A guarantor's general waiver of defenses cannot be used to shield a lender from the lender's willful breach of a loan agreement.
A guarantor's waiver of defenses is limited to legal and statutory defenses expressly set out in the agreement, a California appellate court held in California Bank & Trust v. Thomas Del Ponti. A waiver of statutory defenses is not deemed to waive all defenses, especially equitable defenses, where to enforce the guaranty would allow the lender to profit from its own wrongful conduct.
The facts of the case were straightforward. A developer obtained a construction loan from Vineyard Bank to develop a 70-unit townhome project with guaranties from two of the principals. The developer contracted with a general contractor to build the project in two phases. The project was on schedule for the first 18 months. However, when the first phase of the project was nearly complete, the bank stopped funding approved payment applications, preventing completion and sale of the first phase units. As a result, the developer defaulted under the loan.
The bank eventually reached an agreement with the developer, requiring the general contractor to finish the first phase so the units could be sold at auction. The bank promised to pay the subcontractors unless they discounted their bills and released any liens. The general contractor paid the subs out of its own pocket to keep the project lien free so the auction could proceed. Nevertheless, the bank foreclosed against the developer. In response, the general contractor filed an unbonded stop notice. The bank (through its assignee California Bank & Trust) sued the developer and the guarantors under various theories for the deficiency following a trustee's sale of the property. The general contractor sued the developer and the bank for restitution and breach of contract.
In a consolidated case, the court found that bank breached the assigned construction contract and found that the bank breached the loan agreement with the developer, exonerating the guarantors. The bank appealed, claiming that the guarantors had waived all defenses under the guaranty agreements.
The appellate court rejected the bank's argument. A pre-default waiver of the Bank's own misconduct was not expressly waived in the guaranty agreement. California Civil Code section 2856 permits a guarantor to waive certain legal and statutory defenses. However, that section does not permit a lender to enforce pre-default waivers beyond those specified where to do so would result in the lender's unjust enrichment and allow the lender to profit from its own fraudulent conduct.
In all suretyship and guaranty contracts in California, the creditor owes the surety a duty of continuous good faith and fair dealing. The court reasoned that it would be a violation of public policy to enforce the guarantors' waivers of defenses to payment of the note where the bank willfully breached the loan agreement, causing the default.
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