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When Banks Go Too Far in Guarantor Lawsuits

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Hackard Law attorneys regularly represent and defend California borrowers and guarantors in lender-initiated lawsuits. This litigation often involves the defense of prejudgment attachment proceedings that are ancillary to guarantee and judicial foreclosure actions.

We begin the process of representation with an initial review of our prospective client's case and possible defenses to any lender action. Part of this analysis is securing an understanding of the terms of the loan agreement, promissory note, deed of trust and commercial guaranty that are typically included in commercial real estate loan documentation. We are regularly asked by clients to review cases that leave us no doubt with regard to elements of lender-initiated sham guarantees.

The sham guaranty defense in commercial real estate loan litigation is established upon the principle that a borrower cannot also be the guarantor of his own debt. The essence of this defense is that the lending documents have been structured so that the guarantor has become the de facto borrower - in California, that means a borrower entitled to the unwaivable anti-deficiency protections afforded by statutory and case law.

For years now California law has been trending toward a more expansive protection of de facto borrowers, even if they might be nominally designated as guarantors in lender documents. These protections are intensively fact-based. In any guarantor defense agreement, facts should be addressed as to whether the borrower functioned as a genuine entity rather than a mere shell in the transaction.

Such circumstances can come about when a borrower is an inter-vivos or living trust and the guarantor is the settlor, trustee and beneficiary of the trust. There are a number of additional inquiries that must be conducted to gain a full understanding of whether the lender was purposely structuring the loan transaction to prevent the guarantor from benefiting from the protections of California's anti-deficiency laws - a trap if there ever was one.

If you're facing the challenge of a lender-initiated lawsuit, don't panic or take rash steps. Rather, take steps to defend your interests and assets - and that means contacting an attorney with the experience and skill to effectively counter a bank's inevitable attacks.

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