Guarantors are responsible to lenders for the debts that they guarantee. Unfortunately, some guarantors try to avoid this responsibility by asserting the sham guaranty defense, a defense with poorly defined criteria and an inconstant application. The current lack of clarity surrounding the sham guaranty defense has rendered it susceptible to abuse by runaway guarantors and left lenders uncertain about how to best structure their commercial real estate loan transactions. Against this backdrop, this Note surveys the current state of the sham guaranty defense in California, focusing both on the historical development of the defense and the common factual scenarios in which it is asserted. Next, this Note explores how the California courts’ uneven treatment of the defense has resulted in confusion, unfair results, and an expansion of the defense that favors guarantors. Finally, this Note argues that the California Legislature should intervene and provide guidance to the courts about the proper scope of the sham guaranty defense. To assist in this effort, this Note offers proposed statutes that legislators and other interested parties may consider in their attempts to provide some much-needed stability to this area of commercial lending law.
Runaway Guarantors: Reevaluating the Scope of the Sham Guaranty Defense,
45 Loy. L.A. L. Rev. 1391
Available at: https://digitalcommons.lmu.edu/llr/vol45/iss4/8