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Divorce Does Not Cancel Guaranty

Norman D. Farnam

Jennifer M. Luther

June 1, 2017

The Wisconsin Court of Appeals recently held in Bank Mutual v. Sherman, No. 2015AP2357 (May 17, 2017) (per curiam), that an ex-husband’s guaranty of his then-wife’s debt was still enforceable against him after the couple’s divorce. Daniel Bohringer argued that his guaranty was not enforceable because his ex-wife, Carol Sherman, became a “different legal entity” after she and Bohringer divorced and she subsequently remarried. The Court of Appeals disagreed and concluded that Bohringer’s guaranty was enforceable.

Background

In 2005, while Bohringer and Sherman were married, Bohringer executed continuing guarantees of Bank Mutual’s extensions of credit to Sherman. The guarantees obligated Bohringer to make payments for financial “obligations” “arising out of credit previously granted, credit contemporaneously granted, and credit granted in the future by [Bank Mutual] to any Debtor.”

The couple divorced in 2010. After the divorce, Sherman entered into further notes with Bank Mutual. Bohringer did not receive notice of and did not consent to the post-divorce notes. Sherman subsequently defaulted on a 2012 note.

In 2014, Bank Mutual foreclosed upon and sold commercial property securing the note. Following the foreclosure, the bank executed on Bohringer’s farm to collect a $52,947 deficiency for which Bohringer was liable pursuant to his guaranty. Bohringer had been awarded the farm in the divorce.

Bohringer moved the circuit court to stay the execution of Bank Mutual’s judgment upon his farm. The circuit court declined to stay the execution. The circuit court held that Bohinger was liable on his guaranty and that the farm was not an exempt homestead. Bohringer appealed.

Court of Appeals Decision

On appeal, Bohringer argued that his guaranty was not enforceable because Sherman became a “different legal entity” after the divorce and her subsequent remarriage. However, as the Court of Appeals points out, Bohringer failed to cite to any authority to support this novel legal theory.

The Court noted that the guaranty was a contract between Bohringer and Bank Mutual, which was separate and distinct from Sherman’s liability to the bank. The Court held that the guarantor’s liability is governed by the language of the guaranty. The Court found nothing ambiguous about the language of the guaranty.

The guaranty that Bohringer signed stated that it “shall continue in full force and effect notwithstanding any change in structure or status of Debtor, whether by merger, consolidation, reorganization or otherwise.” The guaranty states, “You are being asked to guarantee the past, present and future obligations of Debtor [i.e., Sherman]. If Debtor does not pay, you will have to.”

The Court found the fact that Bohringer and Sherman were husband and wife at the time that Bohringer signed the guaranty to be of little consequence. The guaranty stated that it was “a complete and exclusive statement of its terms” and “intended [by the parties] as a final expression of this Guaranty.” The Court held that the facts of the case, specifically, Sherman and Bohringer’s divorce, did not relieve Bohringer of his contractual liability to Bank Mutual. The Court of Appeals concluded that Bohringer’s guaranty was enforceable.

Bohringer also argued that his farm was his homestead and, therefore, exempt from execution. The Court of Appeals similarly rejected this argument. The Court concluded that the record supported the circuit court’s finding that the farm was not Bohringer’s homestead as that term is defined in the Wisconsin Statutes.

Key Takeaways

One apparent takeaway from Bank Mutual v. Sherman is that a guarantor should read and understand the terms and scope of any continuing guaranty agreement that he or she is asked to sign. Guaranty agreements are often written broadly, and discharging the obligations contained in a guaranty may prove difficult.

In the context of a divorce proceeding, the parties may want to consider canceling any continuing guarantees in order to avoid the type of situation that resulted in the Sherman case. However, keep in mind that canceling a guaranty may result in the loan being called up for payment.

Of course, the lessons of Bank Mutual v. Sherman are not limited to divorce. The same considerations should be given for continuing guaranty agreements in business relationships. Language may vary from guaranty to guaranty, but Sherman is clear that courts will enforce the unambiguous language of a guaranty. Bottom line:  it is important for any guarantor to understand the specific provisions of the guaranty he or she has signed.


If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at nfarnam@stroudlaw.com or Jennifer Luther at jluther@stroudlaw.com or (608) 257‑2281 or your Stroud attorney.

 DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.