Norman D. Farnam
The Wisconsin Supreme Court has ruled that a circuit court may “decouple” the confirmation of a winning bid at sheriff’s sale in a foreclosure action from the determination of the debt owed by a guarantor. Horizon Bank v. Marshall Point Realty, LLC, et al., 2018 WI 19. The Supreme Court determined that the foreclosure statute does not apply to the relationship between the lender and a guarantor even when a guarantor is made part of the foreclosure action. Therefore, the circuit court could make the confirmation determination and the guarantor-credit determination separately.
When a lender files a foreclosure suit on a mortgagor’s property, the lender often brings money judgment claims against the guarantors of the mortgagor’s debt in the same suit. The lender will obtain a foreclosure judgment which starts the redemption period running and might get a money judgment against the guarantors at the same time. At the end of the redemption period, the lender will take the property to sheriff’s sale. The lender must then ask the circuit court to confirm the winning bid at the sheriff’s sale pursuant to §846.165, Wis. Stats. Before the Horizon Bank case, if the winning bid at the sheriff’s sale was insufficient to cover the entire debt, the guarantor would typically be given a credit for the bid amount and remain liable for the rest.
The Horizon Bank case progressed through the foreclosure process in the ordinary manner, with a foreclosure judgment entered against the mortgagor and a money judgment entered against the guarantor. The lender took the property to sheriff’s sale and was the winning bidder at $2.25 million. The unpaid note balance exceeded $4 million. The lender submitted the winning bid to the court for confirmation and the bid was confirmed. The mortgagor and guarantor did not oppose the confirmation but did not want the winning bid to establish the amount of the remaining debt on the guarantee. They claimed that the real fair market value of the foreclosed property significantly exceeded the outstanding debt. The circuit court declined to rule on the amount of credit the guarantor was entitled to receive.
On appeal, the Court of Appeals reversed, directing the circuit court to give the guarantor a credit in the amount of the winning bid. The Supreme Court reversed, concluding that the foreclosure law does not apply to guarantors.
The Horizon Bank case changes the foreclosure process in two ways. First, it establishes that the confirmability of a winning bid at sheriff’s sale and any resulting deficiency are different than the guarantor’s debt and are determined by different criteria. The standard for determining whether a winning bid should be confirmed as representing the “fair value” of the foreclosed property is whether the bid is so low that it “shocks the conscience” of the court. A bid that is significantly less than the assessed or appraised value of the foreclosed property might be confirmed under this standard, particularly if the lender has waived its right to a deficiency judgment against the borrower for the difference between the amount of the debt and the amount of the bid. For instance, the Court of Appeals has recently confirmed a bid at 55% of fair market value. On the other hand, “the amount of credit to be due on a guarantee is strictly a matter of contract.” Because the standard for confirming a winning bid at sheriff’s sale is different than the determination of credits on a guarantee, any shortfall remaining after crediting the successful bid amount does not necessarily establish the remaining debt owed by the guarantor.
The second change to the foreclosure process resulting from the Horizon Bank case is that because confirmation and guarantor liability have been “decoupled,” the circuit court need not determine the guarantor’s credit at the time of confirmation. For instance, the circuit court might hold a second evidentiary hearing on the guarantor’s liability, extending the length and cost of the action.
Although Horizon Bank might signify a departure from the way attorneys are accustomed to litigating foreclosure and guarantor actions in Wisconsin, the outcome of the case is not only predictable but is consistent with past Wisconsin Supreme Court jurisprudence. In 2010, the Court heard the case of Bank Mutual v. S.J. Boye Construction, Inc., et al., 2010 WI 74, and decided that a lender’s waiver of its right to a deficiency judgment against the borrower in favor of a shortened redemption period did not affect the lender’s rights against the guarantor. The rationale of both cases is the same – the rights and obligations of guarantors do not fall within the foreclosure statute, but are instead governed by the terms and conditions of the guarantee.
It is difficult to predict the impact of the Horizon Bank case on future actions. Perhaps it will merely result in procedural changes in foreclosure actions where separate determinations must be made on the confirmation of the sale and on the credit to the guarantor. However, Horizon Bank might have much bigger implications. For instance, it might be possible for a guarantor to argue that a winning bid that does not “shock the conscience” would nevertheless be an insufficient credit to the guarantor under the guarantee. Likewise, it might be possible for a guarantor to argue that when the lender is the winning bidder and subsequently sells the lender-owned property for a higher price than was bid, the guarantor is entitled to the credit for lender’s sale price instead of the sheriff’s sale price.
Because the answer to these questions will be governed by the specific terms and conditions of each guarantee, it is hard to predict what will happen in any given case. Lenders might consider re-examining their guarantee language to safeguard against these uncertainties.
If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at email@example.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.