By Joe Forward, Legal Writer, State Bar of Wisconsin
Aug. 3, 2010 – A mortgagee must waive a right to pursue deficiency amounts when foreclosing under a shortened redemption period, but does not forfeit a right to pursue deficiency amounts from guarantors, the Wisconsin Supreme Court recently held.
In Bank Mutual v. S.J. Boyer Construction, Inc., 2010 WI 74 (July 9, 2010), the supreme court reversed an appeals court ruling that guarantors fall within the category of debtors protected from deficiency judgments when a mortgagee proceeds under a shortened redemption period.
Under Wis. Stat. 846.103(1), a mortgagee (here, Bank Mutual) must wait six months from the foreclosure judgment date to hold a foreclosure sale of commercial properties or multifamily residences. This allows the mortgagor a chance to redeem the property by paying the judgment before the foreclosure sale.
However, section 846.103(2) allows a mortgagee to proceed with a foreclosure sale under a shortened redemption period. Specifically, a mortgagee may proceed with a foreclosure sale after three months from the date of foreclosure judgment if the mortgagee expressly waives judgment for any deficiency amounts against persons “personally liable for the debt secured by the mortgage.”
That is, “no judgment for deficiency may be ordered nor separately rendered against any party who is personally liable for the debt secured by the mortgage” if the mortgagee proceeds under the shortened redemption period.
This anti-deficiency statute is designed to protect the mortgagor/debtor when the right to redeem has been shortened by three months.
In 2000, Steven and Marcy Boyer (the Boyers) personally guaranteed loans paid to S.J. Boyer Construction, Inc. (Boyer Construction) by First Northern Savings Bank, now doing business as Bank Mutual.
In exchange for the personally guaranteed business notes, Bank Mutual made loans totaling $1.4 million to Boyer Construction, and secured the loans with seven mortgages on five properties that Boyer Construction owned.
Boyer Construction defaulted on the notes. Bank Mutual foreclosed on the seven mortgages and filed individual suits against Steven and Marcy Boyer as guarantors of the notes. Bank Mutual stated that it waived any deficiency against Boyer Construction.
The circuit court entered judgments against the Boyers for $1.436 million as guarantors, and entered foreclosure judgments on the five mortgaged properties. The circuit court authorized Bank Mutual to hold a foreclosure sale under section 846.103(2)’s shortened redemption period of three months because Bank Mutual waived deficiency claims against Boyer Construction. Bank Mutual was the only bidder and purchased the properties for $1.18 million. Thus, the Boyers owed a deficiency of about $256,000.
Bank Mutual moved for an order confirming the foreclosure sale and a judgment for deficiency.
Steven Boyer filed a motion for relief from judgment, stating that Bank Mutual elected the shortened redemption period but did not expressly waive deficiency claims against the Boyers, as required by section 846.103(2).
The circuit court held that the guaranty contract provided an “independent basis for the Boyers to be to be liable to Bank Mutual” despite section 846.103(2), which requires a mortgagee to waive deficiency claims against parties “personally liable for the debt secured by the mortgage” if proceeding under the shortened redemption period.
The appeals court reversed, holding that section 846.103(2) precluded Bank Mutual from seeking a deficiency judgment against the Boyers. Bank Mutual petitioned the supreme court.
In an opinion written by Justice David Prosser, the supreme court ruled 4-2 that section 846.103(2) did not preclude Bank Mutual from seeking a deficiency judgment because the guarantee contract provided an independent basis to seek the deficiency amount.
The court examined whether the Boyers, as guarantors, fall within the category of persons “personally liable for the debt secured by the mortgage” that would preclude Bank Mutual from seeking a deficiency judgment under 846.103(2).
The court concluded that the legislature did not intend for the phrase “personally liable for the debt” to encompass guarantors who guarantee a debt through a contract separate from the note creating the debt.
“If Wis. Stat. section 846.103(2) requires a waiver of deficiency against a guarantor, mortgages would be deprived of some of the security they relied upon for their loan,” the court wrote.
Chief Justice Shirley Abrahamson filed a dissenting opinion (Bradley, J. joined), arguing that guarantors do fall within the class of persons “personally liable for the debt” under section 846.103(2), thus requiring the mortgagee to waive deficiency claims against guarantors if proceeding under the shortened redemption period.
“[T]he substantive effect of the guaranty is to render the guarantors personally obligated to pay the debt secured by the mortgage,” Abrahamson wrote. “To say that the judgment sought against the guarantors is not a deficiency judgment would only further elevate form over substance.”
Roy Prange Jr. of Quarles & Brady LLP, Madison, represented Bank Mutual. Philip Danen of Roels, Keidatz, Fronsee & Danen LLP, De Pere, represented SJ. Boyer Construction, Steven and Marcy Boyer.