In California Bank & Trust v. Del Ponti, the Fourth District California Court of Appeal held that a guarantor's general waiver of all defenses is limited to only those legal and statutory defenses expressly set out in the guaranty (No. E053187, (Cal. Ct. App. Dec. 9, 2014)).

Five Corners Rialto, LLC (Borrower) obtained a $22.5 million construction loan from California Bank & Trusts's predecessor, Vineyard Bank (Bank), to build approximately 70 townhouses. The Bank required two guaranty agreements from Thomas Del Ponti and David Wood (Guarantors) in which the guarantors purported to waive all defenses. Before the project was finished, however, the Bank stopped funding payments under the loan because the project's loan to value ratio was not in compliance with the terms of the loan agreement, claiming that an event of default had occurred. Following the loan's maturity, the parties agreed to a work-out involving the completion of construction of the project, but the Bank subsequently:

The Bank eventually foreclosed on the project and sued the Guarantors for the deficiency. The trial court found that the Bank breached the loan agreement by failing to provide the required notices and wrongfully refusing to fund approved payments, thereby discharging the Guarantors of their obligations. Additionally, the trial court noted that the Bank promised to release the Guarantors from liability if they complied with the Bank's requests.

The Fourth District Court of Appeal affirmed the trial court's findings that the Bank breached the loan agreement by failing to send the required notices and refusing to fund the loan. The Bank argued that the Guarantors remained liable because they had waived their defenses under the guaranty agreements.

The Court of Appeal rejected the Bank's argument, holding that a guarantor's general waiver of defenses only waives those legal and statutory defenses specifically set out in the guaranty agreement, and does not waive equitable defenses such as unclean hands where a lender would profit by its own fraudulent acts or willful misconduct if the guaranty were enforced.

Although Section 2856 of the California Civil Code allows a guarantor to waive its rights and defenses, the Court of Appeal ruled that the statute must be interpreted in a way that prevents a party from profiting from its own misconduct. In this case, the Bank brought about the demise of the project by refusing to fund the loan payments as well as failing to comply with the notice provisions in the loan agreement. Therefore, the guarantors were able to assert the equitable defense of unclean hands.

The court also held that the creditor owes the surety a continuous duty of good faith and fair dealing in all suretyship and guaranty relationships that cannot be waived.

Lenders and guarantors in California should take note of the pragmatic significance of this case of first impression. Primarily, lenders must remain mindful of the terms of their loan agreements, especially in relation to the proper procedures for declaring a default and foreclosing.

Lenders should also limit the use of broad, general waiver language in guaranty agreements, as was used in this case. Instead, guaranty agreements should expressly set out each right or defense being waived. However, it is unclear if a court would enforce a waiver of specific equitable defenses.