CREDIT SUPPORT IN MORTGAGE FINANCING TRANSACTIONS —

LETTERS OF CREDIT AND GUARANTIES

CREDIT SUPPORT IN MORTGAGE FINANCING TRANSACTIONS — LETTERS OF CREDIT AND GUARANTIES

I. INTRODUCTION

In a basic mortgage financing transaction, the lender makes a loan to the borrower, and the borrower grants to the lender a mortgage or deed of trust lien on the real property collateral and a security interest in the associated tangible and intangible personal property. Sometimes and for a number of reasons, the lender is not willing to make its loan solely on the security of such real and personal property collateral and therefore requires that the borrower provide some kind of third party credit support for the loan. Two common forms of third party credit support in mortgage financing transactions are letters of credit and guaranties.

A letter of credit is basically an undertaking by a bank or other financial institution, made at the instance of its customer, to pay a stated amount of money to another party. In mortgage financings, letters of credit as additional collateral are seen most often in a couple of different circumstances. In the first, the borrower causes a letter of credit to be issued directly in favor of the lender as security for the loan in addition to the real property collateral. In the second, the borrower assigns to the lender, as additional security for the loan, a letter of credit made in the borrower’s favor by another party, usually a tenant under a lease of the real property collateral. This second kind of letter of credit is sometimes referred to in this discussion as a “Tenant Letter of Credit” in order to differentiate it from a letter of credit issued for the borrower’s account.

A guaranty is an agreement by a third party, usually affiliated in some manner with the borrower, to assure payment of the borrower’s indebtedness to the lender and/or the performance of the borrower’s other obligations to the lender. The most common forms of guaranties used in mortgage financing transactions are probably repayment guaranties. Other frequently encountered kinds of guaranties include guarantees of a borrower’s obligation to construct improvements on real property collateral and guarantees of the so-called “carveouts” from limited personal liability under a nonrecourse loan.

II. LETTERS OF CREDIT

A. Nature of a Letter of Credit

A letter of credit is a definite undertaking by an issuer to a beneficiary at the request or for the account of an applicant to honor a documentary presentation by payment or delivery of an item of value.1 There are three parties involved in any letter of credit: the “issuer”, who is the bank or other financial institution issuing the letter of

credit; the “applicant” or account party, who is the party at whose request or for whose account a letter of credit is issued; and the “beneficiary”, who is the party entitled under the terms of the letter of credit to make a draw or demand payment thereunder.

In a letter of credit, the issuer undertakes to pay to the beneficiary a stated amount of money upon the satisfaction of the documentary conditions to payment set forth in the letter of credit. The issuer’s undertaking is “independent” of the contractual relationship between the applicant and the beneficiary (and, once the letter of credit is issued, independent of the applicant’s agreement with the issuer). The applicant causes the letter of credit to be issued by the issuer in favor of the beneficiary because of the applicant’s contractual relationship with the beneficiary. In a mortgage financing, this contractual relationship is either created by the loan documents, in the case of a letter of credit procured by a borrower, or often by a lease, in the case of a Tenant Letter of Credit. In the latter case, the borrower assigns the Tenant Letter of Credit to the lender because of the contractual requirements of the loan documents. In connection with the issuance of a letter of credit, the applicant and issuer will enter into some kind of reimbursement or other agreement under which the applicant agrees to reimburse the issuer for any amounts drawn by the beneficiary under the letter of credit. This reimbursement agreement can be secured or unsecured, though if secured, for obvious reasons, such agreement is secured by collateral other than the real property collateral for the loan.

B. Sources of Letter of Credit “Law”

There are two principal sources of letter of credit “law”. The first source is statutory in the form of Article 5 of the Uniform Commercial Code (“UCC”). The second source is the Uniform Customs and Practice for Documentary Credits (“UCP”) as adopted by the International Chamber of Commerce (“ICC”), which sets forth the standards of customs and practice for letters of credit. Of the two sources, the UCP is the probably more important and is incorporated into virtually every letter of credit issued by a major bank. The current version of the UCP is the 1993 Revision, ICC Publication No. 500.

However, Article 5 of the UCC is not unimportant in determining the rights and obligations of the parties involved in a letter of credit, and if the UCP does not cover a particular subject, it is governed by the UCC. Also, the differences between the two sets of rules have narrowed. One of the principal aims of new Article 5 of the UCC, which was promulgated in 1995, was to harmonize Article 5 with the UCP, and Article 5 explicitly contemplates that the UCP will supplement Article 5’s statutory principles.

In 1998, the ICC issued the International Standby Practices (“ISP”). The ISP was intended to set forth the customs and practice for so-called “standby” letters of credit (see discussion below). The ISP is consistent with the UCP in all material respects, but deals solely with standby letters of credit. Although an issuer could incorporate the ISP into its

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letter of credit, in practice and to date, relatively few banks have chosen to do so, and the UCP remains the prevailing set of letter of credit rules.

C. Uses of Letters of Credit

As an initial matter, it may be useful to differentiate between so-called “payment” letters of credit and so-called “standby” letters of credit. A “payment” letter of credit is a vehicle for payment and is most often used in commercial sales transactions. A seller delivers goods to a remote buyer in exchange for the buyer’s delivery of a letter of credit which entitles the seller to obtain payment against its presentation of a bill of lading and/or other evidence of delivery of the goods. The parties contemplate that the letter of credit will be negotiated. The letters of credit used in mortgage financing transactions are often “standby” letters of credit. Such letters of credit are not vehicles for payment and the parties do not necessarily contemplate that such letters of credit will be drawn upon. Rather, like any other collateral for the loan, the parties anticipate that the lender will resort to the letter of credit only upon the occurrence of a default or other condition or circumstance entitling the lender to make a claim for payment of the loan.

In the mortgage financing context, letters of credit are often used where the lender determines that the value of the real property collateral is now or may become insufficient to enable the lender to make a loan in the amount desired by the borrower. In the typical case, a letter of credit is provided as additional or supplemental security in order to cover a shortfall in the income generated by, and/or the value of, the real property collateral because, for example, the property has not been fully leased; the property has been leased but will experience a significant rollover in leases during the loan term; or the property is subject to some other condition which adversely impacts income and/or value. In such cases, the borrower or a principal in or affiliate of the borrower uses its credit and/or other collateral to cause the issuance of a letter of credit in order to enhance the lender’s collateral position and thereby increase the amount of the loan the lender is willing to make. In order to cause the issuance of a letter of credit, the applicant must satisfy the issuer that the applicant can perform its reimbursement obligation if the letter of credit is drawn upon, and the applicant must pay to the issuer a letter of credit fee (often on the order of 1% per year of the stated amount of the letter of credit, more or less).

Letters of credit which constitute a part of the borrower’s personal property rights with respect to the real property collateral are also encountered in mortgage financing transactions. Perhaps the most common example of this is the Tenant Letter of Credit. Although letters of credit have long been used as security deposits under leases, in recent times and in certain parts of the country, both the incidence and stated amounts of Tenant Letters of Credit have increased dramatically. This is particularly true where the tenant is an “emerging company”, law firm or other non-credit tenant, and in some cases, the stated amounts of such Tenant Letters of Credit can equal or exceed one or two years rent under the lease. The significant increase in the number and amounts of Tenant Letters of

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Credit make them an increasingly important part of the lender’s collateral in a mortgage financing.

D. Letter of Credit Provisions

Neither the UCP nor the UCC (nor the ISP, for that matter) mandates the use of a specified form of letter of credit, and therefore a lender taking a letter of credit as additional security for a mortgage loan should make certain that the letter of credit includes certain basic provisions. A letter of credit issuer may have its own form of letter of credit which should, but not always will, contain the desired elements, and even if a letter of credit form does cover “all the bases”, the lender will want to make certain that the various provisions are satisfactory.

The letter of credit should set forth the name and address of the beneficiary and the name of the applicant. Needless to say, the name and address of the beneficiary should be set forth correctly. The beneficiary’s address set forth in the letter of credit is the address to which the issuer will direct any notices given by the issuer under the letter of credit.

The letter of credit should set forth its term or date of expiration (or date of “expiry”, in quaint letter of credit lingo). Under Section 5-106 of the UCC, if no term is stated, the letter of credit expires after one year from its issuance date, or if a letter of credit does not have a stated issuance date, its actual date of issuance. If a letter of credit is stated to be perpetual, a letter of credit expires five years after such stated or actual issuance date.

The term of the letter of credit should extend beyond its expiration date by anywhere from 30 to more than 90 days (see discussion below). Many letter of credit issuers will not or prefer not to issue a letter of credit having a term in excess of one year. In such cases, at a minimum, the lender should require that the letter of credit include an “evergreen” provision under which the term of the letter of credit is automatically renewed for successive one-year periods. In order to include such clauses, the letter of credit issuer will usually require that the automatic annual renewal is subject to the issuer’s not having provided the beneficiary with written notice of nonrenewal not less then a specified period of time, usually 30 or 60 days, prior to the letter of credit’s then-current expiration date. Where an “evergreen” provision does include an issuer right not to renew the letter of credit, a prudent lender should independently verify renewal of the letter of credit with the issuer prior to each expiration date and not rely upon the “non-receipt” of a nonrenewal notice.

The letter of credit must specify the documentary conditions which must be satisfied as a condition to the issuer’s obligation to honor a draw under the letter of credit. As discussed below, a lender should require that the letter of credit be a “clean” or sight draft only letter of credit. The letter of credit also should permit partial draws, i.e. one or

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more draws in individual amounts of less than the entire stated amount of the letter of credit. Under certain circumstances, it may be beneficial for the beneficiary to draw less than the entire stated amount of the letter of credit, for example where a debtor-in-possession or bankruptcy trustee may have the right to capture any “excess” proceeds of the draw.

Unless the letter of credit provides that it is transferable, the beneficiary’s right to draw under the letter of credit cannot be transferred.2 Therefore, the letter of credit should be made expressly transferable by the beneficiary. For letters of credit made in favor of the lender, this enables the lender to sell or syndicate the loan. For Tenant Letters of Credit, this enables the lender to require assignment of the letters of credit to the lender either at the time of loan origination or later, such as following a transfer of the property in foreclosure. A letter of credit should provide that no fee or only a nominal fee is payable for transferring the letter of credit, and that any fee is payable by the applicant. Many letters of credit provide for a transfer fee in an amount equal to the greater of a nominal amount or a percentage of the stated amount of the letter of credit, and if the stated amount of the letter of credit is large, this results in correspondingly large transfer fee.

The letter of credit should include the issuer’s express engagement or agreement to honor drafts drawn under the letter of credit in accordance with its terms if negotiated on or before the expiration date of the letter of credit. A letter of credit should also state its governing law or rules, although this is probably a moot point as almost every letter of credit issued by a major bank will state that it is subject to the UCP.

The letter of credit should specify the branch or location of the issuer at which drafts drawn under the letter of credit must be presented, and perhaps the method of presentation (i.e., in person or by private courier). The lender should make certain that this place of presentation is local to the lender or otherwise convenient to the lender. If such place is not convenient, the lender should consider requiring that the issuer designate a “nominated person.”3

E. Payment of Letters of Credit

The issuer of a letter of credit is obligated to honor drafts drawn under the letter of credit upon the presentation of the documents specified in the letter of credit. Upon presentation by the beneficiary, the issuer’s only duty is to determine whether the documents presented on their face satisfy the documentary requirements of the letter of credit.4 Therefore, a lender seeking to draw under a letter of credit is not required to prove that the borrower is in default under the loan or that the lender is owed the amount demanded. The lender need only present the required documents to the issuer, and the issuer is obligated to honor the draw. This of course makes a letter of credit one of the easiest forms of collateral for a lender to realize upon.

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Because the issuer must pay under a letter for credit solely on the basis of the documents presented, issuer’s payment obligation under the letter of credit is independent of the underlying mortgage financing transaction. This is the so-called “independence principle”. If the documents presented comply with the requirements of the letter of credit, then the issuer must honor the payment demand, regardless of any defenses that the applicant may have against the beneficiary.5

There is one recognized exception to the independence principle. If “a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, the issuer must honor the presentation in “holder in due course” situations, and in other cases, acting in good faith, the issuer may honor or dishonor the presentation. Also, in the case of forgery or material fraud, a court may enjoin payment of the letter of credit. The fraud must be a “material” fraud, the beneficiary must be “adequately protected against loss that it may suffer because the relief is granted,” and the court must determine that the person seeking the injunction is more likely than not to succeed on its claim. Because an injunction against payment would violate the independence principle, such injunctions are rarely granted.6

The flip side of the issuer’s obligation to make payment under a letter of credit solely on the basis of the documents presented is that such documents must strictly comply with letter of credit requirements.7 Even a scrivener’s or typographical error in the documents presented could result in rejection of a draw. A lender’s presentation of documents under a letter of credit is not the time for creativity. The documents should conform exactly with what is required under the letter of credit. Any discrepancy in the documents can justify the issuer’s dishonor of the draw.

When a beneficiary makes a draw under a letter of credit, the issuer has a reasonable time after presentation, but not beyond the end of the seventh business day, to either honor the payment demand or give notice to the presenter of any discrepancies in the presentation.8 If the issuer gives a notice of dishonor, it must state all discrepancies in respect of which the issuer refuses to honor the draw.9 Under the UCP, an issuer assumes no liability for consequences arising out of interruption of its business by reason of a force majeure event. Unless otherwise agreed, an issuer will not, upon resumption of its business, accept drafts or pay under letters of credit that expired during the interruption of its business.

Because the issuer is obligated to pay solely on the basis of the documents presented, and such documents must strictly comply with the letter of credit, the lender should provide in the letter of credit that only the letter of credit itself, perhaps together with a “sight draft” in the amount of the draw (which is basically a check written by beneficiary to itself on the letter of credit), need be presented. The borrower will often seek to require that the lender deliver additional documentation as a condition to making a draw under the letter of credit, such as a certification of a default by the borrower under

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the loan documents. If the lender agrees to this, the lender should limit the certification to a simple statement that the lender is entitled to make a draw under the letter of credit. In no event should the lender be required to certify that the lender has given required default notices or that applicable cure periods have expired, and the use of defined terms in the loan documents such as “Event of Default” which incorporate notice and cure periods should be similarly avoided. Among other reasons, a borrower bankruptcy and the automatic stay (discussed below) could prevent the lender from giving a default notice and making such a certification in the documents presented.

Any written statements or certifications that must be presented as a condition to a draw under a letter of credit should avoid the use of person’s names, specified offices (for example, use “authorized representative” rather than “senior vice president”) or other information which may change over time. In addition, the lender should make certain that, if the letter of credit is transferred, the transferee would be able to provide the required written statement or certification. Notwithstanding that the terms of the letter of credit entitle the lender to make a draw, the lender will be liable to the borrower if the lender draws upon a letter of credit when the lender is not entitled to do so.10

F. Additional Letter of Credit Issues (Non-Bankruptcy)

In some respects, a letter of credit could be likened to a check written with disappearing ink. Unlike a guaranty, which, absent unintended consequences, generally remains outstanding for the entire term of the loan, each letter of credit has a fixed expiration date. Therefore, unless the lender carefully monitors the expiration date of a letter of credit, the lender runs the risk of having an item of collateral “disappear” or lapse.

As discussed above, letter of credit issuers often prefer or even require that letters of credit be issued for a term not to exceed one year. As also discussed above, in such cases, letters of credit should include “evergreen” provisions. For letters of credit containing evergreen provisions, the lender should not simply rely upon not having received a notice of nonrenewal from the issuer, and should instead confirm directly with a responsible party at the issuer that the letter of credit has not been “non-renewed”. In addition, needless to say, where the beneficiary’s current notice address differs from the beneficiary’s address set forth in the letter of credit, the possibility of the beneficiary not receiving a notice of nonrenewal of a letter of credit becomes even more acute.

Some cautious lenders require that, in lieu of accepting a letter of credit with an evergreen provision, the borrower cause the letter of credit to be amended on a periodic basis expressly to extend its term, and to provide the letter of credit amendment to the lender not less than a sufficient period of time prior to the then-applicable expiration date. In any event, the underlying loan documents should obligate the borrower to cause any letter of credit not issued for the full term of the loan to be extended not less than thirty days prior to its expiration date. The loan documents should also provide that, if the

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borrower fails to cause the letter of credit to be extended on or before such date, the lender is entitled to draw the entire stated amount of the letter of credit and to hold the proceeds of the draw in a cash collateral account.

These considerations are equally relevant to a Tenant Letter of Credit. The lender should make certain, or should make certain that the borrower makes certain, that the term of any such letter of credit does not expire without the borrower (or the lender, if a transferee beneficiary under the letter of credit) making a draw of the entire stated amount of the letter of credit. The borrower’s (and lender’s, if applicable) right to make such a draw will necessarily be dependent upon the terms of the underlying lease.

The financial condition of the issuer is another relevant consideration for the lender. Obviously, a lender taking the letter of credit as additional security in a mortgage financing should make certain that the issuer possesses the financial capacity to honor the letter of credit if that should become necessary. The underlying loan documents should therefore give the lender a right of approval over the identity of the letter of credit issuer. In addition, in cases of a remote or unknown issuer of a letter of credit, the lender should consider requiring that a more local or known bank or financial institution “confirm” the letter of credit and thereby become liable for making payments under the letter of credit.

Even if the lender determines that the letter of credit issuer possesses the financial capacity to perform its obligations under a letter of credit at the outset of the loan, because often letters of credit are required to be in place for several years, the issuer’s ability to honor draws under the letter of credit may change over time. For this reason, many lenders include in the underlying loan documents a provision to the effect that, if the lender deems itself insecure with respect to the letter of credit by reason of the financial condition of the issuer (preferably without any requirement that the lender specify any objective criteria for such insecurity), then the lender has the right to require that the borrower furnish a substitute letter of credit issued by a different bank or other financial institution acceptable to the lender. Such provisions usually entitle the lender to draw the entire stated amount of the letter of credit if the borrower fails to cause a substitution to occur within a stated period of time following the lender’s demand. Clearly, the preferred course of action is to require that the borrower furnish a letter of credit from a substantial, well-regarded bank or other financial institution at the outset of the loan in order to avoid these kinds of issues.

As discussed above, although letters of credit can generally be made transferable, transferring a letter of credit is cumbersome. This is particularly the case for a Tenant Letter of Credit. Also, following a transfer, the transferee beneficiary may not be able to make a statement or certification required under the letter of credit in order to make a draw. The requirement for strict compliance with letter of credit conditions and the procedural requirements for effecting the transfer of a beneficiary’s rights under a letter of credit contrast with a guaranty, which is easily assigned together with the loan and loan documents.

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G. Certain Bankruptcy Issues

One of the principle virtues of a lender’s taking a letter of credit as additional security in a mortgage financing is that, unlike most other forms of collateral, a letter of credit and the lender’s rights to make a draw under the letter of credit are generally not affected by a bankruptcy of the borrower. Under Section 362 of the U.S. Bankruptcy Code (hereinafter, “Bankruptcy Code”)11, the filing of a bankruptcy case creates an “automatic stay” which prohibits the prosecution of proceedings or other attempts to obtain any property of the bankruptcy estate. It is well-established that the borrower’s bankruptcy and the automatic stay under Section 362 do not prevent a lender from making a draw under a letter of credit issued for the borrower’s account because the letter of credit and the proceeds of the draw are not property of the bankruptcy estate. A letter of credit is deemed under the law to be an independent obligation of the issuer not affected by the applicant’s bankruptcy.

For similar reasons, a draw under a letter of credit made by a lender within the ninety day (or in some circumstance, one year) preference period is not a preference under Section 547 of the Bankruptcy Code12 even though the draw enables an undersecured lender to receive more than the lender would have received in the bankruptcy case. Again, for such purposes, the letter of credit and the proceeds of the draw are not deemed to be part of the bankruptcy estate. There are, however, some other preference issues relating to letters of credit.13

Under certain circumstances, the issuance of a letter of credit could constitute a preference. This is true because courts have held that “an indirect transfer arising from a debtor’s pledge of security to a third party bank may constitute a voidable preference as to the creditor who indirectly benefitted from the indirect transfer to the third party.”14 In that case, the borrower caused the bank to issue a letter of credit in favor of a creditor leasing company within the preference period, and pledged a certificate of deposit to the bank as security for its reimbursement obligation. The leasing company was held not entitled to draw under the letter of credit post-bankruptcy because to do so would enable the leasing company to benefit from a preferential transfer of the borrower’s property, in this case the borrower’s pledge of the certificate of deposit to the bank.

The “indirect transfer” rule followed in In re Air Conditioning, Inc. of Stuart and other cases makes a lender vulnerable to preference attack, but not if the letter of credit is taken at the time of loan origination. At loan origination, any transfer of property to the letter of credit issuer would be made as part of a contemporaneous exchange for new value and would not therefore constitute a preference.15 The indirect transfer rule and the preference problem it presents are really only relevant in a workout context and only where the lender is undersecured, the letter of credit is given as security for the under-secured indebtedness and the borrower grants a lien or makes another transfer of property to the issuer in order to secure the borrower’s reimbursement obligation to the issuer.

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There is another relatively minor preference issue with taking letters of credit as additional security for mortgage loans. If a lender is paid in full during the preference period and therefore releases or allows to expire a letter of credit held as security for the loan, the payment could be recovered from the lender as a preference, even though the lender’s draw under the letter of credit would not have constituted a preference.16 This demonstrates the point that payments made through a draw under a letter of credit are more “pure” and insulated from bankruptcy attack than payments made by the borrower from other sources. Therefore, where the lender has a choice, the lender should always pay itself through making a draw under a letter of credit. This is not, of course, the usual custom and practice in taking letters of credit as additional security in mortgage financing transactions.

This issue also points out the importance of having a letter of credit remain in place for some period of time following the payment in full of the loan. In order to avoid any preference issue, the time period could be 90 days+ -- the full ninety day preference period following the payment of the loan plus an additional period of time to make a draw on the letter of credit if the borrower does file a petition in bankruptcy during that time.

H. Impact of Revised Article 9

Major revisions to Article 9 of the UCC took effect in fifty states, Puerto Rico and the District of Columbia on July 1, 2001. These revisions impact the manner in which the lender in a mortgage financing transaction perfects its security interest in letter of credit rights under Tenant Letters of Credit. For letters of credit issued in favor of a lender, revised Article 9 is not especially relevant, but the lender should make certain that the loan documents provide that any amounts drawn by the lender under the letter of credit which are in excess of the portion of any draw concurrently applied by the lender to the loan are held by the lender in a cash collateral account.

The only way for a lender to perfect a security interest in letter of credit rights, other than as supporting obligations17 (which are not usually involved in Tenant Letters of Credit), is for the secured party to obtain “control” of that collateral.18 A lender obtains control of letter of credit rights by taking an assignment of proceeds of the letter of credit under UCC § 5-114(c) or otherwise under applicable law or practice pertaining to the letter of credit and by obtaining the consent of the issuer to such assignment. In some cases, consent may be required from more than one party (if, for example, there was a nominated person in addition to the issuer). Section 5-114(c) provides that an issuer need not recognize an assignment of the proceeds of the letter of credit unless and until it consents to the assignment. However, the issuer may not unreasonably withhold its consent. Section 9-409 of the UCC allows the borrower to create, attach, perfect, assign or transfer a security interest in letter of credit rights notwithstanding a contractual or statutory prohibition against, or limitation on, assignment. This section also provides that the transfer or creation of the security interest is not a default.

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A security interest in letter of credit rights does not permit the lender to draw under the letter of credit. It only gives the lender the right to payments under the letter of credit if the beneficiary (the borrower in the mortgage financing transaction) makes a proper draw under the letter of credit. The lender remains at the mercy of its borrower, the beneficiary under the letter of credit. If the lender wants the right to draw under the letter of credit, the lender must become a transferee beneficiary under letter of credit law.19

For security interests in letter of credit rights, the local law of the issuer’s jurisdiction governs perfection, the effect of perfection or nonperfection and priority. The issuer’s jurisdiction is the jurisdiction whose law governs the liability of the issuer with respect to the letter of credit rights under Section 5-116 of the UCC.

Under former Article 9 of the UCC, possession of the letter of credit was the only way to perfect a security interest in the letter of credit. Under revised Article 9, neither possession nor filing of a financing statement will perfect a security interest in letter of credit rights, except to the extent filing perfects a security interest in other collateral to which the letter of credit rights are supporting obligations as discussed above. As a transitional matter, if a lender has a security interest in letter of credit rights created under former Article 9 and perfected under Section 9-304 of former Article 9 (i.e., by possession), the lender has only one year from the effective date of revised Article 9 in the relevant jurisdiction properly to perfect the existing security interest by a control agreement. For most states, this means that the control agreement must be in place by July 1, 2002, or the security interest will become unperfected. Notwithstanding Section 9-203(b) of the UCC, any security interest enforceable against the borrower with respect to letter of credit rights remains subject to the provisions of Section 5-118 of the UCC relating to the security interest of the issuer of the letter of credit. The rights of a transferee beneficiary of the letter of credit are independent of and superior to all security interest as provided in Section 5-114 of the UCC. Accordingly, a transferee beneficiary under a letter of credit in a mortgage financing will always be in a position superior to a lender holding a security interest in letter of credit rights, regardless of the method of perfection.

I. SPECIAL TENANT LETTER OF CREDIT ISSUES

Tenant Letters of Credit present some additional issues. In many cases, a Tenant Letter of Credit has been issued before loan origination or the lender is otherwise not able to participate in the structuring of the letter of credit. In those circumstances, the Tenant Letter of Credit may not meet the lender’s requirements with respect to, for example, the documents to be presented in order to make a draw or the transferability of the letter of credit. It may not be feasible for the lender to require the borrower to obtain a new or amended Tenant Letter of Credit, or the borrower may not have that right under the underlying lease.

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As discussed above, under revised Article 9 of the UCC, the only way for a lender to perfect a security interest in letter of credit rights (other than as a supporting obligation) is for the lender to obtain “control” of such rights by taking an assignment of the proceeds of the letter of credit and having the issuer consent to such assignment. However, as also discussed above, the lender’s security interest does not entitle the lender to draw under the letter of credit and the lender must rely upon the borrower to make proper draws under the letter of credit as and when required.

If the lender wants the right to draw under a Tenant Letter of Credit or otherwise to control (in the non-revised Article 9 security interest sense) use of the Tenant Letter of Credit, the lender could require that the Tenant Letter of Credit be transferred to the lender at the time of origination of the mortgage loan. This approach has both advantages and disadvantages to the lender. The advantages are that the lender is able to control draws under the letter of credit; the application of proceeds of such draws to the loan; and the making of amendments to the letter of credit. If the letter of credit is transferred to the lender, the lender, as beneficiary under the letter of credit, would be entitled to receive notices of nonrenewal of the letter of credit under any evergreen provision. In addition, no third party, including a transferee of the borrower as beneficiary under the letter of credit, would be able to “trump” the lender’s rights under the letter of credit.

There are some disadvantages to this approach as well. The tenant can be expected to resist a transfer of its “security deposit” to the lender, especially if the tenant is not obligated to do so under the lease. Tenants generally prefer to deal with their landlords, with whom they have an existing relationship, on matters relating to their leases. If the lender requires transfer of the letter of credit, the lender could expose itself to liability from the borrower for making an improper draw under the letter of credit, failing to make a draw under the letter of credit or allowing the letter of credit to expire without making a draw. In addition, requiring a transfer to the lender could result in the imposition of multiple transfer fees by the issuer, and such transfer fees can be significant.

A compromise approach could be to require that the borrower transfer the Tenant Letter of Credit to the lender upon the occurrence of certain “triggering” events. These could include the lender’s acquisition of the real property collateral in foreclosure or by deed-in-lieu of foreclosure, the borrower’s failure to make an appropriate draw under the letter of credit, or at such time as the lender seeks to perfect its interest in the rents and profits from the property by delivering notice of payment to the tenants. If the lender pursues this alternative, the lender should not wait until the occurrence of a triggering event before requiring that the borrower execute transfer documentation. Rather, the lender should require at loan origination that the borrower execute transfer documents and that the issuer provide advance consent. This also will avoid the imposition of a transfer fee until such time as a letter of credit is actually transferred to the lender. The lender should also require that physical possession of the letter of credit be delivered to

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the lender so that lender can monitor the borrower’s attempts to draw under the letter of credit and can control any amendments to the letter of credit. Please note that any notices of non-renewal under an evergreen provision would still be delivered to the borrower until the letter of credit were actually transferred to the lender.

The lender should also consider the impact of Sections 365 and 502(b)(6) of the Bankruptcy Code on a Tenant Letter of Credit. Under Section 365, the tenant has the right to assume or reject its lease. If the tenant elects to reject its lease, the borrower would be entitled to assert a claim in the tenant’s bankruptcy for any lease damages the borrower sustains by reason of this rejection. The borrower’s damages would be calculated under applicable state law without regard to any bankruptcy limitations. Section 502(b)(6), however, caps the borrower’s damages at the “rent reserved” under the lease for the greater of (1) one year, or (2) fifteen percent, not to exceed three years, of the remaining term of the lease.

The treatment of a cash security deposit in the event of a tenant’s bankruptcy is clear. If the cash security deposit has not been applied by the borrower prior to the bankruptcy filing, then the security deposit will automatically become an asset of the tenant’s bankruptcy estate and the automatic stay would prohibit the borrower from attempting to offset the security deposit against the borrower’s damages without first obtaining court relief, even if the lease is ultimately rejected by the tenant. The borrower would, however, have a secured claim against the security deposit, subject to the cap. However, to the extent that the amount of the cash security deposit exceeds the cap under Section 502(b)(6), this “excess” must be returned to the bankruptcy estate.

The use of a Tenant Letter of Credit rather than a cash security deposit should enable the lender and borrower to avoid the limitations of the Section 502(b)(6) cap. In view of the independence principal, the proceeds of a draw under a Tenant Letter of Credit are not the tenant’s funds, and therefore neither the tenant nor the issuer of the letter of credit should be entitled to assert that Section 502(b)(6) prohibits the lender and/or borrower from applying the full amount of a draw under the letter of credit to the damages for the tenant’s rejection of its lease. Unfortunately, this issue has not yet been decided by the courts. There is some case law in analogous situations that seems to support this position. For example, courts have long held that a non-debtor guarantor cannot assert the Section 502(b)(6) cap to avoid its liability under its guaranty of a rejected lease.20 Similarly, the California Supreme Court held that lender was entitled to make a draw under the letter of credit even though the lender’s claim against the borrower had been barred by California antideficiency laws.21

There are some countervailing arguments. For example, although the lender may be entitled to draw under the letter of credit, it could be argued that the independence principle does not insulate the lender from exposure for taking a payment in an amount in excess of that to which it is legally entitled. Therefore, perhaps the tenant would be able to sue the borrower or lender to recover any payment in excess of the cap. The issuer

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could assert that, under Section 5-117 of the UCC, upon payment under the letter of credit, the issuer would become subrogated to the rights of the tenant including the right to seek recovery of any payment exceeding the cap. Also, although letters of credit have many of the same characteristics as guaranties, they are not in fact guaranties and case law governing guarantor’s rights may be held not to apply. Finally, at least one court has stated that the amount drawn by a landlord under a letter of credit given as a security deposit must be deducted from the landlord’s lease damage claim as capped under Section 502(b)(6), thereby implying that, to the extent that the amount of the draw exceeded the landlord’s Section 502(b)(6) claim, the excess would belong to the bankruptcy estate.22 It would be difficult to square the independence principle, which says that amounts drawn under a letter of credit are not the borrower’s money, with any case holding that amounts drawn under a Tenant Letter of Credit which exceed the Section 502(b)(6) cap belong to the tenant’s bankruptcy estate.

There may be ways to structure a Tenant Letter of Credit in order to attempt to avoid the limitation of the Section 502(b)(6) cap. If the lender has the right to approve the lease before it is executed, the lender should require that the Tenant Letter of Credit not be denominated as a security deposit or as a substitute for a security deposit, but instead be stated to be additional security for the tenant’s obligations or in the nature of a guarantee of those obligations. Regarding draws, to the extent that the amounts drawn by a lender or borrower exceed the amount concurrently applied to amounts owing under the lease, the lender should require that such amounts be held in a cash collateral account maintained by the borrower with the lender. This cash collateral account would necessarily need to be established at the time the lease were entered into.

III. GUARANTIES

A. Nature of Guaranty

A guarantor or surety is generally defined as “one who promises to answer for the debt, default or miscarriage of another or hypothecates property as security therefor.”23 A contract or agreement pursuant to which a guarantor makes this undertaking is referred to as a guaranty. It is important to note that parties who grant liens upon their property as security for the indebtedness of another party are either guarantors or have all the rights of guarantors, even though such parties are not personally liable on such indebtedness. Guaranties in mortgage financing transactions are usually unsecured, but sometimes the guarantor “collateralizes” its guaranty by granting to the lender a lien on the guarantor’s property as security for its obligations under the guaranty.

B. Sources of Guaranty Law

Guaranties are agreements made by a guarantor in favor of a lender and, like any other agreement, are governed by the law of the state specified in the guaranty, if any,

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subject to choice of law principles. Unlike letters of credit, there are no overarching international rules or federal statutory scheme applicable to guaranties. This discussion will focus on California law because guaranty principles and issues arising under California law are of interest and relevance generally, and because the California one-action rule and antideficiency statutes have produced some interesting results concerning guaranties.

C. Uses of Guaranties

Guaranties are probably the most commonly used form of credit support for mortgage financings. Guarantors are typically principals in, or otherwise affiliated with, the borrower. The reasons why lenders require guaranties are substantially similar to the reasons for requiring letters of credit discussed above. However, unlike letters of credit, guaranties do not require the involvement of another bank or financial institution and do not require the payment of a fee or the furnishing of credit or security for a reimbursement obligation.

Several different kinds of guaranties are used in mortgage financing transactions. Perhaps the most common form of guaranty is the repayment guaranty. Under a repayment guaranty, the guarantor promises to pay to the lender all or a portion of the loan. “Full” repayment guaranties, under which the guarantor guarantees the entire loan, are not uncommon, and limited repayment guaranties are frequently used as well. One common form of limited repayment guaranty is a guarantee of the “top” portion of a loan, expressed either as an absolute dollar amount or as a percentage of the principal amount of the loan outstanding from time to time. For example, a guarantor could guaranty a portion of the loan expressed as a specified dollar amount, and the guarantor would be liable for this amount until the loan were paid down below the specified dollar amount, at which point the guarantor’s liability would reduce with further payment of the loan. Alternatively, a guarantor could guaranty a specified percentage of the outstanding principal amount of the loan, in which case the guarantor’s liability would be reduced with each payment made on the loan. With either alternative, the limited repayment guaranty should expressly state that any payments made following the occurrence of the default do not “count” for purposes of reducing the guarantor’s liability under the guaranty. Some repayment guaranties are structured so that the guarantor’s liability is reduced or stepped down over time, either because the real property collateral satisfies specified performance criteria or simply because of the passage of time. Again, the guaranty should provide that the reduction or step down in the guarantor’s liability does not take place if there is ever a default or at least a default that has not been cured.

Another common form of guaranty in mortgage financing transactions is a completion guaranty. Necessarily, a completion guaranty would only be used where the loan documents obligate the borrower to construct and complete improvements, which is the case with construction loans and loans made for the acquisition, development and/or renovation of real property collateral. Completion guaranties are frequently, though not

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always, used in conjunction with repayment guaranties because, where there is a construction risk, there is also usually a payment risk that the lender seeks to have covered through a guaranty.

Many mortgage loans are made on a nonrecourse basis. This means that the lender agrees to look solely to the real property collateral for satisfaction of the loan. Nonrecourse provisions are always subject to certain “carveouts” for which the lender retains the right to pursue the borrower personally. The list of carveouts can vary, but typically includes things like fraud, waste, misapplication of rents, insurance proceeds or condemnation awards, environmental indemnity provisions and similar items. A lender will frequently require that a guarantor guarantee the borrower’s liability for these non-recourse carveouts. This is especially true where, as is often true, the borrower is a single-asset entity. In such cases, the lender’s right to pursue personally the borrower for a nonrecourse carveout would be of little value. Carveout guaranties often contain “springing recourse” features under which such guaranties convert to full or partial repayment guaranties if the borrower commences bankruptcy proceedings of if the guarantor contests enforcement of the guaranty in some manner.

D. Guaranty Provisions

No independent consideration is required if a guaranty is entered into at the same time as the guaranteed obligation or at the time the guaranteed obligation has been accepted by the lender and constitutes part of the consideration to the lender.24 A guarantor’s obligations with respect to the mortgage loan are as set out in the guaranty. Subject to any limitations required by the purpose for which the guaranty is given, the definition of the “guaranteed obligations” in the guaranty should be as broad as possible.

The lender should make certain that the guaranty constitutes a guaranty of payment and not just of collection. A guaranty of collection means that the “debtor is solvent, and that the demand is collectable by the usual legal proceedings”, and therefore, the lender would be required to attempt to collect from the borrower and exhaust its remedies in doing so before making a claim under the guaranty.25 The guaranty should also specify that there are no conditions to the effectiveness of the guaranty.

If there is more than one guarantor of the guaranteed obligations, either as a party to the guaranty or in a separate guaranty instrument, the guaranty should provide that the obligations of all such guarantors are “joint and several”. This rebuts the presumption under certain applicable law that obligations imposed upon more than one person are “joint” but not “several”, and eliminates the need to join all guarantors.26

A guarantor has a number of rights prescribed by law. In California, the bases for these guarantor’s rights are largely statutory, but in most cases the relevant statute merely codified common law provisions. Therefore, a guarantor is accorded the following rights:

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• To require the lender to proceed against the principal obligor, or to pursue any other remedy in the lender’s power that the guarantor cannot pursue and that would lighten the guarantor’s burden;27

• To compel the principal obligor to perform the guaranteed obligations when due;28

• Upon satisfying all or any part of the guaranteed obligation, to reimbursement by the principal, including costs and expenses;29

• Upon satisfying the guaranteed obligation, to enforce the remedies of the lender against the principal (i.e.,30 rights of subrogation), and to receive contribution from co-guarantors;

• To resort to security give by the principal obligor to the lender or to any co-guarantor;31

• To have security given to the lender by the principal obligor applied before the guarantor’s property securing the obligation is resorted to;32

• To have the guarantor’s obligations reduced so as to be neither larger in amount nor more burdensome in those of the principal;33

• To the disclosure of information regarding the financial condition of the principal obligor known to the lender if (1) the lender has reason to believe that such information materially increases the risk beyond that which the guarantor intends to assume; (2) the lender has reason to believe that the facts are unknown to the guarantor; and (3) the lender has a reasonable opportunity to communicate the facts to the guarantor;34

• To notice, as a debtor, of any intended sale of personal property collateral securing the guaranteed obligations,35 which right cannot be waived prior to the occurrence of a default; and

• To have personal property collateral securing the guaranteed obligation disposed of in a commercially reasonable manner.36

Each of the foregoing rights, as well as the right of the guarantor to be exonerated under circumstances described below, generally can be waived by the guarantor and therefore the guaranty should contain an adequate and specific waiver of each of these guarantor rights.

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E. Enforcement of Guaranties

Unlike letters of credit, a lender’s enforcement of the guaranty is not usually a quick and easy process. Absent voluntary compliance by a guarantor with the lender’s demand (an infrequent occurrence), the lender must bring a legal action under the guaranty in order to recover from the guarantor. Unless for some reason the lender has failed to cause the guarantor to waive its right to require that the lender proceed first against the real property collateral, the lender should have the right to proceed first against the guarantor under the guaranty; proceed first against the real property collateral by judicial or non-judicial foreclosure; or proceed against both the guarantor and the real property collateral concurrently.

If the lender is fortunate enough to hold a full repayment guaranty from a financially capable guarantor, the lender may first want to pursue the guarantor before exercising any rights with respect to the real property collateral. However, in jurisdictions in which foreclosure by power of sale or other “short form” is permitted, the lender will usually want to proceed against the real property collateral either first or concurrently with any action taken against the guarantor. Where foreclosure is by judicial action, the lender may be obliged to join the guarantor as a necessary party in such legal proceeding.

In most cases, the lender will probably foreclose nonjudicially against the real property collateral and thereafter proceed against the guarantor under the guaranty for any shortfall. The lender should be entitled to proceed in this fashion, absent the lender’s failure to obtain an effective waiver of any election-of-remedy defense the guarantor may have in states such as California which have one-action and/or antideficiency laws.37

Regardless of any difficulties in ultimately realizing upon a guaranty, guaranties do have considerable value. This is true because guaranties impose personal liability upon a “real person”, usually a principal in the borrower. Especially where a loan has been made to a single-asset entity, if the borrower or the property encounter financial difficulties, the borrower may not have a strong motivation to work with the lender and may merely “walk away” and give the property back to the lender. This is probably not the case where a principal in the borrower has personal liability under a guaranty; there, the lender should have more success in getting the borrower’s cooperation.

F. Guarantor Issues (Non-Bankruptcy)

One of the principle issues with respect to guaranties is the potential for exoneration of a guarantor (i.e., discharge of the guarantor from liability under the guaranty). A guarantor may be exonerated if, without the guarantor’s consent, the original obligation of the principal is altered in any respect; the remedies or rights of a guarantor against the principal are in any way impaired or suspended; the guarantor is prejudiced by a failure of the creditor to proceed against the principal, or to pursue any

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other remedy not in the guarantor’s power; or the lender violates any of the guarantor’s rights set forth above. Most of the exoneration defenses can be effectively waived by the guarantor in advance. Regarding alterations, the lender should require that, in the guaranty, the guarantor consent in advance to alterations of the guaranteed obligations; in some cases, such consents have been upheld.38 However, the lender should never rely upon an advance consent and instead should obtain the guarantor’s separate written consent to any material modification of the guaranteed obligations.

In some cases, a guaranty of a mortgage loan has been held to be a “sham guaranty” and therefore unenforceable. This result would only occur where the borrower is entitled to certain legal protections that do not extend to a guarantor, such as the protections afforded by California’s one-action rule and antideficiency statutes. In those cases, the nominal “guarantor” is actually the borrower or liable for the borrower’s obligations, and the protections to which the borrower is entitled are not allowed to be circumvented by having those obligations separately guaranteed. For example, the general partner of a partnership is liable for the partnership’s obligations; therefore, a guaranty by a general partner of a partnership borrower’s loan would not be recognized as a separate guaranty obligation. Similarly, if an entity borrower is used for the sole purpose of permitting the lender to obtain personal guaranties of parties who would otherwise have been borrowers, the court may find that the loan was impermissibly structured in that way so as to avoid the protections to which the borrower/guarantors are entitled.39

Completion guaranties present issues of enforceability. It may be difficult to enforce specifically the guarantor’s agreement to complete the improvements because the lender may be held to have an adequate damage remedy. However, the lender may have difficulty recovering the cost to complete the improvements, and may be limited to a remedy measured by the property value as completed. In addition, the lender may either have to make undisbursed loan proceeds available to the guarantor or deduct their amount from its damages.

To the extent that the lender releases all or a portion of the real property collateral for less than equivalent value, a guarantor could argue that this action impermissibly increased the guarantor’s burden with respect to the loan. The lender’s release of the borrower or another guarantor from liability for the loan could provide a guarantor with a similar defense. These kinds of guarantor defenses can and should be waived in the guaranty.

Problems can also arise with respect to guaranties where a lender fails to recognize that some agreement or undertaking is either a guaranty or provides a party with guarantor’s rights. For example, in a mortgage or deed of trust given by a party who is not the borrower and is not otherwise personally liable on the secured obligations, the mortgagor, grantor or trustor should be required to waive guarantor’s rights in the mortgage or deed of trust. Similarly, a party other than the borrower executing an

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environmental or other indemnity agreement in favor of the lender for the benefit of the borrower should also be required to waive such guarantor’s rights. The lender’s failure to require the waiver of guarantor’s rights in any agreement which could conceivably be construed to be a guaranty could have serious consequences for the lender’s attempts to enforce that agreement.

G. Certain Bankruptcy Issues

The automatic stay imposed by Section 362 of the Bankruptcy Code prevents the lender from giving any notice required to accelerate the loan and declare all amounts immediately due and payable. The lender will nevertheless want to be able to pursue the guarantor for the entire amount of the guaranteed obligations. To make that intent clear, the lender should consider including language in the guaranty to the effect that, notwithstanding the fact that the lender may be prevented by applicable law from accelerating the guaranteed obligation, the lender is entitled to demand, and receive, from the guarantor the entire amount of the guaranteed obligations.

The lender (especially if the guaranteed obligation is unsecured or undersecured) will not always be entitled to the payment of interest that would have accrued on the guaranteed obligation after the commencement of bankruptcy proceedings with respect to the borrower. The lender should therefore consider including in the guaranty a provision entitling the lender to recover from the guarantor interest that would have accrued (and other costs, such as attorneys’ fees, that would have been payable) absent bankruptcy proceedings.

As discussed above, sometimes transfers of property or collateral to the lender can be avoided in a bankruptcy proceeding as preferences (or fraudulent transfers). The guaranty should therefore include a provision to the effect that, notwithstanding payment in full of the loan and/or termination of the guaranty, the guaranty will be revived and reinstated in the event that the lender is obligated to return any payment or collateral by reason of a bankruptcy proceeding affecting the borrower.

Even at this late date, some lenders believe that the so-called “Deprizio” case has some vitality.40 In that case, the court held that a lender holding an insider guaranty was subject to a one year, rather than ninety day, preference period. In response to Deprizio, in 1994 Congress amended the Bankruptcy Act to provide, in Section 550(c), that a trustee could not recover from a transferee that is not an insider for transfers made between ninety days and one year before the bankruptcy filing. Although, given the expansive definition of the term “transfer” under the Bankruptcy Code, this amendment would appear to have settled the issue, some lenders believe that it does not clearly address the parties’ rights with respect to a transfer other than a cash payment, such as the grant of a lien on collateral. The reasoning is that, if such a transfer is avoided, there is not a “payment” to be recovered from the guarantor.

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Notwithstanding the foregoing, lenders still generally take guaranties from “insiders” if warranted by the mortgage financing transaction, although lenders also still require waivers of subrogation and reimbursement rights.

H. Impact of Revised Article 9

The borrower’s rights under a guaranty executed for the borrower’s benefit by another party rarely form part of the collateral for a mortgage loan. Therefore, the recent revisions to Article 9 of the UCC have little impact in the guaranty context. A borrower’s guaranty rights are, like letter of credit rights, a supporting obligation that can be pledged as an incident of its collateral. Otherwise, a security interest in such rights is perfected in the same manner as for other general intangibles - generally by filing a financing statement in the borrower’s state of organization.41

1 UCC § 5-102(a)(10). References in this discussion to the Uniform Commercial Code or “UCC” are to the version contained in Uniform Commercial Code (U.L.A.) Articles 5 or 9 (2001), as applicable.

2 UCC § 5-112(a). 3 UCC § 5-102(a)(11). 4 UCP Article 4; UCC § 5-108(a). 5 UCP Article 3 (the issuer’s “undertaking . . . is not subject to claims or defenses

by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary”); UCC § 5-103(d) (“Rights and obligations of an issuer to a beneficiary . . . are independent of the existence, performance or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it. . . .”).

6 UCC § 5-109. 7 UCC § 5-108(a); Paramount Export Co. v. Asia Trust Bank Ltd., 193 Cal. App.

3d 1474, 1480; Kerr-McGee Chemical Corp. v. FDIC, 872 F.2d 971 (11th Cir 1989). 8 UCC § 5-108(b); UCP Article 14(d). 9 UCP Article 14(d)(ii). 10 UCC § 5-110(a)(2). 11 11 U.S.C. § 362.

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12 11 U.S.C. § 547. 13 Section 547 of the Bankruptcy Code provides that certain preferential transfers

of a debtor’s assets made within ninety days prior to the filing of a bankruptcy petition are avoidable (i.e., they must be returned to the debtor). With certain exceptions, a voidable preference consists of any transfer of money or property made by a debtor to or for the benefit of a creditor on account of an antecedent debt if (i) the debtor was insolvent at the time of the transfer, and (ii) the transfer permitted the creditor to receive more than it would have received in a bankruptcy liquidation of the debtor. The term “transfer” includes the granting of security interests. 11 U.S.C. § 101(54).

14 In re Air Conditioning Inc. of Stuart, 845 F.2d 293, 296 (11th Cir. 1998). 15 11 U.S.C. § 547(c)(l). 16 Committee of Creditors Holding Unsecured Claims v. Koch Oil Company (In re

Powerine Oil Company), 59 F.3d 969 (9th Cir. 1995). 17 UCC § 9-102(a)(77). 18 UCC §§ 9-312(b)(2), 9-314. 19 UCC § 5-112. 20 Kopolow v. P.M. Holding Corp., 900 F.2d 1184 (8th Circuit 1990). 21 Western Security Bank v. Superior Court, 15 Cal. 4th 232 (1997). 22 In re PPI Enterprises (U.S.), Inc. 228 B.R. 339 (1998). 23 Cal. Civ. Code § 2787. 24 Cal. Civ. Code § 2792. 25 Cal. Civ. Code § 2800. 26 Cal. Civ. Code § 1431. 27 Cal. Civ. Code § 2845. 28 Cal. Civ. Code § 2845. 29 Cal. Civ. Code § 2847. 30 Cal. Civ. Code § 2848.

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31 Cal. Civ. Code § 2849. 32 Cal. Civ. Code § 2850. 33 Cal. Civ. Code § 2809. 34 Sumitomo Bank of California v. Iwasaki, 70 Cal. 2d 81 (1968). 35 Former UCC § 9-504. 36 Former UCC § 9-504(3). 37 Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968). 38 Stevenson v. Oceanic Bank, 223 Cal. App. 3d 306 (1990). 39 River Bank America v. Diller, 38 Cal. App. 4th 1400 (1995). 40 Levit v. Ingersoll Rand Financial Corp., 874 F.2d 1186 (7th Cir. 1989). 41 UCC §§ 9-301, 9-307.

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