§ 580.5.Obligation Secured By Mortgage Or Deed of Trust and Also Supported By Letter of Credit

Title 8. Of the Trial and Judgment In Civil Actions · Chapter 1. Judgment in General · Last amended 1997 · Last verified July 28, 2026

In one sentenceSection 580.5 provides that when a letter of credit backs an obligation already secured by a mortgage or deed of trust, drawing on, honoring, or seeking reimbursement for that letter of credit -- before or after foreclosure -- doesn't count as an action against the security or as a deficiency judgment under the anti-deficiency statutes.

Full Text of § 580.5

Text sizeJump to: (a) (b)

(a) For purposes of this section:

(1) "Beneficiary" means a "beneficiary" as defined in paragraph (3) of subdivision (a) of Section 5102 of the Commercial Code.

(2) "Issuer" means an "issuer" as defined in paragraph (9) of subdivision (a) of Section 5102 of the Commercial Code.

(3) "Letter of credit" means a "letter of credit" as defined in paragraph (10) of subdivision (a) of Section 5102 of the Commercial Code whether or not the engagement is governed by Division 5 (commencing with Section 5101) of the Commercial Code.

(b) With respect to an obligation which is secured by a mortgage or a deed of trust upon real property or an estate for years therein and which is also supported by a letter of credit, neither the presentment, receipt of payment, or enforcement of a draft or demand for payment under the letter of credit by the beneficiary of the letter of credit nor the honor or payment of, or the demand for reimbursement, receipt of reimbursement or enforcement of any contractual, statutory or other reimbursement obligation relating to, the letter of credit by the issuer of the letter of credit shall, whether done before or after the judicial or nonjudicial foreclosure of the mortgage or deed of trust or conveyance in lieu thereof, constitute any of the following:

(1) An action within the meaning of subdivision (a) of Section 726, or a failure to comply with any other statutory or judicial requirement to proceed first against security.

(2) A money judgment for a deficiency or a deficiency judgment within the meaning of Section 580a, 580b, or 580d, or subdivision (b) of Section 726, or the functional equivalent of any such judgment.

(3) A violation of Section 580a, 580b, 580d, or 726.

End

Plain-English Summary

Lenders sometimes require a letter of credit as extra assurance on top of a mortgage or deed of trust. This section addresses what happens when that letter of credit gets drawn on. Whether the beneficiary presents a draft for payment, or the issuer honors it and seeks reimbursement, none of that activity — whether it happens before or after the underlying property is foreclosed — counts as an "action" against the security within the meaning of § 726's one-action rule, or as a failure to proceed first against the security.

It also doesn't count as a deficiency judgment, or the practical equivalent of one, under §§ 580a, 580b, or 580d, or under § 726's own deficiency provisions. And drawing on or honoring the letter of credit isn't treated as a violation of any of those anti-deficiency statutes either.

In effect, this section keeps a letter of credit functioning as a separate, independent form of credit support — distinct from the mortgage or deed of trust itself — so that using it doesn't trigger the procedural traps and substantive bars that apply to pursuing the real property security.

Frequently Asked Questions

Does drawing on a letter of credit count as pursuing the mortgage security first?

No. Section 580.5 says presenting, paying, or enforcing a letter of credit isn't an "action" within the meaning of § 726(a) or a failure to proceed first against the security.

Is honoring a letter of credit treated as collecting a deficiency judgment?

No, it isn't treated as a deficiency judgment, or its functional equivalent, under §§ 580a, 580b, 580d, or § 726(b).

Does it matter whether the letter of credit is drawn before or after foreclosure?

No. Section 580.5 applies whether the presentment, payment, or reimbursement happens before or after the judicial or nonjudicial foreclosure, or a deed in lieu of foreclosure.

Amendment History

Amended by Stats. 1996, Ch. 176, Sec. 2. Effective January 1, 1997.

Source & verification. Section text is reproduced verbatim from the California Legislative Information. Enacted by the California Legislature. Last verified July 28, 2026. · Official source

Also known as: letter of credit mortgage security californialetter of credit deficiency judgment california