Mortgage lenders using personal or commercial guaranties as recourse against default should take note of the Wisconsin Supreme Court's decision this Tuesday in Horizon Bank, N.A. v. Marshalls Point Retreat LLC, No. 2016AP832, 2018 WI 19 (Mar. 6, 2018). In that case, amounts owing to Horizon Bank were secured by both a mortgage on real property and a personal guaranty. After the property sold at a foreclosure sale, the guarantor conceded that the amount bid at the sale was sufficient to meet the "fair value" requirement for confirmation of the foreclosure sale under Wisconsin law. However, the guarantor maintained that the amount was less than the fair market value of the property and that he should receive a credit for the fair market value of the property in determining the amount remaining as his obligation on his guaranty. The court agreed with the guarantor.
Guarantor Does Not Oppose Foreclosure, But Wants Credit Amount Left Open
Horizon Bank loaned $5 million to Marshalls Point Retreat LLC, secured by a mortgage on property located in Sister Bay. Allen Musikantow signed a continuing guaranty of payment for the loan. Some time later, alleging that Marshalls Point had defaulted on the loan, Horizon Bank brought a foreclosure action. In the same action, the bank also brought a claim for a money judgment against Musikantow pursuant to the terms of the guaranty.
The parties stipulated to the entry of judgment on both of Horizon Bank's claims. The stipulation contained an order for judgment, which the circuit court signed. A judgment for foreclosure was entered against Marshalls Point and a money judgment was entered against Musikantow as guarantor for $4,045,555.55, the amount of principal and interest remaining on the loan. The parties' stipulation also provided that the Sister Bay property may be sold at a sheriff's sale, and that "the amount paid to [Horizon Bank] from the proceeds of said sale . . . shall be credited by [Horizon Bank] as payment on [the] monetary judgment."
The sheriff's sale was held and Horizon Bank, as sole bidder, won the property for a credit bid of $2.25 million. The question then became what amount should be credited to the judgment against Musikantow. The bank claimed that $2.25 million -- the amount of its credit bid -- represented "fair value" for the property within the meaning of Wis. Stat. § 846.165 (requiring a finding of "fair value" to approve a foreclosure sale), and thus Musikantow should receive a credit in the same amount. Musikantow argued that the property had a market value far greater than the bank's credit bid, but agreed not to challenge a fair value finding for purposes of confirming the sale if the court made clear that the fair value finding had no bearing on the amount of his credit.
The trial court agreed to proceed as Musikantow suggested, confirming the sheriff's sale for fair value but making no determination as to the amount of Musikantow's credit. Horizon Bank appealed, and the court of appeals reversed, ruling that the trial court was required to determine the amount of the credit and that the credit amount should be $2.25 million, the amount of the bank's credit bid.
Supreme Court Agrees With Guarantor: "Fair Value" and Guaranty Credit Are "Separate Questions"
The Wisconsin Supreme Court granted review and, in a 6-1 decision, reversed. In doing so, it clarified two key points of Wisconsin law:
- First, the mortgage foreclosure statutes, including Wis. Stat. § 846.165, do not require trial courts to determine guaranty credit amounts in connection with approving a foreclosure sale. Instead, when an action for foreclosure against a mortgagor and an action for a money judgment on a guaranty are brought in the same proceeding, the courts have discretion to "decouple" the credit determination from the sale approval process and address the credit amount separately.
- Second, and relatedly, the "fair value" amount approved in confirming a foreclosure sale under Wis. Stat. § 846.165 is not necessarily the same as the credit amount to which a guarantor is entitled. Rather, those are "separate questions": the fair value amount is subject to a "shock the conscience" standard under Wisconsin law, but "the amount of a credit to be due on a guaranty is strictly a matter of contract." As a practical matter, this means that unless the guaranty or a stipulated judgment dictates otherwise, guarantors have the opportunity to introduce evidence supporting a credit greater than the "fair value" approved in connection with foreclosure.
Here, the Supreme Court ruled for Musikantow because it found that the parties' stipulation was ambiguous as to whether the bank's credit bid was to be the only credit applied to the judgment. This meant that the Bank's credit bid was instead a "floor" for the amount of Musikantow's credit; the court remanded the action to the trial court to determine what the guarantor's total credit should be.
Lenders: Review Your Form Guaranties
Moving forward, lenders seeking to avoid a similar result should include language in the guaranty to the effect that the Guarantor shall be credited only for the amount of proceeds of collateral actually received at a foreclosure sale. More generally, Lenders should review their form guaranties to ensure they are protected against ambiguity around guarantor credit issues. Otherwise, depending on fact-specific arguments about property value, post-foreclosure recovery against the guarantor may not be guaranteed."