Cathay Bank v. Lee

I.

This is a loan guaranty case. Appellant Tom Y. Lee guaranteed a $5.2 million loan from Cathay Bank to a hotel firm of which he was the corporate secretary and a director. The loan was secured by a Quality Inn in Buena Park. The hotel firm defaulted, and the bank foreclosed in a private sale. There was a deficiency between the amount realized at the sale and the amount owing on the loan, and the bank obtained a summary judgment for the difference against Lee, who appeals.

The dispositive issue before us is whether Lee explicitly waived what might be called the “Gradsky defense” to the deficiency action against him. The Gradsky defense is based on Union Bank v. Gradsky (1968) 265 Cal.App.2d 40 [ 71 Cal.Rptr. 64 ], which held that a lender is estopped to recover a deficiency judgment against a guarantor when it elects a particular remedy (nonjudicial foreclosure) which cuts off the guarantor’s subrogation rights against the debtor. Thus, even though California’s antideficiency statute (Code Civ. Proc., § 580d) does not protect guarantors directly, as a practical matter the “Gradsky defense” precludes deficiency judgments against them unless the lender elects the…