California Court of Appeals, First District, First Division
CADC/RAD VENTURE 2011-1 LLC, Plaintiff, Cross-defendant, and Appellant,
RICHARD J. BRADLEY et al., Defendants, Cross-complainants, and Appellants.
Napa County Superior Court No. 2658559 Hon. J. Michael Byrne Judge
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Allen Matkins Leek Gamble Mallory & Natsis, Michael R. Farrell Cathy A. Hongola-Baptista and Kenyon Harbison for Plaintiff, Cross-defendant and Appellant and for Plaintiff and Appellant.
Pfeifer & De La Mora and Michael R. Pfeifer for California Mortgage Bankers Association as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant.
Murphy, Pearson, Bradley & Feeney, Michael P. Bradley, Tanis L. Kelly and Caitlin T. DiMaggio for Defendants, Cross-complainants and Appellants and for Defendants and Repondents.
Plaintiff brought this deficiency action to enforce commercial guaranty agreements executed by defendants Richard J. Bradley and G. Reynolds Yates. Defendants argued the guaranties were shams, and therefore unenforceable, due to their close relationship with the borrower on the subject loan, Nohea Napa Gateway, LLC (Nohea). Defendants in turn brought a counterclaim against plaintiff, as well as its servicing agent, Sabal Financial
Group, LP (Sabal), asserting their attempts to enforce the guaranties constituted an unfair business practice in violation of the Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200 et seq.).
Under California law, a lender may not pursue a deficiency judgment against a borrower where the sale of property securing a debt produces proceeds insufficient to cover the amount of the debt. Lenders may pursue deficiency judgments against guarantors, but only true guarantors. Where the borrower and the guarantor are the same, however, the guaranty is considered an unenforceable sham.
Here, the jury found in favor of defendants on the sham guaranty issue, and the trial court rejected defendants’ UCL counterclaim. Plaintiff now appeals on the ground that substantial evidence does not support the jury’s finding that the guaranties were shams. We agree and reverse. Additionally, defendants appeal contending the trial court erred in entering judgment in favor of plaintiff on their UCL claim. We find defendants’ contentions on this issue without merit and affirm the trial court’s ruling on the counterclaim.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
The loan and guaranties that give rise to this action were executed in connection with the purchase of a 7.38-acre parcel of undeveloped land in Napa (the Napa property). Defendants Bradley and Yates initially discussed purchasing the property as part of an exchange under Internal Revenue Code section 1031 (1031 exchange). Through a 1031 exchange, a taxpayer can defer taxes on gains from the sale of a property by using those gains to purchase a second property. (26 U.S.C. § 1031.) Where the exchange property is purchased first, an exchange accommodation titleholder (EAT) may temporarily hold the property and then transfer it to the taxpayer. In this case, defendants considered using the Napa property as an exchange property in which they could invest proceeds from the sale of the Interurban building, a Seattle property owned by No Boundaries, Ltd (No Boundaries). No Boundaries is a Washington corporation of which defendants each own 50 percent, and which they share with their spouses as community property. In its loan application documents, No Boundaries submitted financial statements reflecting assets during the period of 2003 through 2005 in excess of $6.5 million, along with other information indicating corporate financial activity.
In February 2006, Bradley offered to purchase the Napa property, made the initial $50, 000 deposit, and executed a real estate purchase agreement, through which he agreed to buy the property subject to certain terms and conditions. Shortly thereafter, defendants approached plaintiff’s predecessor-in-interest, Charter Oak Bank (Charter Oak), about obtaining a loan. On February 24, 2006, Michael Ledwich, a vice-president at Charter Oak, indicated the bank needed to review the purchase agreement and various financial information from the borrowing entity and its principals. He did not specify what that borrowing entity should be or the form it should take.
In March 2006, No Boundaries submitted a loan application to Charter Oak. After reviewing the financial information of No Boundaries and defendants, Charter Oak approved the loan on May 31, 2006. The loan approval documents indicate Charter Oak expected an EAT would initially assume the loan and then transfer its obligations to No Boundaries for the purposes of a 1031 exchange. These documents also indicate Charter Oak considered the primary source of repayment to be No Boundaries and the secondary source to be defendants, who would guaranty the loan. Charter Oak policy required loan guaranties from any individuals owning more than 20 percent of a borrowing entity. Ledwich indicated the purpose of this policy was to “pierce the corporate veil of the borrower.”
On June 6, 2006, two days before the loan agreement was executed, defendants decided to switch the borrowing entity from No Boundaries to Nohea. A tax consultant hired by defendants to assist with the 1031 exchange indicated the change was necessary to avoid California withholding tax consequences. Nohea was just an idea at this point, but on June 13, 2006, it filed with the California Secretary of State limited liability company articles of organization. Defendants were later appointed as managers of Nohea.
Charter Oak was informed of the change in borrowers on June 7, 2006. It did not request any financial information from Nohea. Ledwich understood Nohea’s only asset would be the Napa property. He testified Charter Oak was willing to allow Nohea to assume the loan because defendants had enough money to justify an extension of credit, and the name of the borrower was not a critical component of the deal.
On June 8, 2006, two days after the idea of Nohea was conceived, Nohea and Charter Oak executed a business loan agreement for $2.1 million. The loan was secured by a deed of trust against the Napa property executed by Nohea in favor of Charter Oak. Both defendants executed commercial guaranties for the full amount of the loan. As part of the guaranty agreements, defendants waived all their rights and defenses under California’s antideficiency statutes.
The following day, Bradley, No Boundaries, Nohea, and an EAT executed an assignment agreement, an exchange agreement, and a lease. Under the assignment agreement, Bradley assigned his rights to purchase the Napa property to Nohea. The exchange agreement indicated the EAT was the sole owner of Nohea, and the EAT and Nohea would hold the Napa property for the benefit of No Boundaries in order to facilitate the 1031 exchange. The agreement further provided that, within 180 days, the EAT would deliver to No Boundaries all of its interest in Nohea. Additionally, Nohea agreed to lease the Napa property to No ...