1. What is the bank’s position of what the guarantors waived by their agreement with the bank to build out the project?

2. What defenses does a guarantor never waive?

3. Will the guarantors have to pay the deficiency on the sale of the project?

Five Corners Rialto, LLC, obtained a construction loan from Vineyard Bank to develop a 70-unit townhome project (Project), with guaranties from Thomas DelPonti and David Wood, the principals of Five Corners (Guarantors). Five Corners contracted with Advent, Inc., a general contractor, to build the project in two phases. Everything went according to schedule for the first 18 months. However, when Phase I of the Project was nearly complete, the Bank stopped funding approved payment applications, preventing completion and sale of the Phase I units, which, in turn, caused Five Corners to default on the loan.

The Bank reached an agreement with Five Corners, requiring Advent to finish Phase I so the units could be sold at auction and promising to pay the subcontractors if they discounted their bills and released any liens. Advent paid the subcontractors out of its own pocket in order to keep the project lien-free so the auction could proceed. However, the Bank foreclosed against Five Corners. The Bank (through its assignee California Bank and Trust), sued Five Corners and the Guarantors under various theories for the deficiency following a Trustee’s Sale of the Deed of Trust, while Advent sued the developer and the Bank for restitution for the amounts it paid out of pocket.

The cases were consolidated and tried. The court awarded judgment in favor of Advent. The court found that the Bank breached the loan contract, exonerating the Guarantors. The court awarded attorneys’ fees to Advent and the Guarantors. The Bank appealed.

JUDICIAL OPINION

RAMIREZ, Presiding Judge … 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 the four payment applications that had been approved. Further, the 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 the “global strategy” e-mail from the Bank.

The Guarantors did everything expected of them and performed according to the new agreement to the extent the Bank permitted. The Bank does not discuss or challenge the trial court’s factual findings, including the court’s finding that the Bank was guilty of willful misconduct. Instead, the Bank argues that the judgment was in error because the Guarantors waived all their defenses under the guarantee agreements. We disagree. Civil Code section 2856 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. These statutory rights of the guarantor may be waived and such waiver provision is not invalid as opposed to public policy. ………………..