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

Facts: A limited partnership (LP) enters into a purchase agreement for a commercial property. The agreement provides the LP the option to take title to the property under an entity owned by the LP to limit its liability. The LP forms an entity to take title to and obtain a business mortgage secured by the property. To further induce the lender to make the mortgage, the LP enters into a written guaranty for a portion of the mortgage amount, waiving any antideficiency protections it has by law. Later, the entity defaults on the mortgage and the mortgage holder nonjudicially forecloses.

Claim: The mortgage holder seeks to collect the guaranty amount from the LP, claiming the LP breached its guaranty agreement and is obligated to pay since the LP agreed to act as guarantor and waive any antideficiency protections it had under the law.

Counter claim: The LP claims the guaranty is a sham and the LP is not obligated to pay the guaranty amount since, as the owner of the entity that obtained the business mortgage, the LP was also an obligor on the mortgage — not just a guarantor — and, thus, covered by unwaivable antideficiency protections.

Holding: A California court of appeals holds the LP did not enter a sham guaranty and is obligated to pay the guaranty amount since the LP intentionally structured the transaction with the separate entity as the obligor and the LP as the guarantor, excluding the LP from antideficiency protections that only cover the obligor. [LSREF2 Clover Property 4, LLC v. Festival Retail Fund 1, LP (October 4, 2016)_CA4th_]


Read the case text here.
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