Series AGI West Linn of Appian Group Investors DE LLC v. Eves, 217 Cal.App.4th, 156

In this case, Guarantor guaranteed a second loan on commercial property, secured by a junior deed of trust. The Guaranty specifically excluded certain assets of the Guarantor, including a residence he had in Lake Cuomo, Italy. When the senior deed of trust was foreclosed upon, the lender on the second loan, Series AGI, filed suit against the Guarantor to recover its losses on the loan. At that point, the Guarantor had already sold his Lake Cuomo property. Series AGI sought to attach the proceeds from the sale of the property; however, the Guarantor argued that the property had been specifically excluded under the Guaranty, and that it followed to reason that the proceeds from the sale were also excluded. The Court disagreed.

The Court held that since under California law “competent parties have the ‘utmost liberty of contract'” and since the Guarantor was a sophisticated investor, assisted by legal counsel, he should have expressly excluded proceeds from the sale of the property, along with the property itself, in the Guarantor’s list of excluded assets. The Court stated that it was unwilling to “insert into the contract language which one of the parties now wishes were there.” The Court enumerated various places in the loan documents where “proceeds” were addressed (i.e. beneficiary’s rights to proceeds under the deed of trust, proceeds from condemnation awards, insurance proceeds, etc….) and stated that if the Guarantor intended that proceeds from the sale of his assets be excluded from the Guaranty, the language of the Guaranty should have expressly reflected this intent.

The Guarantor attempted to argue that it did not make sense for the creditor to be able to attach the proceeds because if a guarantor could not repay a loan, the only way for it to retain its assets would be to hold onto them. In other words, if the proceeds could be attached, a guarantor would have no incentive to sell its assets to repay creditors. The Court basically responded that a sophisticated investor should have thought of this risk in advance and written its contract properly to protect its assets.

BOTTOM LINE: Be as specific and explicit as possible in agreements to exclude assets from creditors, including derivatives of that asset, such as profits, proceeds, royalties, rents, income, etc…

“This information is for educational purposes only and not intended to constitute legal advice. Every project and property is unique. Please seek legal counsel for advice specific to your project.”