LSREF2 Clover Property 4, LLC v. Festival Retail Fund 1, LP

Since guarantor structured a real-estate secured loan to an affiliate for its own business reasons and guaranteed only 5% of the loan amount, there was no substantial evidence that guarantor was the principal debtor or that the transaction was a sham to avoid the anti-deficiency laws.  Judgment for the guarantor of a defaulted real-estate secured loan is reversed.  No substantial evidence supported the trial court’s finding that the guarantor was the loan’s principal obligor and thus that the guarantee was a sham intended to avoid anti-deficiency protections.  The borrower was the one that suggested the form the transaction ultimately took, forming a special purpose entity (an limited partnership in which the guarantor was a 99.99% owner, but the limited partner) for the purpose of holding the property, obtaining the purchase money loan, and protecting the guarantor from liability.  Furthermore, the guarantee was for only $1.5 million of a $25 million loan, showing that the lender was not principally relying on recovery from the guarantor to protect it from loss.  The guarantor could not escape liability by claiming it was the borrower’s alter ego because it (the guarantor) had neglected to perform the formalities needed to maintain the borrower’s separate identity—particularly as the lender in this case was mostly unaware of the guarantor’s neglect.

California Court of Appeal, Second District, Division 2 (Boren, P.J.); October 4, 2016; 2016 WL 5765423

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