Dealing with Guarantors During Foreclosure Proceedings
A recent Wisconsin appellate court decision provides some lessons for creditors when dealing with guarantors of mortgages during the foreclosure process. In various circumstances, Wisconsin law allows a creditor the option to shorten the debtor’s redemption period in return for agreeing not to go after the “debtor” for any “deficiency” after the sale of the real estate (i.e. if a property sells for less than the amount due the creditor, the creditor has no right to go after debtor personally for the difference). In Bank Mutual v. S.J. Boyer Constr., 2009 WI App 14 (filed 23 Dec. 2008) (ordered published 28 Jan. 2009), the creditor bank attempted to take advantage of this option and also sue the guarantors of the debtor directly for the entire amount due the creditor bank. The circuit court concluded WIS. STAT. § 846.103(2) did not prohibit judgment against the guarantors because the guaranty was a separate contract.
The appellate court analyzed the guarantee and concluded “[a]s guarantors of payment, the Boyers were principal obligors on the guaranteed debts and primarily liable for the payment of those debts. Because they were principal obligors and primarily liable for the debts secured by the mortgages, it follows that the Boyers were "personally liable for the debts secured by the mortgages" under WIS. STAT. § 846.103(2). As a result, Bank Mutual could not reap the benefit of a shorter redemption period under WIS. STAT. § 846.103(2) and obtain judgment for a deficiency against the Boyers. See WIS. STAT. § 846.103(2). The court also noted that Bank Mutual would have been free to sue the Boyers directly on the contract and wait to foreclose on the property.
At least two lessons can be gleaned from this case assuming a creditor is fortunate enough to have guarantors of a mortgage have deep pockets. First, and most obvious, make sure not to opt for a shorter redemption period if you are relying on a guarantor of a mortgage for full payment. Alternatively, depending on the circumstances, a creditor may want to think about suing the guarantor directly on the guarantee and begin collection action against the guarantor and his/her/its other property. If that does not prove successful, creditor can then pursue the foreclosure action at a later date.
