California Court: Guarantors Don’t Get Benefit of CCP Section 580a Appraisal

Prepared by Alan S. Petlak, Esq.
July 11, 2008

California’s Third Appellate District recently held that guarantors are not entitled to the protection afforded by California Code of Civil Procedure Section 580a, which requires the appraisal of real property security before a court may issue a deficiency judgment following a trustee’s sale. Talbott v. Hustwit, decided June 20, 2008.

Section 580a of the California Code of Civil Procedure was enacted after the Depression in 1933 to protect debtors from inflated deficiency judgments after a trustee’s sale. Section 580a provides, in relevant part, that before a court may issue a deficiency judgment following a trustee’s sale, the court must first determine the fair market value of the real property collateral at the time of sale. The court may then render judgment for not more than the amount by which the indebtedness due at the time of sale exceeded the fair market value of the real property. In 1941, the legislature enacted Section 580d, which created a complete bar to a deficiency judgment following a trustee’s sale. Section 580a was never repealed by the Legislature, and comes into play in only limited circumstances, such as when a junior creditor is not satisfied following a foreclosure by a senior lender. In that circumstance, pursuant to Section 580a, the junior creditor’s right to recover any remaining unpaid balance on its own loan will be subject to the fair market value determination required by Section 580a. Prior to the Talbott decision, there was speculation that Section 580a’s fair market value determination might also apply to an action seeking recovery of an unpaid balance against a guarantor.

The borrower was a trust, and the guarantors were the settlors and the secondary (not primary) beneficiaries of the trust. After the borrower defaulted on the loan, the lender acquired the property with a credit bid at a trustee’s sale. The lender then sued the guarantors for a deficiency equal to the difference between the unpaid loan balance and the credit bid. The trial judge entered judgment in favor of the lender for the deficiency.

Appellate Decision
On appeal, the guarantors argued that Section 580a should apply to guarantors as well as principal debtors, which would require the trial court to consider evidence that the property’s fair market value exceeded the total amount owed by the borrower. The appellate court rejected the guarantors’ arguments and held that Section 580a applies only to actions for recovery of deficiency judgments on the principal obligation and that it has no application to an action against a guarantor.

Significance of Decision
The decision makes clear that Section 580a does not apply to an action seeking recovery from a guarantor. Indeed, as noted by the court, the decision is consistent with Section 2856 of the California Civil Code which permits parties to a guaranty agreement expressly to waive the protections afforded principal obligors by antideficiency legislation, including Sections 580a, 580b, 580d and 726 of the California Code of Civil Procedure.

In a very thoughtful concurring opinion, Justice Sills, while agreeing with the majority decision based upon precedent, in light of the current “subprime mortgage crisis,” invited the Supreme Court and the Legislature to re-examine whether the anti-deficiency protections afforded to principal obligors should also apply to guarantors.

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