Wisconsin Supreme Court Addresses Loan Guaranty Issue

September 14, 2018

In a foreclosure case involving loan guarantors, one key issue is what value will be assigned to the mortgaged real estate for application against the guarantor’s liability.  The Wisconsin Supreme Court (“Court”) addressed procedural aspects of the value determination in a March 6, 2018 decision.

In this case, the Court addressed the procedure for determination of the value of mortgaged real estate for application to a money judgment against a guarantor of a loan.  The loan was secured by a mortgage which was foreclosed by the lender.  The property was sold at a sheriff’s sale and purchased by the lender through a credit bid.  The Circuit Court confirmed the foreclosure sale based on the credit bid and indicated there would be further proceedings on the question of application of the property value to the guaranty liability.  The lender objected to further proceedings as to the value to be applied to the guaranty and appealed to the Court of Appeals.  The Court of Appeals directed the Circuit Court to apply a credit of $2.25 million to the money judgment obtained against the guarantor as the sole credit amount for the value of the property that would be applied to the guaranty debt.  This precluded the circuit court from hearing additional evidence as to the value of the property for purposes of the guaranty.  The guarantor appealed.

The guarantor argued that the Court of Appeals should not have limited the credit applied to the guaranty to the amount of the winning bid at the sheriff’s sale.  The guarantor wanted the circuit court to hear additional evidence of the fair value of the property after confirmation of the foreclosure sale.  The guarantor argued that Wis. Stat. Sec. 846.165 does not require the Circuit Court to make a determination of a guaranty credit for the property value at the time the foreclosure sale was confirmed and that the Circuit Court has the discretion to decouple the determination as to the guaranty from the foreclosure action.  Wis. Stat. Sec. 846.165 is the statute which provides that in the event mortgaged premises sell for less than the amount due on the mortgage debt there is no presumption that the premises sold for their fair value and the sale is not confirmed until the court is satisfied that the fair value of the premises sold has been credited on the mortgage debt.

The court held that Wis. Stat. Sec. 846.165 only applies to the mortgagor-mortgagee relationship and does not require a circuit court when confirming a foreclosure sale to also determine at that time the amount to be applied to a guaranty.  The court further held that where an action for a money judgment on a guaranty is brought with a foreclosure action the circuit court may decide the amount of a credit to be applied to a judgment on a guaranty either at the time the sale is confirmed or at another time.  The court noted that the guarantor’s liability under a guaranty does not arise from the guaranteed debt itself (between borrower and lender) but from a separate contract between the lender and guarantor – the guaranty.  The Court also observed that while the amount applied as a credit in the mortgagor-mortgagee relationship is subject to a “shock the conscience” standard under Wis. Stat. Sec. 846.165, the amount to be applied to a guaranty is based on the particular terms of the guaranty.

As a result of this case, we will likely see more guarantors seek additional proceedings on the value of foreclosed real estate after a foreclosure sale is confirmed given the different standards that apply for foreclosure sale confirmation purposes versus guaranty purposes.  We will also likely see lenders seek to have the circuit court resolve the real estate value questions for purposes of the guaranty at the foreclosure sale confirmation hearing to avoid additional delays.

Additionally, we may also see lenders add a waiver of further value proceedings to their guaranty forms essentially asking the guarantors to agree in advance to accept the confirmation sale value.  However, the enforceability of this type of agreement is unclear.

For more information about "Wisconsin Supreme Court Addresses Loan Guaranty Issue," contact Edward J. Lawton at elawton@axley.com or 262.409.2278.