A common commercial loan package includes a mortgage on the corporate borrower’s real estate and guarantys from the principals of the business. If the borrower defaults, the lender can initiate foreclosure proceedings against the property; it can immediately pursue a money judgment against the guarantors while the foreclosure continues.

Under Wisconsin’s foreclosure procedures statute, § 846.103(2), Wis. Stats., upon entry of a judgment of foreclosure, the borrower has six months to pay what is owed in order to redeem the commercial property. The statute also provides that the lender may shorten the redemption period to three months. To do that, the lender must waive any claim against “every party who is personally liable for the debt secured by the mortgage.” This is commonly referred to as “waiving a deficiency claim.” Lenders often exercise their rights to waive the deficiency claim in order to obtain a quicker sale, since the borrower usually has no additional means of paying off a deficiency.

But what about guarantors? Are they “personally liable for the debt secured by the mortgage,” and thereby released from liability for the debt if the lender waives the deficiency claim against the borrower?

The Wisconsin Supreme Court recently declared that exercising rights to obtain a shorter redemption period does not affect the lender’s rights against guarantors. In Bank Mutual v. S.J. Boyer Construction Inc. et al.[1], the Wisconsin Supreme Court rejected a Court of Appeals decision that guarantors are released if the lender opts to shorten the redemption period.

Bank Mutual (the “Bank”), represented by Quarles & Brady LLP, filed a foreclosure lawsuit against its borrower, Boyer Construction, Inc., in which it waived its right to a deficiency claim against the company to gain a shorter redemption period. In the same lawsuit, the Bank sued Steven and Marcy Boyer, who had personally guaranteed the Bank’s loans to Boyer Construction. Steven and Marcy unsuccessfully argued to the trial court that the Bank’s waiver of its right to a deficiency claim applied to them as guarantors. But then, in a published opinion, the Court of Appeals reversed the trial court and agreed with Steven and Marcy that the Bank’s waiver of its right to a deficiency claim against Boyer Construction effectively waived any claims against them as guarantors as well. The Court of Appeals said that they became “personally liable for the debt secured by the mortgage,” when they signed their guarantys.

The practical effect of the Court of Appeals decision was that lenders would not exercise the right to shorten the redemption period in order to preserve rights against guarantors. As a result, the foreclosure process would be longer and more expensive.

The Wisconsin Supreme Court reversed the Court of Appeals and held that guarantors do not fall within the statute, so there could be no waiver of rights against them. Lenders may waive rights to a deficiency judgment against borrowers and shorten the redemption period without jeopardizing their claims against guarantors.

The Supreme Court reached this conclusion on several grounds. The phrase “personally liable for the debt” has traditionally been understood in a foreclosure context to differentiate between the borrowers’ liability under the note and the mortgagor’s liability as to the foreclosed property. For example, on a nonrecourse note nobody is “personally liable for the debt,” but the mortgagee may still foreclose on the property. Guarantor liability is not addressed in that context. The liability of a guarantor arises not from the note, as is the case with the borrower, but rather from a separate guaranty contract. And, statutes in other states have been construed to protect only borrowers, not guarantors.

The Boyer decision benefits guarantors as well because the foreclosure process is shortened and made less costly. Having an earlier foreclosure sale means the loan will be reduced sooner, as will the guarantor’s exposure.

The Boyer decision is also of interest for what it did not decide. Bank Mutual had argued throughout the case that even if the guarantor was released based on § 846.103(2), the guarantor was still on the hook under the express provisions of the guaranty contract. The guaranty contract was in a form typically used by lenders and contained numerous waivers of rights and defenses. But, the Supreme Court declared that it did not need to reach the issue of whether the terms of a guaranty contract trumped the foreclosure statute since a guarantor does not fall within the statute in any event.

The refusal of the Supreme Court to comment on the relationship between the guaranty contract terms, and the statute underscores the need for lenders to make sure their guaranty contract forms contain terms that preserve as many rights of lenders against guarantors as are available. Doing so will, in turn, preserve a lender’s contract waiver argument when the issue is again presented to the courts, albeit involving a different statute.