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. S037504
Supreme Court of California
Apr. 7, 1997.
232
Ervin, Cohen & Jessup, Allan B. Cooper, Steven A. Roseman and Garee T. Gasperian for Petitioner and Real Parties in Interest Western Security Bank, N.A.
William K. Wilburn as Amicus Curiae on behalf of Petitioner and Real Parties in Interest Western Security Bank, N.A.
Walker, Wright, Tyler & Ward, John M. Anglin and Robin C. Campbell for Petitioners Vista Place Associates et al.
R. Stevens Condie and Charles T. Collett as Amici Curiae on behalf of Petitioners Vista Place Associates et al.
No appearance for Respondent.
Saxon, Dean, Mason, Brewer & Kincannon, Lewis, D‘Amato, Brisbois & Bisgaard, Arter & Hadden, Eric D. Dean, Steven J. Coté, Robert S. Robinson and Michael L. Coates for Real Parties in Interest Beverly Hills Business Bank.
Gibson, Dunn & Crutcher, Dennis B. Arnold, Hill, Wynne, Troop & Meisinger, Neil R. O‘Hanlon, Cadwalader, Wickersham & Taft, Robert M. Eller, Joseph M. Malinowski, Kenneth G. McKenna, Michael A. Santoro, John E. McDermott, Kenneth G. McKenna, John C. Kirkland, Stroock & Stroock & Lavan, Julia B. Strickland, Bennett J. Yankowitz, Chauncey M. Swalwell, Brobeck, Phleger & Harrison, George A. Hisert, Jeffrey S. Turner, John Francis Hilson, G. Larry Engel, Frederick D. Holden, Jr., and Theodore W. Graham as Amici Curiae on behalf of Real Parties in Interest Beverly Hills Business Bank.
OPINION
CHIN, J.-This case concerns the extent to which two disparate bodies of law interact when standby letters of credit are used as additional support for
The antideficiency statute invoked in this case is
The Court of Appeal perceived a conflict between the public policies behind
The Legislature soon acted to express a clear, contrary intent. It passed Senate Bill No. 1612 (1993-1994 Reg. Sess.) (hereafter Senate Bill No. 1612) as an urgency measure specifically meant to abrogate the Court of Appeal‘s holding. (Stats. 1994, ch. 611, §§ 5, 6.) In brief, the aspects of Senate Bill No. 1612 we address provided that an otherwise conforming draw on a letter of credit does not contravene the antideficiency laws and that those laws afford no basis for refusal to honor a draw. After the Legislature‘s action, we returned the case to the Court of Appeal for reconsideration in light of the statutory changes. On considering the point, the Court of Appeal concluded the Legislature‘s action was prospective only and had no impact on the court‘s earlier analysis of the parties’ rights and obligations. Accordingly, the Court of Appeal reiterated its former conclusions.
We again granted review and now reverse. The Legislature‘s manifest intent was that Senate Bill No. 1612‘s provisions, with one exception not involved here, would apply to all existing loans secured by real property and supported by outstanding letters of credit. We conclude the Legislature‘s action constituted a clarification of the state of the law before the Court of Appeal‘s decision. The legislation therefore has no impermissible retroactive consequences, and we must give it the effect the Legislature intended.
I. FACTUAL AND PROCEDURAL BACKGROUND
On October 10, 1984, Beverly Hills Savings and Loan Association, later known as Beverly Hills Business Bank (the Bank), loaned $3,250,000 to Vista Place Associates (Vista), a limited partnership, to finance the purchase of real property improved with a shopping center. Vista‘s general partners, Phillip F. Kennedy, Jr., John R. Bradley, and Peter M. Hillman (the Vista partners), each signed the promissory note. The loan transaction created a “purchase money mortgage,” as it was secured by a “Deed of Trust and Assignment of Rents” as well as a letter of credit.
Vista later experienced financial difficulties, and the loan went into default. Vista asked the Bank to modify the loan‘s terms so Vista could continue operating the shopping center and repay the debt. The Bank and Vista agreed to a loan modification in February 1987, under which the three Vista partners each obtained an unconditional, irrevocable standby letter of
Western Security Bank, N.A. (Western) issued the letters of credit at the Vista partners’ request. Each partner agreed to reimburse Western if it ever had to honor the letters. Under the agreement, each Vista partner gave Western a $125,000 promissory note.3
In December 1990, the Bank declared Vista in default on the modified loan. The Bank recorded a notice of default on February 13, 1991, and began
On June 11, 1991, attorneys for the Bank and Vista signed a letter agreement settling the Bank‘s lawsuit. In that agreement, Vista promised it would “not take any legal action to prevent [the Bank‘s] drawing upon [the letters of credit] after the Trustee‘s Sale of the Vista Place Shopping Center, . . . provided that the amount of the draw by [the Bank] does not exceed an amount equal to the difference between [Vista‘s] indebtedness and the successful bid of the Trustee‘s Sale.” Vista promised as well not to take any draw-related legal action against the Bank after the Bank‘s draw on the letters of credit.
On June 13, 1991, the Bank concluded its nonjudicial foreclosure on the shopping center under the power of sale in its deed of trust. The Bank was the only bidder, and it purchased the property. The sale left an unpaid deficiency of $505,890.16.
That same day, the Bank delivered the three letters of credit and drafts to Western and demanded payment of their full amount, $375,000. The Bank never sought to recover the $505,890.16 deficiency from Vista or the Vista partners. About the time that Western received the Bank‘s draw demand, it also received a written notice from the Vista partners’ attorney. The notice asserted that
Western did not honor the Bank‘s demand for payment on the letters of credit. Instead, on June 24, 1991, Western filed this declaratory relief action against the Bank, as well as Vista and the Vista partners (collectively, the Vista defendants). Western‘s complaint sought: (1) a declaration that Western is not obligated to accept or honor the Bank‘s tender of the letters of credit; or, alternatively, (2) a declaration that, if Western must pay on the letters of credit, the Vista partners must reimburse Western according to the terms of their promissory notes.
The Vista defendants cross-complained against Western for cancellation of their promissory notes and for injunctive relief. In July 1991, the Bank filed a first amended cross-complaint, alleging Western wrongfully dishonored the letters of credit, and the Vista defendants breached the agreement not to take legal action to prevent the Bank‘s drawing on the letters of credit.
The Bank, Western, and the Vista defendants each sought summary judgment. After several hearings and discussions with counsel, which produced a stipulation on the key facts, the court issued its decision on January
The trial court signed and filed the judgment on March 26, 1992. The court decreed the Bank was entitled to recover $375,000 from Western, plus interest at 10 percent from June 13, 1991, the date of the Bank‘s demand, and costs of suit. The court further decreed Western could seek reimbursement from the Vista partners severally, and each Vista partner was obligated to reimburse Western, pursuant to the promissory notes in favor of Western, for its payment to the Bank. Western appealed, and the Vista defendants cross-appealed.
The Court of Appeal, after granting rehearing and accepting briefing by several amici curiae, issued an opinion reversing the trial court on December 21, 1993. In that opinion, the court concluded: “We hold that, under
In that first opinion, the Court of Appeal also solicited the Legislature‘s attention: “To the extent that this result will present problems for real estate lenders with respect to the way they now do business (as the Bank and several amici curiae have strongly suggested), it is a matter which should be addressed to the Legislature. We have been presented with two important but conflicting statutory policies. Our reconciliation of them in this case may not prove as satisfactory in another factual context. It is therefore a matter which should receive early legislative attention.” (Fn. omitted.)
We granted review, and while the matter was pending, the Legislature passed Senate Bill No. 1612, an urgency statute that the Governor signed on
The Legislature made its purpose explicit: “It is the intent of the Legislature in enacting Sections 2 and 4 of this act to confirm the independent nature of the letter of credit engagement and to abrogate the holding [of the Court of Appeal in this case] . . . . [¶] The Legislature also intends to confirm the expectation of the parties to a contract that underlies a letter of credit, that the beneficiary will have available the value of the real estate collateral and the benefit of the letter of credit without regard to the order in which the beneficiary may resort to either.” (Stats. 1994, ch. 611, § 5.) The same purpose was echoed in the bill‘s statement of the facts calling for an urgency statute: “In order to confirm and clarify the law applicable to obligations which are secured by real property or an estate for years therein and which also are supported by a letter of credit, it is necessary that this act take effect immediately.” (Stats. 1994, ch. 611, § 6.)
After the Legislature enacted Senate Bill No. 1612, we requested the parties’ views on its effect. On February 2, 1995, after considering the parties’ responses, we transferred the case to the Court of Appeal with directions to vacate its decision and reconsider the cause in light of the Legislature‘s action.
On reconsideration, the Court of Appeal determined Senate Bill No. 1612 constituted a substantial change in existing law. Believing there was no clear evidence that the Legislature intended the statute to operate retrospectively, the Court of Appeal thought Senate Bill No. 1612 had only prospective application. Therefore, Senate Bill No. 1612 did not affect the Court of Appeal‘s prior conclusions on the parties’ rights and obligations. The Court of Appeal filed its second opinion on September 29, 1995, mostly repeating its prior reasoning and conclusions. We granted the Bank‘s petition for review.
II. DISCUSSION
As the Court of Appeal recognized, we first must determine the effect on this case of the Legislature‘s enactment of Senate Bill No. 1612.
A basic canon of statutory interpretation is that statutes do not operate retrospectively unless the Legislature plainly intended them to do so. (Evangelatos v. Superior Court (1988) 44 Cal.3d 1188, 1207-1208 [246 Cal.Rptr. 629, 753 P.2d 585]; Aetna Cas. & Surety Co. v. Ind. Acc. Com. (1947) 30 Cal.2d 388, 393 [182 P.2d 159].) A statute has retrospective effect when it substantially changes the legal consequences of past events. (Kizer v. Hanna (1989) 48 Cal.3d 1, 7 [255 Cal.Rptr. 412, 767 P.2d 679].) A statute does not operate retrospectively simply because its application depends on facts or conditions existing before its enactment. (Ibid.) Of course, when the Legislature clearly intends a statute to operate retrospectively, we are obliged to carry out that intent unless due process considerations prevent us. (In re Marriage of Bouquet (1976) 16 Cal.3d 583, 587, 592 [128 Cal.Rptr. 427, 546 P.2d 1371].)
A corollary to these rules is that a statute that merely clarifies, rather than changes, existing law does not operate retrospectively even if applied to transactions predating its enactment. We assume the Legislature amends a statute for a purpose, but that purpose need not necessarily be to change the law. (Cf. Williams v. Garcetti (1993) 5 Cal.4th 561, 568 [20 Cal.Rptr.2d 341, 853 P.2d 507].) Our consideration of the surrounding circumstances can indicate that the Legislature made material changes in statutory language in an effort only to clarify a statute‘s true meaning. (Martin v. California Mut. B. & L. Assn. (1941) 18 Cal.2d 478, 484 [116 P.2d 71]; GTE Sprint Communications Corp. v. State Bd. of Equalization (1991) 1 Cal.App.4th 827, 833 [2 Cal.Rptr.2d 441]; see Balen v. Peralta Junior College Dist. (1974) 11 Cal.3d 821, 828, fn. 8 [114 Cal.Rptr. 589, 523 P.2d 629].) Such a legislative act has no retrospective effect because the true meaning of the statute remains the same. (Stockton Sav. & Loan Bank v. Massanet (1941) 18 Cal.2d 200, 204 [114 P.2d 592]; In re Marriage of Reuling (1994) 23 Cal.App.4th 1428, 1440 [28 Cal.Rptr.2d 726]; Tyler v. State of California (1982) 134 Cal.App.3d 973, 976-977 [185 Cal.Rptr. 49].)
One such circumstance is when the Legislature promptly reacts to the emergence of a novel question of statutory interpretation: “‘An amendment which in effect construes and clarifies a prior statute must be accepted as the legislative declaration of the meaning of the original act, where the amendment was adopted soon after the controversy arose concerning the proper interpretation of the statute. . . . [¶] If the amendment was enacted soon after controversies arose as to the interpretation of the original act, it is logical to regard the amendment as a legislative interpretation of the original act—a formal change—rebutting the presumption of substantial change.’ (1A Singer, Sutherland Statutory Construction (5th ed. 1993) § 22.31, p.
Even so, a legislative declaration of an existing statute‘s meaning is neither binding nor conclusive in construing the statute. Ultimately, the interpretation of a statute is an exercise of the judicial power the Constitution assigns to the courts. (California Emp. etc. Com. v. Payne (1947) 31 Cal.2d 210, 213 [187 P.2d 702]; Bodinson Mfg. Co. v. California E. Com. (1941) 17 Cal.2d 321, 326 [109 P.2d 935]; see Del Costello v. State of California (1982) 135 Cal.App.3d 887, 893, fn. 8 [185 Cal.Rptr. 582].) Indeed, there is little logic and some incongruity in the notion that one Legislature may speak authoritatively on the intent of an earlier Legislature‘s enactment when a gulf of decades separates the two bodies. (Cf. Peralta Community College Dist. v. Fair Employment & Housing Com. (1990) 52 Cal.3d 40, 51-52 [276 Cal.Rptr. 114, 801 P.2d 357].) Nevertheless, the Legislature‘s expressed views on the prior import of its statutes are entitled to due consideration, and we cannot disregard them.
“[A] subsequent expression of the Legislature as to the intent of the prior statute, although not binding on the court, may properly be used in determining the effect of a prior act.” (California Emp. etc. Com. v. Payne, supra, 31 Cal.2d at pp. 213-214.) Moreover, even if the court does not accept the Legislature‘s assurance that an unmistakable change in the law is merely a “clarification,” the declaration of intent may still effectively reflect the Legislature‘s purpose to achieve a retrospective change. (Id. at p. 214.) Whether a statute should apply retrospectively or only prospectively is, in the first instance, a policy question for the legislative body enacting the statute. (Evangelatos v. Superior Court, supra, 44 Cal.3d at p. 1206.) Thus, where a statute provides that it clarifies or declares existing law, “[i]t is obvious that such a provision is indicative of a legislative intent that the amendment apply to all existing causes of action from the date of its enactment. In accordance with the general rules of statutory construction, we must give effect to this intention unless there is some constitutional objection thereto.” (California Emp. etc. Com. v. Payne, supra, 31 Cal.2d at p.
With respect to Senate Bill No. 1612, the Legislature made its intent plain. Section 5 of the bill states, in part: “It is the intent of the Legislature in enacting Sections 2 and 4 of this act5 to confirm the independent nature of the letter of credit engagement and to abrogate the holding in [the Court of Appeal‘s earlier opinion in this case], that presentment of a draft under a letter of credit issued in connection with a real property secured loan following foreclosure violates Section 580d of the Code of Civil Procedure and constitutes a ‘fraud . . . or other defect not apparent on the face of the documents’ under paragraph (b) of subdivision (2) of Section 5114 of the Commercial Code. . . . [¶] The Legislature also intends to confirm the expectation of the parties to a contract that underlies a letter of credit, that the beneficiary will have available the value of the real estate collateral and the benefit of the letter of credit without regard to the order in which the beneficiary may resort to either.” (Stats. 1994, ch. 611, § 5.)
The Legislature‘s intent also was evident in its statement of the facts justifying enactment of Senate Bill No. 1612 as an urgency statute: “In order to confirm and clarify the law applicable to obligations which are secured by real property or an estate for years therein and which also are supported by a letter of credit, it is necessary that this act take effect immediately.” (Stats. 1994, ch. 611, § 6.) The Legislature‘s unmistakable focus was the disruptive effect of the Court of Appeal‘s decision on the expectations of parties to transactions where a letter of credit was issued in connection with a loan secured by real property. By abrogating the Court of Appeal‘s decision, the
We next consider whether Senate Bill No. 1612 effected a change in the law, or instead represented a clarification of the state of the law before the Court of Appeal‘s decision. As mentioned earlier, Senate Bill No. 1612 amended two code sections (
In the other section amended,
By contrast, the liability of the issuer of a letter of credit to the letter‘s beneficiary is direct and independent of the underlying transaction between the beneficiary and the issuer‘s customer. (See San Diego Gas & Electric Co. v. Bank Leumi, supra, 42 Cal.App.4th at pp. 933-934; Paramount Export Co. v. Asia Trust Bank, Ltd. (1987) 193 Cal.App.3d 1474, 1480 [238 Cal.Rptr. 920]; Lumbermans Acceptance Co. v. Security Pacific Nat. Bank (1978) 86 Cal.App.3d 175, 178 [150 Cal.Rptr. 69].) Thus, as the amendment to
Senate Bill No. 1612‘s remaining statutory addition with which we are concerned,6
The Court of Appeal saw
Gradsky held that a creditor, after nonjudicial foreclosure of the real property security for a note, could not recover the note‘s unpaid balance from a guarantor. (Gradsky, supra, 265 Cal.App.2d at p. 41.) Significantly, the court did not find
The court noted that the guarantor, after payment, ordinarily would be equitably subrogated to the rights and security formerly held by the creditor. (Gradsky, supra, 265 Cal.App.2d at pp. 44-45; cf.
However, the rules applicable to surety relationships do not govern the relationships between the parties to a letter of credit transaction. (See Dolan, Letters of Credit, supra, § 2.10[1], pp. 2-62 to 2-63.) At the time of this case‘s transactions, a majority of courts did not grant subrogation rights to an issuer that honored a draw on a credit; the issuer satisfied its own primary obligation, not the debt of another. (Tudor Dev. Group, Inc. v. U.S. Fid. & Guar. Co. (3d Cir. 1992) 968 F.2d 357, 361-363; see 3 White & Summers, Uniform Commercial Code, supra, Letters of Credit, § 26-15, pp. 211-212; but see
Gradsky contains additional language suggesting a much broader rule than its holding and analysis warranted. Going beyond the subrogation theory underlying its holding, the court observed: “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.” (Gradsky, supra, 265 Cal.App.2d at pp. 45-46.) The court also said: “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.” (Id. at p. 46.) In view of the reasoning of the court‘s holding, these additional observations were unnecessary to the case‘s determination.
Commonwealth Mortgage followed Gradsky to hold a mortgage guaranty insurer could not enforce indemnity agreements to obtain reimbursement from the debtors for the insurer‘s payment to the lender after the lender‘s nonjudicial sale of its real property security. (Commonwealth Mortgage, supra, 211 Cal.App.3d at p. 517.) The court said the mortgage guaranty insurance policy served the same purpose as the guaranty in Gradsky, and thus Gradsky would bar the insurer from being reimbursed under subrogation principles. (Commonwealth Mortgage, supra, 211 Cal.App.3d at p. 517.) The court found the substitution of indemnity agreements for subrogation rights did not distinguish the case from Gradsky. Relying on the rule that a principal obligor incurs no additional liability on a note by also being a guarantor of it, the court said the agreements added nothing to the debtors’ existing liability. (Commonwealth Mortgage, supra, 211 Cal.App.3d at p. 517.) Thus, the court said the indemnity agreements could not be viewed as independent obligations. (Ibid.) Instead, the court concluded they were invalid attempts to have the debtors waive in advance the statutory prohibition against deficiency judgments. (Ibid.)
As did Gradsky, Commonwealth Mortgage also inveighed against subterfuges that thwart the purposes of
(Commonwealth Mortgage, supra, 211 Cal.App.3d at pp. 515, 517.) “Although section 580d applies by its specific terms only to actions for ‘any deficiency upon a note secured by a deed of trust’ and not to actions based upon other obligations, the proscriptions of section 580d cannot be avoided through artifice [citation] . . . . In determining whether a particular recovery is precluded, we must consider whether the policy behind section 580d would be violated by such a recovery. [Citation.]” (Commonwealth Mortgage, supra, 211 Cal.App.3d at p. 515.) Thus, as did the Gradsky court, the Commonwealth Mortgage court augmented its opinion with concepts unnecessary to its determination of the case.7
The Court of Appeal in this case extrapolated from the Gradsky and Commonwealth Mortgage precedents a rule that swept far beyond their origins in guaranty and suretyship relationships: “Not only is a creditor prevented from obtaining a deficiency judgment against the debtor, but no other person is permitted to obtain what would, in effect, amount to a deficiency judgment.” (Original italics.) The Court of Appeal apparently concluded a transaction has such an effect if it “has the practical consequence of requiring the debtor to pay additional money on the debt after default or foreclosure.” (Original italics.) “Thus, we preserve the principle, clearly established by Gradsky and Commonwealth [Mortgage], 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.” However, as we have seen, neither Gradsky nor Commonwealth Mortgage established such a principle as a rule of law. Instead, their statements accentuated the courts’ vigilance regarding attempted evasions of the antideficiency and foreclosure laws.
The Court of Appeal mistook standby letters of credit for such an attempt by seeing them only as a form of guaranty. The court analogized the standby letter of credit to a guaranty because of the perceived functional similarities. One consequence of that analogy was that the court applied to standby letters of credit a rule whose legal justifications originated in the subrogation rights owed to sureties. However, as discussed before, letters of credit—standby or otherwise—are not a form of suretyship, and the rights of the parties to these transactions are not governed by suretyship principles.
While analogies can improve our understanding of how and why letters of credit are useful, analogies cannot substitute for recognizing the letters’ unique qualities. The authors of one leading treatise aptly summarized the point: “In short, a letter of credit is a letter of credit. As Bishop Butler once said, ‘Everything is what it is and not another thing.‘” (3 White & Summers, Uniform Commercial Code, supra, Letters of Credit, § 26-2, p. 117, fn. omitted.)
By focusing on analogies to guaranties, the Court of Appeal also overlooked that the parties in this case specifically intended the standby letters of credit to be additional security.8 The parties’ stipulated facts include that the original loan agreement was secured by a letter of credit, and that “Vista caused [the subsequent letters of credit] to be issued by Western as additional collateral security . . . .” The Court of Appeal found the letters of credit were not security interests in personal property under
When viewed as additional security for a note also secured by real property, a standby letter of credit does not conflict with the statutory
The Legislature plainly intended that the sections of Senate Bill No. 1612 we have addressed would apply to existing loan transactions supported by outstanding letters of credit. We conclude the Legislature‘s action did not effect a change in the law. Before the Legislature passed Senate Bill No. 1612, an issuer could not refuse to honor a conforming draw on a standby letter of credit—given as additional security for a real property loan—on the basis that the draw followed a nonjudicial sale of the real property security. The Court of Appeal created such a basis, but produced an unprecedented rule without solid legal underpinnings or any real connection to the actual language of the statutes involved.
Therefore, the aspects of Senate Bill No. 1612 we have discussed did not effect any change in the law, but simply clarified and confirmed the state of the law prior to the Court of Appeal‘s first opinion. Because the legislative action did not change the legal effect of past actions, Senate Bill No. 1612 does not act retrospectively; it governs this case. The Legislature concluded that Senate Bill No. 1612 should be given immediate effect to confirm and clarify the law applicable to loans secured by real property and supported by letters of credit. This conclusion was reasonable, particularly in view of the uncertainties the financial community evidently faced after the Court of Appeal‘s decision. (See, e.g., Murray, What Should I Do With This Letter of Credit? (Cont.Ed.Bar 1994) 17 Real Prop. L. Rptr. 133, 138-140.)
In sum, the Court of Appeal erred in concluding the Legislature‘s enactment of Senate Bill No. 1612 had no effect on this case. The Legislature explicitly intended to abrogate the Court of Appeal‘s prior decision and make certain the parties’ obligations when letters of credit supported loans also secured by real property. The Legislature manifestly intended the
DISPOSITION
The judgment of the Court of Appeal is reversed, and the cause remanded for further proceedings consistent with this opinion.
George, C. J., Baxter, J., and Brown, J., concurred.
WERDEGAR, J., Concurring and Dissenting.—I concur in the majority‘s conclusion that
The conclusion that the Bank may properly draw upon the letter of credit does not compel the further conclusion that the antideficiency law ultimately offers no protection to Vista Place Associates. This is illustrated by a comparison of the majority opinion and the separate opinion of Justice Mosk, which agree on the former point but disagree on the latter. In my view, the Bank‘s petition for review of a decision rejecting its claim (as
Underlying the broad declaration just mentioned is the majority‘s erroneous conclusion that Senate Bill No. 1612 merely clarified existing law and, thus, may be applied to transactions entered into before the bill‘s operative date. Before that date, the antideficiency law did not distinguish between residential and nonresidential real estate transactions. Now, however, as amended by Senate Bill No. 1612, the antideficiency law does distinguish between residential and nonresidential real estate transactions. New
In light of this provision, we may conclude that letters of credit before Senate Bill No. 1612 either were enforceable in the specified residential real estate transactions but now are not, or were not enforceable in all other real estate transactions but now are. This case does not require us to choose between these possibilities. Either way, Senate Bill No. 1612 went beyond mere clarification to change the effective scope of the antideficiency law. To apply it retroactively would change the legal consequences of past acts. Under these circumstances, it is appropriate to apply the ordinary presumption that a legislative act operates prospectively, and inappropriate to apply to this case the new set of rules articulated in Senate Bill No. 1612.
MOSK, J., Concurring and Dissenting.—I agree with the majority that the issue before us is not whether Senate Bill No. 1612 (1993-1994 Reg. Sess.) (hereafter Senate Bill No. 1612) has retrospective application. It does not.
I disagree with the majority that Senate Bill No. 1612 did not change prior law. In my view, far from merely “clarifying” the “true” meaning of prior law—as the majority implausibly assert—its numerous amendments and additions to the statutes reversed what the Court of Appeal aptly referred to as “the fifty years of consistent solicitude which California courts have given to the foreclosed purchase money mortgagee.”1
As the majority concede, a legislative declaration of an existing statute‘s meaning is neither binding nor conclusive. “The Legislature has no authority to interpret a statute. That is a judicial task.” (Del Costello v. State of California (1982) 135 Cal.App.3d 887, 893, fn. 8 [185 Cal.Rptr. 582]; see also California Emp. etc. Com. v. Payne (1947) 31 Cal.2d 210, 213 [187 P.2d 702]; Bodinson Mfg. Co. v. California E. Com. (1941) 17 Cal.2d 321, 326 [109 P.2d 935].) As the majority also concede, the legislative interpretation of prior law in this case is particularly unworthy of deference: Nothing in the previous legislative history of letter of credit statutes suggests an intent to create an exception to the antideficiency statutes. Indeed, it is apparently only recently that standby letters of credit have been used in real estate transactions.
Accordingly, unlike the majority, I conclude that before Senate Bill No. 1612, standby letters of credit were not exempt from the antideficiency statutes precluding creditors from obtaining a deficiency judgment from a creditor following nonjudicial foreclosure on a real property loan.
I.
As the Court of Appeal emphasized, before Senate Bill No. 1612, the potential conflict between the letters of credit statutes and the antideficiency statutes posed a question of first impression, arising from the relatively recent innovation of the use of standby letters of credit as additional security
The majority conclude that even before Senate Bill No. 1612, there was no restriction on the right of a creditor to demand payment on a standby letter of credit after a nonjudicial foreclosure on real property. They are wrong.
Under the so-called “independence principle,” the issuer of a standby letter of credit “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.” (
A standby letter of credit specifically operates as a means of guaranteeing payment in the event of a future default. “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, 992-993, fns. omitted.)
Thus, in practical effect, a standby letter of credit constitutes a promise to provide additional funds in the event of a future default or deficiency. As such, prior to passage of Senate Bill No. 1612, it potentially came up against the restrictions of the antideficiency statutes barring a creditor from obtaining additional funds from a debtor after a nonjudicial foreclosure. Indeed, as
We have previously summarized the history and purpose of the antideficiency statutes as follows.
“Prior to 1933, a mortgagee of real property was required to exhaust his security before enforcing the debt or otherwise to waive all rights to his security [citations]. However, having resorted to the security, whether by judicial sale or private nonjudicial sale, the mortgagee could obtain a deficiency judgment against the mortgagor for the difference between the amount of the indebtedness and the amount realized from the sale. As a consequence during the great depression with its dearth of money and declining property values, a mortgagee was able to purchase the subject real property at the foreclosure sale at a depressed price far below its normal fair market value and thereafter to obtain a double recovery by holding the debtor for a large deficiency. [Citations.] In order to counteract this situation, California in 1933 enacted fair market value limitations applicable to both judicial foreclosure sales ([
Code Civ. Proc.,] § 726 ) and private foreclosure sales ([id.,] § 580a ) which limited the mortgagee‘s deficiency judgment after exhaustion of the security to the difference between the fair [market] value of the property at the time of the sale (irrespective of the amount actually realized at the sale) and the outstanding debt for which the property was security. Therefore, if, due to the depressed economic conditions, the property serving as security was sold for less than the fair [market] value as determined under section 726 or section 580a, the mortgagee could not recover the amount of that difference in this action for a deficiency judgment. [Citation.]“In certain situations, however, the Legislature deemed even this partial deficiency too oppressive. Accordingly, in 1933 it enacted
section 580b [citation] which barred deficiency judgments altogether on purchase money mortgages. ’Section 580b places the risk of inadequate security on the purchase money mortgagee. A vendor is thus discouraged from overvaluing the security. Precarious land promotion schemes are discouraged, for the security value of the land gives purchasers a clue as to its true market value. [Citation.] If inadequacy of security results, not from overvaluing, but from a decline in property values during a general or local depression, section 580b prevents the aggravation of the downturn that would result if defaultingpurchasers were burdened with large personal liability. Section 580b thus serves as a stabilizing factor in land sales.’ [Citations.]“Although both judicial foreclosure sales and private nonjudicial foreclosure sales provided for identical deficiency judgments in nonpurchase money situations subsequent to the 1933 enactment of the fair value limitations, one significant difference remained, namely property sold through judicial foreclosure was subject to the statutory right of redemption ([
Code Civ. Proc.,] § 725a ), while property sold by private foreclosure sale was not redeemable. By virtue ofsections 725a and701 , the judgment debtor, his successor in interest or a junior lienor could redeem the property at any time during one year after the sale, frequently by tendering the sale price. The effect of this right of redemption was to remove any incentive on the part of the mortgagee to enter a low bid at the sale (since the property could be redeemed for that amount) and to encourage the making of a bid approximating the fair market value of the security. However, since real property purchased at a private foreclosure sale was not subject to redemption, the mortgagee by electing this remedy, could gain irredeemable title to the property by a bid substantially below the fair value and still collect a deficiency judgment for the difference between the fair value of the security and the outstanding indebtedness.“In 1940 the Legislature placed the two remedies, judicial foreclosure sale and private nonjudicial foreclosure sale on a parity by enacting
section 580d [citation].Section 580d bars ‘any deficiency judgment’ following a private foreclosure sale. ‘It seems clear . . . that section 580d was enacted to put judicial enforcement on a parity with private enforcement. This result could be accomplished by giving the debtor a right to redeem after a sale under the power. 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 instead to bar a deficiency judgment after private sale, the Legislature achieved its purpose without denying 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 his debt is protected.‘” (Cornelison v. Kornbluth (1975) 15 Cal.3d 590, 600-602 [125 Cal.Rptr. 557, 542 P.2d 981], fns. omitted.)
Over the several decades since their enactment, our courts have construed the antideficiency statutes liberally, rejecting attempts to circumvent the proscriptions against deficiency judgments after nonjudicial foreclosure. “It is well settled that the proscriptions of
Nor can the antideficiency protections be waived by the borrower at the time the loan was made. (See
In this regard, as the Court of Appeal observed, two decisions are of particular relevance here: Union Bank v. Gradsky (1968) 265 Cal.App.2d 40 [71 Cal.Rptr. 64] (hereafter Gradsky), and Commonwealth Mortgage Assurance Co. v. Superior Court (1989) 211 Cal.App.3d 508 [259 Cal.Rptr. 425] (hereafter Commonwealth).
In Gradsky, the Court of Appeal held that
In Commonwealth, borrowers purchased real property with a loan secured by promissory notes provided by a bank. At the bank‘s request, they obtained policies of mortgage guarantee insurance to secure payment on the promissory notes. They also signed indemnity agreements promising to reimburse the mortgage insurer for any funds it paid out under the policy. When the borrowers defaulted on the promissory notes, the bank foreclosed nonjudicially on the real property. It then collected on the mortgage insurance; the mortgage insurer then brought an action for reimbursement on the indemnity agreements.
The majority‘s attempt to distinguish Gradsky and Commonwealth, by characterizing them as grounded in subrogation law, is unpersuasive. Indeed, in Commonwealth, subrogation law was not directly in issue; the indemnity obligation provided a contract upon which to base collection.3
The majority miss the point. As the Court of Appeal in this matter explained: ”Gradsky and Commonwealth reflect the strong judicial concern about the efforts of secured real property lenders to circumvent
The Legislature, in enacting Senate Bill No. 1612, expressly abrogated the Court of Appeal decision in this matter and gave primacy to the so-called “independence principle” as against the antideficiency protections. Its additions and amendments to the statutes—lobbied for, and drafted by, the California Bankers Association—significantly altered prior law. Senate Bill No. 1612, therefore, should have prospective application only.
As the Court of Appeal observed, from the perspective of the debtor, a standby letter of credit is not cash or its equivalent. It is, instead, a promise to provide additional funds in the event of future default or deficiency and has the practical consequence of requiring the debtor to pay additional money on the debt after default or foreclosure.5 Moreover, unlike cash, which can be pledged as collateral security only once, a standby letter of credit does not require a debtor to part with its own funds until payment is made and thus permits a borrower to use standby letters of credit in a large number of transactions separately. Cash collateral, by contrast, does not impose personal liability on the borrower following a trustee‘s sale and does not encourage speculative lending practices.
As the Court of Appeal observed: “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 antideficiency legislation was originally enacted to prevent.”
The Court of Appeal correctly concluded that, before Senate Bill No. 1612, there was no implied exception to the antideficiency statutes for letters of credit. It erred, however, in holding that Western Security Bank, N.A. (Western) could have refused to honor the letter of credit on the ground that the Beverly Hills Business Bank (Bank), in presenting the letters of credit after a nonjudicial foreclosure, worked an “implied” fraud on Vista Place Associates (Vista).
The Court of Appeal cited
Western, presented with a demand for payment on a letter of credit, was limited to determining whether the documents presented by the beneficiary complied with the letter of credit—a purely ministerial task of comparing the documents presented against the description of the documents in the letter of credit. If the documents comply on their face, the issuer must honor the draw, regardless of disputes concerning the underlying transaction. (Lumbermans Acceptance Co. v. Security Pacific Nat. Bank (1978) 86 Cal.App.3d 175, 178 [150 Cal.Rptr. 69];
In my view, the concurring and dissenting opinion by Justice Kitching in the Court of Appeal correctly reconciled the policies behind standby letter of credit law and the antideficiency provisions of
Kennard, J., concurred.
Notes
The Legislature (Stats. 1996, ch. 497, § 7) later amended a statutory reference found in California Uniform Commercial Code section 5114 as it existed before chapter 176 was enacted. This second legislative action might appear to restore the prior section 5114 from the repealed former division 5 and possibly leave two sections numbered 5114 in the new division 5. (See
All references to section 5114 in this opinion are to California Uniform Commercial Code section 5114 as it existed before the 1996 legislation.
As the reference to “goods or documents” in the statute suggests, the drafters appear to have contemplated use of letters of credit in commercial financial transactions, not as additional security in real estate transactions.A letter of credit transaction involves at least three parties and three separate and independent relationships: (1) the relationship between the issuer and the beneficiary created by the letter of credit; (2) the relationship between the customer and the beneficiary created by a contract or promissory note, with the letter of credit securing the customer‘s obligations to the beneficiary under the contract or note; and (3) the relationship between the customer and the issuer created by a separate contract under which the issuer agrees to issue the letter of credit for a fee and the customer agrees to reimburse the issuer for any amounts paid out under the letter of credit. (Gregora, Letters of Credit in Real Property Finance Transactions, supra, 9 Cal. Real Prop. J. at p. 2; San Diego Gas & Electric Co. v. Bank Leumi, supra, 42 Cal.App.4th at pp. 932-933; see Voest-Alpine Intern. Corp. v. Chase Manhattan Bank (2d Cir. 1983) 707 F.2d 680, 682, and Colorado Nat. Bank, etc. v. Bd. of County Com‘rs (Colo. 1981) 634 P.2d 32, 36-38, for a discussion of the history and structure of letter of credit transactions.)
Letters of credit can function as payment mechanisms. For example, in sales transactions a letter of credit assures the seller of payment when parting with goods, while the conditions for payment specified in the letter of credit (often a third party‘s documentation, such as a bill of lading) assure the buyer the goods have been shipped before payment is made. (Gregora, Letters of Credit in Real Property Finance Transactions, supra, 9 Cal. Real Prop. J. at p. 3.) In the letter of credit‘s role as a payment mechanism, a payment demand occurs in the ordinary course of business and is consistent with full performance of the underlying obligations. (Ibid.)
The use of letters of credit has now expanded beyond that function, and they are employed in many other types of transactions in which one party requires assurances the other party will perform. (Gregora, Letters of Credit in Real Property Finance Transactions, supra, 9 Cal. Real Prop. J. at p. 3.) When used to support a debtor‘s obligations under a promissory note or other debt instrument, the so-called “standby” letter of credit typically provides that the issuer will pay the creditor when the creditor gives the issuer written certification that the debtor has failed to pay the amount due under the debtor‘s underlying obligation to the creditor. (Ibid.) Thus, a payment demand under a standby letter of credit indicates that there is a problem—either the customer is in financial difficulty, or the beneficiary and the customer are in a dispute. (Ibid.)
In any event, the analogy between standby letters of credit and guarantees is not as “forced” as the majority would suggest. As one commentator recently observed, “upon closer analysis, the borders between standby credits and contracts of guarantee are not so well settled as they may first appear.” (McLaughlin, Standby Letters of Credit and Guaranties: An Exercise in Cartography (1993) 34 Wm. & Mary L.Rev. 1139, 1140; see also Alces, An Essay on Independence, Interdependence, and the Suretyship Principle (1993) 1993 U. Ill. L.Rev. 447 [rejecting distinction between letters of credit and “secondary obligations,” i.e., guarantees and sureties].) Moreover, “courts have long recognized that, in a sense, issuers of credits ‘must be regarded as sureties.’ [Citation.] A seller of goods often insists on a commercial letter of credit because he is unsure of the buyer‘s ability to pay. The standby letter of credit arises out of situations in which the beneficiary wants to guard against the applicant‘s nonperformance. In both instances, the credit serves in the nature of a guaranty.” Dolan, The Law of Letters of Credit: Commercial and Standby Credits (2d ed. 1991) § 2.10[1], pp. 2-61 to 2-62.)Section 4 of Senate Bill No. 1612 made certain technical, nonsubstantive changes to