Fair value and guarantors

     Should guarantors be protected by the fair value sections of Cal. Code Civ. Pro. 726 and 580a? In other words, what if the lender sells the debtor's property at a foreclosure sale for less than fair value and then sues the guarantor for the balance due? Can the guarantor argue that the property should have sold for more and that therefore the judgment against him or her should be reduced?

     Professor Mertens proposes that guarantors be allowed to raise fair value to limit liability. Mertens, California's Foreclosure States: Some Proposals for Reforms, 26 Santa Clara L.Rev. 533 (1986). In 1995, a court of appeal agreed, but the case, Bank of Southern California v. Dombrow, 39 Cal.App.4th 1457, was decertified. The case involved a guarantor who had waived many of the protections that the law had extended to guarantors but who then challenged the amount received at a non-judicial foreclosure sale of the debtor's property as being below the fair value. The court stated:

...However, the Gradsky waiver does not establish the amount of the deficiency, which brings us to section 580a. [Paragraph] Initially, we note that no previous court has held section 580a applicable to guarantors; in fact, earlier cases have held guarantors do not have rights under section 580a. ...Because a nonjudicial foreclosure sale is nonredeemable, the guarantor should at least be granted a fair market value hearing to preclude a creditor from purchasing the real property at its own foreclosure sale for a low price and then holding the guarantor personally liable on the remaining amount owing on the obligation. Moreover, a distinction between the language of section 580d and the language of section 580a is in keeping with granting guarantors a fair market value hearing. While section 580d refers to a "note secured by a deed of trust," section 580a refers to "an obligation for the payment of which a deed of trust...was given." The broader language of section 580a supports a broader application.

We realize that no previously published opinion has held section 580a applicable to guarantors and that some earlier cases have held that it is not. ... However, given that these earlier decisions were based upon antiquated law and the strong public policy of this state is to prevent excess recoveries by secured creditors, we conclude section 580a should afford a guarantor the protection of a fair market value hearing if the creditor elects to foreclose nonjudicially and subsequently brings a suit against the guarantor for a deficiency judgment.

Do you agree?