Wells Fargo Bank Nat. Assn. v. Rolling Willow LLC CA3

Filed 5/25/16 Wells Fargo Bank Nat. Assn. v. Rolling Willow LLC CA3
NOT TO BE PUBLISHED
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(Sacramento)
----
WELLS FARGO BANK NATIONAL C078520
ASSOCIATION,
(Super. Ct. No.
Plaintiff and Respondent, 34201000091328CUCLGDS)
v.
ROLLING WILLOW LLC,
Defendant and Appellant.
“California’s antideficiency statutes [citations], enacted during the Depression,
limit or prohibit lenders from obtaining personal judgments against borrowers where the
lender’s sale of real property security produces proceeds insufficient to cover the amount
of the debt.” (Talbott v. Hustwit (2008) 164 Cal. App. 4th 148, 151.) “These protections
cannot be avoided by artifice or waived through a private agreement.” (CADC/RADC
Venture 2011-1 LLC v. Bradley (2015) 235 Cal. App. 4th 775, 783 (Bradley).)
1
One of the antideficiency statutes is Code of Civil Procedure1 section 580d. As
relevant here, subdivision (a) of that statute provides, as a general rule, that “no
deficiency shall be owed or collected, and no deficiency judgment shall be rendered for a
deficiency on a note secured by a deed of trust . . . on real property . . . in any case in
which the real property . . . has been sold by the . . . trustee under power of sale contained
in the . . . deed of trust.” Under subdivision (b), however, the bar in subdivision (a) “does
not affect the liability that a guarantor . . . might otherwise have with respect to the
deficiency.” Thus, “a lender may recover a deficiency judgment from a guarantor who
waives his or her antideficiency protections, even though the antideficiency statutes
would bar the lender from recovering that same deficiency from the primary borrower.”
(Bradley, supra, 235 Cal.App.4th at p. 784.)
“However, to collect a deficiency from a guarantor, he must be a true guarantor
and not merely the principal debtor under a different name.” (Cadle Co. II v. Harvey
(2000) 83 Cal. App. 4th 927, 932.) “It is well established that where a principal obligor
purports to take on additional liability as a guarantor, nothing is added to the primary
obligation. [Citations.] The correct inquiry set out by the authority is whether the
purported debtor is anything other than an instrumentality used by the individuals who
guaranteed the debtor’s obligation, and whether such instrumentality actually removed
the individuals from their status and obligations as debtors. [Citation.] Put another way,
are the supposed guarantors nothing more than the principal obligors under another
name? [Citation.] . . . [T]he legislative purpose of the antideficiency law may not be
subverted by attempting to separate the primary obligor’s interests by making a related
entity the debtor while relegating the true principal obligors to the position of
guarantors.” (Torrey Pines Bank v. Hoffman (1991) 231 Cal. App. 3d 308, 319-320.)
1 All further section references are to the Code of Civil Procedure.
2
“Where the borrower and the guarantor are the same, . . . the guaranty is considered an
unenforceable sham.” (Bradley, supra, 235 Cal.App.4th at p. 780.)
In this case, the question is whether the purported debtor -- a limited liability
company that was formed to serve as a vehicle for the acquisition of a shopping center by
another limited liability company in a 1031 exchange2 -- was nothing more than an
instrumentality used by the second limited liability company to acquire the shopping
center, such that the second company’s guarantee of the note secured by a deed of trust
on the shopping center must be treated as a sham. On the record before us, we conclude
there is a triable issue of fact on this point. Accordingly, we will reverse the summary
judgment entered in favor of the lender on the guaranty.
FACTUAL AND PROCEDURAL BACKGROUND
Before the transactions at issue in this case, James and Ruth Ku,3 a married
couple, jointly owned a limited liability company, defendant Rolling Willow, LLC,
which in turn owned and operated two sports and fitness clubs, including real property.
While James did, at times, serve as the managing member of Rolling Willow, mostly it
was Ruth who filled that role, and in her capacity as managing member Ruth “did the
accounting, negotiated contracts and oversaw both clubs.”
In or around 2007, tiring from the work load of running two athletic clubs, the Kus
began considering selling Rolling Willow’s remaining real estate and investing in a
shopping center they saw for sale on Fair Oaks Boulevard in Carmichael, known as
2 “Through a 1031 exchange, a taxpayer can defer federal taxes on gains from the
sale of a property by using those gains to purchase a second property. (26 U.S.C.
§ 1031.)” (Bradley, supra, 235 Cal.App.4th at p. 780.)
3 To avoid confusion, as necessary we will refer to the Kus individually by their
first names.
3
Carmichael Town Center.4 During the investigation into the purchase of the shopping
center, it came to Ruth’s attention that Rolling Willow could save on capital gains taxes
from the sale of the athletic club property by entering into a 1031 exchange.
Ruth conducted research regarding 1031 exchanges and ultimately, through
Rolling Willow, hired a company that specializes in facilitating such exchanges: Asset
Protection Intermediary (API). On November 8, 2007, Rhonda Hall of API forwarded to
the Kus and to Lorraine Lew of Alliance Title Company, which was apparently the
escrow agent for the purchase of the shopping center, documents necessary for the
closing of that purchase. Those documents included a statement of closing conditions
dated November 6, 2007, and an exchange accommodation agreement to be signed by
Rolling Willow, which API had signed on November 8.
The exchange accommodation agreement -- which bore the subtitle “Transfer of
Membership Interest in Disregarded Entity” -- was an agreement between Rolling
Willow (as the “Exchanger”), API, as the exchange accommodation titleholder, and a
new limited liability company -- Carmichael Town Center LLC -- as the “Disregarded
Entity.” (Bolding omitted.) The purpose of the agreement was to allow Rolling Willow
to engage in what is known as a “reverse” 1031 exchange, in which existing property
(referred to as the relinquished property) is exchanged for new property (referred to as the
replacement property), but the replacement property is purchased first and the
relinquished property is sold later. In such an exchange, “an exchange accommodation
titleholder . . . may temporarily hold the [replacement] property and then transfer it to the
taxpayer.” (Bradley, supra, 235 Cal.App.4th at p. 780.)
4 To avoid further confusion, we will refer to the shopping center as such (the
shopping center), and we will use the name Carmichael Town Center to refer to the
limited liability company that was created to take title to the shopping center, as
described hereafter.
4
Under the exchange accommodation agreement, the reverse exchange of property
was to be accomplished by API acquiring “ ‘incidents of ownership’ ” of the shopping
center “by and through its ownership of 100% of the outstanding membership
interests . . . in the Disregarded Entity,” i.e., the new limited liability company known as
Carmichael Town Center. A limited liability company with a single member is referred
to as a “disregarded entity” because, for federal income tax purposes, unless it elects to
be classified as an association, such a company is “[d]isregarded as an entity separate
from its owner.” (26 C.F.R. § 301.7701–3(a), (b)(ii) (2012).) Thus, Carmichael Town
Center was to acquire title to the shopping center, and by owning Carmichael Town
Center, API would be deemed to own the shopping center. Rolling Willow would then
have 180 days to sell the athletic club property, at which time API would transfer the
ownership of the shopping center to Rolling Willow by transferring to Rolling Willow
API’s membership interest in Carmichael Town Center. At that time, as the sole member
of Carmichael Town Center, Rolling Willow would be deemed the owner of the shopping
center, and the 1031 exchange would be complete.
The exchange accommodation agreement contained various terms and conditions
reflecting the fact that Carmichael Town Center, at least while it was owned by API, was
going to be nothing more than a vehicle for Rolling Willow’s acquisition of the shopping
center in the 1031 exchange. Those terms and conditions included the following:
1) While an owner’s policy of title insurance was to be issued to Carmichael Town
Center, Rolling Willow was to advance the premium costs of that insurance.
2) Carmichael Town Center was to be designated an additional named insured on
a liability and casualty insurance policy reasonably acceptable to API -- presumably a
policy obtained by Rolling Willow.
3) Rolling Willow was to be “solely responsible for all purchase money and
transaction expenses incurred by [API] and/or [Carmichael Town Center] in connection
with the acquisition of the [shopping center].
5
4) Rolling Willow was to be solely responsible for arranging any third party
financing necessary for API and/or Carmichael Town Center to acquire the shopping
center.
5) Neither API nor Carmichael Town Center was to have any obligation to
advance any sum on behalf of Rolling Willow and could elect to have Rolling Willow
advance such sums to any third party that might be due payment in connection with
API’s acquisition of the shopping center.
6) Any loan obligation of API or Carmichael Town Center was to be nonrecourse
as to both of them.
7) Neither API nor Carmichael Town Center was to have any duty to review the
loan documents prepared by any third party lender for the benefit of Rolling Willow.
8) During the time that API owned Carmichael Town Center, Rolling Willow was
to pay on behalf of API and Carmichael Town Center “all of the costs and expenses
relating to acquiring, holding, operating, maintaining, repairing, managing, leasing,
improving, constructing or developing the” shopping center.
9) Rolling Willow was to be “solely responsible for paying any encumbrance
secured by the” shopping center.
10) Rolling Willow was to be “solely responsible for maintenance of any policies
of insurance that m[ight] be required by” API.
11) API and/or Carmichael Town Center could lease the shopping center to
Rolling Willow or to a person Rolling Willow designated in writing.
12) API and/or Carmichael Town Center could contract with Rolling Willow, or
someone Rolling Willow designated in writing, to manage the shopping center.
13) Except to the extent the shopping center was leased to a third party, as
between API, Carmichael Town Center, and Rolling Willow, Rolling Willow was to have
the right of possession and the use of the shopping center at Rolling Willow’s sole risk
and expense.
6
The closing conditions from API included the following:
“In the event [Carmichael Town Center] is requested to sign any financing
documents, this closing is conditioned upon the Note and/or Deed of Trust/Mortgage
containing non-recourse language. The following is suggested language for said non-
recourse provision:
“ ‘Lender acknowledges that Borrower will hold title to the Property for purposes
of facilitating a tax deferred exchange for Guarantor and that Guarantor is the real party
in interest. In making the Loan, Lender has relied solely on the value of the collateral
and the financial condition of the Guarantor. . . .’ ” (Italics omitted.)
Acting on behalf of Rolling Willow, Ruth negotiated to obtain a loan from Placer
Sierra Bank, which was later acquired by defendant Wells Fargo Bank (Wells Fargo), to
complete the purchase of the shopping center. During those negotiations, Ruth and the
representative of the bank, Bob Pedersen, discussed Rolling Willow investing
approximately $2 million from the sale of Rolling Willow’s athletic club property into
the purchase, and that was ultimately made a condition of the loan. According to Ruth,
Pedersen “agreed and said the loan was to Rolling Willow,” with Carmichael Town
Center being “merely a ‘straw dog’ or ‘holding company’ for the 1031 exchange.”
Ultimately, the purchase of the shopping center closed in December 2007, with a
representative of API executing on behalf of Carmichael Town Center a promissory note
to Wells Fargo in the sum of $4.1 million. The note included a nonrecourse provision
that specified that “there shall be no personal liability on Carmichael Town Center LLC
to pay the indebtedness evidenced by this Note or any other instrument evidencing or
securing this Note . . . . Lender and subsequent holders of this Note expressly agree to
rely solely upon the personal liability of Rolling Willow LLC, Ruth Ku and James Ku
and any security or collateral which secures this Note for payment of the Note . . . .”
Commercial guaranties of Carmichael Town Center’s obligation to Wells Fargo under the
note were executed by Ruth, James, and Rolling Willow. Around the same time, Wells
7
Fargo and Carmichael Town Center entered into an interest rate swap transaction related
to the loan.
In January 2008, Wells Fargo supplied a form entitled “THIRD PARTY
AUTHORIZATION FOR ACH DEBITS AND CREDITS” to be signed by Rolling
Willow and Carmichael Town Center. The form authorized Wells Fargo “to initiate debit
and credit entries for all obligations and liabilities including interest and fees . . . as they
become due on Carmichael Town Center, LLC’s Interest Rate Swap Transaction . . . to
and from the account in the name of Rolling Willow, LLC . . . .” A similar authorization
was signed again in September 2008.
In April 2008, API and Rolling Willow signed a document assigning API’s
membership interest in Carmichael Town Center to Rolling Willow. The assignment was
to be effective upon delivery, but it is not clear when delivery occurred. Ultimately,
however, it appears Rolling Willow sold its athletic club real estate around the end of
July or beginning of August 2008. The week after that sale -- at which time API
presumably delivered the assignment to Rolling Willow, thereby transferring ownership
of Carmichael Town Center to Rolling Willow -- Pedersen requested information from
Ruth for the Carmichael Town Center loan file, including a current financial statement
for Rolling Willow. In connection with that request, Pedersen noted as follows: “We
understand that Rolling Willow and Carmichael [Town Center] may be combined
together in one operating entity with the sale of the real estate for the Rollingwood Sports
Club, so some type of interim [financial statement] that takes this into account may work.
Let’s discuss.”
The record does not show that any such combination of Rolling Willow and
Carmichael Town Center ever occurred. In December 2009, Carmichael Town Center
defaulted on the loan and the interest rate swap agreement by failing to make the
payments due under the note and the agreement. The Kus and Rolling Willow also
defaulted on their guaranties.
8
On November 2, 2010, Wells Fargo filed a verified complaint for monetary
damages against Rolling Willow and the Kus (jointly, defendants). Later that month,
Wells Fargo acquired title to the shopping center with a credit bid of nearly $2 million at
a trustee’s sale under the deed of trust that secured the promissory note. Thereafter, in
January 2011, Wells Fargo filed a first amended complaint that alleged causes of action
for breach of commercial guaranties, money lent, account stated, and unjust enrichment.
The amended complaint sought recovery from defendants of a principal sum in excess of
$2 million plus a “Swap Termination Fee” of nearly $700,000, with interest on both
amounts, plus attorney fees.
In August 2011, defendants filed their answer to the amended complaint. That
answer contained four affirmative defenses: failure to state a claim, failure to state a
cause of action, negligence of third party, and equitable apportionment.
In early 2013, the parties stipulated that defendants could file an amended answer
to the amended complaint. Among other things, the amended answer included a new
affirmative defense that defendants called “ILLUSORY CONTRACT.” In that defense,
defendants alleged that “the Contract between the parties as alleged is an illusory contract
in that it seeks to enforce legal obligations on the Guarantors, when the contract explicitly
states that the plaintiff’s [sic] will not seek to enforce the contractual obligation(s) against
the contracting party, i.e., CTC . . . . Since the original contract was never intended to be
enforced against the original contracting party, . . . then any Guarantee on a non
enforceable agreement is Illusory by application of Law.”
Based on the parties’ stipulation, in March 2013 the court ordered that the
amended answer was to be filed forthwith. For some reason, however, it was not -- even
though it had been submitted to the court with the stipulation. Nevertheless, as they later
stipulated, the parties conducted discovery “as though the . . . Amended answer had been
filed” “[a]nd used the language of illusory contract and sham [guaranty] interchangeably
in conducting discovery on defendant’s [sic] defense in this litigation.” Ultimately, after
9
the resolution of the summary judgment motion at issue here, the parties stipulated to the
filing of the amended answer nunc pro tunc to March 2013.
The case was originally set for trial in March 2013, but Wells Fargo successfully
moved for a continuance to allow “additional time to conduct discovery, prepare for trial,
and complete dispositive motions.” Trial was eventually reset for February 2014, but the
week before trial was to begin, the Kus filed for relief in bankruptcy.
With the bankruptcy stay in favor of the Kus in place and the trial date vacated so
that Rolling Willow could find a new attorney, in April 2014 Wells Fargo filed a motion
for summary judgment or, in the alternative, summary adjudication against Rolling
Willow, which was set for hearing in July 2014. In support of its motion, Wells Fargo
argued that Rolling Willow had explicitly waived the protections of the antideficiency
statutes in its guaranty of the debt owed by Carmichael Town Center.
Rolling Willow opposed Wells Fargo’s motion “on the ground that there [we]re
triable issues of fact as to what party [wa]s the actual or true obligor under the loan
agreement with the bank.” In essence, Rolling Willow asserted that its evidence was
sufficient to show that Rolling Willow, not Carmichael Town Center, was “the true and
intended obligor” and was “therefore entitled to the protections afforded under
California’s anti-deficiency statutes.”
In reply, Wells Fargo argued that Rolling Willow was trying to raise a “sham
guaranty” defense to the enforcement of its guaranty and that the court should reject that
effort because Rolling Willow did not plead that defense in its answer. Wells Fargo also
argued that Rolling Willow had not established that Rolling Willow was the alter ego of
Carmichael Town Center or that the guaranty was a sham. In addition, Wells Fargo
offered numerous evidentiary objections to the declarations and exhibits Rolling Willow
submitted in support of its opposition.
10
On its own motion, the trial court continued the hearing on the summary judgment
motion from July to September.5 In August, the court struck Rolling Willow’s separate
statement for noncompliance with various form requirements and also noted that the two
declarations Rolling Willow had filed were inadmissible because they were not signed
under penalty of perjury. The court gave Rolling Willow leave to file an amended
separate statement and amended declarations before the hearing. Rolling Willow did so,
and also filed a supplemental declaration, and in response Wells Fargo filed evidentiary
objections to one of the amended declarations and to the supplemental declaration.
In its tentative ruling on the motion, the court, looking to Rolling Willow’s
original answer to the amended complaint instead of its amended answer, held that
because Rolling Willow had not pled the sham guaranty defense, the court could not
consider the evidence offered by Rolling Willow in opposition to the motion. At the
hearing on the motion, Rolling Willow pointed out its amended answer and asserted that
the “illusory contract” defense in that answer was essentially the same as the sham
guaranty defense on which its opposition to the summary judgment motion was based.
The court took the matter under submission and ultimately issued its ruling in December
2014. Disagreeing with Rolling Willow, the court found that Rolling Willow’s
“affirmative defense of ‘illusory contract’ does not provide a valid basis for [Rolling
Willow] to oppose the present motion based on the ‘sham guaranty’ defense.” Thus, the
court held that Wells Fargo’s “objections to the totality of [Rolling Willow]’s evidence in
opposition (which evidence was offered solely [to] show a ‘sham guaranty’) were
properly sustained and [the] motion was properly granted as effectively unopposed.” The
court also went on, however, to hold that even if the court considered Rolling Willow’s
evidence, that evidence did not raise a triable issue of fact on the sham guaranty defense
5 On our own motion, we take judicial notice of the minute order for this
continuance, which neither party included in their appendix.
11
because the evidence failed to show: (1) that there was no legal separation between
Rolling Willow and Carmichael Town Center or (2) that Wells Fargo structured the loan
in a manner intended to circumvent the antideficiency laws. Accordingly, the trial court
granted summary judgment in favor of Wells Fargo and entered judgment against Rolling
Willow for $3,073,590.94.
Rolling Willow timely appealed.
DISCUSSION
I
The Issues Raised By The Pleadings
On appeal, Rolling Willow first suggests that the trial court erred in concluding
that Rolling Willow could not rely on a sham guaranty defense in opposing the summary
judgment motion because Rolling Willow did not plead that defense. According to
Rolling Willow, Wells Fargo admitted that the parties used the terms “illusory contract”
and “sham guaranty” interchangeably in conducting discovery on Rolling Willow’s
alleged defenses; accordingly, Wells Fargo was not prejudiced by Rolling Willow’s
inartful pleading.
In response, Wells Fargo contends that “[c]onducting discovery on an issue is not
the same as placing the matter at issue in pleadings,” and Wells Fargo insists the trial
court was correct in concluding that Rolling Willow could not rely on a sham guaranty
defense in opposing the summary judgment motion because Rolling Willow did not plead
that defense.
“ ‘The purpose of a summary judgment proceeding is to permit a party to show
that material factual claims arising from the pleadings need not be tried because they are
not in dispute.’ [Citation.] ‘The function of the pleadings in a motion for summary
judgment is to delimit the scope of the issues . . . .’ [Citations.] The complaint measures
the materiality of the facts tendered in a defendant’s challenge to the plaintiff’s cause of
action. [Citation.] The answer supplements that measure where the plaintiff is the
12
moving party and the defendant relies upon an affirmative defense.” (FPI Development,
Inc. v. Nakashima (1991) 231 Cal. App. 3d 367, 381-382.)
“To create a triable issue of material fact, the opposition evidence must be directed
to issues raised by the pleadings. [Citation.] If the opposing party’s evidence would
show some factual assertion, legal theory, defense or claim not yet pleaded, that party
should seek leave to amend the pleadings before the hearing on the summary judgment
motion.” (Distefano v. Forester (2001) 85 Cal. App. 4th 1249, 1264-1265.)
The foregoing rules are nothing more than a specific application, in the summary
judgment context, of the axiom that “[t]he pleadings establish the scope of an action and,
absent an amendment to the pleadings, parties cannot introduce evidence about issues
outside the pleadings.” (Emerald Bay Community Assn. v. Golden Eagle Ins. Corp.
(2005) 130 Cal. App. 4th 1078, 1091.) Of course, saying that the pleadings establish the
scope of the action and the parties cannot introduce evidence about issues outside the
pleadings begs this question (which is central here): What issues can the pleadings in a
particular action be said to fairly raise? With respect to the present case, the trial court
took a narrow view of the answer to that question, concluding that Rolling Willow’s
pleading of an “illusory contract” defense was insufficient to allow the introduction of
evidence relating to a “sham guaranty” defense because the two defenses are “separate
and legally distinct.” In the trial court’s view, “an illusory contract is an agreement
which is rendered unenforceable due to the lack of consideration as a result of one party
having an unqualified right to cancel the contract.” A sham guaranty, on the other hand,
exists “only were it is shown that (1) there is no ‘legal separation’ between the guarantor
and the primary obligor(s) on the underlying loan or (2) the lender structured the loan
(and its related guaranty) in a manner intended to circumvent the anti-deficiency laws.”
Based on this legal distinction between the two defenses, the trial court found that
Rolling Willow’s pleading of the former did not allow it to oppose summary judgment
based on the latter.
13
Whatever merit there may be in the trial court’s articulation of the distinction
between the two defenses in the abstract, that distinction does not resolve the issue before
us because of the application of other pertinent rules the trial court did not mention. One
of these is the rule of liberal construction set forth in section 452, which provides that
“[i]n the construction of a pleading, for the purpose of determining its effect, its
allegations must be liberally construed, with a view to substantial justice between the
parties.” Another is the rule that “[t]he court must, in every stage of an action, disregard
any error . . . or defect, in the pleadings or proceedings which, in the opinion of said
court, does not affect the substantial rights of the parties.” (§ 475.) In light of these
rules, the Second District Court of Appeal observed nearly 100 years ago that “[f]or
sufficiency of the facts pleaded, courts look to substance, not to form. The basic
principle of the code procedure is that the administration of justice should not be
embarrassed by technicalities, strict rules of construction, or useless forms.” (Menefee v.
Oxnam (1919) 42 Cal. App. 81, 96.)
The foregoing authorities suggest that just because “illusory contract” and “sham
guaranty” may be legally distinct concepts in the abstract does not mean that distinction
is dispositive of the issue here. What matters here is not whether Rolling Willow
attached the wrong label to the defense it called “ILLUSORY CONTRACT,” or whether
Rolling Willow thoroughly and accurately articulated the parameters of the “sham
guaranty” defense in its answer, but rather whether Wells Fargo understood what Rolling
Willow meant by the defense it pled, and whether Wells Fargo had an ample and fair
opportunity to conduct discovery based on its understanding of what Rolling Willow
meant. If Wells Fargo had such an understanding and opportunity, then neither
substantial justice nor the substantial rights of the parties would be offended by allowing
Rolling Willow to oppose Wells Fargo’s summary judgment motion based on the defense
Wells Fargo understood was at issue.
14
The dispositive factor here is this: Wells Fargo admitted and agreed that it
understood Rolling Willow’s “illusory contract” defense was, in effect, a “sham
guaranty” defense when the parties stipulated that Rolling Willow’s amended answer to
the amended complaint should be filed nunc pro tunc back to March 2013, before the
summary judgment motion was filed and before the parties finished conducting
discovery. Indeed, Wells Fargo specifically agreed that the parties used the terms
“interchangeably in conducting discovery on [Rolling Willow]’s alleged defenses in this
litigation.” Accordingly, we do not see how Wells Fargo could have been surprised by
the basis on which Rolling Willow opposed the summary judgment motion or prejudiced
in its ability to reply to that response. Absent any such surprise or prejudice, Rolling
Willow’s “illusory contract” defense must be liberally construed as adequately raising the
“sham guaranty” issue, and any defect in Rolling Willow’s inartful pleading of the “sham
guaranty” defense must be disregarded, so as to achieve substantial justice between the
parties and to avoid honoring form over substance. Accordingly, we conclude the trial
court erred in determining that the “sham guaranty” issue was not raised by the pleadings.
II
The Trial Court’s Ruling On The Evidence
As we have noted, Wells Fargo offered numerous evidentiary objections to the
declarations and exhibits Rolling Willow submitted in support of its opposition to the
motion for summary judgment. In its appellate brief, Wells Fargo contends that (1) the
trial court “sustained Wells Fargo’s evidentiary objections to the multiple declarations . . .
proffered to support Rolling Willow’s [o]pposition”; (2) “[t]he trial court judge’s review,
analysis and rulings on Wells Fargo’s evidentiary objections were legally sound, well
considered, and wholly reasonable”; (3) “Rolling Willow has not challenged the trial
court’s ruling on Wells Fargo’s evidentiary objections”; and (4) “Rolling Willow’s
failure to challenge the trial court’s evidentiary rulings on appeal requires [this] court to
exclude Rolling Willow’s evidence.”
15
In reply, Rolling Willow contends Wells Fargo has mischaracterized the trial
court’s ruling. According to Rolling Willow, “[t]he trial court never addressed Wells
Fargo’s evidentiary objections.” Instead, “[t]he trial court determined that Rolling
Willow’s evidence was inadmissible to defeat Wells Fargo’s summary judgment motion
because Rolling Willow had not pled ‘sham guaranty’ as an affirmative
defense. And the evidence that Rolling Willow offered in opposition to Wells Fargo’s
motion was relevant only to a “sham guaranty’ defense.”
We agree with Rolling Willow on this point. It is true that in its tentative ruling,
the trial court wrote that Wells Fargo’s “objections to [Rolling Willow]’s evidence are
sustained.” The trial court, however, did not separately analyze or even refer to Wells
Fargo’s various objections to various portions of the declarations from Rolling Willow.
Instead, as Rolling Willow points out, the trial court essentially held that all of Rolling
Willow’s evidence was irrelevant because (in the trial court’s view) that evidence
addressed an affirmative defense (sham guaranty) that was outside the scope of the
pleadings. That this, and not any of Wells Fargo’s individual evidentiary objections, was
the basis of the trial court’s ruling on Rolling Willow’s evidence was only made more
clear by the trial court’s submitted matter ruling. There, the trial court first expressly
found that the illusory contract defense was not a valid basis for Rolling Willow to
oppose the summary judgment motion based on a sham guaranty. Immediately
thereafter, the court then stated that “[f]or this reason, [Wells Fargo]’s objections to the
totality of [Rolling Willow]’s evidence in opposition . . . were properly sustained.”
(Italics added.) Thus, the trial court excluded Rolling Willow’s evidence on the ground it
was irrelevant because it pertained to a defense the trial court believed was not alleged in
Rolling Willow’s answer, not because of any other evidentiary objections Wells Fargo
offered.
In light of the foregoing, we are confident the trial court never reached, let alone
ruled on, Wells Fargo’s individual objections to Rolling Willow’s evidence. It is true that
16
in the absence of any such ruling, those objections were still preserved for review on
appeal. (See Reid v. Google, Inc. (2010) 50 Cal. 4th 512, 534.) Wells Fargo, however,
did not offer any substantive argument with respect to those objections, instead choosing
to rest its argument on Rolling Willow’s failure to challenge the purported rulings on
those objections that the trial court, in fact, never made. In the absence of any pertinent
argument from Wells Fargo on its evidentiary objections, we find no basis for excluding
any of the evidence Rolling Willow offered in opposition to the summary judgment
motion. Accordingly, we proceed to the merits of the sham guaranty defense.
III
The Sham Guaranty Defense
Rolling Willow contends the evidence it offered in opposition to the summary
judgment motion was sufficient to raise a triable issue of fact as to whether Rolling
Willow was the true borrower in the transaction and was thus protected by the
antideficiency statutes from any liability on its purported guaranty. For the reasons that
follow, we agree.
In Bradley, the appellate court explained the pertinent rule as follows: “A
guaranty is an unenforceable sham where the guarantor is the principal obligor on the
debt. This is the case where either (1) the guarantor personally executes the underlying
loan agreements or a deed of trust or (2) the guarantor is, in reality, the principal obligor
under a different name by operation of trust or corporate law or some other applicable
legal principle. The legislative purpose against deficiency judgments may not be
subverted by use of a borrowing entity with the true principal obligor relegated to the
position of guarantor.” (Bradley, supra, 235 Cal.App.4th at pp. 786-787.) Or, as stated
in Torrey Pines, “[t]he correct inquiry set out by the authority is whether the purported
debtor is anything other than an instrumentality used by the individuals who guaranteed
the debtor’s obligation, and whether such instrumentality actually removed the
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individuals from their status and obligations as debtors.” (Torrey Pines Bank v. Hoffman,
supra, 231 Cal.App.3d at p. 320.)
In examining the evidence to see if Rolling Willow raised a triable issue of fact as
to whether Carmichael Town Center was a mere instrumentality of Rolling Willow for
purposes of determining the enforceability of Rolling Willow’s guaranty of what
purported to be Carmichael Town Center’s debt, we are bound by the following rules:
“When a summary judgment motion prima facie justifies a judgment, . . .
[c]ounter-affidavits and declarations need not prove the opposition’s case; they suffice if
they disclose the existence of a triable issue.” (AARTS Productions, Inc. v. Crocker
National Bank (1986) 179 Cal. App. 3d 1061, 1065.) “There is a triable issue of material
fact if . . . the evidence would allow a reasonable trier of fact to find the underlying fact
in favor of the party opposing the motion in accordance with the applicable standard of
proof.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal. 4th 826, 850.)
Additionally, in ruling on a summary judgment motion, the court must consider all
of the evidence, and all inferences reasonably drawn from that evidence, in the light most
favorable to the party opposing the motion. (Aguilar v. Atlantic Richfield Co., supra, 25
Cal.4th at p. 843.) “All doubts as to whether there are any triable issues of fact are to be
resolved in favor of the party opposing summary judgment.” (Zelda, Inc. v. Northland
Ins. Co. (1997) 56 Cal. App. 4th 1252, 1259.)
With the foregoing rules in mind, we conclude the evidence was sufficient to raise
a triable issue of fact as to whether there was “significant identity” between Rolling
Willow and Carmichael Town Center, such that the latter company “should be deemed to
be a ‘mere instrumentality’ [citation] through which [Rolling Willow] operated, but
which never served to remove [Rolling Willow] from the status of primary obligor[].”
(Torrey Pines Bank v. Hoffman, supra, 231 Cal.App.3d at p. 321.)
The evidence introduced by Rolling Willow revealed that Carmichael Town
Center did not exist until the Kus conceived the idea of exchanging Rolling Willow’s
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athletic club property for the shopping center after which Ruth ultimately named the new
limited liability company. More importantly, the evidence supports the reasonable
conclusion that the sole purpose of creating Carmichael Town Center was so that the new
company could serve as a vehicle for Rolling Willow to acquire ownership of the
shopping center in a manner allowing Rolling Willow to defer capital gains taxes on the
disposition of the athletic club property.
There is no evidence that Carmichael Town Center was capitalized so that it could
function as a bona fide company, rather than as merely a shell for completion of the 1031
exchange by Rolling Willow. Indeed, reasonable inferences from the evidence lead to
the conclusion that it was not capitalized, because the original owner of the company --
API -- owned the company only for the purpose of facilitating Rolling Willow’s 1031
exchange, and there was no reason for API to put any capital into the new company.
Moreover, there is no evidence that Rolling Willow provided capital to Carmichael Town
Center at the outset, or had any reason to, because the exchange accommodation
agreement between API and Carmichael Town Center on the one hand and Rolling
Willow on the other essentially provided that Rolling Willow would be directly
responsible for all financial obligations that Carmichael Town Center otherwise
reasonably could have been expected to pay if Carmichael Town Center had been
anything other than a shell. Specifically, under the agreement, Rolling Willow was
responsible for: (1) the premium costs of a title insurance policy on the shopping center;
(2) the cost of maintaining any other policies of insurance API might require; (3) all
purchase money and transaction expenses incurred by API and/or Carmichael Town
Center in connection with the acquisition of the shopping center; (4) “all of the costs and
expenses relating to acquiring, holding, operating, maintaining, repairing, managing,
leasing, improving, constructing or developing the” shopping center; and (5) “paying any
encumbrance secured by the [shopping center].”
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In addition to excusing Carmichael Town Center from any financial responsibility
in connection with the purchase of the shopping center, the exchange accommodation
agreement shifted to Rolling Willow other obligations that Carmichael Town Center
reasonably could have been expected to perform if it were a bona fide company seeking
to purchase the shopping center and not just a mere shell used to facilitate Rolling
Willow’s purchase of that asset. Specifically, Rolling Willow was solely responsible for
arranging any third party financing necessary for Carmichael Town Center to acquire the
shopping center, and Carmichael Town Center had no duty to review the loan documents
prepared by any third party lender for the benefit of Rolling Willow.
Also, the exchange accommodation agreement essentially vested the right to
operate the shopping center in Rolling Willow, rather than in Carmichael Town Center.
Specifically, Carmichael Town Center could only lease the shopping center to Rolling
Willow or to a person Rolling Willow designated in writing and could only contract with
Rolling Willow or someone Rolling Willow designated in writing to manage the
shopping center. And except to the extent the shopping center was leased to a third party,
as between API, Carmichael Town Center, and Rolling Willow, Rolling Willow was to
have the right of possession and the use of the shopping center at Rolling Willow’s sole
risk and expense.
Finally, it is worth reiterating that in the conditions API required to close the
purchase of the shopping center, API suggested a nonrecourse provision for the
promissory note that would have made it clear that Carmichael Town Center would hold
title to the shopping center solely for purposes of facilitating the 1031 exchange for
Rolling Willow, and Rolling Willow was “ ‘the real party in interest.’ ” (Italics omitted.)
Taken together and construed in the light most favorable to Rolling Willow,
Rolling Willow’s evidence was sufficient to support a finding by a reasonable trier of fact
that Carmichael Town Center was nothing more than an instrumentality used by Rolling
Willow to complete a 1031 exchange that did not remove Rolling Willow from its status
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as the true owner of the shopping center and the true borrower under the promissory note
to Wells Fargo. If the trier of fact were to make such a finding, then Rolling Willow
would be entitled to the protection of section 580d and a judgment against Rolling
Willow on its guaranty for the deficiency owed on the shopping center would be
prohibited. Accordingly, the trial court erred in granting summary judgment to Wells
Fargo.
As a closing note, it is worthwhile to explain how this case differs from Bradley,
which also involved an asserted sham guaranty arising out of a 1031 exchange. In that
case, like this one, a limited liability company (Nohea) was created to serve as a vehicle
for a 1031 exchange by another company (No Boundaries), which was a corporation.
(Bradley, supra, 235 Cal.App.4th at pp. 780-782.) The difference in Bradley was that No
Boundaries, the corporation completing the exchange, did not guarantee Nohea’s
obligation on the loan used to secure the replacement property. Instead, the guaranties at
issue came from the two individual defendants who owned all of the stock in No
Boundaries. (Ibid.) The individuals “argued the guaranties were shams, and therefore
unenforceable, due to their close relationship with” Nohea. (Id. at p. 779.) A jury
agreed, but the court of appeal did not. (Id. at p. 780.) In explaining its decision, the
court wrote as follows: “Here, defendants do not have a direct ownership interest in
Nohea. The company was originally owned by an [exchange accommodation titleholder]
and later transferred to No Boundaries. Moreover, No Boundaries, not defendants, made
Nohea’s payments under the loan. Defendants contend direct ownership is not required,
pointing out that they own No Boundaries with their wives, and that Bradley made the
initial down payment on the Napa property. But even if Nohea is merely a shell
controlled by No Boundaries and alter ego principles allow for the simultaneous piercing
of two corporate veils, defendants still need to establish that we should disregard No
Boundaries’s corporate form. They have failed to do so. The evidence shows No
Boundaries observed the necessary formalities, including passing corporate resolutions,
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holding corporate meetings, and maintaining separate bank accounts and assets.” (Id. at
p. 789.) Thus, in Bradley, the individual defendants could not claim their guaranties were
shams because whether Nohea was a mere instrumentality used by No Boundaries to
complete the 1031 exchange, it was clear that No Boundaries was not itself a mere
instrumentality of its shareholders.
Bradley and the present case might be comparable if here the Kus, rather than
Rolling Willow, were seeking to invalidate their guaranties, but that is not the case. The
issue here is whether there was sufficient legal separation between Rolling Willow and
Carmichael Town Center to validate Rolling Willow’s guaranty of Carmichael Town
Center’s purported debt. We have found a triable issue of fact on that point.
Consequently, reversal is required.
DISPOSITION
The judgment is reversed. Rolling Willow shall recover its costs on appeal. (Cal.
Rules of Court, rule 8.278(a)(2).)
/s/
Robie, Acting P. J.
We concur:
/s/
Mauro, J.
/s/
Duarte, J.
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