Western Security Bank v. Superior Court, S037504

CourtUnited States State Supreme Court (California)
Citation15 Cal.4th 232,62 Cal.Rptr.2d 243,933 P.2d 507
Docket NumberNo. S037504,S037504
Parties, 933 P.2d 507, 32 UCC Rep.Serv.2d 534, 97 Cal. Daily Op. Serv. 2554, 97 Daily Journal D.A.R. 4507 WESTERN SECURITY BANK, N.A., Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent; BEVERLY HILLS BUSINESS BANK et al., Real Parties in Interest. VISTA PLACE ASSOCIATES et al., Petitioners, v. The SUPERIOR COURT of Los Angeles County, Respondent; WESTERN SECURITY BANK, N.A., et al., Real Parties in Interest.
Decision Date07 April 1997

Ervin, Cohen & Jessup, Allan B. Cooper, Steven A. Roseman, Beverly Hills, and Garee T. Gasperian, Woodland Hills, for Petitioner and Real Parties in Interest Western Security Bank, N.A.

William K. Wilburn, Saratoga, as Amicus Curiae on behalf of Petitioner and Real Parties in Interest Western Security Bank, N.A.

Walker, Wright, Tyler & Ward, John M. Anglin and Robin C. Campbell, Los Angeles, for Petitioners Vista Place Associates et al.

R. Stevens Condie, Oakland, and Charles T. Collett, Newport Beach, as Amici Curiae on behalf of Petitioners Vista Place Associates et al.

No appearance for Respondent.

Saxon, Dean, Mason, Brewer & Kincannon, La Jolla; Lewis, D'Amato, Brisbois & Bisgaard, Los Angeles; Arter & Hadden, Eric D. Dean, Steven J. Cote, Los Angeles; Robert S. Robinson and Michael L. Coates, Irvine, for Real Parties in Interest Beverly Hills Business Bank.

Gibson, Dunn & Crutcher, Dennis B. Arnold, Los Angeles; Hill, Wynne, Troop & Meisinger, Neil R. O'Hanlon, Los Angeles; Cadwalader, Wickersham & Taft, Robert M. Eller, Joseph M. Malinowski, Kenneth G. McKenna, Michael A. Santoro, John E. McDermott, Kenneth G. McKenna, John C. Kirkland, Los Angeles; Stroock & Stroock & Lavan, Julia B. Strickland, Bennett J. Yankowitz, Chauncey M. Swalwell, Los Angeles; Brobeck, Phleger & Harrison, George A. Hisert, Jeffrey S. Turner, John Francis Hilson, G. Larry Engel, Frederick D. Holden, Jr., San Francisco, and Theodore W. Graham, San Diego, as Amici Curiae on behalf of Real Parties in Interest Beverly Hills Business Bank.

CHIN, Justice.

This case concerns the extent to which two disparate bodies of law interact when standby letters of credit are used as additional support for loan obligations secured by real property. On one side we have California's complex web of foreclosure and antideficiency laws that circumscribe enforcement of obligations secured by interests in real property. On the other side is the letter of credit law's "independence principle," the unique characteristic of letters of credit essential to their commercial utility.

The antideficiency statute invoked in this case is Code of Civil Procedure section 580d. That section precludes a judgment for any loan balance left unpaid after the lender's nonjudicial foreclosure under a power of sale The Court of Appeal perceived a conflict between the public policies behind Code of Civil Procedure section 580d and the independence principle under the facts of this case. Here, after nonjudicial foreclosure of the real property security for its loan left a deficiency, the lender attempted to draw on the standby letters of credit of which it was the beneficiary. Ordinarily, the issuer's payment on a letter of credit would require the borrower to reimburse the issuer. (See § 5114, subd. (3).) The Court of Appeal considered that this result indirectly imposed on the borrower the equivalent of a prohibited deficiency judgment. The court concluded the situation amounted to a "fraud in the transaction" under section 5114, subdivision (2)(b), one of the limited circumstances justifying an issuer's refusal to honor its letter of credit.

[933 P.2d 510] in a deed of trust or mortgage on real property. (See Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 43-44, 27 Cal.Rptr. 873, 378 P.2d 97.) 1 The independence principle, in summary form, makes the letter of credit issuer's obligation to pay a draw conforming to the letter's terms completely separate from, and not contingent on, any underlying contract between the issuer's customer and the letter's beneficiary. (See, e.g., Cal.U.Com.Code, § 5114, subd. (1); San Diego Gas & Electric Co. v. Bank Leumi (1996) 42 Cal.App.4th 928, 933-934, 50 Cal.Rptr.2d 20.) 2

The Legislature soon acted to express a clear, contrary intent. It passed Senate Bill No. 1612 (1993-1994 Reg. Sess.) (hereafter Senate Bill No. 1612) as an urgency measure specifically meant to abrogate the Court of Appeal's holding. (Stats.1994, ch. 611, §§ 5, 6.) In brief, the aspects of Senate Bill No. 1612 we address provided that an otherwise conforming draw on a letter of credit does not contravene the antideficiency laws and that those laws afford no basis for refusal to honor a draw. After the Legislature's action, we returned the case to the Court of Appeal for reconsideration in light of the statutory changes. On considering the point, the Court of Appeal concluded the Legislature's action was prospective only and had no impact on the court's earlier analysis of the parties' rights and obligations. Accordingly, the Court of Appeal reiterated its former conclusions.

We again granted review and now reverse. The Legislature's manifest intent was that Senate Bill No. 1612's provisions, with one exception not involved here, would apply to all existing loans secured by real property and supported by outstanding letters of credit. We conclude the Legislature's action constituted a clarification of the state of the law before the Court of Appeal's decision. The legislation therefore has no impermissible retroactive consequences, and we must give it the effect the Legislature intended.


On October 10, 1984, Beverly Hills Savings and Loan Association, later known as Beverly Hills Business Bank (the Bank), loaned Vista later experienced financial difficulties, and the loan went into default. Vista asked the Bank to modify the loan's terms so Vista could continue operating the shopping center and repay the debt. The Bank and Vista agreed to a loan modification in February 1987, under which the three Vista partners each obtained an unconditional, irrevocable standby letter of credit in favor of the Bank in the amount of $125,000, for a total of $375,000. These were delivered to the Bank as additional collateral security for repayment of the loan. Under the modification agreement, the Bank was entitled to draw on the letters of credit if Vista defaulted or failed to pay the loan in full at maturity.

[933 P.2d 511] $3,250,000 to Vista Place Associates (Vista), a limited partnership, to finance the purchase of real property improved with a shopping center. Vista's general partners, Phillip F. Kennedy, Jr., John R. Bradley, and Peter M. Hillman (the Vista partners), each signed the promissory note. The loan transaction created a "purchase money mortgage," as it was secured by a "Deed of Trust and Assignment of Rents" as well as a letter of credit.

Western Security Bank, N.A. (Western) issued the letters of credit at the Vista partners' request. Each partner agreed to reimburse Western if it ever had to honor the letters. Under the agreement, each Vista partner gave Western a $125,000 promissory note. 3

In December 1990, the Bank declared Vista in default on the modified loan. The Bank recorded a notice of default on February 13, 1991, and began nonjudicial foreclosure proceedings. (Civ.Code, § 2924.) It then filed an action against Vista seeking specific performance of the rents and profits provisions in the trust deed and appointment of a receiver.

On June 11, 1991, attorneys for the Bank and Vista signed a letter agreement settling the Bank's lawsuit. In that agreement, Vista promised it would "not take any legal action to prevent [the Bank's] drawing upon [the letters of credit] after the Trustee's Sale of the Vista Place Shopping Center, ... provided that the amount of the draw by [the Bank] On June 13, 1991, the Bank concluded its nonjudicial foreclosure on the shopping center under the power of sale in its deed of trust. The Bank was the only bidder, and it purchased the property. The sale left an unpaid deficiency of $505,890.16.

[933 P.2d 512] does not exceed an amount equal to the difference between [Vista's] indebtedness and the successful bid of the Trustee's Sale." Vista promised as well not to take any draw-related legal action against the Bank after the Bank's draw on the letters of credit.

That same day, the Bank delivered the three letters of credit and drafts to Western and demanded payment of their full amount, $375,000. The Bank never sought to recover the $505,890.16 deficiency from Vista or the Vista partners. About the time that Western received the Bank's draw demand, it also received a written notice from the Vista partners' attorney. The notice asserted that Code of Civil Procedure section 580d barred Western from seeking reimbursement from the Vista partners for any payment on the letters of credit, and that if Western paid, it did so at its own risk.

Western did not honor the Bank's demand for payment on the letters of credit. Instead, on June 24, 1991, Western filed this declaratory relief action against the Bank, as well as Vista and the Vista partners (collectively, the Vista defendants). Western's complaint sought: (1) a declaration that Western is not obligated to accept or honor the Bank's tender of the letters of credit; or, alternatively, (2) a declaration that, if Western must pay on the letters of credit, the Vista partners must reimburse Western according to the terms of their promissory notes.

The Vista defendants cross-complained against Western for cancellation of their promissory notes and for injunctive relief. In July 1991, the Bank filed a first amended cross-complaint, alleging Western wrongfully dishonored the letters of credit, and the Vista defendants breached the agreement not to take legal action to prevent the Bank's drawing on the...

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