[MCLE Self-Assessment Test]

MCLE Self-Assessment Test

April 1988

Answer the following questions after reading the article on letters of credit. Use the answer form provided to send the test, along with a $20 processing fee, to the State Bar. Please allow at least eight weeks for MCLE certificates to reach you in the mail.

1. Prior to the adoption of SB 1612, two California appellate decisions held that a lender was prohibited from recovering against a guarantor or a mortgage insurer following a nonjudicial foreclosure of real estate collateral.

2. Guaranties and mortgage insurance contracts are not suretyship obligations.

3. SB 1612 was adopted in direct response to the 1993 decision of the court of appeal in the Western Security case which was subsequently overturned by the California Supreme Court.

4. SB 1612 provides that a letter of credit is not a suretyship obligation.

5. SB 1612 provides that a draw on a letter of credit following a nonjudicial foreclosure of commercial real estate collateral does not violate CCP §580d.

6. SB 1612 provides that a draw on a letter of credit prior to a judicial foreclosure of commercial real estate collateral violates CCP §726.

7. As a result of SB 1612, some types of consumer purchase money letters of credit are unenforceable.

8. The "independence principle" is embodied in California Commercial Code §5114.

9. The "independence principle" is an important part of the law governing:

10. The "independence principle" generally permits the issuer of a letter of credit to refuse to honor any draw request if the issuer reasonably believes that the beneficiary and the account party are engaged in a dispute.

11. Issuers of letters of credit favor the "independence principle" because it preserves their right to obtain reimbursement from the account party even if they honor a draw request which on its face does not comply with the terms of the letter of credit.

12. Despite the "independence principle," fraud in the transaction may justify an issuer's refusal to honor a draw request which on its face complies with the terms of the letter of credit.

13. SB 1612 strengthened the "independence principle" in California.

14. In the Western Security case, the California Supreme Court held that SB 1612 applies to all letters of credit issued in connection with commercial real estate loans -- regardless of whether they are issued before or after the effective date of the statute.

15. The court in Western Security construed SB 1612 to be a major change in prior law regarding the right to draw on letters of credit backing commercial real estate loans.

16. The Western Security court declared that letters of credit are most analogous to:

17. Under the Western Security decision, whether or not the antideficiency laws restrict the enforcement of a credit instrument generally de-pends on whether the credit instru-ment is a suretyship obligation.

18. The decision in Western Security undermines the view that CCP §580d indirectly prohibits a lender's enforcement of a suretyship obligation following a nonjudicial foreclosure of commercial real estate collateral.

19. Counsel representing lenders should include waivers of both the antideficiency and suretyship defenses in any suretyship obligation given in connection with a real estate-secured loan.

20. If a deed of trust secures a note executed by a party other than the trustor, the deed of trust may be a suretyship obligation.

This activity has been approved for Minimum Continuing Legal Education credit by the State Bar of California in the amount of 1 hour.

The State Bar of California certifies that this activity conforms to the standards for approved education activities prescribed by the rules and regulations of the State Bar of California governing minimum continuing legal education.