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Foreclosure Update: Fair Value Determination; Liability of Guarantor
In a Door County foreclosure case involving a personal guaranty, the Wisconsin Supreme Court will decide whether a stipulated judgment signed by the bank, the borrower, and the guarantor (and accepted by the court) governs the value of the foreclosed property to be credited against the guaranty. In Horizon Bank, N.A. v. Marshalls Point Retreat, LLC and Allen Musikantow, the parties entered a stipulated judgment of foreclosure. The stipulation provided that the amount of the winning bid at the foreclosure sale would be credited against the guaranty, with the remaining balance, if any, being reduced to a monetary judgment against the guarantor.
The amount owing under the loan was $4,045,555. The amount of the winning bid at the sheriff’s sale was the bank’s partial credit bid of $2,250,000. In Wisconsin, where the bank (as in this case) does not seek a deficiency judgment against the borrower, there is a presumption that the winning bid represents the property’s fair value. See Bank of New York v. Mills, 678 N.W.2d 332 (Wis. 2004). The guarantor stated at the confirmation hearing, however, that he had a witness prepared to testify that the value of the foreclosed property could be as high as $10,000,000 (which, if believed and if sufficient to overcome the presumption of fair value, could eliminate any remaining obligation under the guaranty).
The loan documents contained confusing or contradictory provisions which created some doubt (at least in the guarantor’s mind) concerning which court should take the case and which law to apply (Wisconsin, Indiana, Florida, or Federal). The guarantor opted not to put on his purported valuation testimony at the confirmation hearing because he felt that the question of the application of the bid amount against his guaranty was “more likely to be litigated” in a non-Wisconsin court. The circuit court judge apparently accepted this view and confirmed the sheriff sale for $2,250,000, but left unresolved the question of the amount of the guarantor judgment, at least until “the federal court kicks this back to me to make a decision.” No federal case was brought.
The bank appealed to the Wisconsin Court of Appeals, arguing that the circuit court should have entered the guarantor judgment. The appellate court agreed, concluding that the circuit court had proper jurisdiction to decide the question and, further, that because the guarantor failed to enter any evidence at the confirmation hearing to establish a higher value (and ultimately did not argue against the confirmation of the sale for the amount of the winning bid), the court’s confirmation of the $2,250,000 bid established the fair value for the property and that such value should be properly applied to the guaranty (in accordance with the agreement of the parties set forth in their stipulated judgment), resulting in a definitive amount remaining owed by the guarantor equal to $1,795,555.
The Wisconsin Supreme Court has taken an appeal of this decision, so we will see whether the supreme court views the case any differently than the court of appeals. To avoid the uncertainty and expense created under these facts, banks and borrowers should ensure that they have thought through the possible effect of the governing law and choice of venue provisions typed in their loan document forms. For more information regarding this case, or to contact a Wisconsin banking attorney, please contact Attorney Andrew Bosshard at Bosshard | Parke Ltd.