LSREF2 Clover Property 4 v. Festival Retail Fund 1
B259937M
| Cal. Ct. App. | Oct 6, 2016Background
- Festival Retail Fund 1, LP (Festival Fund) formed SPEs to buy retail property; it created Festival 357 (borrower) and FRF1 (general partner) before seeking financing. Festival Fund contributed equity to Festival 357.
- Anglo Irish Bank (the Bank) made a $25,025,000 loan to Festival 357 secured by the property; Festival Fund executed a guaranty capped at $1.5 million and expressly waived antideficiency protections (Civ. Code § 2856).
- Festival 357 defaulted; after assignments, LSREF2 Clover (Clover) acquired the loan and bought the property at a nonjudicial foreclosure for ~ $17.5M.
- Clover sued Festival Fund for breach of guaranty; trial court found the guaranty a sham, concluded Festival Fund was the true principal obligor (single business enterprise / alter ego with FRF1), and entered judgment for Festival Fund.
- Court of Appeal reversed: evidence showed Festival Fund itself structured the SPE arrangement pre-loan, the Bank did not force the entity form, the guaranty was limited and did not make Festival Fund the primary obligor, and antideficiency protections therefore did not bar enforcement of the guaranty.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether guaranty is a sham so antideficiency laws bar recovery | Clover: guaranty valid; Festival Fund is not primary obligor | Festival Fund: guaranty is sham because it was the true principal obligor and single business enterprise with FRF1, so unwaivable antideficiency protections apply | Reversed trial court: guaranty not a sham; substantial evidence does not show Festival Fund was the principal obligor or that lender structured transaction to evade antideficiency laws |
| Whether lender structured transaction to subvert antideficiency laws | Clover: Bank looked to borrower/property; lender did not create entities to hide obligors | Festival Fund: Bank required guaranty and corporate records, relied on Festival Fund’s finances, showing it viewed Festival Fund as primary | Held: bank did not dictate entity formation; requiring guaranty or records alone insufficient to show subversion; property appraisal and loan terms show lender relied on borrower/property |
| Whether corporate form should be pierced (single business enterprise/alter ego) | Clover: alter ego inapplicable; Festival Fund chose structure to limit liability and lender unaware of any failure of formalities | Festival Fund: FRF1 lacked assets, employees, meetings; unity of interest makes Festival Fund liable for borrower debts | Held: alter ego/single-enterprise theory not supported; doctrine is exceptional and does not apply where lender did not know of or cause any abuse of form and where parties chose the SPE structure |
| Effect of contractual language ("primary party", joint and several) | Clover: contract terms show Festival 357 is borrower; guaranty language does not convert Festival Fund into borrower | Festival Fund: contract phrases show substantive primary-obligor status | Held: contractual phrasing ambiguous or inapplicable; loan contains limitation directing lender to look solely to borrower/property for repayment, undermining Festival Fund’s claim |
Key Cases Cited
- CADC/RADC Venture 2011-1 LLC v. Bradley, 235 Cal.App.4th 775 (Cal. Ct. App.) (sham-guaranty analysis; lender vs. defendants who created ownership structure)
- California Bank & Trust v. Lawlor, 222 Cal.App.4th 625 (Cal. Ct. App.) (guaranty is sham only if guarantor is true principal obligor; focus on purpose/effect to detect circumvention of antideficiency laws)
- River Bank America v. Diller, 38 Cal.App.4th 1400 (Cal. Ct. App.) (lender-structured entity formation can support sham-guaranty defense)
- Cadle Co. II v. Harvey, 83 Cal.App.4th 927 (Cal. Ct. App.) (guarantor treated as principal obligor by operation of law may invoke antideficiency protections)
- Mesler v. Bragg Management Co., 39 Cal.3d 290 (Cal. 1985) (alter ego / single-enterprise doctrine elements and equitable limitations)
- Valinda Builders, Inc. v. Bissner, 230 Cal.App.2d 106 (Cal. Ct. App.) (undercapitalized or mere shell borrower relevant to sham-guaranty inquiry)