California Bank & Trust v. DelPonti, 181 Cal. Rptr. 3d 216 (Cal. Ct. App. 2014).
Five Corners Rialto, LLC (“Five Corners”) obtained a construction loan from Vineyard Bank (“Bank”) to develop a 70-unit townhome project, with guaranties from Thomas DelPonti and David Wood (“Guarantors”). 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, which, in turn, caused Five Corners to default on the loan.
The Bank foreclosed against Five Corners, and through its assignee, sued Five Corners and the Guarantors under various theories for deficiency. In the Bank’s action against the Guarantors to collect the deficiency owed under the guarantees, the trial court found that the Bank breached the loan contract, thereby exonerating the Guarantors. The trial court’s judgment in favor of the Guarantors was grounded upon its finding that the Bank materially breached the loan agreement by refusing to honor four payment applications that previously had been approved. Further, the trial court found that the Bank led the Guarantors to believe they would be released from the guarantees if they performed all the items listed in a “global strategy” e-mail from the Bank. In its appeal of the trial court’s decision, the Bank did not discuss or challenge any factual findings, including the trial court’s finding that the Bank was guilty of willful misconduct. Instead, the Bank argued that the judgment was in error because the Guarantors waived all their defenses under the guarantee agreements.
In disagreement with the Bank’s argument, the court of appeals cited to California Civil Code section 2856, which provides that any guarantor or other surety, including a guarantor of a note secured by real property, may waive rights and defenses that would otherwise be available to the guarantor. Waivable defenses include the guarantor’s rights of subrogation, reimbursement, indemnification, and contribution; any rights or defenses the guarantor might have by reason of any election of remedies by the creditor; or any rights or defenses the guarantor might have because the principal’s obligation is secured by real property or an estate for years.
The court found no cases on point that addressed the availability of equitable defenses to Guarantors whose contractual guaranty waived specific legal defenses. In analyzing this issue, the court determined that while California Civil Code section 2856 did permit a guarantor to waive certain legal and statutory defenses, it did not permit a lender to enforce pre-default waivers beyond those specified in the agreement, where to do so would result in the lender’s unjust enrichment, and allow the lender to profit from its own fraudulent conduct. The court therefore held that a guarantor’s waiver of defenses is limited to legal and statutory defenses expressly set out in the agreement. Furthermore, the court stated that a waiver of statutory defenses is not deemed to waive all defenses, especially equitable defenses, such as unclean hands, where to enforce the guaranty would allow a lender to profit by its own fraudulent conduct.
In reviewing the specific waivers at issue, the court applied a rule of strict construction and limited such waivers to those legal or statutory defenses particularly set forth in the guaranty agreement. The court held that they did not constitute a waiver of all equitable defenses, which would be contrary to public policy. It then cited to the actual language of the waiver provision for support, which contemplated the retention of certain defenses by stating, “[e]xcept as prohibited by applicable law, the Guarantor waives….” Finally, the court stated that in all suretyship and guaranty relations, the creditor owes the surety a duty of continuous good faith and fair dealing and that this duty was not waived by the Guarantors.
