Bank’s Decision To Draw From Letter of Credit Does Not Extinguish Entire Debt Because Debt Was Clearly Not Paid In Full

In this breach of commercial guaranty decision, the Court of Appeals reversed the trial court's grant of a motion for nonsuit in favor of the guarantors.  The basis for the reversal was that the lender's draw on a letter of credit that provided additional collateral for the loan extinguished the borrower's obligation under the loan and the guarantors' obligations under their guaranties.  (Legendary Investors Group No. 1 LLC v. Niemann (March 25, 2014, B245620) 224 Cal.App.4th 1407, 2014 Daily Journal D.A.R. 3766).

The letter of credit contained a provision that required that a draft drawn on the letter of credit state that the amount claimed represents and covers the unpaid indebtedness under the loan including principal, interest, and all charges.  The draft issued by the bank under the letter of credit contained this language.  The trial court concluded that this language extinguished all unpaid indebtedness of the borrower under the loan, that there can be no guaranty without a loan, and that the guarantors' obligations under their guaranties were extinguished along with the borrower's.

The appellate court interpreted the provision in the letter of credit relied on by the trial court in the context of all of the language in the letter of credit and found that it did not necessarily provide for extinguishment of the borrower's indebtedness under the loan.  The appellate court addressed the waiver provisions in the guaranties and found that in any event, the guaranties specifically limited the guarantors' defenses to payment in full of the loan, the loan had not actually been paid in full, and the guarantors were not discharged even if the borrower had been released from liability.


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