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CALIFORNIA CORPORATE & SECURITIES LAW

Knowledge Of Loan Extensions Precludes Exoneration

The California Civil Code devotes several sections to the subject of the exoneration of sureties.  Section 2819, for example, intones:

“A surety is exonerated, except so far as he or she may be indemnified by the principal, if by any act of the creditor, without the consent of the surety the original obligation of the principal is altered in any respect, or the remedies or rights of the creditor against the principal, in respect thereto, in any way impaired or suspended.”

On the face of it, there is some common sense in this statute.  If a creditor alters the original obligation, this changes the nature of the surety’s obligation.  Hence, the surety must either consent to the change or be exonerated.

This was the issue in G.W. Warrens, Inc. v. Dabney, Cal. Ct. of Appeal Case No. No. H042243 (May 4, 2017).  In that case, the creditor had entered into deferral agreements with debtor, who was the purchaser of the creditor’s business.  The guarantor argued that he had not consented to these deferrals and hence was exonerated pursuant to Section 2819.  The trial court found that the guarantor knew of the deferral agreements because he was the controlling and “managing shareholder” of the debtor purchaser.  The Court of Appeal affirmed because this was a question of fact and substantial evidence supported the trial court’s conclusion.  What is not clear, at least to me, is how knowledge alone equates to consent.

Some readers may wonder why I began this post writing about sureties and then switched to a discussion about guarantors.  The answer is that California law makes no distinction between a surety and guarantor. Cal. Civ. Code § 2787.

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