## Facts

- A borrower executed a $112,500 promissory note to a bank, secured by a first deed of trust on real property, along with a building loan agreement for construction disbursements.
- The borrower’s spouse, who acted as general contractor, executed a written guaranty of the borrower’s obligations.
- The guaranty included broad waiver language, including waiving any right to require the bank to proceed first against the borrower, other persons, or any security, or to pursue any other remedy.
- After construction was completed and funds were disbursed, the bank twice extended the note’s maturity with the guarantor’s written consent.
- When the note remained unpaid, the bank conducted a trustee’s sale (nonjudicial foreclosure) under the deed of trust and bid in the property for $112,500 (treated as fair market value), applying proceeds to taxes, sale costs, interest, and principal.
- A balance remained unpaid on the note, and the bank sued the guarantor to recover the deficiency.

## Issues

1. Whether a creditor that elects nonjudicial foreclosure under a deed of trust may recover the remaining unpaid balance from a guarantor when the anti-deficiency bar prevents the guarantor from obtaining subrogation reimbursement from the principal debtor.
2. Whether a broad guaranty waiver of rights to require pursuit of the debtor or collateral permits recovery from the guarantor despite the creditor’s election of a remedy that eliminates subrogation rights.

## Decision

- The court affirmed dismissal of the bank’s complaint after the trial court sustained the guarantor’s demurrer without leave to amend.
- Although the anti-deficiency statute does not, by its terms, directly bar an action against a guarantor, the creditor was equitably estopped from recovering from the guarantor.
- The estoppel applied because the creditor’s election of a trustee’s sale, combined with the statutory bar on deficiencies after nonjudicial foreclosure, destroyed the guarantor’s subrogation rights against the principal debtor.
- The guaranty’s general waiver language did not clearly authorize the creditor to extinguish the guarantor’s substantive subrogation rights and still collect the post-sale deficiency from the guarantor.

## Legal Principles

- After a nonjudicial foreclosure sale under a power of sale, no deficiency judgment may be obtained against the principal debtor under the anti-deficiency statute.
- A guarantor who pays the debt ordinarily has subrogation rights to pursue reimbursement from the principal debtor to the extent of the payment.
- A creditor that elects a remedy that, by operation of law, eliminates the guarantor’s ability to obtain reimbursement from the principal debtor may be equitably estopped from enforcing the guaranty for the resulting deficiency.
- General waivers in a guaranty of rights to require pursuit of the debtor or collateral are not necessarily a clear waiver of the guarantor’s substantive right to subrogation or a consent to the creditor’s destruction of that right.

## Conclusion

Because the bank chose a nonjudicial foreclosure that triggered the statutory bar on any deficiency against the borrower, the guarantor’s reimbursement/subrogation remedy against the borrower was extinguished; equity therefore prevented the bank from shifting that loss to the guarantor by suing on the guaranty for the remaining unpaid balance.


Union Bank v. Gradsky, 265 Cal. App. 2d 40 (Cal. Ct. App. 1968)