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Note: To finance a USD 9.4 million building project, DB NPI Century City (Guarantors) (managed by Niemann Properties) established a line of credit with East West Bank (Beneficiary/Assignor), secured by a deed of trust to the project, a promissory note, and various guaranties. Guarantors agreed to waive all rights and defenses from "the cessation from any cause whatsoever other than payment in full, of the indebtedness' or 'any act of omission or commission by Lender which directly or indirectly results in or contributes to the discharge of the Borrower... or the indebtedness."

Following an updated appraisal that revealed a decrease in the project's value and thereby a deficiency in the security collateralizing the loan, Beneficiary/ Assignor required Guarantors to further secure the loan with a certificate of deposit and a standby letter of credit. Guarantors put USD 114,000 on deposit and applied for a standby LC with Wells Fargo (Issuing Bank) in the amount of USD 841,280. The standby contained the following drawing statement: "We hereby claim [USD] 841,280... The amount claimed by us represents and covers the unpaid indebtedness including principal, interest and all charges and expenses incurred due to [Beneficiary] arising from the granting of banking facilities to [Guarantors]...."

Following the borrowers' default on their loan, Guarantors similarly defaulted on their surety undertaking obligations to Beneficiary/Assignor. Beneficiary/Assignor then drew on the CD and the standby LC with the Issuing Bank. The Beneficiary/ Assignor then sold the loan documents to Legendary Investors Group No. 1 (Assignee), which still contained an outstanding balance of more than USD 5.4 million. Having purchased the deed of trust, Assignee foreclosed on Guarantor's property, sold the property for USD 2 million, and sued for the remainder of the promissory note. Assignee argued that Guarantors breached the commercial guaranty agreement to fulfill debt obligations. Guarantors denied that they owed anything to Assignee, basing their argument in the language of the drawing statement required by the standby LC, which they interpreted to mean that the drawing on the standby letter of credit by Beneficiary/Assignor in the amount of USD 841,280 extinguished any remaining debt that it owed.

The trial court granted a nonsuit in favor the Guarantors, agreeing with their defense that the LC language was clear as to the relinquishment of claims of Assignor on any remaining debt, thus invalidating Assignee's claims. The trial court additionally excluded evidence that Assignee had sought to admit. On appeal, the California Court of Appeals, Epstein, J.P., reversed the trial court's decision to deny the Assignee's motion in limine.

The appellate judge stated that Assignee's motion in limine, which would preclude the letter of credit as evidence, should have been granted because Guarantors had waived their rights to such defenses. Furthermore, the court ruled that the whole of the standby LC was improperly interpreted at trial as the LC clearly indicated that it is to be a security for future credit facilities and that multiple and partial drawings were expressly allowed in other parts of the LC. The drawing statement therefore could not have extinguished the outstanding balance remaining on the loan.

[ALC/mjb]

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