You own a strip center in Ontario or an industrial building in Fontana through an LLC, on a loan the lender called non-recourse. A tenant is gone, the loan matures next spring, and the servicer’s letter mentions the guaranty you signed.
That guaranty is usually where the money is. California’s anti-deficiency statutes protect the borrower LLC, not the person who signed it.
Does a non-recourse loan protect the owners of a California commercial property?
Mostly, until a carveout applies. A CMBS loan limits the lender to the property and its rents, then lists exceptions. Some cover only actual loss, like misapplied rents; others make the whole balance recourse on a voluntary bankruptcy, an unapproved transfer, or a breach of the special purpose entity (SPE) covenants.
In California, Code Civ. Proc. § 580d says no deficiency “shall be owed or collected” after a trustee’s sale. Section 726, the one-action rule, requires foreclosure before suit and limits a judicial deficiency to the debt over fair value. Section 580b covers seller carrybacks and owner-occupied homes, not a lender’s commercial loan.
All of that protects the debtor. Sections 580d(b) and 580b(c) preserve the liability of “a guarantor, pledgor, or other surety,” and Talbott v. Hustwit, 164 Cal. App. 4th 148 (2008), held that the fair-value limit in section 580a does not apply to guarantors.
Can a California guarantor waive the anti-deficiency rules?
Yes. Cal. Civ. Code § 2856 lets a guarantor waive subrogation, the defenses in Civil Code §§ 2787 to 2855, and defenses under sections 580a, 580b, 580d and 726, in any words showing that intent. Its model language says the creditor “may collect from the guarantor even if the creditor, by foreclosing on the real property collateral, has destroyed any right the guarantor may have to collect from the debtor.” I see that sentence, nearly verbatim, in most carveout guaranties.
Civil Code § 2809 forbids a surety obligation “larger in amount” than the principal’s, yet River Bank America v. Diller, 38 Cal. App. 4th 1400 (1995), held that guarantors of a nonrecourse loan had waived it.
Under the sham guaranty doctrine, a “guarantor” who is really the principal obligor keeps the “unwaivable protection” of section 580d; Torrey Pines Bank v. Hoffman, 231 Cal. App. 3d 308 (1991), applied it to spouses guaranteeing their own trust’s loan. Later cases narrow it. CADC/RADC Venture 2011-1 LLC v. Bradley, 235 Cal. App. 4th 775 (2015), upheld LLC managers’ guaranties absent a loan “structured to subvert the antideficiency laws,” and LSREF2 Clover Property 4, LLC v. Festival Retail Fund 1, LP, 3 Cal. App. 5th 1067 (2016), held that a fund buying through its own SPE “could not also claim the benefit of antideficiency protections.”
A guarantor may still argue that a CMBS lender requiring the SPE dictated the shell, as in Diller; expect a bankruptcy-remoteness reply.
Have California courts enforced a springing full-recourse guaranty?
In GECCMC 2005-C1 Plummer Street Office Limited Partnership v. NRFC NNN Holdings, LLC, 204 Cal. App. 4th 998 (2012), an affiliate guaranteed “the entire Loan” if either Washington Mutual lease on two Chatsworth properties was “terminated or canceled” without consent. WaMu failed, the lender bought at a trustee’s sale for about $11 million, and the trial court entered a $42,220,349.35 judgment against the guarantor.
The Court of Appeal reversed: under the leases and Civil Code § 1951.4, only the landlord could end them, and it never did. Read with the deed of trust, the guaranty covered “bad boy acts”; otherwise “the sole security for the loans is the property.” The lender lost “even assuming that we would follow” Wells Fargo Bank, NA v. Cherryland Mall Limited Partnership, 295 Mich. App. 99 (2011), a Michigan solvency-covenant case.
Plummer Street turned on lease wording and does not void carveout guaranties. I found no later published California decision on insolvency or bankruptcy triggers, and California has no counterpart to Michigan’s Nonrecourse Mortgage Loan Act (2012) or Ohio Rev. Code § 1319.08, which void solvency covenants as recourse triggers. A California guarantor relies on contract reading instead: Civil Code § 1641 says “[t]he whole of a contract is to be taken together.”
Will filing Chapter 11 make the guarantors liable for the whole loan?
Under most forms, yes. The automatic stay in 11 U.S.C. § 362(a) halts foreclosure but protects the debtor, not its owners, so the lender can sue the guarantors once the LLC files. I found no Ninth Circuit or published California decision on these triggers; lenders cite out-of-state cases enforcing them.
Subchapter V is usually unavailable. 11 U.S.C. § 101(51D) excludes from “small business debtor” anyone whose primary activity is owning “single asset real estate,” and a one-center SPE likely fits, even if H.R. 7730, passed by Congress in September 2026, raises the debt limit to $7.5 million. In ordinary Chapter 11, section 362(d)(3) gives a single-asset debtor 90 days to propose a viable plan or pay interest, and a filing aimed at one lender risks dismissal (see my post on Subchapter V bad faith).
No Ninth Circuit case decides the SPE clauses that bar filing without an independent manager’s vote, but In re Huang, 275 F.3d 1173 (9th Cir. 2002), warned that otherwise “astute creditors would routinely require their debtors to waive,” and In re Bay Club Partners-472, LLC (Bankr. D. Or. May 6, 2014), refused a lender-requested ban. In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016), and In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899 (Bankr. N.D. Ill. 2016), rejected lender vetoes. Either way, the guaranty springs.
Is your commercial loan maturing, or did a default notice just arrive? What you sign with the servicer, and in what order, decides whether a recourse trigger fires, so map the steps before anything is filed.
How would this play out for a Murrieta retail center?
Illustrative facts: Marcus and two partners own a $9 million Murrieta retail center through an SPE LLC, with a $6.2 million CMBS loan maturing in March 2027. The anchor left, debt service coverage fell below 1.0, and the center is worth about $5.4 million. Marcus and one partner signed a guaranty with section 2856 waivers; the loan requires the borrower to “remain solvent” and goes full recourse on a voluntary bankruptcy.
Deed in lieu. With no trustee’s sale, section 580d never applies; the LLC relies on its non-recourse clause. The guaranty survives unless released, and with $6.2 million owed on $5.4 million of property, a Cherryland reading would say the solvency trigger already fired. The release is the negotiation.
Trustee’s sale. If the servicer credit-bids $4.6 million, section 580d shields the LLC. If a trigger has fired, the guarantors owe roughly $1.6 million plus default interest and fees, measured from the bid, not the $5.4 million value. Otherwise they owe only loss items, like diverted rents.
Chapter 11. The full $6.2 million springs to Marcus and his co-guarantor on the petition date. Filing makes sense only with a payable plan and a written standstill for the guarantors.
Involuntary petition. Under 11 U.S.C. § 303(b), one creditor can file against an SPE with fewer than 12 creditors; many forms count that only if an insider colluded or the case is not dismissed in time.
The better path is usually a pre-negotiated consensual foreclosure or deed in lieu: the partners hand over rents and estoppels and consent to a receiver, and the servicer releases the guaranty. A friendly note sale needs the same release.
Where does recourse language hide, and what happens at tax time?
Read the guaranty before the default. Recourse language hides in the guaranty, in the loan agreement’s exculpation section, and in SPE covenants copied into the LLC’s own operating agreement, where a “remain solvent” clause is easy to miss. Plummer Street read the documents together, and so do I.
If the debt stays non-recourse, foreclosure or a deed in lieu is a sale for the full $6.2 million, whatever the value (Commissioner v. Tufts, 461 U.S. 300 (1983); Treas. Reg. § 1.1001-2(a)(4)(i), (b)). That is gain, not cancellation of debt income, so the exclusions in IRC § 108 cannot reach it. If a carveout made the LLC liable, section 1.1001-2(a)(2) splits off cancellation income that section 108 may exclude, partner by partner (see our real estate tax strategy page).
| Carveout trigger | Recourse | Helps the LLC? | Helps the guarantor? | Guarantor can still argue |
|---|---|---|---|---|
| Voluntary bankruptcy | Full | Stay; § 580d after a trustee’s sale | No, given § 2856 waivers, unless a sham | Filing was not voluntary or authorized |
| Unapproved transfer | Full | Same | Same | No transfer, or consent given |
| SPE or solvency covenant | Full in many forms | Same | Same | Separateness rule, not a solvency promise (§ 1641) |
| Waste or misapplied rents | Loss only | Same | Same | Actual loss only |
| Environmental | Loss, often by indemnity | Little; indemnities usually survive | Same | Condition predates ownership |
| Fraud | Loss or full, by form | Same as above | Same | No reliance or causation |
Frequently Asked Questions
Is a guaranty of a non-recourse loan enforceable in California?
Generally, yes. Anti-deficiency statutes protect the borrower, and Civil Code section 2856 lets guarantors waive them, subject to a narrow sham guaranty exception for a guarantor who is really the borrower.
Does California have a law like Michigan’s ban on solvency covenants?
No. Michigan and Ohio passed statutes after Cherryland Mall barring post-closing solvency covenants as recourse triggers. California has none, so guarantors rely on contract-interpretation arguments.
Can the lender sue me as guarantor after a trustee’s sale?
Yes, if you signed the usual waivers. Section 580d(b) preserves guarantor liability, and the debt is typically reduced only by the lender’s credit bid, not the appraised value.
Will filing bankruptcy for my property LLC trigger my guaranty?
Yes, if the guaranty lists a voluntary bankruptcy as a full-recourse event. A single-property LLC also may not qualify for Subchapter V, which excludes single asset real estate owners.
Can I negotiate a release of my carveout guaranty?
Often, as part of a deed in lieu or consensual foreclosure. Servicers trade releases for cooperation, and the release belongs in the transfer documents.
How North Star Law Firm Can Help
North Star Law Firm negotiates guaranties and deed-in-lieu agreements through its contract drafting and review practice, drafts SPE operating agreements, and weighs Chapter 11 and Subchapter V options. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Bankruptcy Court for the Central District of California.
If your loan is maturing or in default, contact North Star Law Firm or schedule a consultation before signing anything the servicer sends.