Given the current restrictions being placed on lending institutions, it is becoming increasingly difficult for small businesses to obtain the financing necessary to support growth or even sustain their current operations.
Personally Guaranty Loans Survive Foreclosure
In addition to obtaining a mortgage to secure a loan, it is not uncommon for banks to further require small business owners to personally guaranty payment of the note. Those who do personally guaranty loans made to their business should be aware that their obligation may survive foreclosure, and may exist even after the business’s obligation has been extinguished.
Generally speaking, if a business defaults on its loan, the bank will initiate a foreclosure action and attempt to repossess or sell any collateral offered to secure the note.
If the Note is Secured by Real Property a Period of Redemption is Allowed
If the note is secured by real property, in the form of a mortgage, Wisconsin Statutes allow for a period of redemption, after the judgment of foreclosure is issued, to allow the debtor property owner additional time to pay off the judgment debt and retain ownership of the real property.
Period of Redemption Depends on Status of Mortgaged Property
The period of redemption depends on the status of the mortgaged property.
For one to four family, owner-occupied residences, farms, churches, or other tax-exempt charitable organizations, there is a twelve-month redemption period.
For all other property types, there is a six-month redemption period.
Business is Sold at Sheriff’s Sale if It’s Unable to Redeem the Property
If your business is unable to redeem the property, it will be sold at sheriff’s sale. Often, this results in a sale price lower than the appraised value of the property and lower than the amount of the foreclosure judgment.
In such cases, the lender is entitled to a deficiency judgment in an amount equal to the unpaid balance of the loan, which is not covered by the sale of the property.
By law, a lender may shorten the applicable redemption period to six or three months, respectively, by electing to waive its right to a deficiency judgment against any party who is personally liable for the debt secured by the mortgage.
Bank Mutual V. S.J. Boyer Construction, Inc. Case Helps Define the Language Better
In the past, this language has been interpreted to require lenders wishing to shorten the statutory redemption period to waive the right to obtain a deficiency judgment against, in addition to the borrower, all personal guarantors.
At first glance, the common perception is that the phrase “any party who is personally liable for the debt secured by the mortgage”, must include personal guarantors.
However, in its recent decision of Bank Mutual v. S.J. Boyer Construction, Inc., the Wisconsin Supreme Court stated that the legislature intended the phrase “any party who is personally liable for the debt secured by the mortgage” to be defined in accordance with its legal meaning, as opposed to its common and ordinary meaning.
S.J. Boyer Construction Obtained Several Business Loans from Bank Mutual
In Bank Mutual v. S.J. Boyer Construction, Inc., S.J. Boyer Construction, Inc. obtained several business loans from Bank Mutual. Each note was secured by a mortgage on a piece of real property owned by the company. The notes were further secured by the personal guaranties of the company’s owners, Steven and Marcy Boyer.
Boyer Construction Defaulted On Loans, Bank Mutual Foreclosed on Mortgages
When Boyer Construction defaulted on the loans, Bank Mutual foreclosed on the mortgages issued to secure the notes. In favor of a shorter redemption period, Bank Mutual elected to waive its right to a deficiency judgment. In turn, the mortgaged properties were sold at sheriff’s sale three months from the date of entry of the foreclosure judgment.
Boyer Construction Believed that Obligations Were Extinguished
Giving the statutes their common meaning, the Boyer’s assumed that their obligations under the personal guaranties they signed were extinguished when Bank Mutual waived its right to seek a deficiency judgment.
The Boyer’s Are Actually Liable for the Debt Arising out of the Personal Guaranty
Instead, the court awarded Bank Mutual a deficiency judgment against the Boyer’s, individually. In its decision, the court stated that the liability of a personal guarantor arises from a separate contract than the mortgage. Therefore, guarantors are not members of the class of persons against whom a lender must waive judgment when invoking a shorter redemption period. The legal meaning of the phrase, “any party who is personally liable for the debt secured by the mortgage”, does not include personal guarantors because they are not liable for the debt secured by the mortgage. Only the borrower, in this case Boyer Construction, is liable for that debt. The Boyer’s are liable for the debt arising out of their personal guaranty, which is a separate contract.
This case illustrates the importance of fully understanding the ramifications of an obligation before you enter into it. If you are considering a transaction wherein you will be required to personally guaranty payment of a loan on behalf of your business, or if you have already executed a personal guaranty and your business is in danger of defaulting on the loan, you may want to seek the advice of legal counsel to keep you fully informed of what may lie ahead.