diff --git a/fundingmanager.go b/fundingmanager.go
index c8cfbe08..6251cfde 100644
--- a/fundingmanager.go
+++ b/fundingmanager.go
@@ -13,8 +13,10 @@ import (
 	"github.com/roasbeef/btcd/wire"
 	"github.com/roasbeef/btcutil"
 
+	"fmt"
 	"github.com/BitfuryLightning/tools/rt"
 	"github.com/BitfuryLightning/tools/rt/graph"
+	"google.golang.org/grpc"
 )
 
 const (
@@ -88,6 +90,14 @@ type fundingOpenMsg struct {
 	peer *peer
 }
 
+// fundingErrorMsg couples an lnwire.ErrorGeneric message
+// with the peer who sent the message. This allows the funding
+// manager properly process the error.
+type fundingErrorMsg struct {
+	err  *lnwire.ErrorGeneric
+	peer *peer
+}
+
 // pendingChannels is a map instantiated per-peer which tracks all active
 // pending single funded channels indexed by their pending channel identifier.
 type pendingChannels map[uint64]*reservationWithCtx
@@ -232,6 +242,8 @@ out:
 				f.handleFundingSignComplete(fmsg)
 			case *fundingOpenMsg:
 				f.handleFundingOpen(fmsg)
+			case *fundingErrorMsg:
+				f.handleErrorGenericMsg(fmsg)
 			}
 		case req := <-f.fundingRequests:
 			f.handleInitFundingMsg(req)
@@ -297,6 +309,23 @@ func (f *fundingManager) processFundingRequest(msg *lnwire.SingleFundingRequest,
 // TODO(roasbeef): add error chan to all, let channelManager handle
 // error+propagate
 func (f *fundingManager) handleFundingRequest(fmsg *fundingRequestMsg) {
+
+	// Check number of pending channels to be smaller than maximum allowed
+	// number and send ErrorGeneric to remote peer if condition is violated.
+	if len(f.activeReservations[fmsg.peer.id]) >= cfg.MaxPendingChannels {
+		errMsg := &lnwire.ErrorGeneric{
+			ChannelPoint: &wire.OutPoint{
+				Hash:  wire.ShaHash{},
+				Index: 0,
+			},
+			Problem:          "Number of pending channels exceed maximum",
+			ErrorID:          lnwire.ErrorMaxPendingChannels,
+			PendingChannelID: fmsg.msg.ChannelID,
+		}
+		fmsg.peer.queueMsg(errMsg, nil)
+		return
+	}
+
 	msg := fmsg.msg
 	amt := msg.FundingAmount
 	delay := msg.CsvDelay
@@ -684,6 +713,7 @@ func (f *fundingManager) initFundingWorkflow(targetPeer *peer, req *openChanReq)
 // wallet, then sends a funding request to the remote peer kicking off the
 // funding workflow.
 func (f *fundingManager) handleInitFundingMsg(msg *initFundingMsg) {
+
 	nodeID := msg.peer.lightningID
 
 	localAmt := msg.localFundingAmt
@@ -755,3 +785,46 @@ func (f *fundingManager) handleInitFundingMsg(msg *initFundingMsg) {
 	)
 	msg.peer.queueMsg(fundingReq, nil)
 }
+
+// processErrorGeneric sends a message to the fundingManager allowing it
+// to process the occurred generic error.
+func (f *fundingManager) processErrorGeneric(err *lnwire.ErrorGeneric,
+	peer *peer) {
+	f.fundingMsgs <- &fundingErrorMsg{err, peer}
+}
+
+// handleErrorGenericMsg process the error which was received from remote peer,
+// depends on the type of error we should do different clean up steps and
+// inform user about it.
+func (f *fundingManager) handleErrorGenericMsg(fmsg *fundingErrorMsg) {
+	if fmsg.err.ErrorID == lnwire.ErrorMaxPendingChannels {
+		peerID := fmsg.peer.id
+		chanID := fmsg.err.PendingChannelID
+
+		f.resMtx.RLock()
+		resCtx, ok := f.activeReservations[peerID][chanID]
+		f.resMtx.RUnlock()
+
+		if !ok {
+			resCtx.err <- fmt.Errorf("ErrorGeneric error " +
+				"was returned from remote peer for channel "+
+				"(id: %v), but it can't be found and thereby "+
+				"can't be canceled.", chanID)
+		}
+
+		if err := resCtx.reservation.Cancel(); err != nil {
+			resCtx.err <- fmt.Errorf("Remote peer responded "+
+				"with: Number of pending channels exceed "+
+				"maximum, but we can't cancel the reservation "+
+				"- %v", err)
+		} else {
+			resCtx.err <- grpc.Errorf(OpenChannelFundingError,
+				"Remote peer responded with: Number of "+
+					"pending channels exceed maximum")
+		}
+
+		f.resMtx.Lock()
+		delete(f.activeReservations[peerID], chanID)
+		f.resMtx.Unlock()
+	}
+}
diff --git a/lnd_test.go b/lnd_test.go
index 43c0a4c9..5f72d1f6 100644
--- a/lnd_test.go
+++ b/lnd_test.go
@@ -13,6 +13,7 @@ import (
 	"github.com/roasbeef/btcd/wire"
 	"github.com/roasbeef/btcrpcclient"
 	"github.com/roasbeef/btcutil"
+	"google.golang.org/grpc"
 	"testing"
 )
 
@@ -86,6 +87,29 @@ func assertTxInBlock(ct *CT, block *btcutil.Block, txid *wire.ShaHash) {
 	ct.Errorf("funding tx was not included in block")
 }
 
+// mineBlocks mine 'num' of blocks and check that blocks are present in
+// node blockchain.
+func mineBlocks(ct *CT, net *networkHarness, num uint32) []*btcutil.Block {
+	blocks := make([]*btcutil.Block, num)
+
+	blockHashes, err := net.Miner.Node.Generate(num)
+	if err != nil {
+		ct.Errorf("unable to generate blocks: %v", err)
+	}
+
+	for i, blockHash := range blockHashes {
+		block, err := net.Miner.Node.GetBlock(blockHash)
+		if err != nil {
+			ct.Errorf("unable to get block: %v", err)
+		}
+
+		blocks[i] = block
+	}
+
+	return blocks
+}
+
+
 // openChannelAndAssert attempts to open a channel with the specified
 // parameters extended from Alice to Bob. Additionally, two items are asserted
 // after the channel is considered open: the funding transaction should be
@@ -102,14 +126,8 @@ func openChannelAndAssert(ct *CT, net *networkHarness, ctx context.Context,
 	// Mine a block, then wait for Alice's node to notify us that the
 	// channel has been opened. The funding transaction should be found
 	// within the newly mined block.
-	blockHash, err := net.Miner.Node.Generate(1)
-	if err != nil {
-		ct.Errorf("unable to generate block: %v", err)
-	}
-	block, err := net.Miner.Node.GetBlock(blockHash[0])
-	if err != nil {
-		ct.Errorf("unable to get block: %v", err)
-	}
+	block := mineBlocks(ct, net, 1)[0]
+
 	fundingChanPoint, err := net.WaitForChannelOpen(ctx, chanOpenUpdate)
 	if err != nil {
 		ct.Errorf("error while waiting for channel open: %v", err)
@@ -150,14 +168,7 @@ func closeChannelAndAssert(ct *CT, net *networkHarness, ctx context.Context,
 	// Finally, generate a single block, wait for the final close status
 	// update, then ensure that the closing transaction was included in the
 	// block.
-	blockHash, err := net.Miner.Node.Generate(1)
-	if err != nil {
-		ct.Errorf("unable to generate block: %v", err)
-	}
-	block, err := net.Miner.Node.GetBlock(blockHash[0])
-	if err != nil {
-		ct.Errorf("unable to get block: %v", err)
-	}
+	block := mineBlocks(ct, net, 1)[0]
 
 	closingTxid, err := net.WaitForChannelClose(ctx, closeUpdates)
 	if err != nil {
@@ -752,16 +763,114 @@ func testBasicChannelCreation(net *networkHarness, ct *CT) {
 	}
 }
 
-type testCase func(net *networkHarness, t *testing.T)
+// testMaxPendingChannels checks that error is returned from remote peer if
+// max pending channel number was exceeded and that '--maxpendingchannels' flag
+// exists and works properly.
+func testMaxPendingChannels(net *networkHarness, ct *CT) {
+	maxPendingChannels := defaultMaxPendingChannels + 1
+	amount := btcutil.Amount(btcutil.SatoshiPerBitcoin)
+
+	timeout := time.Duration(time.Second * 10)
+	ctx, _ := context.WithTimeout(context.Background(), timeout)
+
+	// Create a new node (Carol) with greater number of max pending
+	// channels.
+	args := []string{
+		fmt.Sprintf("--maxpendingchannels=%v", maxPendingChannels),
+	}
+
+	carol, err := net.NewNode(args)
+
+	if err != nil {
+		ct.Errorf("unable to create new nodes: %v", err)
+	}
+	if err := net.ConnectNodes(ctx, net.Alice, carol); err != nil {
+		ct.Errorf("unable to connect carol to alice: %v", err)
+	}
+
+	carolBalance := btcutil.Amount(maxPendingChannels) * amount
+	if err := net.SendCoins(ctx, carolBalance, carol); err != nil {
+		ct.Errorf("unable to send coins to carol: %v", err)
+	}
+
+	// Send open channel requests without generating new blocks thereby
+	// increasing pool of pending channels. Then check that we can't
+	// open the channel if the number of pending channels exceed
+	// max value.
+	openStreams := make([]lnrpc.Lightning_OpenChannelClient, maxPendingChannels)
+	for i := 0; i < maxPendingChannels; i++ {
+		stream, err := net.OpenChannel(ctx, net.Alice, carol, amount, 1)
+		if err != nil {
+			ct.Errorf("unable to open channel: %v", err)
+		}
+		openStreams[i] = stream
+	}
+
+	// Carol exhausted available amount of pending channels, next open
+	// channel request should cause ErrorGeneric to be sent back to Alice.
+	_, err = net.OpenChannel(ctx, net.Alice, carol, amount, 1)
+	if err == nil {
+		ct.Errorf("error wasn't received")
+	} else if grpc.Code(err) != OpenChannelFundingError {
+		ct.Errorf("not expected error was received : %v", err)
+	}
+
+	// For now our channels are in pending state, in order to not
+	// interfere with other tests we should clean up - complete opening
+	// of the channel and then close it.
+
+	// Mine a block, then wait for node's to notify us that the channel
+	// has been opened. The funding transactions should be found within the
+	// newly mined block.
+	block := mineBlocks(ct, net, 1)[0]
+
+	chanPoints := make([]*lnrpc.ChannelPoint, maxPendingChannels)
+
+	for i, stream := range openStreams {
+		fundingChanPoint, err := net.WaitForChannelOpen(ctx, stream)
+		if err != nil {
+			ct.Errorf("error while waiting for channel open: %v", err)
+		}
+
+		fundingTxID, err := wire.NewShaHash(fundingChanPoint.FundingTxid)
+		if err != nil {
+			ct.Errorf("unable to create sha hash: %v", err)
+		}
+
+		assertTxInBlock(ct, block, fundingTxID)
+
+		// The channel should be listed in the peer information
+		// returned by both peers.
+		chanPoint := wire.OutPoint{
+			Hash:  *fundingTxID,
+			Index: fundingChanPoint.OutputIndex,
+		}
+		if err := net.AssertChannelExists(ctx, net.Alice, &chanPoint); err != nil {
+			ct.Errorf("unable to assert channel existence: %v", err)
+		}
+
+		chanPoints[i] = fundingChanPoint
+	}
+
+	// Finally close the channel between Alice and Carol, asserting that the
+	// channel has been properly closed on-chain.
+	for _, chanPoint := range chanPoints {
+		closeChannelAndAssert(ct, net, ctx, net.Alice, chanPoint)
+	}
+
+}
+
+type testCase func(net *networkHarness, ct *CT)
 
 var testCases = map[string]testCase{
 	"basic funding flow":          testBasicChannelFunding,
 	"channel force closure":       testChannelForceClosure,
 	"channel balance":             testChannelBalance,
 	"single hop invoice":          testSingleHopInvoice,
+	"max pending channel":         testMaxPendingChannels,
 	"multi-hop payments":          testMultiHopPayments,
+	"multiple channel creation":   testBasicChannelCreation,
 	"invoice update subscription": testInvoiceSubscriptions,
-	"multiple channel creation": 	testBasicChannelCreation,
 }
 
 // TestLightningNetworkDaemon performs a series of integration tests amongst a
diff --git a/lnwire/error_generic.go b/lnwire/error_generic.go
index c5ff2f0d..dea6f1d3 100644
--- a/lnwire/error_generic.go
+++ b/lnwire/error_generic.go
@@ -7,6 +7,12 @@ import (
 	"github.com/roasbeef/btcd/wire"
 )
 
+const (
+	// Is returned by remote peer when number of pending channels exceed max
+	// value.
+	ErrorMaxPendingChannels = 1
+)
+
 // ErrorGeneric represents a generic error bound to an exact channel. The
 // message format is purposefully general in order to allow expression of a wide
 // array of possible errors. Each ErrorGeneric message is directed at a particular
diff --git a/peer.go b/peer.go
index a996c4be..f970c8d9 100644
--- a/peer.go
+++ b/peer.go
@@ -373,6 +373,16 @@ out:
 			p.remoteCloseChanReqs <- msg
 		// TODO(roasbeef): interface for htlc update msgs
 		//  * .(CommitmentUpdater)
+
+		case *lnwire.ErrorGeneric:
+			switch msg.ErrorID {
+			case lnwire.ErrorMaxPendingChannels:
+				p.server.fundingMgr.processErrorGeneric(msg, p)
+			default:
+				peerLog.Warn("ErrorGeneric(%v) handling isn't" +
+					" implemented.", msg.ErrorID)
+			}
+
 		case *lnwire.HTLCAddRequest:
 			isChanUpdate = true
 			targetChan = msg.ChannelPoint
diff --git a/rpcserver.go b/rpcserver.go
index c93b4be8..976deccd 100644
--- a/rpcserver.go
+++ b/rpcserver.go
@@ -27,6 +27,10 @@ import (
 	"golang.org/x/net/context"
 )
 
+const (
+	OpenChannelFundingError = 100
+)
+
 var (
 	defaultAccount uint32 = waddrmgr.DefaultAccountNum
 )