In its July 9, 2010 decision in Bank Mutual v. S. J. Boyer Construction, Inc. (2008AP912), the Wisconsin Supreme Court rules that a mortgage holder who elects to foreclose on a mortgage using a shortened redemption period does not forfeit the right to obtain a judgment against a guarantor of the underlying mortgage debt. While the lender cannot proceed against the borrower for any deficiency due, the lender can still collect from the guarantor on the guaranty.
State foreclosure statutes allow for two different redemption periods – a longer one of twelve months (for a one-to four-family owner-occupied residence, a farm, a church, or a tax-exempt nonprofit charitable organization) or six months (for all other properties), and a shorter redemption period of six or three months, respectively. If the mortgage holder (the “mortgagee”) elects the shorter redemption period, then the mortgagee waives a deficiency judgment against “every party who is personally liable for the debt secured by the mortgage.” In Bank Mutual, the Court concludes that the phrase “personally liable for the debt” is a term of art that must be given its legal meaning, and that the term is not intended to include guarantors who guarantee a debt through a contract separate from the note creating the debt.
The key to continued guarantor liability is a contract of guaranty separate from the mortgage note whose terms permit recovery even when the original borrower has no further liability for the underlying debt. A guarantor’s liability on a contract of guaranty is based upon the terms of that guaranty, and is treated as distinct from the liability of the borrower. The guarantor is liable on the guaranty contract, not on the underlying note or other obligation, and therefore the deficiency limitation of the shortened redemption period does not apply.
This clarification of the foreclosure statute allows lenders to take advantage of a shortened redemption period without losing the right to collect on a guaranty unrestricted by the “anti-deficiency” language of the foreclosure law.