Court Limits Scope Of Guarantor Waivers

Note to readers: This brief post covers only one key aspect of this important case. There are other ramifications for contractual relationships that could impact you. Check with us for more details if you have an interest, or any concerns.

In the recent court case of California Bank & Trust v. Del Ponti, the court set an important precedent that applies to disputes on commercial loans between property developers and lenders.  In effect, a commercial lender cannot enforce waivers in guarantee agreements which are unlawful or otherwise contravene public policy.  Guarantor waivers are limited to certain legal and statutory defenses specifically set forth in the agreements, but not equitable defenses. 

In Del Ponti, the developers, Five Corners, obtained a construction loan from California Bank & Trust to build a 70-unit townhome project with guaranties from DelPonti and Wood, the principals of Five Corners.  Near the end of Phase 1 of construction, the Bank stopped releasing approved payments. This brought the project to a halt with no units sold which forced Five Corners to default on the loan.

The Bank reached a workout agreement with Five Corners which required the project contractor to complete Phase I so the units could be sold at auction, however the Bank proceeded with foreclosure and a Trustee’s sale of the units, and thereafter sued Five Corners and the guarantors under various theories for the deficiency.  The Court entered judgment in favor of Five Corners, and found that the Guarantors were exonerated due to the Bank’s breach of contract due to its failure to honor approved payment applications.   

The Bank appealed the judgments, arguing that the judgment was in error because the Guarantors waived all their defenses under their guarantee agreements.

Guarantor Waivers Which Are Unlawful Or Contravene Public Policy Are Unenforceable

The Court considered Civil Code section 2856, which provides that any guarantor or other surety, including a guarantor of a note secured by real estate, may waive rights and defenses that would otherwise be available to the guarantor, and reviewed the various provisions that a guarantor may validly waive including Sections 2845 and 2849.

In this case, however, the Court was unwilling to extend Section 2856 to the Guarantors’ pre-default waiver of the Bank’s own misconduct.  The Court held that a guarantor cannot be held liable where a contract is unlawful or contravenes public policy, and applied a rule of strict construction to limit guarantor waivers to those legal and statutory defenses particularly set forth in the guarantee agreements, and do not constitute a waiver of all equitable defenses.  Thus, the Court emphasized that a waiver of statutory defenses is not deemed to be a waiver of all defenses, especially equitable defenses such as unclean hands, whereby enforcing the guaranty would allow a lender to profit from its own fraudulent misconduct.

At PLP, we are experienced commercial loan and lending attorneys with the practical legal skills and knowledge to assert our clients’ interests or defend them in breach of contract actions, and have the expertise to navigate this complex area of business litigation.

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