by
Stephen M. Fenster In addition to a
lender taking real property security from a borrower, a
lender often attempts to obtain a guaranty because a
guarantor has less protection than a borrower/trustor has.
The lender has often attempted to designate the borrower as
a guarantor rather than a trustor. This will often backfire
because if a court rules that a guarantor of a secured debt
is the debtor in disguise, the guarantor acquires all the
protections the law furnishes to the trustor, including that
the lender proceed by a way of a judicial foreclosure, in
lieu of a trustee’s sale to allow for a future
deficiency; requires the lender to proceed first against the
real property under the “one-action rule”; or
protection in purchase-money cases where the code protects
the borrower from a deficiency; and protection in
private-sale foreclosures where no deficiency after the
trustee’s sale is permitted. The surest way for
the lender to invite trouble is to insist that the intended
borrower find someone else to take title so that the
borrower can become the guarantor instead. Often times, the
lender requires the borrower to create a single purpose
entity such as a corporation, limited partnership, or
limited liability company to act as the borrower. The issue before
the courts forces the courts to decide whether the guarantor
is truly distinct from the party or parties actually liable
for repayment of the loan. The independent solvency of the
borrower may he controlling. Therefore, where the borrower
entity, such as a single purpose entity, has no independent
solvency or capitalization separate from the guarantor, the
court may find that the guaranty is a “sham” and
that the guarantor as the true borrower is entitled to all
the protections. If the lender then proceeds, in the event
of a default, without recognizing the protections that the
sham guarantor would have, the lender would lose the ability
to obtain a deficiency against the guarantor and be limited
to whatever value the real property security has at the time
of a trustee’s sale or foreclosure. Otherwise, the
lender is required to comply with all anti- deficiency
protections that the borrower has.
