Boardman Law Firm LLP—Banking Group

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Wisconsin Supreme Court Issues Decision on Foreclosure, Waiver of Deficiency and Guarantors

On July 9, 2010, the Wisconsin Supreme Court issued its opinion in Bank Mutual v. S. J. Boyer Construction Co. The primary issue in this case was whether, under the Wisconsin statutes, a lender's election to waive its right to a deficiency judgment in exchange for a shorter redemption period precludes the lender from seeking payment in full from a guarantor. The Wisconsin Court of Appeals decided that if a bank waives its right to a deficiency judgment in order to shorten the redemption period, that bank cannot seek payment from guarantors. This meant that a lender had to choose between a shorter redemption period and enforcing its guarantees. The Wisconsin Supreme Court disagreed. The opinion is important and beneficial for banks engaged in commercial and real estate lending, particularly loans to corporations, LLCs or partnerships secured by real estate and guaranteed by the principals of the company.

Wisconsin’s procedure for mortgage foreclosures involves a foreclosure judgment, followed by a period of redemption, the sale of the mortgaged property at sheriff’s sale, and finally confirmation of the sale by the court. The lender can seek a deficiency judgment against the borrower if the sale is for less than the amount of the foreclosure judgment. The period of redemption is twelve months for one to four-family owner-occupied residences, farms, churches, or property owned by tax-exempt nonprofit charitable organizations. For all other properties, the period of redemption is six months. Provided the borrower has agreed in writing at the time of the execution of the mortgage, the lender can shorten the redemption period to six months for one to four-family owner-occupied residences, farms, churches, or property owned by tax-exempt nonprofit charitable organizations and to three months for all other types of property by agreeing to waive the right to a deficiency judgment against “every party who is personally liable for the debt secured by the mortgage."

In Bank Mutual, the bank made five construction loans to Boyer Construction Co. The loans were guaranteed by Steven and Marcy Boyer. The loans were secured by real estate mortgage liens on properties owned by Boyer Construction. After default, the bank commenced a foreclosure action against Boyer Construction and an action on the guaranty against the Boyers. Using Wisconsin's procedure for shortening the redemption period, the bank waived any claim for deficiency against Boyer Construction and elected a three month redemption period. Judgment was granted on the guaranty against the Boyers. When the property was sold at sheriff's sale, the guarantors (the Boyers) argued that the bank had waived any deficiency claim against them by electing the shortened redemption period. The Court of Appeals agreed, holding that under Wisconsin's waiver of deficiency procedure, the guarantors were also released from further obligation once the bank elected the shortened redemption period. The Court of Appeals' rationale was that the Boyers, in their capacity as guarantors, were "personally liable" for the Boyer Construction debt secured by the mortgage. Therefore, when the bank waived its right to a deficiency judgment against "every party who is personally liable for the debt secured by the mortgage," it waived its right to enforce its guaranty against the Boyers.

The Wisconsin Supreme Court reversed the Court of Appeals. The Supreme Court held that the Boyers’ guaranty was a separate contract, and therefore the Boyers were not parties " personally liable for the debt secured by the mortgage.” This means that the bank did not waive its right to seek a judgment against the Boyers on their guaranty.

This decision has significant practical impact for banks. Commercial real estate lending is typically made to corporate borrowers, and commercial real estate loans are usually secured by real estate mortgages and guaranteed by the principals of the company. The Court of Appeals’ decision forced banks to choose between a shorter redemption period and enforcement of the guaranties. Typically that would mean choosing a longer redemption period. As a result of the Bank Mutual decision, banks no longer have to make that choice. Banks can elect a shorter redemption period by waiving a right of deficiency against the borrower company (which usually has no assets which have not been pledged already to the bank), sell the mortgaged property at a sheriff's sale, and still obtain judgment against the guarantors.

• A copy of the Supreme Court decision can be obtained here: Supreme Court Foreclosure Decision.