Compliance Bulletin

Trial Court Decision Now Being Appealed Lets Commercial Guarantor off the Hook
July 18, 2016

Trial court decision now being appealed lets commercial guarantor off the hook. A case to watch now before a California Court of Appeal is called LSREF2 Clover Property 4, LLC v. Festival Retail Fund 1 357 North Beverly Drive, LP. It addresses whether a guarantor on a commercial real estate loan could evade its obligations under a number of related legal theories, the application of which in this case is detrimental to all commercial real estate lenders. In this case the guarantor successfully argued that the borrower and guarantor were so closely related that they should be treated as a single business enterprise, such that the guarantor (having stepped into the shoes of the borrower’s general partner) was essentially the same as the borrower and thus entitled to anti-deficiency protection. The trial court found that the lender had structured the transaction in order to treat the guarantor as the primary obligor, based on evidence that is quite routine, for example, that the lender reviewed all the entities’ formation documents and reviewed the guarantor’s financial condition. CBA filed an amicus brief before the Court of Appeal. CBA’s brief was ably prepared by Joseph Poppen with the law firm of Bryan Cave, a CBA affiliate member. See CBA’s Regulatory Compliance Bulletin for more information.