CREDIT SUPPORT IN MORTGAGE FINANCING TRANSACTIONS LETTERS ...
CREDIT SUPPORT IN MORTGAGE
FINANCING TRANSACTIONS —
LETTERS OF CREDIT AND GUARANTIES
CREDIT SUPPORT IN MORTGAGE FINANCING TRANSACTIONS —
LETTERS OF CREDIT AND GUARANTIES
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
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.
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
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
Credit make them an increasingly important part of the lender’s collateral in a mortgage
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
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
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
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
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.
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
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
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
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
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
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
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.
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
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
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.
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
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
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
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
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
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
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.
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,
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
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
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
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
• 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
• 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-
• 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
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
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
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
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
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
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.
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
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.
UCC § 5-112(a).
UCC § 5-102(a)(11).
UCP Article 4; UCC § 5-108(a).
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. . . .”).
UCC § 5-109.
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).
UCC § 5-108(b); UCP Article 14(d).
UCP Article 14(d)(ii).
UCC § 5-110(a)(2).
11 U.S.C. § 362.
11 U.S.C. § 547.
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).
In re Air Conditioning Inc. of Stuart, 845 F.2d 293, 296 (11th Cir. 1998).
11 U.S.C. § 547(c)(l).
Committee of Creditors Holding Unsecured Claims v. Koch Oil Company (In re
Powerine Oil Company), 59 F.3d 969 (9th Cir. 1995).
UCC § 9-102(a)(77).
UCC §§ 9-312(b)(2), 9-314.
UCC § 5-112.
Kopolow v. P.M. Holding Corp., 900 F.2d 1184 (8th Circuit 1990).
Western Security Bank v. Superior Court, 15 Cal. 4th 232 (1997).
In re PPI Enterprises (U.S.), Inc. 228 B.R. 339 (1998).
Cal. Civ. Code § 2787.
Cal. Civ. Code § 2792.
Cal. Civ. Code § 2800.
Cal. Civ. Code § 1431.
Cal. Civ. Code § 2845.
Cal. Civ. Code § 2845.
Cal. Civ. Code § 2847.
Cal. Civ. Code § 2848.
Cal. Civ. Code § 2849.
Cal. Civ. Code § 2850.
Cal. Civ. Code § 2809.
Sumitomo Bank of California v. Iwasaki, 70 Cal. 2d 81 (1968).
Former UCC § 9-504.
Former UCC § 9-504(3).
Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968).
Stevenson v. Oceanic Bank, 223 Cal. App. 3d 306 (1990).
River Bank America v. Diller, 38 Cal. App. 4th 1400 (1995).
Levit v. Ingersoll Rand Financial Corp., 874 F.2d 1186 (7th Cir. 1989).
UCC §§ 9-301, 9-307.