## Facts

- A lender made roughly $38 million in nonrecourse construction loans to a limited partnership formed to develop an apartment project.
- The project was controlled through entities owned or controlled by Sanford and Helen Diller; their development company also participated.
- In connection with the nonrecourse loans, the Dillers and the development company executed “carve-out” guaranties intended to cover specified liabilities beyond the borrower’s nonrecourse obligation.
- The borrower defaulted, and the lender completed a nonjudicial foreclosure sale; the sale proceeds did not satisfy the debt.
- The lender sued the guarantors to enforce the guaranties after foreclosure.
- The guarantors argued the structure functioned as an end run around California antideficiency protections and that the guaranties were invalid because they imposed obligations greater than the borrower’s nonrecourse liability.

## Issues

1. Whether Civil Code § 2809 renders unenforceable guaranties that impose obligations “larger in amount or in other respects more burdensome” than a borrower’s nonrecourse obligations.
2. Whether California antideficiency law and “sham guaranty” principles bar enforcement of insider guaranties after nonjudicial foreclosure.
3. Whether the guarantors raised triable issues supporting their cross-claim for negligent misrepresentation against the lender.
4. Whether a postjudgment attorney-fee award to the guarantors can stand after reversal of the merits judgment.

## Decision

- The court reversed the summary judgment for the guarantors on the lender’s guaranty claims.
- The court held the trial court erred in applying Civil Code § 2809 to invalidate the guaranties merely because the borrower’s debt was nonrecourse.
- The court rejected, on the summary-judgment record, the guarantors’ attempt to treat the guaranties as barred per se by antideficiency policy or as “sham” obligations.
- The court affirmed summary adjudication for the lender on the guarantors’ negligent misrepresentation cross-claim for failure to show triable issues on the tort’s elements.
- Because the merits judgment was reversed, the court reversed the attorney-fee and cost award to the guarantors predicated on prevailing-party status.

## Legal Principles

- Civil Code § 2809 does not automatically invalidate a guaranty simply because it creates liability beyond a borrower’s nonrecourse obligation; parties may contract for independent or additional “carve-out” liability, subject to other legal limits.
- Antideficiency statutes do not categorically immunize separate guarantors from liability after a nonjudicial foreclosure; a “sham guaranty” defense requires evidence that the guarantor is, in substance, the primary obligor or that the structure is an improper device to obtain a deficiency.
- In negotiated commercial lending transactions, negligent misrepresentation requires proof of actionable misstatements and justifiable reliance; conclusory allegations do not defeat summary adjudication.
- A prevailing-party attorney-fee award dependent on a judgment must be set aside when the underlying judgment is reversed.

## Conclusion

The court allowed the lender to pursue enforcement of negotiated carve-out guaranties notwithstanding the borrower’s nonrecourse loan and the lender’s nonjudicial foreclosure, while disposing of the guarantors’ negligent misrepresentation theory and vacating the guarantors’ fee award because prevailing-party status had to be reconsidered on remand.


River Bank America v. Diller, 38 Cal. App. 4th 1400 (Cal. Ct. App. 1995)