Here’s a hypothetical situation: In 2007, John convinced his wealthy friends Paul, George and Ringo to invest with him in a surefire plan to develop some vacant Santa Clarita land into what we all know we need more of out here — a strip mall attached to more than 100
condominiums.
Back in 2007, any investment in California real estate was almost guaranteed to be golden. Believing that, John borrowed $1.5 million from his local bank. The bank agreed to do the loan on two conditions.
First, it would have to have a deed of trust against the land to be developed. Second, Paul, George and Ringo would have to jointly and severally guarantee the loan.
The Fab Four , knowing they were going to make millions, thought the bank’s demands were reasonable, and merely one necessary step on their way to fame and fortune. They signed the papers without reading them carefully and proceeded to develop the land, using both the bank’s money and their own.
Unfortunately for our mop-top quartet, their dreams ran smack into the worst recession since the Great Depression . They were unable to sell the condos and couldn’t find anyone to move in to the strip mall. Creditors were demanding payment, including the bank.
John told the bank it could have the property back as payment for the loan. But the bank, armed with the joint and several guarantees, went after Paul, George and Ringo instead. They replied, “Hey, you’ve got the land and John is the primary borrower. Go after him and the land, and leave us alone.”
To this, the bank responded, “Ah, we have your joint and several guarantees. We can pick and choose who we decide to go after, the timing of what we want to do to enforce the guarantees and which assets we will attach to satisfy the debt.”
Following that logic, the bank took possession of Paul and George’s interest in their plumbing business, Ringo’s stock portfolio and other assets of all three, including assets they owned with their respective wives. Predictably, the wives were less than happy.
The four friends appealed the bank’s behavior to the California Court of Appeals, hoping to get a sympathetic ear to their plight.
Unfortunately, they learned to their dismay that this exact issue had just been decided in another case, Bank of America v. Stonehaven (2010) 186 CA4th 719.
In Stonehaven, the court ruled that the personal guarantees were separate obligations from the person actually borrowing the money.
The court acknowledged that state law does give guarantors some protection in cases like these.
For instance, unless the parties agree otherwise, the bank would be forced to go after the land used as security for the loan.
Also, the guarantors could have kept the bank from going after their property using the argument that the bank was required to use one court action at a time rather than the shotgun approach the bank used in going after all of the assets of all of the guarantors.
Paul, George and Ringo could have insisted on making sure that these protections were in the loan agreements.
But they didn’t want to read all that boring paperwork, and they didn’t want to spend money on an attorney.
So they trusted the bank. The bank, wanting to protect its investment with the four guys, wrote up the agreement having the guys waive all of these protections and agreeing to be jointly liable for the loan.
Now, Paul, George and Ringo, in an effort to save up to $5,000 by hiring an attorney, will have to pay the entire $1.5 million, as well as the bank’s legal fees.©