WESTERN SECURITY BANK v. SUPERIOR COURT BEVERLY HILLS BUSINESS BANK

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Court of Appeal, Second District, Division 3, California.

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.

No. B066488.

Decided: September 29, 1995

Ervin, Cohen & Jessup, Allan B. Cooper, Steven A. Roseman and Garee T. Gasperian, Beverly Hills, for Western Security Bank, N.A. William K. Wilburn, Saratoga, as amicus curiae on behalf of Western Security Bank, N.A. Walker, Wright, Tyler & Ward, John M. Anglin and Robin C. Campbell, Los Angeles, for Vista Place Associates, et al. No appearance for Respondent. Saxon, Dean, Mason, Brewer & Kincannon and Steven J. Cote, Newport Beach, for Beverly Hills Business Bank. Hill Wynne Troop & Meisinger, Neil R. O'Hanlon, Cadwalader, Wickersham & Taft, John E. McDermott, Kenneth G. McKenna, John C. Kirkland, 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. and Theodore W. Graham, San Diego, as amici curiae on behalf of Beverly Hills Business Bank.

In this appeal and cross-appeal, we examine the relationship between a bank, its customer whose debt to the bank was secured by a deed of trust on real property, and a second financial institution which issued letters of credit on behalf of the customer as a means of giving the bank additional security for the customer's repayment of the secured debt.   Upon the customer's default, and following the bank's subsequent nonjudicial foreclosure, the bank sought to draw on the letters of credit in order to reduce the substantial deficiency which remained;  in response, the customer claimed that such a draw was barred by California's anti-deficiency statutes.   This action was filed to determine the rights and liabilities of the parties.   It necessarily presents a novel conflict between the strong and competing public policies behind California's anti-deficiency legislation and the continued commercial vitality and utility of the “independence principle” as it relates to standby letters of credit.

This is the second time we have been required to consider the issues raised in this case.   We filed our original opinion on December 21, 1993.   Shortly thereafter, the Supreme Court granted review.   However, on February 2, 1995, after the Legislature accepted our invitation to address certain conflicting policy questions, the Supreme Court transferred the case back to us with directions to vacate our prior opinion and to reconsider the matter in light of the statutory changes.   The changes made by the Legislature are set out in Senate Bill No. 1612 (Stats.1994, ch. 611, §§ 1–6) which amended Civil Code section 2787 1 and added Code of Civil Procedure sections 580.5 and 580.7.2  We have examined these new statutory changes and have concluded that while they represent a clear legislative choice that the “independence principle” applicable to letters of credit shall, with but minor exception, have primacy over the provisions of the anti-deficiency statutes, they cannot be applied retrospectively.   Therefore, they have no impact on our analysis of the issues presented by the pending appeal and cross-appeal.

We resolve the issues presented to us by holding that, under section 580d of the Code of Civil Procedure,3 an integral part of California's long established anti-deficiency legislation, the issuer of a standby letter of credit, provided to a real property lender by a debtor as additional security, may decline to honor it after receiving notice that it is to be used to discharge a deficiency following the beneficiary-lender's nonjudicial foreclosure on real property.   Such a use of standby letters of credit constitutes a “defect not apparent on the face of the documents” within the meaning of California Uniform Commercial Code section 5114, subdivision (2)(b), and therefore such permissive dishonor does no offense to the “independence principle.”   We also conclude that the “mixed collateral” rules contained in the Commercial Code have no application to the facts of this case.

PROCEDURAL AND FACTUAL BACKGROUND

On October 10, 1984, Beverly Hills Savings and Loan Association (now known as Beverly Hills Business Bank and hereinafter referred to as the “Bank”) loaned $3,250,000 to Vista Place Associates, a limited partnership (hereinafter “Vista”), in order to finance the purchase of a parcel of improved real property, to wit, a shopping center.   Vista's general partners, Phillip F. Kennedy, Jr. John R. Bradley and Peter M. Hillman, (hereinafter, “the Vista partners”) each signed the promissory note;  and the loan was secured by a “Deed of Trust and Assignment of Rents.”

Due to Vista's financial difficulties, the Bank's loan to Vista subsequently went into default.   Vista requested that the Bank modify the terms of the loan to enable Vista to continue to operate the shopping center and repay the debt.   On February 1, 1987, the Bank and Vista entered into a loan modification agreement under the terms of 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 letters were delivered to the Bank as additional collateral security for repayment of the loan.   The modification agreement provided that the Bank was entitled to use the letters of credit if Vista defaulted or the loan was not paid in full at maturity.

The letters of credit were issued by Western Security Bank (“Western”) at the request of the three Vista partners who each promised to reimburse Western if it was ever required to honor the letters.   In support of such promises, separate promissory notes of $125,000 were given to Western by each of the Vista partners.

In December 1990, the Bank declared Vista to be in default on the modified loan and a notice of default was recorded on February 13, 1991, thereby commencing nonjudicial foreclosure proceedings.  (Civ.Code, § 2924.)   Thereafter, the Bank filed an action against Vista seeking specific performance of the rents and profits provisions in the trust deed as well as appointment of a receiver.   On June 11, 1991, a letter agreement settling that law suit was signed by attorneys for both the Bank and Vista.   Pursuant to that letter agreement, Vista agreed it would “not take any legal action to prevent [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 [Bank] does not exceed an amount equal to the difference between [Vista's] indebtedness and the successful bid of the Trustee's Sale.”   Vista further agreed that after the Bank drew on the letters of credit, it (Vista) would not take any legal action against the Bank with respect to that draw.

On June 13, 1991, the Bank concluded its nonjudicial foreclosure on the shopping center.   The Bank was the only bidder and became the purchaser.   This sale left an unpaid deficiency in the sum of $505,890.16.   That same day, the Bank delivered the three letters of credit to Western and demanded that it pay the full amount thereof, that is, $375,000.   The Bank never sought to recover any part of the deficiency directly from Vista or the Vista partners.

Contemporaneously with the receipt of the Bank's draw demand, Western also received written notice from Vista's attorney stating that any attempt by Western to seek reimbursement from Vista for Western's payment on the letters of credit would be barred by Code of Civil Procedure section 580d.   Finding itself in the middle of competing claims with respect to the letters of credit, Western refused to honor the Bank's demand for payment thereon and filed this action, naming as defendants the Bank, Vista, and the Vista partners (Vista and the Vista partners are sometimes hereinafter referred to collectively as “the Vista defendants”).

Western's sole cause of action is for declaratory relief in which it seeks (1) a declaration that it is not obligated to accept or honor the Bank's tender of the letters of credit, or alternatively, (2) a declaration that, if it is required to honor the letters, then the three Vista partners are obligated to reimburse Western pursuant to their separate promissory notes.

Western's complaint was filed on June 24, 1991.   The following month, the Vista defendants filed a cross-complaint against Western for cancellation of the three promissory notes and for injunctive relief.   In July 1991, the Bank filed a first amended cross-complaint against Western (for wrongful dishonor of the letters of credit) and against the Vista defendants (for breach of their letter agreement to not take any legal action to prevent the Bank from drawing upon the letters of credit).

The Bank, Western and the Vista defendants each filed competing motions for summary judgment.   Prior to the hearing on these motions, the trial court issued a 20–page tentative ruling for review by counsel.   The court tentatively concluded that Western was required to honor the Bank's demand for payment on the letters of credit and Western could in turn seek reimbursement from the Vista partners pursuant to their promissory notes.   The court stated that it appeared there were no disputed material facts to try and only issues of law were presented by the motions for summary judgment, but that if the court was incorrect in its analysis, it would deny all the motions for summary judgment and conduct a short trial to deal with the disputed issues of material fact.4

After several hearings and discussions with counsel, during which the parties agreed upon certain relevant facts, the matter was argued on January 17, and the court issued its decision on January 23, 1992.   By its minute order of that date, the court (1) denied the three motions for summary judgment, (2) severed the Vista defendants' cross-complaint against Western for cancellation of the promissory notes, (3) severed the Bank's amended cross-complaint against the Vista defendants for breach of the letter agreement, and (4) issued a tentative decision on the trial of Western's complaint for declaratory relief and the Bank's amended cross-complaint against Western for wrongful dishonor of the letters of credit.

 The judgment was signed and filed on March 26, 1992.   The court decreed that the Bank was entitled to recover from Western the sum of $375,000, plus interest at 10% from and after June 13, 1991, and costs of suit.   The court further decreed that Western was not barred from severally seeking reimbursement from the Vista partners, pursuant to their respective promissory notes, of the amount paid to the Bank.   Thereafter, Western filed an appeal from the judgment and the Vista defendants filed a cross-appeal.5

ISSUES PRESENTED

Although the parties assert them in differing ways and from conflicting perspectives, this case presents, apart from the impact of the Legislature's recent enactment of SB 1612, three issues for resolution and exposes a fourth which must be remanded for consideration by the trial court.6

1. What is the impact of a secured real property lender's election of the remedy of nonjudicial foreclosure on its right to thereafter reduce a remaining deficiency by drawing upon standby letters of credit obtained by the debtor from a separate financial institution and given to the lender as additional security?

2. To what extent is such use of letters of credit governed by the “mixed collateral” rules contained in the California Uniform Commercial Code?

3. If the financial institution issuing the letters of credit is required to honor them, must it also pay interest on that obligation for the period of time during which it litigated in good faith the conflicting claims being made upon it by the lender and the debtor?

Finally, a critical and threshold issue is whether the Legislature's recent enactment of sections 580.5 and 580.7 has any impact on this case.   The Bank contends that these statutory changes are controlling because they are either declarative of existing law or entitled to retrospective application.   As already noted, we conclude that these new statutory provisions constitute a change in the law which should have prospective application only.

DISCUSSION

1. Application of the Anti–Deficiency Legislation

California has an elaborate and interrelated set of anti-deficiency and foreclosure statutes relating to the enforcement of obligations secured by interests in real property.7  Most of these statutes were enacted as the result of “the Great Depression and the corresponding legislative abhorrence of the all too common foreclosures and forfeitures [which occurred] during that era for reasons beyond the control of the debtors.”  (Hetland & Hansen, The “Mixed Collateral” Amendments to California's Commercial Code—Covert Repeal of California's Real Property Foreclosure and Anti-deficiency Provisions or Exercise in Futility? (1987) 75 Cal.L.Rev. 185, 187–188, fn. omitted, hereinafter “Hetland & Hansen.”)   The particular statute which is critical to the resolution of this case is Code of Civil Procedure section 580d (hereinafter “section 580d”).

 Under section 580d, when a debtor defaults on payment of a loan that is secured by a deed of trust on real property and the creditor then sells the property for less money than the debtor owed, the creditor may seek a deficiency judgment against the debtor for the balance of the debt if the creditor has foreclosed judicially but not if the foreclosure was by exercise of the nonjudicial power of sale.  (Union Bank v. Gradsky (1968) 265 Cal.App.2d 40, 43, 71 Cal.Rptr. 64.)

In a judicial foreclosure, the beneficiary or trustee of the deed of trust brings an action to foreclose.   The judgment obtained therefrom directs the sale of the property and application of the proceeds of sale to the amount due on the debt and to the costs of the action and the sale of the property.   Unless a deficiency recovery is otherwise forbidden, the judgment may also contain a provision for allowance of deficiency and proceedings to determine the amount of deficiency.   After entry of the judgment, and upon application by the judgment creditor, the clerk of the court will issue a writ of sale.   The levying officer, or an appointed receiver, then sells the property.   Because judicial foreclosure permits recovery of a deficiency, the property must be sold subject to the debtor's right of redemption.8

In a nonjudicial foreclosure, the trustee exercises the power of sale given him or her by the deed of trust.   The sale is conducted at a public auction after notice of the sale is given to the public and to the debtor.   Prior to the sale, the trustee records a notice of default and mails a copy to the debtor;  the debtor then has the right to cure the default up to five business days before the date of sale indicated in the recorded notice of sale.9

From the creditor's point of view, the major disadvantage of a nonjudicial foreclosure is that the creditor may not seek a deficiency judgment.   However, the nonjudicial foreclosure is less expensive and more quickly concluded than a judicial foreclosure and the debtor has no right of redemption.  “The right to redeem, like proscription of a deficiency judgment, has the effect of making the security satisfy a realistic share of the debt.  [Citation.]  By choosing ․ to bar a deficiency judgment after private sale, the Legislature [has given] the creditor his election of remedies.   If the creditor wishes a deficiency judgment, his sale is subject to statutory redemption rights.   If he wishes a sale resulting in nonredeemable title, he must forego the right to a deficiency judgment.   In either case the debtor is protected.”  (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d at pp. 43–44, 27 Cal.Rptr. 873, 378 P.2d 97.)

 Section 580d has the effect and was apparently enacted for the purpose of putting “judicial enforcement on a parity with private enforcement.”  (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d at p. 43, 27 Cal.Rptr. 873, 378 P.2d 97.)   Besides discouraging the over-valuation of property used to secure loans, “The antideficiency statutes further serve to prevent creditors in private sales from buying in at deflated prices and realizing double recoveries by holding debtors for large deficiencies.  [Citation.]”  (Commonwealth Mortgage Assurance Co. v. Superior Court (1989) 211 Cal.App.3d 508, 514, 259 Cal.Rptr. 425.)   In the event the value of the secured property becomes inadequate to satisfy the debt due to a decline in property values during a general or local depression, the anti-deficiency legislation can also serve as a brake on the aggravation of the downturn by avoiding or limiting the imposition of additional personal liability on defaulting borrowers.  (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d at p. 42, 27 Cal.Rptr. 873, 378 P.2d 97.)   These are very important public policy considerations.

 Section 580d has been broadly applied.   Not only is a creditor prevented from obtaining a deficiency judgment against the debtor, but no other person is permitted to obtain against the debtor what would, in effect, amount to a deficiency judgment.   Thus, in Union Bank v. Gradsky, supra, 265 Cal.App.2d 40, 71 Cal.Rptr. 64 (“Gradsky”), the court held that a guarantor of a promissory note secured by a first deed of trust on real property is not entitled to seek reimbursement from the debtor if that guarantor is required to pay to the debtor's lender the amount of the deficiency after the lender has foreclosed nonjudicially.   However, the court also held that the guarantor would not be required to pay the creditor any deficiency amount since the guarantor would be precluded by section 580d from recouping that amount from the debtor.   As Gradsky put it, “If [the guarantor] can successfully assert an action in assumpsit against [the debtor] for reimbursement, the obvious result is to permit the recovery of a ‘deficiency’ judgment against the debtor following a nonjudicial sale of the security under a different label.   It makes no difference to [the debtor's] purse whether the recovery is by the original creditor in a direct action following nonjudicial sale of the security, or whether the recovery is in an action by the guarantor for reimbursement of the same sum.”  (Union Bank v. Gradsky, supra, 265 Cal.App.2d at pp. 45–46, 71 Cal.Rptr. 64.)

In accord with Gradsky is Commonwealth Mortgage Assurance Co. v. Superior Court, supra, 211 Cal.App.3d 508, 259 Cal.Rptr. 425 (“Commonwealth”).   In Commonwealth, a couple borrowed money from a bank for purchase of three condominium units, giving the bank promissory notes for the three loans.   The bank required the debtors to obtain mortgage guarantee insurance policies to secure payment on their notes.   The debtors signed indemnity agreements with the mortgage insurer whereby they agreed to protect the insurer from any loss it might incur under the policies of mortgage insurance.   When the couple defaulted on their bank loans, the insurer sued to recover from them the sum it had paid to the bank after the bank had foreclosed nonjudicially on the real property.   The Commonwealth court rejected the insurer's argument that section 580d was not impacted by the parties' transactions.

Like the argument upon which the Bank relies here, the insurer's position in Commonwealth was based on its claim that (1) it was not seeking a deficiency judgment but rather was merely attempting to recover under its contract with the debtor and (2) “its suit involves an obligation separate and distinct from that of the underlying notes secured by the deeds of trust.”  (Commonwealth Mortgage Assurance Co. v. Superior Court, supra, 211 Cal.App.3d at p. 514, 259 Cal.Rptr. 425.)   The court noted that the facts of the case before it were “substantially similar in effect to those in [Gradsky ] and conclude[d] that the indemnity agreements [sued on by the insurer were] nothing more than attempts to recover a deficiency in violation of the anti-deficiency statute.”  (Id. at p. 515, 259 Cal.Rptr. 425.)   The court found that the policies of mortgage insurance served the same purpose as did the guarantee in Gradsky, saying that the indemnity agreement between the insurer and the debtor “add[ed] nothing to the liability [the debtors] already incurred as principal obligors on the notes․”  (Id. at p. 517, 259 Cal.Rptr. 425.)

 Besides protecting debtors from deficiency-like recoveries in favor of third party guarantors or insurers after nonjudicial foreclosures on the debtor's real property security, section 580d necessarily has another consequence.   By application of the principles of estoppel, section 580d also protects those third parties from having to pay any deficiency to the creditor.   The Gradsky court found that this result followed from the fact that it is the creditor who controls the election as to the process to be used in the collection of the secured debt following default.   Upon the debtor's default, the creditor can elect to either foreclose judicially or nonjudicially;  or, in the case of a guarantor, the creditor can decline to exercise foreclosure rights and simply seek payment of the debt from the guarantor, who would in turn be subrogated to the creditor's rights of judicial or nonjudicial foreclosure on the real property.  (Union Bank v. Gradsky, supra, 265 Cal.App.2d at pp. 43–46, 71 Cal.Rptr. 64.)

When the creditor chooses nonjudicial foreclosure, a guarantor, with no right to control that choice and thus no way to protect himself, is adversely impacted;  there are no subrogation rights to pass on to the guarantor and the guarantor is precluded by section 580d from seeking from the debtor what would in effect be a deficiency judgment.   Therefore, the Gradsky court concluded, when a creditor chooses to foreclose nonjudicially, the burden of a deficiency should fall solely on the creditor.   To make it fall on the third party guarantor is unfair.  (Union Bank v. Gradsky, supra, 265 Cal.App.2d at pp. 45–47, 71 Cal.Rptr. 64.)

Gradsky and Commonwealth reflect the strong judicial concern about the efforts of secured real property lenders to circumvent section 580d by the use of financial transactions between debtors and third parties which involve post nonjudicial foreclosure debt obligations for the borrowers.   Their common and primary focus is on the lender's requirement that the debtor make arrangements with a third party to pay a portion or all of the mortgage debt remaining after a foreclosure, i.e., to pay the debtor's deficiency.   The Gradsky court recognized that the fundamental question was:  “Did the Legislature intend section 580d to shield the debtor only from a deficiency judgment obtained by the originally secured creditor, or did it intend to protect him from all personal liability in each instance in which he has no right of redemption?”  (Union Bank v. Gradsky, supra, 265 Cal.App.2d at p. 43, 71 Cal.Rptr. 64.)   The court answered the question by saying:  “The Legislature clearly intended to protect the debtor from personal liability following a nonjudicial sale of the security.   No liability, direct or indirect, should be imposed upon the debtor following a nonjudicial sale of the security.”  (Id. at p. 46, 71 Cal.Rptr. 64;  emphasis added.)

One of the important questions which we must answer is whether and to what extent the principles of Gradsky and Commonwealth impact the outcome here.   The Vista defendants argue that these two cases should control and require us to find that (1) the Bank is not entitled to draw on the letters of credit from Western, (2) Western is not required to honor those letters of credit, and (3) Western is not entitled to enforce the promissory notes given to it by the Vista partners.   They insist that the letters of credit which they delivered to the Bank serve the same purpose as did the guarantee in Gradsky and the indemnity agreements/mortgage insurance in Commonwealth—additional security to the beneficiary of the trust deed—and “add nothing to the liability” that Vista had already incurred as principal debtor on the promissory note that is secured by the deed of trust.  (Commonwealth Mortgage Assurance Co. v. Superior Court, supra, 211 Cal.App.3d at p. 517, 259 Cal.Rptr. 425.)

On the other hand, and despite the strong similarities between this case and Gradsky and Commonwealth, the Bank and the several Amici argue that those cases are not applicable because (1) Gradsky relied on subrogation law for its holding that a nonjudicial foreclosure would prevent a lender from pursuing a guarantor and (2) Commonwealth, while an indemnification case, would have also been a subrogation matter but for the indemnity contracts signed by the debtors.   In short, these cases depended upon the law applicable to guarantor relationships, including the important right of subrogation.   This, they argue, is entirely different from the law applicable to letters of credit.   Specifically, they insist that any application here of Gradsky and Commonwealth would offend the independence principle which California statutorily recognizes with respect to letters of credit.   We now turn to this issue.

2. Application of the Independence Principle As It Relates to “Standby” Letters Of Credit

 Citing Lumbermans Acceptance Co. v. Security Pacific Nat. Bank (1978) 86 Cal.App.3d 175, 150 Cal.Rptr. 69, the Bank argues that irrevocable letters of credit are unconditional and independent of the underlying commercial transaction between the customer of the issuing bank and the beneficiary of the letters and therefore must be honored by the issuing bank if the draft or demand presented to said bank complies with the terms of the credit, irrespective of the current status of the relationship between the customer and the beneficiary.   This argument raises the fundamental question as to whether or to what extent the so-called “independence principle” prevails over the strong public policy considerations upon which the anti-deficiency legislation rests.

We begin our discussion of this issue by reviewing the nature and purpose of the financial instrument known as a letter of credit.   One commentator summarized the essential characteristics of the traditional and standby letters of credit as follows:  “[A letter of credit is] an engagement by an issuer (usually a bank) to a beneficiary, made at the request of a customer, which binds the bank to honor drafts up to the amount of the credit upon the beneficiary's compliance with certain conditions specified in the letter of credit.   The customer is ultimately liable to reimburse the bank.   The traditional function of the letter of credit is to finance an underlying customer's beneficiary contract for the sale of goods, directing the bank to pay the beneficiary for shipment.   A different function is served by the ‘standby’ letter of credit, which directs the bank to pay the beneficiary not for his own performance but upon the customer's default, thereby serving as a guarantee device.”  (Note, “Fraud in the Transaction:”  Enjoining Letters of Credit During the Iranian Revolution (1980) 93 Harv.L.Rev. 992, 993, fns. omitted [hereinafter “Note”];  emphasis added;  see generally, Verkuil, Bank Solvency and Guaranty Letters of Credit (1973) 25 Stan.L.Rev. 716, 721–724.)

As the Lumbermans court put it, “The letter of credit is a commercial instrument which represents a primary obligation between the issuer and the beneficiary.   An issuer has no responsibility for performance of the underlying contract between the customer and the beneficiary [Com.Code, § 5109].   An issuer ‘must honor a draft or demand for payment which complies with the terms of the relevant credit regardless of whether the goods or documents conform to the underlying contract for sale or other contract between the customer and the beneficiary.’  [Citations.] ․  But the issuer of an irrevocable letter of credit is, by the [provisions of Com.Code, § 5114] exempted from any responsibility to determine the reciprocal rights and liabilities of the applicant for the letter of credit as against the beneficiary.”  (Lumbermans Acceptance Co. v. Security Pacific Nat. Bank, supra, 86 Cal.App.3d at p. 178, 150 Cal.Rptr. 69.) 10

 We agree with the argument of the Bank and amici that because of this independence principle, which is so critical to the commercial utility and reliability of letters of credit, an issuer does not have the defenses to payment that might be available to guarantors or sureties.   The obligations of such third parties clearly depend upon an existing liability of the debtor;  as a result, defenses available to the debtor are also available to the guarantor or surety.

 However, it does not necessarily follow that an issuer in all cases is required to honor a demand for payment regardless of any dispute which may exist in the underlying transaction between the beneficiary and the customer.   Even prior to the adoption of the Uniform Commercial Code an exception to the independence principle was recognized where there was a “fraud in the transaction.”   In such circumstance the issuer was permitted to dishonor the demand.  (Sztejn v. J. Henry Schroder Banking Corp. (Sup.Ct.1941) 177 Misc. 719, 721–723, 31 N.Y.S.2d 631, 634–635.)   This exception was recognized and adopted by the Uniform Commercial Code in section 5–114, subdivision (2) and was ultimately enacted in California.  (See fn. 10, ante.)

 In this case, we are dealing with a “standby” letter of credit rather than a traditional commercial letter.   This distinction is more than relevant to our analysis, it is critical.   As already noted, the traditional letter is essentially a payment document and is most frequently used in the sale of goods.   The seller of the goods (beneficiary of the letter of credit) is entitled to payment by the issuer bank upon presentment of a demand together with a bill of lading which reflects that the goods have been shipped to the buyer (customer of the issuing bank).   The independence principle is particularly important in such a transaction.11  The issuer may not question, nor is it required to determine, whether the seller had actually shipped the goods or whether the goods conformed to the contract.

 A standby letter of credit differs in that the beneficiary may make a demand upon it only in the event that the customer defaults on the underlying contract.   Thus, unlike the traditional letter where the parties expect a demand to be made on the issuer, payment on the standby letter is a circumstance which all parties expect, or at least hope, will not occur.   A call upon a standby letter necessarily suggests a substantial likelihood of dispute and difficulty.   Indeed, a payment demand on a standby letter is a strong indication that something is seriously wrong;  either the debtor is in financial difficulty or a dispute with the beneficiary has arisen.  (Gregora, Letters of Credit in Real Property Finance Transactions, (1991) 9 Cal.Real Prop.J. 1, 3.12

 A critical, indeed essential, part of the Bank's argument is that the standby letter given here must be regarded as the legal and practical equivalent of a cash deposit or at least no different than if the Vista defendants had borrowed $375,000 from Western and simply delivered that to the Bank prior to their default on the loan.   Clearly, if either of those circumstances had occurred there would be no claim that the Bank's retention of such funds would in any way offend the anti-deficiency statutes.   However, that is not the case before us.

 No matter how it may be regarded by the beneficiary, a standby letter is certainly not cash or its equivalent from the perspective of the debtor;  in reality, it represents his promise to provide additional funds in the event of his future default or deficiency, thus confirming its use not as a means of payment but rather as an instrument of guarantee.   Even though such promise is manifested by the irrevocable commitment of a third party bank it still has the practical consequence of requiring the debtor to pay additional money on the debt after default or foreclosure.

As the arguments in support of the Bank's position concede, letters of credit have become popular in real estate financing transactions because (1) the customer (debtor) does not have or is unwilling to make the cash available for a larger down payment;  this is often true because the debtor is spread too thin by a number of concurrent or pending transactions, (2) the real property security does not have the necessary value to support the deal and/or (3) real estate lenders are simply unwilling to totally rely on the value of the real property security.

In short, if real property borrowers had sufficient cash or credit they could satisfy lender demands for increased equity positions.   It is an essential and undeniable fact that the standby letter of credit device is commonly used to put together real estate financing transactions which cannot stand on their own either because the borrower does not have sufficient worth to take an adequate equity position or the value of the land involved is not sufficient to support the loan which the borrower requires.13  For us to conclude that such use of a standby letter of credit is the same as an increased cash investment (whether or not from borrowed funds) is to deny reality and to invite the very overvaluation and potential aggravation of an economic downturn which the anti-deficiency legislation was originally enacted to prevent.14

 Courts construe the anti-deficiency statutes liberally so that the purposes behind them will be promoted.  (Simon v. Superior Court (1992) 4 Cal.App.4th 63, 78, 5 Cal.Rptr.2d 428.)  “It is well settled that the proscriptions of section 580d cannot be avoided through artifice [citation]․”  (Rettner v. Shepherd (1991) 231 Cal.App.3d 943, 952, 282 Cal.Rptr. 687.)   In case after case, the courts have thwarted lenders' attempts to get around the anti-deficiency statutes.  (See, e.g., Freedland v. Greco (1955) 45 Cal.2d 462, 289 P.2d 463;  Simon v. Superior Court, supra, 4 Cal.App.4th 63, 5 Cal.Rptr.2d 428.)

 Because section 580d was enacted for a public reason it cannot be waived in advance (Freedland v. Greco, supra, 45 Cal.2d at p. 467, 289 P.2d 463) or contravened by a private agreement (see Valinda Builders, Inc. v. Bissner (1964) 230 Cal.App.2d 106, 112, 40 Cal.Rptr. 735).   When we examine an attempt by a lender to obtain additional funds after a nonjudicial foreclosure, it is necessary to consider whether the policy behind section 580d would be violated by such a recovery.  (Commonwealth Mortgage Assurance Co. v. Superior Court, supra, 211 Cal.App.3d at p. 515, 259 Cal.Rptr. 425;  Passanisi v. Merit–McBride Realtors, Inc. (1987) 190 Cal.App.3d 1496, 1508, 236 Cal.Rptr. 59.)

 In this case it seems obvious that all parties contemplated from the outset of the transaction that in the event of a default by the Vista defendants, the Bank would be entitled to make a demand upon the letters.   However, to the extent that such expectation extended to a post nonjudicial foreclosure demand by the Bank, the transaction would clearly represent an impermissible advance waiver of the protection provided by section 580d.   If that was not the expectation of the parties then the Bank's use of the letters for such a purpose is certainly wrongful.   In either event, the result conflicts with the limitations imposed by section 580d.

 To permit standby letters of credit to serve the purpose of allowing the lender to recover a post nonjudicial foreclosure deficiency would severely undermine the entire basis of section 580d;  indeed, they would simply become the “artifice of choice” to avoid the section's limitations entirely.   In our view, the Bank's effort to enforce the standby letters of credit delivered by the Vista defendants is nothing more than an attempt to recover a deficiency in violation of section 580d.15  The language used by the Commonwealth court seems applicable:  “To splinter the transaction and view the indemnity agreements as separate and independent obligations ․ is to thwart the purpose of section 580d by a subterfuge [and that is] a result we cannot permit.”  (Commonwealth Mortgage Assurance Co. v. Superior Court, supra, 211 Cal.App.3d at p. 517, 259 Cal.Rptr. 425.)

The pivotal issue with which we are confronted is whether the independence principle, as codified in California Uniform Commercial Code section 5114, requires us to sanction such use of standby letters of credit in spite of the resulting offense to the fundamental policy embodied in section 580d.   If we conclude that in such circumstance an issuer has no alternative but to honor the payment demand then we effectively have subordinated the anti-deficiency legislation to the need for commercial certainty upon which the independence principle is predicated.   On the other hand, if we hold that an issuer, on the facts before us, cannot properly honor a request for payment on standby letters, then we have done the opposite.   We cannot, in this case, completely vindicate both of these competing statutory policies.   We must therefore seek a way to reconcile them.  “It is the duty of courts, when reasonably possible, to harmonize [statutory provisions] so as to give effect to the apparent intent of the [L]egislature.”  (Stowe v. Merrilees (1935) 6 Cal.App.2d 217, 220, 44 P.2d 368;  see also, County of Los Angeles v. Craig (1942) 52 Cal.App.2d 450, 452, 126 P.2d 448.)

 California Uniform Commercial Code section 5114, subdivision (2)(b), provides that when there has been a notification from the customer of “fraud, forgery or other defect not apparent on the face of the documents,” the issuer “may honor the draft or demand for payment.” 16  It is permissive, not mandatory.   In other words, where the issuer has been notified of what amounts to a “fraud in the transaction” committed by the beneficiary, there is a “defect” not apparent on the face of the documents which will justify the issuer's refusal to honor the draft or demand.17  That is exactly what happened here.

 As we have stated, the delivery of a standby letter of credit for the purpose of guaranteeing payment of any deficiency remaining after a nonjudicial foreclosure amounts to an impermissible advance waiver.   Thus, the Bank could not have properly received them for that purpose.   Therefore, the Bank's request for and acceptance of letters of credit from the Vista partners necessarily depended upon its implicit representation that the letters would not be presented for payment after a nonjudicial foreclosure.   The Bank's subsequent conduct in nonetheless presenting the letters following such a foreclosure effectively worked a fraud upon the Vista partners.   (Civ.Code, §§ 1572, subds. (4) and (5), 1709 and 1710, subd. (4).) 18  The Bank's act was no less a fraud because the representation which it necessarily made was implied rather than express.

Western was informed that the Bank was seeking a deficiency after a nonjudicial foreclosure, contrary to the provisions of section 580d.   The Bank's effort to recover payment on the standby letters after it had concluded a nonjudicial foreclosure constituted the imposition of indirect liability upon the Vista partners which clearly conflicts with the legislative policy and purpose behind the enactment of section 580d.   In our view, such conduct amounted to a “fraud in the transaction” within the meaning of California Uniform Commercial Code section 5114, subdivision (2).

 Western was therefore justified in its refusal to honor the Bank's demand for payment.19  As Western had been notified of a “defect” within the meaning of California Uniform Commercial Code section 5114, subdivision (2)(b), it was free to reject the Bank's demand.   It was, of course, also free to honor it.   The strong public policy behind section 580d and its violation by the Bank is sufficient to support our conclusion that a “defect” existed;  but the importance of the codified independence principle is also vindicated by Western's right, which it could have exercised, to honor the Bank's demand without jeopardizing its right to full reimbursement from the Vista partners.20

We recognize that there is an important distinction to be made between the principles which govern a contract of guaranty and those which apply to standby letters of credit.21  We do not disturb the issuer's right of reimbursement should it decide to exercise its statutory authority to honor a beneficiary's payment demand even after a nonjudicial foreclosure.   To that extent, the subrogation analyses of Gradsky and Commonwealth are not applicable.   What is important here about those cases is the fact that each involved an attempt by the lender, who controls the selection of the remedies in the collection process, to recoup a deficiency via payouts from third parties while at the same time avoiding the limitations imposed by the anti-deficiency laws.   Each case represented an attempt to circumvent such laws by resort to a device which would obscure the actual economic consequence to the borrower:  the burden of a deficiency without any right of redemption.

 Thus, we preserve the principle, clearly established by Gradsky and Commonwealth, that a lender should not be able to utilize a device of any kind to avoid the limitations of section 580d;  and we apply that principle here to standby letters of credit.   This we accomplish by holding that the Bank is not entitled to make a demand upon the letters after a nonjudicial foreclosure.22  This result reconciles these competing statutory provisions and policies without doing undue damage to either.23

We now must turn to the question of whether the Legislature's recent enactment of Senate Bill No. 1612 (and particularly section 580.5 contained therein) will apply to this case so as to preclude this result.

3. The Legislative Decision To Give Primacy To The Independence Principle Is A Public Policy Choice Which Changes The Law And Has Prospective Application Only

 On September 15, 1994, the Governor signed Senate Bill No. 1612.   Due to an urgency clause, the bill became effective on that date.   This legislation, which was drafted for the express purpose of overriding our earlier decision,24 represents a clear public policy choice by the Legislature.   A lender is entitled, under the provisions of section 580.5, to pursue collection on a letter of credit given as additional security for the payment of an obligation secured by a mortgage or deed of trust upon real property either before or after a judicial or non-judicial foreclosure and without regard to the restraints which might otherwise have been imposed by Code of Civil Procedure sections 580a, 580b, 580d or 726.   A minor exception is provided for in section 580.7.   Under that section, a letter of credit may not be enforced as provided in section 580.5 if it has been issued to a natural person in order to prevent a default on an existing loan which is secured by a purchase money deed of trust or mortgage on real property containing one to four residential units, and then only if the letter of credit was issued after September 15, 1994.

From the analysis we have already set out regarding the application and import of the anti-deficiency statutes, we have no doubt that section 580.5 works a substantial change in the law.   It not only creates a “letter of credit” exception to the anti-deficiency statutes, it does so with respect to the residential purchase money mortgage, a heretofore sacrosanct safe haven for the California homebuyer.25  We cannot think of any change in California real estate law which would be more repugnant to the fifty years of consistent solicitude which California courts have given to the foreclosed purchase money mortgagee.

In addition, as we have already explained, the anti-deficiency statutes provided protection which was not waivable in advance.   However, under the new statute a lender may require a letter of credit as additional security for the repayment of a purchase money mortgage or other obligation secured by real property.   The practical effect of this will be that the lender will receive a waiver of the anti-deficiency legislation to the amount of the letter of credit.   The Legislature certainly has the power to make this policy change, but it can hardly be denied that a significant change in the law has taken place.

Finally, that the Legislature expressly sought to abrogate our earlier decision, and at the same time attached an urgency clause to the legislation is entirely consistent with its belief that a change in existing law was being made.   We do not overlook the fact that the Legislature's stated reason for the urgency was:  “․ to confirm and clarify the law applicable to obligations which are secured by real property․”  (Stats.1994, ch. 611, § 6.)   We simply do not attach much meaning to that statement.   The promoters sought to have a statement included that the legislation was “declarative of existing law” but the Legislature refused to make that declaration.   We thus have no trouble concluding that the Legislature believed that these statutory provisions did in fact change the law in California.

 If we were to accept the Bank's position that section 580.5 applies to this case, it would certainly have the consequence of altering the legal effect of existing agreements as well as the reasonable expectations of Vista and the Vista Partners.   This would be a retroactive application of the new statute.  (Kizer v. Hanna (1989) 48 Cal.3d 1, 7, 255 Cal.Rptr. 412, 767 P.2d 679.)   It is for this reason that a new statute is presumed to operate prospectively absent an express declaration of retrospectivity or a clear indication that the Legislature intended such an application.   (Tapia v. Superior Court (1991) 53 Cal.3d 282, 287, 279 Cal.Rptr. 592, 807 P.2d 434;  DiGenova v. State Board of Education (1962) 57 Cal.2d 167, 174, 18 Cal.Rptr. 369, 367 P.2d 865.) 26

The Supreme Court, in Evangelatos v. Superior Court (1988) 44 Cal.3d 1188, 246 Cal.Rptr. 629, 753 P.2d 585, quoted with approval the comments of (then) Justice Rehnquist discussing the controlling principle:  “ ‘The principle that statutes operate only prospectively, while judicial decisions operate retrospectively, is familiar to every law student.  [Citations.]  This court has often pointed out:  “[T]he first rule of construction is that legislation must be considered as addressed to the future, not to the past․  The rule has been expressed in varying degrees of strength but always of one import, that a retrospective operation will not be given to a statute which interferes with antecedent rights ․ unless such be ‘the unequivocal and inflexible import of the terms, and the manifest intention of the legislature.’ ”  [Citation.]'  (Italics added.)”  (Evangelatos v. Superior Court, supra, at p. 1207, 246 Cal.Rptr. 629, 753 P.2d 585, quoting from United States v. Security Industrial Bank (1982) 459 U.S. 70, 79–80, 103 S.Ct. 407, 412–413, 74 L.Ed.2d 235.)

 To overcome this presumption of prospectivity, the Bank is required to demonstrate that Senate Bill No. 1612 was intended by the Legislature to be applied to all past transactions.   We can find no such intent anywhere in the statute.   If the Legislature had wanted the statute to operate retroactively it certainly could have so provided.   Its failure to do so is “an authoritative indication the Legislature intended a prospective application.   [Citation.]”  (In re Marriage of Reuling (1994) 23 Cal.App.4th 1428, 1439–1440, 28 Cal.Rptr.2d 726. 27

 We are asked by the Bank and the amici supporting its position to overlook these general principles.   The argument which is advanced is that the anti-deficiency legislation amounts to a statutory penalty or forfeiture against lenders, not unlike the usury statutes.   We are referred to three usury cases which recognized the principle that an amendment to the usury statute, which provided a new exception to that statute, could be applied in favor of a defendant bank in a still pending usury action.   While we credit counsel's creativity, we need not be detained long by this argument.

 The anti-deficiency statutes are not like a usury statute.   They do not amount to limitations on charges or fees which a lender may make for the extension of credit.   They are procedural devices enacted essentially to protect foreclosed debtors from having to pay a deficiency that is unrelated to the difference between the fair market value of their foreclosed property and the amount of their unpaid debt.   No statutory cause of action against a lender is created.   A lender is simply required to make a choice between foreclosure with or without a right of redemption.   If it chooses the former it may recover a deficiency under fair market value procedures, subject to the debtor's vested right of redemption;  if it chooses the latter it must forego any claim to a deficiency.   To characterize such a scheme, where the lender has total control of the choice, as a statutory penalty on the lender, from which it may legislatively be relieved in any pending action not yet final, is simply not correct.

We find no basis for concluding that the Legislature intended retroactive application of Senate Bill No. 1612.   We therefore conclude that it has prospective application and does not impact the conclusions we have reached as to the rights and obligations of the respective parties.

4. There Is No Merit To The Bank's Claim That This Is A “Mixed Collateral” Transaction

 The Bank contends this is a “mixed collateral transaction” 28 which is governed by provisions in Commercial Code section 9501, and those provisions permit the Bank to recover on the letters of credit.  Commercial Code section 9501 (“section 9501”) addresses remedies afforded a secured party when a debtor defaults under a security agreement.   Subdivision (4) of section 9501 speaks to obligations which are secured by both a security interest in personal property and an interest in real property, and it provides that the secured party may proceed in any sequence against such real and personal property.29

The Bank asserts that these provisions regarding mixed collateral gave it the right to draw on the letters of credit after it foreclosed on the real property.   Additionally, the argument goes, given the rights set forth in section 9501, the Bank is not truly seeking a deficiency judgment and therefore section 580d is not impacted.

These arguments are without merit.   The letters of credit at issue here are not security interests in personal property.   Rather, the letters of credit are just what the loan modification agreement between Bank and Vista described them to be—“additional security for repayment of the Loan.”  Commercial Code section 9203 provides that subject to certain situations not relevant here, “a security interest [in collateral] ․ does not attach unless all of the following are applicable:  [¶] (a) The collateral is in the possession of the secured party pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral․  [¶] (b) Value has been given.  [¶] (c) The debtor has rights in the collateral.”  (Emphasis added.)

 The Bank does not explain what rights the Vista partners have in the “collateral,” i.e., the letters of credit.   As we have discussed at some length, a letter of credit is nothing more than a third party's promise to pay under certain conditions.   The Bank itself has asserted here that Western's promise to pay is independent of the relationship between itself and the Vista defendants.   In addition, section 9501, subdivision (4)(c)(iv), makes it clear that the mixed collateral rules may not be relied upon to defeat or circumvent the bar of section 580d.

5. Western's Liability For Interest 30

 Western vigorously disputes that it should be required to pay any interest on the obligation represented by the letters of credit and argues that to impose that burden is to unfairly punish it for its uncertainty as to the rights and liabilities of the parties and its attempt to resolve that uncertainty by the timely filing of a declaratory relief action.   However, the question of whether Western would be liable to pay interest on the amount due on the letters of credit depends upon whether or not it was obligated to honor them.

 The obligation to pay interest depends entirely upon the existence of an underlying enforceable obligation upon which the interest would be calculated.   In short, if it is ultimately determined that Western is liable to the Bank on the letters of credit then it must follow that it is liable for legal interest thereon from and after the day when its obligation to pay on the letters arose.  (Civ.Code, § 3287, subd. (a).) 31  Damages are deemed certain or capable of being made certain within the meaning of Civil Code section 3287, subdivision (a), when there is essentially no dispute as to the basis for computing the damages which are recoverable but where the dispute centers only on the issue of liability.   (Fireman's Fund Ins. Co. v. Allstate Ins. Co. (1991) 234 Cal.App.3d 1154, 1173, 286 Cal.Rptr. 146.)   This certainty requirement has been reduced to two tests:  (1) does the debtor know the amount owed or (2) would the debtor be able to compute the amount owed.  (Ibid.)  Clearly, both tests are satisfied here.

 As we have already discussed, absent a valid waiver of the benefits of the anti-deficiency legislation by the Vista defendants, Western would have no liability to the Bank.   In that circumstance, the issue of interest would be moot.   However, there is an unresolved issue of waiver which involves disputed questions of both fact and law.   In the event that it is determined that defendants did indeed waive the benefits of section 580d, then Western will be liable to the Bank for the amount due on the letters of credit.   If so, it will also be liable for interest.

 However, such liability necessarily will depend on the fact that the Vista defendants were found to have waived their section 580d rights.   In such event, the Vista defendants' implied representation to Western that such rights had not been waived, and that they were entitled to raise the section 580d defense, would be the direct cause of Western's interest burden.   Therefore, the Vista defendants ultimately must be liable for such interest as Western may be required to pay.   Beyond doubt, Western relied upon defendants' claim that they had a valid and unwaived defense under section 580d to the Bank's demand on the letters of credit.   Whatever interest Western may be required to pay to the Bank will thus be the direct result of the Vista defendants' representations and Western's reliance thereon.

6. The Unresolved Issue of Waiver

 While it is settled that a debtor cannot validly make an advance or contemporaneous waiver of the protections afforded by the anti-deficiency legislation (Freedland v. Greco, supra, 45 Cal.2d at p. 467, 289 P.2d 463;  Palm v. Schilling, supra, 199 Cal.App.3d at pp. 69–76, 244 Cal.Rptr. 600), it is less clear whether a waiver of section 580d, subsequent to the creation of the debt and the security interest, might be permitted, particularly where new consideration has been extended by the existing creditor for the waiver.   However, waiver is not an issue which is ripe for consideration by us.

The Vista defendants disputed in the trial court the Bank's claim that the letter agreement settling the original lawsuit amounted to a waiver of any objection to the Bank's enforcement of the letters of credit.32  They claimed that issues of material fact existed as to the meaning and effect of that letter agreement.   However, because the parties agreed to withdraw and reserve this waiver issue, it was never addressed or resolved by the trial court (see fn. 6, ante ).   In view of the conclusions which we have reached with respect to the issues which were ripe for appellate review, it will now be necessary for the trial court to consider and rule upon the waiver question and we will remand the case for that purpose.

DISPOSITION

Let a peremptory writ of mandate issue directing the trial court to vacate the judgment heretofore entered and to conduct further proceedings consistent with the views expressed herein.   Costs to Western and the Vista defendants.

Although I agree with the majority's conclusion that Senate Bill No. 1612 is not to be applied retroactively and does not impact this case, I respectfully dissent from the other conclusions reached in the majority opinion.

The independence principle contained in letter of credit law and the anti-deficiency statutes, particularly Code of Civil Procedure section 580d, are both important.   However, there is no “anti-deficiency exception” to the independence principle.   The majority has defined too broadly the term “fraud in the transaction” under California Uniform Commercial Code section 5114, subdivision (2).   I do not agree that Bank's presentation of the letter of credit to Western for payment after a nonjudicial foreclosure is akin to a fraudulent act and see no indication that is what the Legislature intended.

The independence principle provides that a letter of credit is independent from the underlying transaction between the borrower and the beneficiary of the letter of credit.   The commercial certainty which is promoted through the independence principle will be undermined if this court creates an exception to the letter of credit statutes.   This would be detrimental to California issuers, beneficiaries and customers.

“ ‘The isolation of the issuer of a credit from the underlying sales contract has made it possible for the letter of credit to remain an economical and practical financing device, since the issuer's receipt, examination, and payment of the documents accompanying a draft can be achieved in a standardized and inexpensive manner.’  (Annot., 35 A.L.R.3d 1404, 1406.)   Thus, one of the expected advantages and essential purposes of a letter of credit is that the beneficiary will be able to rely on assured, prompt payment from a solvent party;  necessarily, a part of this expectation of ready payment is that there will be a minimum of litigation and judicial interference, and this is one of the reasons for the value of the letter of credit device in financial transactions.  [Citations.]”  (N.Y. Life Ins. Co. v. Hartford Nat. Bank & Trust Co. (1977) 173 Conn. 492, 378 A.2d 562, 566.)

Western must honor Bank's demand for payment as long as the documents presented comply with the terms of the letter of credit.   Western need not and should not look at the underlying transaction between Bank and Vista and should have no concern with whether Bank has presented a letter of credit for payment after a nonjudicial foreclosure.  (See Lumbermans Acceptance Co. v. Security Pacific Nat. Bank (1978) 86 Cal.App.3d 175, 178, 150 Cal.Rptr. 69.)

The policies behind the letter of credit law and Code of Civil Procedure section 580d can be reconciled by the following procedure:  Western must honor the letter of credit presented by Bank.   Western may then seek reimbursement from Vista pursuant to Commercial Code section 5114, subdivision (3) and its promissory notes, and Vista may seek disgorgement from Bank if Vista has not legally waived its protection under section 580d.   This procedure would retain certainty in the California letter of credit market while implementing the policies supporting section 580d.

The majority's holding would create serious disruption in the present letter of credit market.   For example, existing letter of credit beneficiaries have relied on statutes and policies which support the independence principle and have not been given notice of this new development.   Additionally, California banks which issue letters of credit may be harmed if beneficiaries in the national and international market cannot be certain that the California issuers will honor their demand for payment and abide by the independence principle.

I would affirm the judgment below.

FOOTNOTES

1.   Civil Code section 2787, which abolished the distinction between sureties and guarantors, was amended to include the provision that a “letter of credit [as defined in Commercial Code section 5103] is not a form of suretyship obligation.”

2.   Code of Civil Procedure section 580.5 (“§ 580.5”) adopts the definitions of “beneficiary,” “issuer” and “letter of credit” as set out in California Uniform Commercial Code section 5103 and then provides in subdivision (b):  “With respect to an obligation which is secured by a mortgage or a deed of trust upon real property or an estate for years therein and which is also supported by a letter of credit, neither the presentment, receipt of payment, or enforcement of a draft or demand for payment under the letter of credit by the beneficiary of the letter of credit nor the honor or payment of, or the demand for reimbursement, receipt of reimbursement or enforcement of any contractual, statutory or other reimbursement obligation relating to, the letter of credit by the issuer of the letter of credit shall, whether done before or after the judicial or nonjudicial foreclosure of the mortgage or deed of trust or conveyance in lieu thereof, constitute any of the following:  [¶] (1) An action within the meaning of subdivision (a) of Section 726, or a failure to comply with any other statutory or judicial requirement to proceed first against security.  [¶] (2) A money judgment for a deficiency or a deficiency judgment within the meaning of Section 580a, 580b, or 580d, or subdivision (b) of Section 726, or the functional equivalent of any such judgment.  [¶] (3) A violation of Section 580a, 580b, 580d, or 726.”Code of Civil Procedure section 580.7 (“§ 580.7”) adopts the definitions of “beneficiary,” “issuer” and “letter of credit” as set out in California Uniform Commercial Code section 5103 except it substitutes the word “customer” for “issuer” and then provides in subdivision (b):  “No letter of credit shall be enforceable by any party thereto in a loan transaction in which all of the following circumstances exist:  [¶] (1) The customer is a natural person.  [¶] (2) The letter of credit is issued to the beneficiary to avoid a default of the existing loan.  [¶] (3) The existing loan is secured by a purchase money deed of trust or purchase money mortgage on real property containing one to four residential units, at least one of which is owned and occupied, or was intended at the time the existing loan was made, to be occupied by the customer.  [¶] (4) The letter of credit is issued after the effective date of this section.”

3.   Code of Civil Procedure section 580d states in relevant part:  “No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property ․ in any case in which the real property ․ has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.”

4.   At a hearing on December 18, 1991, counsel for the Vista defendants indicated he could not stipulate that there were no triable issues as to the meaning of the post-default letter agreement (which had been the basis for settling the original lawsuit between the Bank and Vista) wherein Vista had promised not to take legal action to prevent the Bank from drawing on the letters of credit;  specifically, the principal issue cited by counsel was whether the letter was meant to or did constitute a waiver of the anti-deficiency statute.   Even though the court's tentative ruling had indicated that waiver was just an alternative ground for granting summary judgment in favor of the Bank, counsel for the Vista defendants stated that a hearing on the issue was required.   However, in order to facilitate a final ruling on the question of whether Bank would otherwise have a right to obtain a deficiency judgment, the issue of waiver was conditionally removed by the agreement of the parties.   It was, however, reserved for future resolution in the event that the judgment awarded to the Bank was reversed on appeal.  (See fn. 5, post.)

5.   While the judgment from which the appeal was taken appeared to be final in that it disposed of all of the relevant issues raised, even by the severed cross-complaints, it was nonetheless interlocutory and therefore not appealable.   The conditional reservation by the court of the waiver issue (see fn. 4, ante ) left open a factual question which becomes critical to the outcome of this case in light of the decision which we reach.   It would have been better had the trial court not acquiesced in the parties' request to reserve this issue pending a determination of the appeal.   However, since it did so, this case must now be remanded for resolution of this remaining factual question.   As none of the parties has raised the issue of non-appealability, the case has been fully briefed by both the parties and several amici, and the issues presented are novel and important, we have, on our own motion, elected to treat the appeal by Western and the cross-appeal by the Vista defendants as petitions for a writ of mandate so that we can resolve those issues on their merits.  (See generally, 9 Witkin Cal.Procedure (3d ed. 1985) Appeal, §§ 62–66, pp. 86–91.)

6.   This fourth issue relates to the possible waiver by the Vista defendants of any defense to payment on the letters of credit and subsequent enforcement of the related reimbursement agreement.   It was raised in the trial court but expressly was not resolved and is therefore not before us.

7.   The most important of these statutes (as they have been construed and applied by more than a half-century of case law) are:(1) Code of Civil Procedure Section 726, subdivision (a), which allows only one action and one form of action for the recovery of a debt or enforcement of a right secured by a mortgage or deed of trust.   The practical consequence of this limitation is that a creditor may not obtain a personal deficiency judgment against a debtor without first exhausting the security.  (Pacific Valley Bank v. Schwenke (1987) 189 Cal.App.3d 134, 140, 234 Cal.Rptr. 298.)(2) Code of Civil Procedure sections 726, subdivision (b), and 580a, which require that any deficiency judgment must be based upon proceedings commenced within three months after the foreclosure sale and be computed on the basis of the fair market value of the secured property at the time of sale;  in other words, any deficiency judgment must be promptly sought and be limited to the difference between the amount of the foreclosure judgment and the fair value of the security.  (Citrus State Bank v. McKendrick (1989) 215 Cal.App.3d 941, 944–945, 263 Cal.Rptr. 781;  Walter E. Heller Western, Inc. v. Bloxham (1985) 176 Cal.App.3d 266, 270–274, 221 Cal.Rptr. 425;  Rainer Mortgage v. Silverwood, Ltd. (1985) 163 Cal.App.3d 359, 365–366, 209 Cal.Rptr. 294.)(3) Code of Civil Procedure section 580b, which precludes, in the case of a deed of trust or a mortgage on a dwelling for not more than four families, any deficiency judgment at all where the secured debt is a “purchase money obligation.”  (Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 41–42, 27 Cal.Rptr. 873, 378 P.2d 97;  Brown v. Jensen (1953) 41 Cal.2d 193, 197–198, 259 P.2d 425;  Palm v. Schilling (1988) 199 Cal.App.3d 63, 68–69, 244 Cal.Rptr. 600.)(4) Code of Civil Procedure section 580d, which provides that if the foreclosing creditor elects to proceed by nonjudicial foreclosure, there can be no deficiency judgment whether or not the debt was purchase money and regardless of the fair value of the security sold.  (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d at pp. 43–44, 27 Cal.Rptr. 873, 378 P.2d 97.)(5) Civil Code section 2924c, subdivision (a)(1), which provides that there is no irreversible acceleration of an installment obligation pending either a judicial or nonjudicial foreclosure;  a debtor has the right to reinstate the obligation by paying the part of the debt past due at any time prior to final judgment in a foreclosure action or until five days before sale by nonjudicial foreclosure.

8.   The applicable periods of redemption are set out in Code of Civil Procedure section 729.030:  “The redemption period during which property may be redeemed from a foreclosure sale under this chapter ends:  [¶] (a) Three months after the date of sale if the proceeds of the sale are sufficient to satisfy the secured indebtedness with interest and costs of action and of sale.  [¶] (b) One year after the date of sale if the proceeds of the sale are not sufficient to satisfy the secured indebtedness with interest and costs of action and of sale.”

9.   For a more detailed discussion of nonjudicial and judicial foreclosures, see 5 Augustine & Zarrow, Cal. Real Estate Law & Practice (Matthew Bender 1993) chs. 123, 124, p. 123–1 et seq.;   Hetland, Deficiency Judgment Limitations in California—A New Judicial Approach (1963) 51 Cal.L.Rev. 1.

10.   California Uniform Commercial Code section 5114 provides:“(1) an issuer must honor a draft or demand for payment which complies with the terms of the relevant credit regardless of whether the goods or documents conform to the underlying contract for sale or other contract between the customer and the beneficiary.   The issuer is not excused from honor of such a draft or demand by reason of an additional general term that all documents must be satisfactory to the issuer, but an issuer may require that specified documents must be satisfactory to it.“(2) Unless otherwise agreed, when documents appear on their face to comply with the terms of a credit but a required document does not in fact conform to the warranties made on negotiation or transfer of a document of title (Section 7507) or of a certificated security (Section 8306) or is forged or fraudulent or there is fraud in the transaction:“(a) The issuer must honor the draft or demand for payment if honor is demanded by a negotiating bank or other holder of the draft or demand which has taken the draft or demand under the credit and under circumstances which would make it a holder in due course (Section 3302) and in an appropriate case would make it a person to whom a document of title has been duly negotiated (Section 7501) or a bona fide purchaser of a certified security (Section 8302).“(b) In all other cases as against its customer, an issuer acting in good faith may honor the draft or demand for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents.“(3) Unless otherwise agreed, an issuer which has duly honored a draft or demand for payment is entitled to immediate reimbursement of any payment made under the credit and to be put in effectively available funds not later than the day before maturity of any acceptance made under the credit.”  (Emphasis added.)

11.   “A letter of credit transaction [ ] comprehends three separate commitments:  (1) the customer-bank contract, binding the bank to issue the letter of credit on behalf of the customer and obligating the customer to reimburse the bank;  (2) the letter of credit commitment, binding the bank to pay the beneficiary upon the latter's compliance with the terms specified in the credit;  and (3) an underlying contract between customer and beneficiary, which the letter of credit is issued to facilitate.  [¶] One can therefore describe a traditional letter of credit as an instrument ensuring that neither buyer nor seller has both goods and cash at the same time.   Unwilling to sell on credit, the seller instead receives the bank's irrevocable commitment and is thereby assured of payment.   Unwilling to pay on credit, the customer pays in advance of receiving the goods, but only upon receipt of documents which indicate that the goods have been shipped.   The need to achieve these characteristics and protect the allocation of risks they represent produced the cardinal rule of letter of credit law:  the ‘independence principle’ which holds each commitment in a letter of credit transaction to be independent of the others.”  (See Note, supra, 93 Harv.L.Rev., at pp. 1000–1001, fns. omitted.)

12.   It is worthy of note that the law applicable to letters of credit was restated in Article 5 of the Uniform Commercial Code as that law stood in 1952, years before litigation over standby letters had raised the more difficult issues created by those instruments.   Indeed, the case digests reflect that litigation concerning standby letters of credit was negligible until the 1970's.  (See Note, supra, 93 Harv.L.Rev. at pp. 1013–1014, fn. 101.)   Certainly, there is no California case law directly addressing the consequences of the use of the standby letter in a real estate financing context.   Unfortunately, the Legislature, when it enacted SB 1612 in 1994, did not make any attempt to recognize the distinction between traditional and standby letters of credit and the possible need to avoid having rules created for the former applied to transactions utilizing the latter.

13.   One commentator characterized the use of standby letters for such purposes in the following terms:  “It is now common for letters of credit to support a borrower's obligation under a loan secured by real property.   A typical situation in which such a letter of credit is used is as follows:  A borrower desires to obtain a $20,000,000 loan from a lender secured by a deed of trust on real property.   However, the lender's appraisal of the real property will support a loan of only $18,000,000.   The borrower fills this gap by providing the lender with a $2,000,000 letter of credit issued by another financial institution.   The lender is now willing to lend $20,000,000, the loan being secured by a deed of trust upon the real property and further supported by the $2,000,000 letter of credit.”  (Gregora, supra, 9 Cal.Real Prop.J., at p. 4 (1991).)

14.   Neither Bank nor the amici in support of its position question the historical factors of economic chaos and social disruption on which the anti-deficiency legislation was based.   Indeed, they ignore them.   In the legislative history of Senate Bill No. 1612, one Committee analysis of the bill closes with the revealing paragraph:  “proponents [i.e., California Bankers Association and California Association of Realtors] assert that the use of letters of credit is especially important when real estate values are declining.   In that situation they provide a way to support continuing development.”

15.   The Bank was, of course, free to make a demand upon the defendants' standby letters after the debt went into default but prior to the nonjudicial foreclosure.   Had it done so, there would be no conflict with section 580d.   The consequences of a pre-foreclosure call on a standby letter would be to provide a payment to the creditor on the obligation.   This might well cure an existing default or require a new notice of default which would provide additional rights to the borrower.   It is the attempt to enforce the letters following the nonjudicial foreclosure sale which presents the problem.   The Bank was also free to proceed by judicial foreclosure before making a demand on the letters.   Had the Bank done this then the Vista defendants would have retained their statutory right of redemption.

16.   As originally drafted in the Uniform Commercial Code, section 5–114, subdivision (2)(b), also provided:  “but a court of appropriate jurisdiction may enjoin such honor.”   When California enacted the code it deleted this authority thus making it clear that the issuer could not be enjoined.  (Agnew v. Federal Deposit Ins. Corp. (N.D.Cal.1982) 548 F.Supp. 1234, 1238.)   However, as we have previously held, this limitation does not extend to the beneficiary who may be enjoined from demanding or receiving payment where a draw against a letter of credit would be improper.  (Mitsui Manufacturers Bank v. Texas Commerce Bank–Fort Worth (1984) 159 Cal.App.3d 1051, 1058–1059, 206 Cal.Rptr. 218.)

17.   It is clear from this record that the Bank does not qualify as a holder in due course of the subject letters.   It was the Bank's own conduct and election of foreclosure remedies which has raised the section 580d problem.   Thus, there is no basis for the application of California Uniform Commercial Code section 5114, subdivision (2)(a).

18.   The term “fraud in the transaction” includes a deception of the debtor.   While there is some authority to the contrary (see e.g., Federal Deposit Insurance Corporation v. Bank of San Francisco (9th Cir.1987) 817 F.2d 1395, 1399), we believe that this term applies to a “fraud in the underlying transaction” (i.e., fraud on the debtor).   There is no California law on this point, but we have no trouble concluding that if the term were limited to a “fraud in the credit transaction” (i.e., fraud on the issuer) it would be nothing more than a meaningless redundancy.   It is difficult to imagine a fraud on the issuer that would not involve the use of a forged or fraudulent document;  however, those two possibilities are already expressly included in California Uniform Commercial Code section 5114, subdivision (2).   Thus, the final phrase, “or there is fraud in the transaction,” must have been added for some other purpose.   In order to give it any independent meaning we conclude that it must be read so as to include a fraud in the underlying transaction.   For discussion of this question and a review of the drafting history of Uniform Commercial Code section 5–114 which supports this conclusion, see White & Summers, Uniform Commercial Code (3d ed. 1988) Letters of Credit, Ch. 19, § 19–7 pp. 60–63.

19.   Given the permissive language in Commercial Code section 5114, subdivision 2(b), it seems clear that had Western chosen to honor the Bank's demand, the Vista defendants would have no recourse against Western and would be liable on their reimbursement notes;  their remedy would have been limited to an appropriate action against the Bank.

20.   In such event, the Vista partners would have had recourse only against the Bank.   The vindication of the important post nonjudicial foreclosure limitations imposed by section 580d compels the conclusion that the actions of the Bank in seeking to recover on the deficiency are, absent a valid waiver, prohibited.   We have previously held that “No policy is served by permitting any beneficiary to draw improperly against a letter of credit.”  (Mitsui Manufacturers Bank v. Texas Commerce Bank–Fort Worth, supra, 159 Cal.App.3d at p. 1059, 206 Cal.Rptr. 218.)   Thus, while Western may, under section 5114, honor the Bank's demand, that code section refers only to the duty and privilege of the issuer (159 Cal.App.3d at p. 1058, 206 Cal.Rptr. 218);  it does not protect the beneficiary from injunctive or other legal action by the debtor.

21.   However, the border between these two credit-enhancement devices can certainly become blurred as this case suggests and as legal commentators have recognized.  (See generally, McLaughlin, Standby Letters of Credit and Guaranties:  An Exercise in Cartography (1993) 34 William and Mary L.Rev. 1139.)

22.   Because the parties focused on the application of section 580d, and in view of our conclusion as to its decisive impact in this case, we have no need to discuss, and we express no opinion on, the question of whether the Bank's actions would also have constituted a violation of Code of Civil Procedure, section 726, subdivision (a).

23.   Because the essential nature of a standby letter of credit is to provide a guarantee of the borrower's defaulted commitment, it has raised serious difficulties and potential conflicts with other laws, as this case certainly demonstrates.   At least one commentator has suggested statutory changes to Article 5 of the Uniform Commercial Code which would modify the independence principle as it is applied to standby letters of credit.  “The Code should provide that as to any letter of credit payable not upon evidence of the beneficiary's performance of the underlying contract, but rather upon evidence of the customer's default, the customer should be entitled:  (1) to prior notice of any demand for payment on the credit, and (2) to enjoin payment upon a showing of any valid defense he has on the underlying contract.   Under such a provision, standbys would still guarantee payment to the beneficiary by substituting the bank's solvency for the customer's, but would no longer put the customer at risk when the contract breaks down through no fault of his own.   The standby would function more like the surety bond it replaces and would still retain the low-cost advantages of the letter of credit, since an issuing bank would still deal exclusively in documents and would remain privileged to pay on conforming documents unless enjoined.   As article 5 stands now, however, the only way the courts could relax the independence principle to accommodate standbys would be through expansion of the ‘fraud in the transaction’ provision in section [5114, subd. (2) ].  While the drafters of this provision may have aimed it primarily at Sztejn-like cases of egregious misperformance within the context of a traditional letter of credit, their evident willingness to leave its content to judicial elaboration, combined with their failure to otherwise deal with the problems unique to standbys, would not make such an expansion unreasonable.”  (See Note, supra, 93 Harv.L.Rev., at p. 1014, fns. omitted.)

24.   In section 5 of Senate Bill No. 1612, it states:  “It is the intent of the Legislature ․ to confirm the independent nature of the letter of credit engagement and to abrogate the holding in Western Security Bank, N.A. v. The Superior Court of Los Angeles County, 21 Cal.App.4th 156 [25 Cal.Rptr.2d 908] (1993)․”

25.   Given the representations made to members of the Legislature as reflected in the Committee reports, one could conclude that this fact will come as a surprise.   However, the plain language of section 580.7 applies only to default workouts on existing purchase money loans, not to the original purchase loans themselves.   As the amicus California Bankers Association candidly admitted in its brief, “[T]he exception for certain residential mortgages in new CCP § 580.7 means what it says.  CCP § 580.7 is applicable only to a narrow set of residential mortgage transactions, and other residential mortgage transactions are left to the general rule of CCP § 580.5.”

26.   We note that both the Civil Code and the Code of Civil Procedure (in section 3) provide:  “No part of it is retroactive, unless expressly so declared.”

27.   We note that when counsel for the amicus California Bankers Association wrote to the Supreme Court on March 9, 1994 urging it to grant the Bank's petition for review (of our earlier decision) he referred to Senate Bill No. 1612 which was then pending in the Legislature.   After expressing some concern as to whether the bill would be enacted, he pointed out that even if it was, “․ it is highly unlikely that it would or could be retroactive.   Among other reasons, there is a presumption against the retroactive application of new statutes.   See, e.g., Civil Code Section 3.   This Court's resolution of the issues, notwithstanding any prospective legislation is critical to the numerous transactions already negotiated and consummated under the current law.”

28.   Prior to 1986, any conflict which arose between California's real property anti-deficiency rules and the security enforcement scheme contained in the Commercial Code (which focuses primarily upon commercial transactions when the security consists of liens on tangible or intangible personal property) was resolved by applying the real property rules exclusively whenever a single obligation was secured by real property and by personal property.  (See Hetland & Hansen, supra, 75 Cal.L.Rev. at p. 186.)   However, the 1985 “mixed collateral” amendments to the Commercial Code (i.e., § 9501, subd. (4)) “reject the hegemony of the real property enforcement scheme where both real and personal property secure a single obligation.   Yet the amendments do not explicitly reverse the prior situation by supplanting the real property system with a predominant personal property enforcement scheme.   Instead, the amendments purport to strike a compromise by providing for the simultaneous application of the two security enforcement schemes to the respective real and personal property interests securing the single obligation.”  (Hetland & Hansen, supra, 75 Cal.L.Rev. at p. 186.)   However, as we discuss below, we do not have occasion in this case to confront nor any need to discuss or resolve the conflicts, and unintended consequences which these changes may have wrought.

29.   Commercial Code section 9501, subdivision (4)(a)(i) provides:“(4) If an obligation secured by a security interest in personal property or fixtures ․ is also secured by an interest in real property or an estate therein:“(a) The secured party may do any of the following:“(i) Proceed, in any sequence, (1) in accordance with the secured party's rights and remedies in respect of real property as to the real property security, and (2) in accordance with this chapter as to the personal property or fixtures.”

30.   We only reach this issue in view of our determination that this case must be remanded to the trial court for resolution of the factual question of waiver.   Depending on the trial court's determination, the issue of interest may or may not exist.   We provide this discussion for the potential guidance of the trial court.

31.   Civil Code section 3287, subdivision (a) reads in relevant part:  “Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day, ․”

32.   This was the only claim of waiver asserted.   There was no contention that a waiver occurred when the letters of credit were delivered in consideration for a modification of the original loan agreement.   Without expressing an opinion as to whether such contention would have had any merit, we emphasize that in our discussion of the issues raised by this case we have treated the modified loan agreement, pursuant to which the letters were delivered, as though it were an original loan transaction.

CROSKEY, Associate Justice.

KLEIN, P.J., concurs.