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California Bank & Trust v. Lawlor

California Court of Appeals, Fourth District, Third Division

November 25, 2001

CALIFORNIA BANK & TRUST, etc., Plaintiff and Respondent,
v.
DAVID LAWLOR et al., Defendants and Appellants. CALIFORNIA BANK & TRUST, etc. Plaintiff and Respondent,
v.
COVENANT MANAGEMENT GROUP, LLC, et al., Defendants and Appellants.

Ordered Field Date 12/20/13

Appeal from judgments of the Superior Court of Orange County, Nos. 30-2010-00379838 & 30-2010-00389709 William M. Monroe, Judge.

Grobaty & Pitet, Christopher L. Pitet and Erica P. Herczeg for Defendants and Appellants.

Bryan Cave, Ren R. Hayhurst, H. Mark Mersel and Lana Encheff for Plaintiff and Respondent.

OPINION

ARONSON, J.

Defendants and appellants appeal from the deficiency judgments the trial court entered after it granted plaintiff and respondent’s motions for summary adjudication on their breach of guaranty claims.[1] In opposing those motions, Defendants did not dispute any of the facts offered to establish the underlying loans, the guaranties Defendants signed, the loan defaults, Defendants’ refusal to pay under the guaranties, or the amounts due and owing after California B&T nonjudicially foreclosed on the real property security for the loans. Instead, Defendants argued their close relationship with the borrowers made Defendants primary obligors on the loans rather than true guarantors, and therefore California’s antideficiency law prevented California B&T from obtaining deficiency judgments against Defendants. In granting the summary adjudication motions, however, the trial court refused to consider Defendants’ “sham guaranty” defense because Defendants failed to allege it as an affirmative defense in their answers.

We affirm because Defendants failed to present sufficient evidence to create a triable issue on their sham guaranty defense, and therefore we do not reach California B&T’s contention that Defendants waived this issue because they failed to allege it as an affirmative defense. As explained below, Defendants failed to create a triable issue because they presented insufficient evidence to show there was no legal separation between them and the primary obligors on the loans, or that the lender who made the loan structured it in a manner to circumvent the antideficiency law.

I

FACTS AND PROCEDURAL HISTORY

Smith and Lawlor are real estate investors and developers. Along with Smith’s wife, they formed several entities they used for different development projects, including Cartwright Properties, LLC, Heritage Orcas Partners, LP, Heritage Orcas VL Partners, LP, Covenant Management, and Heritage Capital. Smith, his wife, and Lawlor effectively were the only members or partners in these entities either in their own name or through one of the other entities. For example, Smith and Lawlor owned and controlled Covenant Management, which owned and controlled Heritage Capital, which was the general partner of Heritage Orcas Partners and Heritage Orcas VL Partners (collectively, Heritage Orcas).

Alliance made an approximately $2 million loan to Cartwright Properties in December 2004, and an approximately $1.4 million loan to Cartwright Properties in October 2006. Cartwright Properties signed a business loan agreement, commercial security agreement, and promissory note for each loan. To secure the loans, Cartwright Properties gave Alliance trust deeds on its office building. Alliance required Smith, his wife, and Lawlor to execute separate commercial guaranties for each loan, and also required Covenant Management to execute a commercial guaranty for the second loan. Defendants contend Alliance required Smith, his wife, and Lawlor to submit extensive information on their individual financial resources before it made either loan.

In June 2008, Alliance loaned Heritage Orcas approximately $10.5 million pursuant to a business loan agreement and promissory note. As security for the loan, Heritage Orcas gave Alliance a trust deed on two parcels of real property. In making the loan, Alliance required Smith, Lawlor, Covenant Management, and Heritage Capital to execute a continuing guaranty. Defendants contend Alliance required Smith and Lawlor to submit extensive information about their individual financial resources before it authorized the loan.

California B&T acquired Alliance’s assets from the FDIC in February 2009. Shortly thereafter, Cartwright Properties and Heritage Orcas both defaulted on their loans and Defendants refused to pay on their guaranties. In June 2010, California B&T filed an action against Cartwright Properties, Smith, Smith’s wife, Lawlor, and Covenant Management to (1) recover on the loans to Cartwright Properties; (2) judicially foreclose on the real property security for the loans; and (3) enforce the commercial guaranties. In July 2010, California B&T filed a similar action against Heritage Orcas, Smith, Lawlor, Covenant Management, and Heritage Capital to (1) recover on the loan to Heritage Orcas; (2) judicially foreclose on the real property security for the loan; and (3) enforce the continuing guaranty Defendants signed. Defendants filed their answers to the two actions in September 2010.

During the first half of 2011, California B&T conducted nonjudicial foreclosure sales under the trust deeds that secured the loans to Cartwright Properties and Heritage Orcas. California B&T purchased the property Cartwright Properties pledged for a credit bid that left an outstanding balance on the two loans of nearly $2 million. California B&T also purchased the property that secured the Heritage Orcas loan for a credit bid that left an outstanding balance on its loan of more than $13 million.

In July 2012, California B&T filed a motion in each action seeking summary adjudication on its breach of guaranty claims, which would entitle it to deficiency judgments against Defendants for the outstanding balances on all loans. Defendants did not dispute that they signed the guaranties, nor did they challenge the balances California B&T claimed were due on the loans after it foreclosed on the security. Instead, Defendants argued the guaranties were sham guaranties and therefore they were actually the primary obligors on the loans, not true guarantors. As primary obligors, Defendants claimed they were entitled to the protection of California’s antideficiency statutes and California B&T could not obtain a judgment against them for the difference between the value of the security and the outstanding loan balances.

The trial court granted the motions on the grounds that California B&T met its initial burden to produce evidence establishing the elements of its breach of guaranty claims, and Defendants could not create a triable issue based on their sham guaranty defense because Defendants failed to allege it as an affirmative defense in their answers. After the trial court entered judgment in both actions, Defendants timely appealed and we consolidated the two appeals.

II

Discussion

A. Relevant Summary Adjudication Standards

“‘“The purpose of a summary judgment proceeding is to permit a party to show that material factual claims arising from the pleadings need not be tried because they are not in dispute.” [Citation.]’” (Affholder, Inc. v. Mitchell Engineering, Inc. (2007) 153 Cal.App.4th 510, 516.) A party may seek summary adjudication on whether a cause of action, affirmative defense, or punitive damages claim has merit or whether a defendant owed a duty to a plaintiff. (Code Civ. Proc., § 437c, subd. (f)(1).)[2] “A motion for summary adjudication... shall proceed in all procedural respects as a motion for summary judgment.” (§ 437c, subd. (f)(2).)

The moving party “bears an initial burden of production to make a prima facie showing of the nonexistence of any triable issue of material fact.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850-851.) To meet that burden, a plaintiff seeking summary adjudication on a cause of action must present evidence sufficient to establish every element of that cause of action. A plaintiff’s initial burden, however, does not include disproving any affirmative defenses the defendant asserts. “Once the plaintiff... has met [its] burden, the burden shifts to the defendant... to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto.” (§ 437c, subd. (p)(1); Oldcastle Precast, Inc. v. Lumbermens Mutual Casualty Co. (2009) 170 Cal.App.4th 554, 564-565.)

A triable issue of material fact exists “‘if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.’ [Citation.] Thus, a party ‘cannot avoid summary [adjudication] by asserting facts based on mere speculation and conjecture, but instead must produce admissible evidence raising a triable issue of fact. [Citation.]’ ...


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