(1964), the antideficiency rule in question was Cal. Civ.
Proc. Code 580b, which barred the creditor from recovering a deficiency against the borrower because the debt
was vendor purchase-money financing. The court held
that because section 580b barred the creditor from recovering against the borrower, the guarantor likewise could not
recover reimbursement from the borrower, but that this did
not provide a defense to enforcement of the guaranty. 229
Cal. App. 2d at 554-55. Here the guarantors inability to
recover reimbursement was not because of an election of
remedies by the creditor, but because the antideficiency bar
of section 580b would apply no matter what enforcement
mechanism the creditor utilized. The same would be true
if, as described in text, section 726(a)s security-first rule is
considered to preclude reimbursement.
65 15 Cal. 4th 232, 249 (1997). W. Sec. Bank itself involved a letter
of credit, not a guaranty. See Cal. Civ. Proc. Code 580.5.

66 See, e.g., Gradsky, 265 Cal. App. 2d at 46 (The creditor


has a duty to the surety not to impair the suretys remedies against the principal debtor.); see also Cal. Civ.
Code 2819; Restatement (Third) of Suretyship and
Guaranty 37. If a reimbursement right is recognized
in this context, an important question will be whether the
measure of reimbursement is the same regardless of how the
creditor forecloses.
67 40 Cal. App. 3d 456 (1974).
68 265 Cal. App. 2d 40 (1968).
69 After nonjudicial foreclosure the guarantor would be unable
to recover the deficiency by subrogation because the guarantor would be standing in the creditors shoes, and Cal. Civ.
Proc. Code 580d would apply directly. Gradsky, 265 Cal.
App. 2d at 45. Reimbursement would be precluded, the
court believed, because allowing it would impose upon the
borrower indirectly the very deficiency that section 580d
was intended to bar directly, and this would impermissibly
undermine the legislative purpose of section 580d. Id. at
45-46; see supra note 62. Regarding the California Supreme
Courts later criticism of this view of reimbursement, see supra
note 65 and accompanying text.
70 45 Cal. 2d 462 (1955); see also W. Fuel Co. v. Sanford G.
Lewald Co., 190 Cal. 25 (1922).
71 45 Cal. 2d at 467.
72 Recovery from additional collateral does not violate the
antideficiency rule of Cal. Civ. Proc. Code 580d and
is not limited by the fair-value rule of 580a. Dreyfuss v.
Union Bank, 24 Cal. 4th 400, 406 (2000); Freedland, 45
Cal. 2d at 466; Hatch v. Security-First Natl Bank, 19 Cal.
2d 254, 259-60 (1942).
73 Cal. Corp. Code 15904.04(a) (limited partnerships) &
16306(a) (general partnerships).
74 See, e.g., Riddle v. Lushing, 203 Cal. App. 2d 831 (1962)
(applying Cal. Civ. Proc. Code 580b) ; Union Bank
v. Dorn, 254 Cal. App. 2d 157 (1967) (applying 580d);
Prestige Ltd. Partnership-Concord v. East Bay Car Wash
Partners (In re Prestige Ltd. Partnership-Concord), 205 B.R.
427 (Bankr. N.D. Cal. 1997) (applying 726(a)), aff d,
164 F.3d 1214 (9th Cir. 1999).
The same rule has been applied to the settlor/trustee of
a borrower revocable trust, see Cadle Co. II v. Harvey, 83
Cal. App. 4th 927 (2000), Torrey Pines Bank v. Hoffman,
231 Cal. App. 3d 308 (1991), but see Talbott v. Hustwit,
164 Cal. App. 4th 148 (2008) (enforcing settlors guaranty
where the settlor was not also the trustee), and in some
circumstances to the shareholder of a borrower corporation,
see Valinda Builders, Inc. v. Bissner, 230 Cal. App. 2d 106
(1964). But see Knowles v. Sandercock, 107 Cal. 629, 64142 (1895).
The sham guaranty doctrine is discussed in detail in 2
Bernhardt, supra note 3, 9.89S-9.89X.
75 See, e.g., Cadle, 83 Cal. App. 4th at 929, 931, 934 n.8; River
Bank Am. v. Diller, 38 Cal. App. 4th 1400, 1420-24 (1995);
Union Bank v. Gradsky, 265 Cal. App. 2d 40, 42 (1968).
76 See Pac. Valley Bank v. Schwenke, 189 Cal. App. 3d 134
(1987); and see supra note 72.
77 Hoffman, 231 Cal. App. 3d at 319-20 (emphasis added);
see also Cadle, 83 Cal. App. 4th at 933; Dorn, 254 Cal.

California Real Property Journal Volume 28 Number 3

13

App. 2d at 159; Valinda Builders, 230 Cal. App. 2d at 110;


Riddle, 203 Cal. App. 2d at 834. In Everts v. Matteson, 21
Cal. 2d 437, 450 (1942), the California Supreme Court
determined that principal obligors had purported to guaranty their own obligation in an extension agreement, and
concluded: The extension agreement may not therefore be
construed as a contract of guaranty.
78 See supra note 24.
79 162 Cal. 181 (1912). See supra notes 27-29 and accompanying text.
80 If the third party can recover reimbursement from the borrower as a personal liability when the creditor could not
have done so, there is little purpose in applying the securityfirst rule to the borrower in the first place. If the borrower
is immunized from reimbursement liability, the result is a
windfall to the borrower from the third partys collateral.
Gnarini also did not consider the relevance, in a judicial
foreclosure action, of the post-sale right of redemption, or

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81
82
83
84

California Real Property Journal Volume 28 Number 3

how it would function in this context. See Cal. Civ. Proc.


Code 726(e), 729.010(a) (where deficiency judgment
may be ordered, property shall be sold subject to a right of
redemption), and 729.020 (Property sold subject to the
right of redemption may be redeemed only by the judgment
debtor or the judgment debtors successor in interest.)
(emphasis added).
See, e.g., Carson v. Reid, 137 Cal. 253, 255 (1902) (The
land described in the mortgage became the guarantor of the
payment of the note . . . .).
Stearns, supra note 6, 1.3.
Frederic P. Storke & Don W. Sears, Transfer of Mortgaged
Property, 38 Cornell L. Q. 185, 192 (1953).
See supra notes 6 and 20 and accompanying text.