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

WESTERN SECURITY BANK, N.A., Plaintiff and Appellant, v. BEVERLY HILLS BUSINESS BANK, et al., Defendants and Respondents.

No. BO66488.

Decided: June 22, 1993

Ervin, Cohen & Jessup, Allan B. Cooper, Steven A. Roseman and Garee T. Gasperian, Beverly Hills, for plaintiff and appellant. Walker, Wright, Tyler & Ward, John M. Anglin, Robin C. Campbell, Los Angeles, Saxon, Dean, Mason, Brewer & Kincannon and Steven J. Cote, Orange, for defendants and appellants.

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 antideficiency statutes.   This action was filed to determine the rights and liabilities of the parties.

We hold that, under section 580d of the Code of Civil Procedure,1 an integral part of California's long established antideficiency legislation, letters of credit provided by a debtor as additional security may not be drawn on to discharge a deficiency following the creditor's nonjudicial foreclosure on real property.   We also hold that the “mixed collateral” rules contained in the California Uniform Commercial Code have no application to the facts of this case.   We therefore will reverse the judgment.


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 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 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.   However, 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, which was $375,000.   The Bank never sought to recover any part of the deficiency directly from Vista.

Contemporaneously with the receipt of the Bank's draw letter, Western also received written notice from Vista's attorney stating that any attempt 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 the 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.2

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, 1993.   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.


Although the parties assert them in differing ways and from conflicting perspectives, this appeal presents three issues for resolution and raises a fourth which must be remanded for consideration by the trial court.

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

2. To what extent is such use of letters of credit governed by the “mixed collateral” rules contained in the 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 creditor and the debtor?

A fourth issue, relating to the possible waiver by the debtor of any objection to the enforcement of the letters of credit, was raised in the trial court but not resolved and is therefore not before us.


1. A Deficiency Judgment is Precluded by a Creditor's Use of Nonjudicial Foreclosure

California has an elaborate and interrelated set of antideficiency and foreclosure statutes relating to the enforcement of obligations secured by interests in real property.3  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 Antideficiency Provisions or Exercise in Futility?, (1987)75 Cal.L.Rev. 185, 187–188, fn. omitted, hereinafter “Hetland & Hansen.”)   The 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 nonjudicial means.  (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.

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, mailing a copy to the debtor, and the debtor has the right to cure the default up to five business days before the date of sale indicated in the recorded notice of sale.4

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.)   This statutory restriction has the effect and was apparently enacted for the purpose of putting “judicial enforcement on a parity with private enforcement.”  (Id. at p. 43, 27 Cal.Rptr. 873, 378 P.2d 97.) 5

 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.6  The court said, “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.

“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.   To permit a guarantor to recover reimbursement from the debtor would permit circumvention of the legislative purpose in enacting section 580d.”  (Gradsky, supra, 265 Cal.App.2d at pp. 45–46, 71 Cal.Rptr. 64, emphasis added.)

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 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 in the instant case relies, 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 Union Bank v. Gradsky (1968) 265 Cal.App.2d 40 [71 Cal.Rptr. 64] ․ 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 antideficiency statute.”  (Id. 211 Cal.App.3d 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 judgments 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, it 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.  (Id. at pp. 45–47, 71 Cal.Rptr. 64.)

Gradsky reasoned that “If section 580d is interpreted to shield [the guarantor] from liability to the [creditor], the ultimate impact of loss falls upon the [creditor, who] had an election of remedies․  If the section does not apply to [the guarantor] and he is required to pay the deficiency to the [creditor] and has no right of reimbursement against [the debtor], the loss falls upon [the guarantor], who [like the debtor] had no election of remedies.”  (Union Bank v. Gradsky, supra, 265 Cal.App.2d at p. 46, 71 Cal.Rptr. 64, emphasis added.)

The Gradsky court went on to emphasize that since it is the creditor who has the option to preserve its right to a deficiency judgment (as well as the option to protect the guarantor's right to a subrogation judgment), the creditor has a duty not to impair the guarantor's remedies against the debtor (citing Civ.Code, §§ 2810 and 2819).  (Union Bank v. Gradsky, supra, 265 Cal.App.2d at p. 46, 71 Cal.Rptr. 64.)  “Upon the [creditor's] electing to pursue a remedy which destroys both the security and the possibility of the [guarantor's] reimbursement from the principal debtor, the creditor is thereafter estopped from pursuing the guarantor for a deficiency following a nonjudicial sale of the security.”  (Id. at pp. 46–47, 71 Cal.Rptr. 64.)

 In our view, Gradsky and Commonwealth control this case 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.7  The letters of credit secured by the Vista partners 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 those letters of credit “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.) 8

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

Despite the strong similarity between this case and Gradsky and Commonwealth, the Bank contends those cases do not govern the matter before us.   The Bank argues, that (1) this is a mixed collateral transaction which is governed by the provisions of California Uniform Commercial Code, section 9501, subdivision (4)(a)(i),9 which permits the Bank to recover on the letters of credit, or in the alternative, (2) the letters of credit represent a separate transaction which is independent of the underlying transactions between the Vista partners and the Bank.

a. California Uniform Commercial Code section 9501

 California Uniform 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.10

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.11  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.”   In our view, this is the same as the lender receiving a guarantee(Gradsky ) or mortgage insurance protection (Commonwealth ).

b. The Independent Nature of 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.  “[T]he issuer of an irrevocable letter of credit is, by the [provisions of Com.Code, section 5114], exempted from any responsibility to determine the reciprocal rights and liabilities of the applicant for the letter of credit as against the beneficiary.  [Citation.]”  (Id. at p. 178, 150 Cal.Rptr. 69.)

We reject this analysis.   Under Gradsky and Commonwealth, the Bank is, in effect, estopped from even presenting the letters of credit to Western since the Bank, by choosing to foreclose nonjudicially, made it impossible for Western to collect on the promissory notes given to it by the Vista partners.   Therefore, since there can be no valid presentation of the letters of credit for draw, the ordinary rights and duties of a bank issuing letters of credit, whatever those rights and duties may be, simply do not arise.

Additionally, if the letters of credit were given the effect for which the Bank argues, the protection given in section 580d would easily be rendered meaningless, since lenders would routinely use such financial instruments as a way to circumvent the statute.   Creditors would foreclose nonjudicially, thereby depriving the debtor of the right to redemption, and then rely on previously obtained letters of credit to satisfy any deficiency.   Such a result would run contrary to the Legislature's intent, in enacting section 580d, to make a creditor, seeking to foreclose on real property, choose between giving up a deficiency judgment and giving up a sale resulting in a nonredeemable title (Roseleaf Corp. v. Chierighino, supra, 59 Cal.2d at pp. 43–44, 27 Cal.Rptr. 873, 378 P.2d 97).

 Courts construe the antideficiency statutes liberally so that the purpose 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 antideficiency statutes.12

In Simon v. Superior Court, supra, 4 Cal.App.4th 63, 5 Cal.Rptr.2d 428, a lender took two promissory notes, each secured by a separate deed of trust on the same real property.   The deeds of trust were recorded the same day and were denominated as senior lien and junior lien in accordance with the sequence in which they were recorded.   The lender foreclosed nonjudicially on the senior lien, purchasing the property itself, and then claimed to be a sold out junior lienor with a right to a deficiency judgment on the junior note.   The claim was rejected by the court.

In Freedland v. Greco (1955) 45 Cal.2d 462, 289 P.2d 463, a lender used two $7,000 promissory notes for the same $7,000 debt, one secured by a deed of trust on the borrower's real property and the other by a chattel mortgage on equipment.   Upon borrower's default, lender foreclosed nonjudicially on the real property and then brought an action to foreclose on the chattel mortgage and obtain a deficiency judgment on that second foreclosure.   The Freedland court stated the Legislature did not intend “that section 580d could be circumvented by such a manifestly evasive device.”  (Id. at p. 467, 289 P.2d 463.) 13  The court also noted that antideficiency protections given to debtors may not be waived in advance and the creditor's use of the two promissory notes required such a waiver of the debtor.  (Ibid.)  Certainly the same can be said of the letters of credit secured for Bank by the Vista partners.

3. Western's Liability For Interest

 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).) 14  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, either or both tests are satisfied here.

 Western's argument that its liability for such interest is impacted by the perceived uncertainty as to the nature and extent of its liability under the letters of credit is without merit.   We are aware of no authority for such a proposition and Western cites us to none.   The obligation to pay interest depends upon the existence of liability for a debt certain and the debtor's state of mind as to that liability or litigation over that issue is irrelevant.

4. 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 antideficiency legislation (Civ.Code, § 2953;  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.  (For a case suggesting that even a subsequent waiver of section 580d may not be valid, see Palm v. Schilling, supra, 199 Cal.App.3d at pp. 74–76, 244 Cal.Rptr. 600.)   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.   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. 2, 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.


The judgment appealed from is reversed, the cause is remanded, and the trial court is directed to conduct further proceedings consistent with the views expressed herein.   Costs on appeal to Western and the Vista defendants.


1.   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.”

2.   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 antideficiency 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 summary judgment awarded to the Bank was reversed on appeal.   As we note below, our conclusion in this matter requires that the case be remanded for resolution of this issue.

3.   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.  (Rainer Mortgage v. Silverwood, Ltd. (1985) 163 Cal.App.3d 359, 365–366, 209 Cal.Rptr. 294;  Walter E. Heller Western Inc. v. Bloxham (1985) 176 Cal.App.3d 266, 270–274, 221 Cal.Rptr. 425;  Citrus State Bank v. McKendrick (1989) 215 Cal.App.3d 941, 944–945, 263 Cal.Rptr. 781.)(3) Code of Civil Procedure section 580b, which precludes, in most circumstances, any deficiency judgment at all where the secured debt is a “purchase money obligation.”  (Brown v. Jensen (1953) 41 Cal.2d 193, 197–198, 259 P.2d 425;  Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 41–42, 27 Cal.Rptr. 873, 378 P.2d 97;  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.

4.   For a more detailed discussion of nonjudicial and judicial foreclosures, see 5 Augustine & Zarrow, Cal. Real Estate Law & Practice (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.

5.   Besides discouraging the overvaluation 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.)

6.   As discussed, below, the court in Gradsky also held that under principles of estoppel, 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.

7.   We do not by this conclusion intend to express any view as to how the trial court should resolve on remand the remaining issue of the alleged waiver.

8.   For purposes of the issues before us, it makes no difference that in Gradsky the guarantor was a third party, a stranger to the initial transaction, whereas here, the guaranty instruments at issue are letters of credit obtained by the Vista partners, who are in reality principal obligors.  (Union Bank v. Dorn (1967) 254 Cal.App.2d 157, 61 Cal.Rptr. 893 [partners individually guaranteed payment of partnership's promissory note secured by deed of trust on real property;  the court found section 580d prevented the creditor from recovering deficiency judgment from partners after creditor foreclosed nonjudicially].)

9.   Prior to 1986, any conflict which arose between California's real property antideficiency rules and the security enforcement scheme contained in the California Uniform 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, at p. 186.)   However, the 1985 “mixed collateral” amendments to the California Uniform 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.”  (Ibid.)  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.

10.   California Uniform 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.”

11.   California Uniform 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.   A letter of credit is simply a third party's promise to pay under certain conditions.   As discussed below, the Bank itself asserts that Western's promise to pay is independent of the relationship between itself and the Vista defendants.

12.   In addition, section 9501, subdivision (4)(c)(iv) makes clear that the mixed collateral rules may not be relied upon to defeat or circumvent the bar of Code of Civil Procedure section 580d.

13.   There was no challenge to the creditor's right to exhaust both the real property security and the chattel mortgage on the equipment, only to the creditor's attempt to obtain a deficiency judgment after the nonjudicial sale of the real property.

14.   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, ․”

CROSKEY, Associate Justice.

KLEIN, P.J., and KITCHING, J., concur.