11.09.15

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Guarantor’s Defense: It Needs to be Written and Signed

An important opinion about the enforceability of guaranties was published on November 2, 2015, by Division I of the Washington Court of Appeals, and we represented the prevailing party in the case.  It is Frontier Bank v. Bingo Investments, No. 72529-7-1, ___ Wn. App. ___.  Members of a family guaranteed real property development loans made by Frontier Bank between 2006-2008.  Frontier Bank was closed in 2010, and the FDIC sold most of Frontier Bank’s assets to our client, Union Bank, including the guaranties.

After the real estate developments were liquidated by general receivers, over $50 million remained due on the guaranteed loans. Union Bank sued the guarantors, who defended by alleging that they had been fraudulently induced by Frontier Bank to sign the guaranties.  The trial court rejected the defense and granted summary judgment to Union Bank.

The guarantors appealed unsuccessfully to the Washington State Court of Appeals, which held:

1.  The statute of frauds, RCW 19.36.110, prevents a guarantor from using fraudulent inducement as a defense unless the defense is proved by a written document that has been signed by the lender.  Testimony that the lender fraudulently induced the guarantor to give the guaranty by making fraudulent oral promises or statements is not good enough.  There must be a writing signed by the lender.  In this case, the documents presented by the guarantors were not signed at all.

2.  Because Union Bank bought the guaranty from the FDIC, Union Bank was entitled to rely upon the FDIC’s rights under 12 U.S.C. § 1823(e) and the D’Oench Doctrine, which bar a guarantor’s defenses based on fraudulent schemes or arrangements unless they are proved by writings signed by both the guarantor and the lender.  So, testimony that the lender used fraudulent schemes or arrangements to induce the guarantor to give the guaranty is not good enough.  There must be a writing inducing the fraud that is signed by both guarantor and lender, and there were none in this case.

3.  The guarantor cannot defend by complaining that the lender is acting in bad faith when the lender seeks the guarantor’s specific performance of the guaranty’s terms.  An absolute guaranty is enforceable according to its terms, and the lender does not breach the covenant of good faith and fair dealing by insisting that the guarantor do what it absolutely promised: pay the guaranteed debt.

The Court of Appeals also awarded Union Bank its attorneys’ fees and costs on appeal.