Chang guaranteed three construction loans, totaling 4 million dollars, for another party. In the guarantees Chang waived the right to require the Bank to proceed first against the borrower, or foreclose against the borrower’s property. The other party defaulted, and the bank went after Chang first, filing a lawsuit and seeking a writ of attachment against HER personal property, that was not security for the loans.
The trial judge said no to the writ, claiming that C.C.P. Section 483.010 does not allow attachment on a claim secured by real property. The court of appeals said no, the writ can attach to Chang’s property.
The appellate judges pointed out that the guarantee is a separate and independent obligation from the principal debt (the underlying construction loans) Though the construction loans were secured by real property, the guaranties were not. Thus, the 483.010 prohibition does not apply, so long as the guarantor waives their right to require the bank to go first after the security for the original loans.
Without a waiver, the guarantor may require that the bank proceed against the borrower or foreclose the real property. If the bank neglects to take such action on the surety’s demand, the surety is exonerated to the extent that he or she is prejudiced.
However, The guaranty forms used by most lenders provide that the guarantor waives most of their protective rights and usually include a waiver by the guarantor of the obligation to foreclose on the security prior to recovery of the debt from the guarantor. These waivers are enforceable.
Why did the bank go after Chang’s property first? It was probably more valuable. The default occurred quickly, so construction was probably not completed. Her property was a sure thing- they could always go after the borrower, and the other property, later. If they held a non-judicial (trustee’s) sale of the original property, and there was a deficiency, the anti-deficiency laws prohibit the bank from seeking the deficiency from the guarantor.
A Guarantor is guaranteed to face liability if there is any problem with the loan. It is a risky device, and should be used with care.
United Central Bank v. Sup. Court (2009) 179 CalApp 4th 212