In a recent decision, Horizon Bank N.A. v. Marshalls Point Retreat LLC, No. 2016AP832, 2018 WI 19 (Mar. 6, 2018), the Wisconsin Supreme Court sent lenders a warning – be cognizant of the language used in guaranties, as an instrument for protection against defaults, as well as the language used in proposed stipulated judgments entered in a foreclosure proceeding. Specifically, the Court considered whether Wis. Stat. § 846.165 requires a circuit court to determine the amount of a guaranty credit at the time the foreclosure sale is confirmed, and whether a circuit court has the discretion to decouple guaranty-related rulings from underlying foreclosure sales.

In Horizon Bank, Plaintiff Horizon Bank, National Association (Horizon Bank) loaned $5 million to Marshalls Point Retreat LLC (Marshalls Point), secured by a mortgage on property (Property). Allen Musikantow, a member of Marshalls Point (the guarantor), signed a continuing guaranty of payment for the loan. After Marshalls Point had defaulted on the loan, Horizon Bank brought a foreclosure action against it and pursued a claim for a money judgment against the guarantor in the same proceeding under the terms of the guaranty.

The parties stipulated to the entry of judgment on both of Horizon Bank’s claims, including to the entry of the money judgment against the guarantor in excess of $4 million. In addition, the stipulation provided that “[t]he amount paid to [Horizon Bank] from the proceeds of said sale of the [Property] … shall be credited by [Horizon Bank] as payment on said monetary judgment.” At the sheriff’s sale, Horizon Bank bought the Property for a credit bid of $2.25 million. After Horizon Bank moved to confirm the sale, neither Marshalls Point nor the guarantor objected to the confirmation of sale; however, they both requested the circuit court to insert the language in the order protecting the guarantor from being bound to the amount of the winning bid as the amount of the credit. The circuit court granted Horizon Bank’s motion to confirm the sale. Yet, the circuit court declined to rule on the credit to be applied toward the judgment against the guarantor.

On appeal, Horizon Bank argued that the stipulation between the parties controlled the amount of the credit to be applied toward the judgment. The Wisconsin Court of Appeals agreed and remanded the matter back to the circuit court with the direction to amend the money judgment against the guarantor by applying a sole credit of $2.25 million.

The Wisconsin Supreme Court reversed the decision of the Court of Appeals. The Supreme Court began its analysis by considering the plain language of Wis. Stat. § 846.165(2) and concluded that the statute does not apply to a judgment obtained against a third-party guarantor. The Supreme Court noted that the statute states that confirmation of sale cannot occur until the circuit court “is satisfied that the fair value of the premises sold has been credited on the mortgage debt, interest and costs.” Accordingly, the Supreme Court concluded, Wis. Stat. § 846.165 does not apply to credits toward a judgment on a guaranty—it applies only to the relationship between a mortgagee and mortgagor who signs a promissory note and does not require a circuit court to make a determination of a guaranty credit at the time a foreclosure is confirmed.

The Supreme Court further held that when an action for foreclosure against a mortgagor and an action for a money judgment on a guaranty are brought in the same proceeding, the circuit court may, in its discretion, decide the amount of a credit to be applied to a judgment on a guaranty either at the time the sale is confirmed or at another time.

Finally, the Supreme Court held that the stipulation between the parties did not establish that the amount of the winning bid at the sheriff’s sale shall be the sole credit toward the money judgment against the guarantor. The Supreme Court noted that the parties’ stipulation was ambiguous as to the amount of the total credit. Accordingly, the Supreme Court reversed the decision of the Court of Appeals and remanded the case to the circuit court for further proceedings to determine the amount of the credit to be applied toward the judgment against the guarantor.

Practical Advice to Lenders

Given the Supreme Court’s ruling in Horizon Bank, lenders utilizing guaranties as an instrument for protection against defaults should carefully evaluate the language of the guaranties they use, as well as any proposed stipulated judgments they enter into. Any ambiguity in guaranties or stipulations for judgment may undermine the protections lenders seek to receive by obtaining guaranties or by stipulating to judgments of foreclosure. For example, the lender in Horizon Bank could have possibly avoided the unfavorable outcome had its guaranty or the stipulation with the guarantor stated that the guarantor was entitled to be credited only for the amount of proceeds of collateral received at a foreclosure sale.