## Facts

- Cornelius and Elena Gillespie bought an apartment building and executed a $40,000 promissory note secured by a second deed of trust.
- The note was assigned through intermediaries and ultimately came to John F. Bauman as part of consideration for his interest in a separate property transaction.
- Edward Castle, William Dias, and Samuel Stewart assigned the note to Bauman with recourse and executed a written guaranty allocating percentage liability (Castle 25%; Dias 37.5%; Stewart 37.5%).
- The guaranty stated Bauman could proceed “directly and independently” against the guarantors and waived any requirement that Bauman first proceed against the security.
- The Gillespies defaulted on payments and fell behind on the first deed of trust.
- Bauman elected to pursue nonjudicial foreclosure under the power of sale in the second deed of trust; defendants received notice of the trustee’s sale.
- The trustee’s sale proceeds were insufficient to satisfy the note, and Bauman sued the guarantors for the remaining balance.
- The trial court entered judgment for the guarantors based on intervening authority applying antideficiency policy to guarantor liability after nonjudicial foreclosure.

## Issues

1. Whether a creditor who elects nonjudicial foreclosure under a deed of trust, thereby eliminating the principal obligors’ deficiency liability under California antideficiency law, is equitably barred from recovering the resulting deficiency from guarantors.
2. Whether guaranty language allowing the creditor to proceed directly against guarantors and waiving prior resort to security constitutes a clear and enforceable waiver of the guarantors’ equitable defense based on loss of subrogation rights.
3. Whether a separate reimbursement arrangement benefiting the guarantors affects the creditor’s ability to recover from them after a nonjudicial foreclosure.

## Decision

- The Court of Appeal affirmed judgment for the guarantors.
- The court held that the creditor’s election of nonjudicial foreclosure triggered antideficiency consequences that eliminated the principal debtors’ deficiency liability and, in turn, impaired the guarantors’ subrogation rights against the principal debtors.
- Because that impairment arose from the creditor’s chosen remedy, the guarantors could assert an equitable defense barring the creditor’s deficiency claim against them.
- The guaranty’s “proceed directly” and “no need to exhaust security” clauses were insufficient to waive this defense because they did not clearly and expressly address liability despite antideficiency effects and loss of subrogation.
- The guarantors’ separate reimbursement protection did not alter the creditor’s election, the antideficiency consequences, or the availability of the equitable defense.

## Legal Principles

- When a creditor elects nonjudicial foreclosure under a power of sale and that election eliminates the principal obligor’s deficiency liability under antideficiency law, the creditor may be equitably barred from recovering the deficiency from a guarantor because the election destroys or materially impairs the guarantor’s subrogation rights.
- The guarantor’s protection operates as an equitable defense tied to impairment of subrogation, not as a direct invocation of the principal obligor’s statutory antideficiency defense.
- A guarantor may waive this equitable defense only by clear, express terms that contemplate nonjudicial foreclosure’s antideficiency consequences and accept continued liability despite the resulting loss of subrogation.
- General waivers concerning the order of remedies (e.g., permission to sue guarantor first or waiver of exhaustion of security) do not, without more, constitute an effective waiver of the defense.

## Conclusion

The court held that a creditor who chooses nonjudicial foreclosure and thereby extinguishes the principal debtors’ deficiency liability cannot recover the remaining deficiency from guarantors unless the guaranty contains a clear, express waiver acknowledging and accepting the antideficiency and subrogation consequences of that election.


Bauman v. Castle, 15 Cal. App. 3d 990 (Cal. Ct. App. 1971)