Note: In order to obtain a USD 10,900,000 loan for the purchase of commercial real estate by West LA City Portfolio (Borrower), Michael Mugel (Guarantor), as owner and manager, signed both a deed of trust and a separate guarantee agreement in favor of CW Capital (Lender). The guarantee agreement stated in part that:

"'Guarantor hereby irrevocably and unconditionally guarantees to Lender ... and assign[s] the payment and performance of the Guaranteed Obligations as and when the same shall be due and payable, whether by lapse of time, by acceleration of maturity or otherwise.' The 'Guaranteed Obligations' were defined as: (a) 'all amounts' owed by the Borrower under the terms of the promissory note; (b) payment of 'all of the stated obligations of Borrower under the Environmental and Hazardous Substance Indemnification Agreement;' and (c) 'the obligation to provide a $1,400,000 letter of credit pursuant to and in accordance with section 11(kk) of the Security Instrument.'"

The deed of trust also required that Borrower provide a USD 1,400,000 standby if the current tenant vacated the premises while the loan was outstanding to cover "tenant improvement costs, leasing commissions incurred with the re-letting of the premises, and 'debt service shortfall.'" It was agreed that Lender would draw on the LC if Borrower defaulted or if the LC was not delivered when requested.

When Borrower's tenant vacated the premise, Lender made three separate demands that Guarantor provide the standby. When neither Borrower nor Guarantor delivered a standby, Lender foreclosed and sold the property at a foreclosure sale to 3115 Sepulveda Boulevard Holdings (Trustee). Trustee subsequently sued Guarantor for breach of the guarantee and demanded the LC, arguing that while the sale may have extinguished the deed of trust, Guarantor still had a duty to deliver the LC under the Guarantee Agreement.

The trial court ruled that Guarantor's obligations under the guarantee agreement were independent of the deed of trust and that Guarantor must provide a standby in favor of Trustee as purchaser of the property. The Court of Appeals of California, Fourth Appellate District, Division Three, in an opinion by O'Leary, P.J., affirmed. The appellate court concluded that when Lender and Guarantor signed the guarantee agreement, "the Lender created a stand-alone obligation that was not extinguished with the deed of trust", and the agreement was "'an irrevocable, absolute, continuing guaranty of payment and performance'...'expressly made irrevocable [with] no expiration date.'" The appellate court also ruled that Guarantor had waived its right to have any outstanding debt first enforced against the Borrower and then against the Guarantor. "There is nothing in the language of the Guaranty Agreement suggesting the obligation would terminate when the deed of trust was extinguished. To the contrary, in making the promise to produce a letter of credit, [Guarantor] expressly waived any defense which could have arisen from the underlying transaction." Finally, the appellate court ruled that Trustee's filing suit in civil court constituted a proper request for the issuance of the LC.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.