Forgot your password?
Please enter your email & we will send your password to you:
My Account:
Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1997 LC CASE SUMMARIES 933 P.2d 507 (Cal. 1997)
Topics:
Anti-deficiency Statute; Independence Principle.
Type of Lawsuit:
Declaratory action initiated by issuing bank seeking clarification of its obligations on LC under California's Anti-Deficiency Statute.
Parties:
Plaintiff/Issuer - Western Security Bank
Defendant/Beneficiary - Beverly Hills Business Bank
Defendant/Applicant - Vista Place Associates
Counsel:
For Plaintiff: Allan B. Cooper, Steven A. Roseman and Garee T. Gasperian (Ervin, Cohen& Jessup).
For Defendants: John M. Anglin and Robin C. Campbell (Wright, Tyler,& Ward). Amici Curiae on behalf of Defendants: R. Stevens Condie and Charles T. Collett. Amicus Curiae on behalf of Plaintiff: William K. Wilburn.
Underlying Transaction:
Loan financing the purchase of real property.
LC:
Three standby LCs for US$ 125,000 each. Silent as to the UCP.
Decision:
The California Supreme Court reversed the decision of the intermediate appellate court, concluding that legislation in response to the appellate court's prior ruling (that an issuer's obligation on a standby letter of credit is subject to the anti-deficiency Statute as if it applies to the underlying transaction) was not to be applied retroactively, but only prospectively.
Rationale:
The legislature' s actions were only a clarification of existing law and not a change of the legislative scheme. As such, the clarification applied retroactively and covered the LC transaction in this case.
Article
Factual Summary: As additional collateral to cure a defaulted real estate loan, three standby letters of credit secured by promissory notes were issued to lender/beneficiary. When the applicant again defaulted on the loan, a non-judicial foreclosure took place and the lender drew on the LCs to make up for a deficiency resulting from the foreclosure sale. The applicant warned the issuing bank that the California Anti-deficiency Statute (Code of Civil Procedure Section 580(d)) barred the issuing bank from seeking reimbursement for payment of the LC. Rather than honoring the request for payment, the issuer sought declaratory relief in which it asked the court to determine its obligation against both the beneficiary and the applicant.
The trial court decreed that the issuer was obligated to pay the beneficiary and that the applicants were obligated to reimburse the issuer. On appeal, the California Court of Appeals reversed, ruling that a presentation in violation of the anti-deficiency statute constituted a "defect not apparent on the face of the Documents" within the meaning of California UCC prior section 5-114, subdivision (2)(b) and that dishonor does no offense to the 'independence principle.' (For a summary of the intermediate appellate court decision see 1997 Annual Survey of Letter of Credit Law & Practice520
1997 Annual Survey of Letter of Credit Law & Practice
The state legislature reacted in the preamble by amending the statute to remove the perceived conflict, specifically stating that its action was intended to abrogate the decision. Upon consideration of the impact of the amendment, the appellate court ruled that the amendment was a substantial change to existing law and, thus, would not operate retroactively. On review, the California Supreme Court reversed.
Legal Analysis:
1. Anti-deficiency Statute: Consistent with the legislature's stated intention that its actions apply to existing loan transactions supported by outstanding letters of credit, and thus operate retroactively, the Court found that the legislature's actions merely confirmed and clarified the state of law prior to the Court of Appeals' first decision.
2. Independence Principle: The Supreme Court found that, in its earlier opinion, the appellate court mistakenly saw letters of credit as only a form of guaranty, and not as a means of payment, and had applied principles of guarantee and surety law to relationships between the parties to a letter of credit transaction. The appellate court failed to recognize that in a letter of credit transaction the issuer undertakes its own obligation, not that of another. Moreover, the appellate court also overlooked the parties' intent to use the standby letters of credit as security for the outstanding loan. Nothing in the law limits security on real property only to trust deeds. Citing settled law, the court noted that "creditors may resort to such other security in addition to nonjudicial foreclosure of the real property security."
©1998 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.