Filed 1/27/14 PNL Pomona v. Meruelo CA2/1
                  NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     SECOND APPELLATE DISTRICT

                                                  DIVISION ONE


PNL POMONA, L.P.,                                                    No. B243334
         Plaintiff and Respondent,
                                                                     (Super. Ct. No. KC055493)
    v.
BELINDA MERUELO, et al.,
         Defendants and Appellants.

          APPEAL from an order of the Superior Court of Los Angeles County. Salvatore
Sirna, Judge. Reversed.
          Neufeld, Marks & Gralnek, Timothy L. Neufeld and Paul S. Marks, for Plaintiffs
and Appellants.
          Hagan & Associates, Cara J. Hagan and Shannon C. Williams, for Defendant and
Respondent.




                                ___________________________________
       A husband and wife created a revocable intervivos family trust with themselves as
trustors, trustees and beneficiaries. They then caused the trust to take out a loan from a
lender and personally guaranteed the loan. When the borrower defaulted on the loan, the
lender nonjudicially foreclosed on real property securing the loan and then sought a
deficiency judgment against the guarantors, which the trial court granted. We reverse.
California’s nondeficiency statutes prevent a lender from obtaining a deficiency judgment
against a primary obligor after nonjudicial foreclosure. A guarantor of a loan to an inter
vivos trust who is also the trustor, trustee and beneficiary of the trust is considered to be a
primary obligor, and is not liable for any deficiency following nonjudicial foreclosure.
                                      BACKGROUND
A.     The Loan
       On November 11, 1988, Homero and Belinda Meruelo formed the Meruelo Living
Trust, a revocable, inter vivos trust, with themselves as trustees and beneficiaries.1 In
March 1999, Redwood Trust, Inc., a Maryland corporation, loaned $9.8 million to the
Meruelo Trust, secured by real property located in Pomona, California (the Pomona
property).
       On March 29, 1999, the parties executed four documents structuring and
memorializing the terms of the loan. First, Homero and Belinda, as trustees of the
Meruelo Trust, executed a promissory note by which the trust promised to begin making
payments of principal and interest to Redwood Trust in the amount of approximately
$82,000 per month. They then, in their personal capacities, executed a guaranty
agreement in which they unconditionally guaranteed the Meruelo Trust’s performance
“according to the terms expressed in the Loan Documents.” The Meruelos also executed,
again as trustees of the Meruelo Trust, a supplementary loan agreement wherein the trust
promised to convey the Pomona property to a single purpose entity—either a limited
partnership, limited liability company, or single purpose corporation—within one year


       1
           For clarity, we will sometimes refer to the Meruelos by their first names.

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and assign to it the trust’s interest in the loan. Failure to do so would result in either an
interest rate increase or change in the maturity date of the promissory note, at the lender’s
option. Finally, the Meruelos as trustees executed a deed of trust securing the Pomona
property.
          As relevant here, the promissory note provided that “[t]his Note shall be the joint
and several obligation of all Persons executing this Note and all sureties, guarantors, and
endorsers of this Note, and this Note shall be binding upon each of such Persons and their
respective successors and assigns . . . .”
B.        First Default
          The Meruelo Trust and its successors faithfully made loan payments for a decade.
In 2003, the Meruelo Trust transferred the Pomona property to Meruelo Pomona, a
limited liability corporation, which thereafter made loan payments to Redwood Trust. In
2005, Redwood Trust assigned its interest in the Meruelo loan to respondent PNL
Pomona (PNL). In 2007, Meruelo Pomona transferred the Pomona property to Merco
Group 2001-2021 West Mission Blvd. (Merco Group), another limited liability
corporation, which thereafter made loan payments to PNL.
          PNL claimed the 2003 transfer of the Pomona property to Meruelo Pomona and
the 2007 transfer to the Merco Group were made without PNL’s consent and constituted
a default on the loan, which by the loan’s terms would justify PNL imposing an increased
interest rate. PNL recorded a notice of default and began foreclosure proceedings.
          In 2008, Homero Meruelo passed away, and Belinda became the executor of his
estate.
C.        Reinstatement
          In October 2008, PNL Pomona and Belinda Meruelo, personally and in her
capacities as trustee of the Meruelo Trust and executor of Homero’s estate, entered into a
“Reinstatement Agreement” whereby PNL agreed to release the notice of default,
terminate foreclosure proceedings, and reinstate the loan obligation “as though no default
had occurred,” in exchange for a payment of $500,000 for “accrued default interest.”

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Further, Belinda Meruelo reaffirmed the obligations set forth in the promissory note, deed
of trust, and guaranty, reaffirmed “security interests created thereby,” and waived any
defenses as to their enforceability.
       In the reinstatement agreement Belinda Meruelo also purported to acknowledge
and reaffirmed the following document: “Assignment of the Note obligation by
Borrower to include Meruelo Pomona, LLC, a California limited liability company as
successor to the Original Borrower.” However, no evidence was introduced below
indicating this document was ever created.
D.     Second Default, Foreclosure, Lawsuit
       On January 2009, the Merco Group stopped making loan payments, and in March
2009 filed for bankruptcy protection.
       On April 16, 2009, PNL sued Belinda Meruelo, the Estate of Homero Meruelo, the
Merco Group, Meruelo Pomona, and the Meruelo Trust for breach of contract, breach of
the guaranty, and judicial foreclosure. After dismissing the Merco Group and its cause of
action for judicial foreclosure, PNL sought and received authority from the bankruptcy
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court to nonjudicially foreclose on the Pomona property. On August 25, 2011, PNL
obtained title to the Pomona property at a nonjudicial foreclosure sale for a credit bid of
$7.7 million. (A credit bid constitutes a creditor’s assertion of the amount it is owed.
Biancalana v. T.D. Service Co. (2013) 56 Cal.4th 807, 816.)
       The parties to the state court lawsuit thereafter stipulated that the nonjudicial
foreclosure proceedings resolved PNL’s claims against all but the guarantors of the loan
pursuant to California’s antideficiency law, Code of Civil Procedure sections 580a
through 580d and 726. PNL then proceeded against Belinda Meruelo and the estate of
Homero Meruelo for breach of the guaranty, which the parties stipulated would be
adjudicated in a reference proceeding.


       2
           Respondent’s request for judicial notice of bankruptcy court documents is
granted.

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       Belinda Meruelo, individually and on behalf of the estate of Homero, argued the
guaranty was a sham, in that no meaningful distinction existed between the Meruelos’
personal assets and those of the Meruelo Trust. Belinda declared those assets were
coextensive, and when the loan was made in 1999, Redwood Trust never requested or
received separate financial information for the trust.
       On January 20, 2012, the referee entered a statement of decision in which he found
appellants had waived their antideficiency defenses and further found the guaranty was
fully enforceable in the amount of PNL’s claimed deficiency of $3,306,941.05.
Appellants objected to the statement of decision, but on May 29, 2012, the trial court
overruled their objections and entered judgment affirming the referee’s decision. In June
2012, the court denied appellants’ motion for a new trial.
       This appeal followed.
                                       DISCUSSION
       Belinda Meruelo and the estate of Homero Meruelo contend the guaranty was
unenforceable as a sham because they were primary obligors on the note, and therefore
the guaranty added nothing to the principal obligation. We agree.
       California’s antideficiency statutes reflect a deliberate policy to limit the right to
recover deficiency judgments, that is, to recover on the debt more than the value of the
security. The goal of the policy is “‘(1) to prevent a multiplicity of actions, (2) to prevent
an overvaluation of the security, (3) to prevent the aggravation of an economic recession
which would result if creditors lost their property and were also burdened with personal
liability, and (4) to prevent the creditor from making an unreasonably low bid at the
foreclosure sale, acquire the asset below its value, and also recover a personal judgment
against the debtor.’ [Citations.]” (Torrey Pines Bank v. Hoffman (1991) 231 Cal.App.3d
308, 318 (Torrey Pines).)
       To further this policy, Code of Civil Procedure section 580d provides in pertinent
part that “No judgment shall be rendered for any deficiency upon a note secured by a
deed of trust or mortgage upon real property . . . hereafter executed in any case in which

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the real property . . . has been sold by the mortgagee or trustee under power of sale
contained in the mortgage or deed of trust.” This proscription can neither be waived in
advance (Freedland v. Greco (1955) 45 Cal.2d 462, 467-468) nor avoided or contravened
by private agreement. (Commonwealth Mortgage Assurance Co. v. Superior Court
(1989) 211 Cal.App.3d 508, 515.) “In determining whether a particular recovery is
precluded, we must consider whether the policy behind section 580d would be violated
by such a recovery.” (Ibid.)
       A guarantor is one “who promises to answer for the debt . . . of another . . . .”
(Civ. Code, § 2787.) A person thus cannot guarantee his own debt. (4 Miller & Starr,
Cal. Real Estate (3d ed.) § 10:263.) “[W]hen an intervivos revocable trust is the principal
obligor on a debt subject to the antideficiency laws, a guaranty of that debt by the
individual who is the trustee and settlor of the trust is ineffective because the individual
and the trust are essentially the same; accordingly, the individual is deemed the principal
obligor for purposes of applying the antideficiency laws.” (Cadle Co. II v. Harvey (2000)
83 Cal.App.4th 927, 933 (Cadle); see Torrey Pines, supra, 231 Cal.App.3d at p. 321.)
       In Torrey Pines, a bank made a construction loan to a family trust for the purpose
of building an apartment complex on property owned by the trustees as individuals. The
Hoffmans, a married couple, were the settlors of the trust and also served as its trustees
and beneficiaries during their lifetimes. The trust document authorized them, as trustees,
to bind the trust estate and to borrow money secured by trust property. The Hoffmans
signed personal guaranties of the loan and waived the protections of the antideficiency
statute (Code Civ. Proc., §§ 580a–580d). When the family trust defaulted on the loan, the
bank completed a nonjudicial foreclosure and sued the Hoffmans, as guarantors, to
recover the deficiency.
       The appellate court held the Hoffmans, as persons who created, administered, and
benefited from the trust, were the alter ego of the trustees and principal obligors. (Torrey
Pines, supra, 231 Cal.App.3d at p. 316.) “It is well established that where a principal
obligor purports to take on additional liability as a guarantor, nothing is added to the

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primary obligation. . . . The correct inquiry . . . 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. . . . Put another way, are the supposed
guarantors[, the Hoffmans,] nothing more than the principal obligors[, the trustees,] under
another name?” (Id. at pp. 319-320, citations omitted.) “The evidence of this transaction
as a whole demonstrates substantial identity between the individual guarantors and the
debtor trustees. The bank was presented with substantially the same financial
information for both the family trust and the individual guarantors as an inducement to
make the loan. It had a copy of the family trust (the borrower) naming the Hoffmans, the
settlors, as their own trustees and beneficiaries (along with their children). Although the
guaranties were signed by the Hoffmans as individuals, the bank was well aware of their
trust capacities, and should have been aware of the rules regarding the purpose,
usefulness, and limitations on the inter vivos trust device.” (Id. at p. 320.) “These
trustees were personally liable on the contract they entered into on behalf of the trust.
There is a significant identity between these individuals and their inter vivos trust during
their lifetimes, such that their trust should be deemed to be a ‘mere instrumentality’ . . .
through which they operated, but which never served to remove them from the status of
primary obligors. Accordingly, they must be considered to be primary obligors along
with their trust.” (Id. at p. 321, citation omitted.)
       Similarly, in Cadle, Harvey, the settlor and trustee of his intervivos revocable
trust, purported to guarantee a loan on which the trust was the principal obligor. The
court held the guaranty was ineffective for antideficiency purposes because Harvey was
the principal obligor on the note. (Id. at pp. 323-325.)
       In short, it does not matter that the names on a promissory note and trust deed are
different from those on the guarantee agreement if the supposed guarantors are nothing
more than principal obligors under another name. “[I]f the guarantor is actually the
principal obligor, he is entitled to the unwaivable protection of the antideficiency statutes,

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including Code of Civil Procedure section 580d, which prohibits a deficiency judgment
after nonjudicial foreclosure of real property under a power of sale (as occurred here).”
(River Bank America v. Diller (1995) 38 Cal.App.4th 1400, 1420; see Greenspan v.
LADT LLC (2010) 191 Cal.App.4th 486, 522; Nevin v. Salk (1975) 45 Cal.App.3d 331,
341.)
        “‘Unlike a corporation, a trust is not a legal entity. Legal title to property owned
by a trust is held by the trustee . . . .’ ‘“A . . . trust . . . is simply a collection of assets and
liabilities. As such, it has no capacity to sue or be sued, or to defend an action.”’”
(Stoltenberg v. Newman (2009) 179 Cal.App.4th 287, 293.) “[T]he proper procedure for
one who wishes to ensure that trust property will be available to satisfy a judgment . . . [is
to] sue the trustee in his or her representative capacity.” (Galdjie v. Darwish (2003) 113
Cal.App.4th 1331, 1349.)
        Here, when Redwood Trust loaned $9.8 million to the Meruelo trust it sought no
financial information about the trust itself, only about the trustors, Belinda and Homero
Meruelo. When the trust defaulted, PNL, Redwood’s successor in interest, sued the
trustees in their representative capacities for liability under the primary obligation.
Clearly, Redwood Trust and then PNL were aware that the Meruelo loan fell within the
well established rule that when a loan is made to a revocable trust, the trustees of the trust
are primary obligors. The trustees’ guarantee therefore added no additional security and
could not be employed as an artifice to circumvent the antideficiency laws.
        Respondent argues the borrowers and guarantors here are not the same because in
the October 2008 reinstatement agreement, Meruelo Pomona was substituted for the
Meruelo Trust as the borrower. Recall that by way of the reinstatement agreement
Belinda Meruelo reaffirmed the promissory note, deed of trust, and guaranty, and more
importantly reaffirmed a purported assignment of the original loan to Meruelo Pomona.
Respondent argues this assignment transferred the loan from the Meruelo Trust to a third
party, Meruelo Pomona, and removed the Meruelos as primary obligors, which hence



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created their obligation to guarantee the loan. The argument is without merit for two
reasons.
       First, no evidence of any assignment of the loan from the Meruelo Trust to
Meruelo Pomona exists other than this reference in the reinstatement agreement. Without
the assignment itself, however, we can only speculate on the nature of Meruelo Pomona’s
interest in the loan and its status as a potential borrower. The second reason the
assignment, if it existed, did not breathe life into the Meruelos’ sham guaranty is that it
failed to remove them as primary obligors. Going just by the title of the purported
assignment, its stated effect was only to “include” Meruelo Pomona as successor to the
original borrower. The title leaves uncertain whether Meruelo Pomona supplanted the
Meruelo Trust on the loan or merely joined it as a co-debtor, presently assumed any
obligations under the original loan, and, if it did, assumed all or only some of them. The
reinstatement agreement did provide that Belinda Meruelo would execute another
guaranty of the original note, but this apparently never occurred.
       The instant case is indistinguishable from Torrey Pines, which held that when a
debtor is nothing more than an instrumentality of individuals who purport to guarantee
the debtor’s obligation, the guarantors are principal obligors protected by the
antideficiency laws.
                                      DISPOSITION
       The judgment is reversed. Appellants are to recover their costs on appeal.
       NOT TO BE PUBLISHED.


                                                         CHANEY, Acting P. J.
We concur:
                                                                      *
              JOHNSON, J.                                MILLER, J.



       *
          Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant
to article VI, section 6 of the California Constitution.
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