Opinion ID: 2214876
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Heading: Personally liable for the debt secured by the mortgage

Text: ¶ 39 We now define the phrase personally liable for the debt secured by the mortgage used in Wis. Stat. § 846.103(2). We acknowledge that, read according to its common and ordinary meaning, the phrase does not clearly exclude guarantors. Thus, reasonable people could read the language to cover the Boyers. Nonetheless, it is clear to us that the phrase personally liable for the debt is a term of art that must be given its legal meaning. See Estate of Matteson, 309 Wis.2d 311, ¶ 22, 749 N.W.2d 557. We conclude that, by using the phrase personally liable for the debt, the legislature intended to use the phrase's specific legal meaning and did not intend it to encompass guarantors who guarantee a debt through a contract separate from the note creating the debt. ¶ 40 We reach this conclusion for three reasons. First, the phrase personally liable has traditionally been used to distinguish the borrower's liability, which is a personal obligation based upon the note, from the mortgagor's liability, which is an obligation limited to the property named in the mortgage that is provided as security for the note. Second, a guarantor's liability has traditionally been treated as separate and distinct from the liability of the borrower, contingent on the terms of the guaranty. Third, other states with statutes insulating borrowers from deficiency judgments have generally refused to extend those protections to guarantors.
¶ 41 In the context of foreclosure law, the term personally liable for the debt has traditionally been used to distinguish liability on the note, which is a personal obligation, from liability on the mortgage, which is an obligation limited to the property given to secure the debt. Thus, the phrase explains that a deficiency judgment can be obtained against a mortgagor only if that mortgagor is also liable on the underlying debt. ¶ 42 The use of the phrase personally liable for the debt to distinguish the borrower's liability on the note from the mortgagor's liability on the mortgage is illustrated by Farmers & Merchants Bank v. Matsen, 219 Wis. 401, 263 N.W. 192 (1935). In Matsen, the bank began an action to collect the amount due on a note, and the borrower raised the defense that a foreclosure action was already pending. Id. at 401, 263 N.W. 192. This court framed the issue as: Does the fact that an action is pending for the foreclosure of a mortgage and for a judgment for a deficiency constitute a defense to a subsequent action commenced by the same plaintiff, demanding judgment on the obligation secured by the mortgage against those personally liable thereon? Id. at 402, 263 N.W. 192. ¶ 43 The court began by noting that deficiency judgments were not available at common law. Id. at 403, 263 N.W. 192. It added that the Wisconsin foreclosure statutes permitted a plaintiff in a foreclosure action also to seek a deficiency judgment. Id. The court explained the relationship between this statutory scheme and the common-law rule: When a deficiency judgment is entered in a foreclosure action, it is a final adjudication of the defendant's commonlaw liability for the debt. There is in reality but one judgment, the judgment of foreclosure. The so-called deficiency judgment is merely a completion of the judgment upon the coming in and confirmation of the report of sale. Id. The court further noted that the deficiency statute merely permits a combination of two causes of action, one upon the note, and one for foreclosure, with certain restricting provisions. Id. Thus, it concluded, the lender was not required to seek a deficiency judgment, but once the lender put the note in suit and asserted a personal liability against the defendants, he may not again assert that liability in a separate action at law. Id. at 403-04, 263 N.W. 192 (emphasis added). ¶ 44 Matsen clearly demonstrates the purpose of the phrase personally liable for the debt secured by the mortgage in Wis. Stat. § 846.04. The statute unites an action in equity on the foreclosure with an action in law on the debt. Thus, it erases the common-law distinction that separated a legal action on the mortgagor's personal liability from an equitable action on the foreclosure itself. [10] With the passage of Wisconsin's deficiency statute, what normally would have been pursued in a court of lawan action to hold the party personally liablecould now be pursued together with the foreclosure action. [11] ¶ 45 In Glover v. Marine Bank of Beaver Dam, 117 Wis.2d 684, 345 N.W.2d 449 (1984), this court again addressed the distinction between a mortgagor's obligation to provide security and a borrower's personal liability on the underlying debt. In Glover, the mortgagee was given four mortgages on five properties to secure two notes. Id. at 686, 345 N.W.2d 449. The Glovers argued that because the bank foreclosed on only some of the mortgages, waiving its right to go after the Glovers personally for any deficiency, it actually extinguished the underlying debt. Id. at 690, 345 N.W.2d 449. The court rejected that argument, holding that this theory confuses the historical distinction between the two separate elements of the real estate mortgagethe debt itself and the mortgage acting as security for the debt. Id. at 695, 345 N.W.2d 449. Although by statute these two causes of action could be brought together, the court concluded that the historically separate treatment of the two elements controls in our interpretation of sec. [846.101]. Id. ¶ 46 The distinction explained in Glover is further explained by the approach to personal liability taken by the Restatement (Third) of Property: A mortgage is a conveyance or retention of an interest in real property as security for performance of an obligation. A mortgage is enforceable whether or not any person is personally liable for that performance. Restatement (Third) of Property: Mortgages § 1.1. Thus, the Restatement explains, parties may agree to nonrecourse or limited recourse mortgages, which preclude or limit personal liability. Id., § 1.1 cmt. It goes on to explain: If personal liability is entirely excluded by the parties' agreement, the effect is to restrict the mortgagee's remedy for nonperformance to foreclosure of the mortgage. Such a restriction or exclusion of personal liability does not impair the enforceability of the mortgage by means of foreclosure, but it does limit or bar the mortgagee's access to both a personal judgment prior to foreclosure and a deficiency judgment following foreclosure. Id. ¶ 47 This language suggests that the phrase personally liable for the debt pertains to those situations in which the borrower may be held personally liable for a debt beyond the foreclosure on any property that has been mortgaged as security for the debt. It supports our conclusion that personally liable is a term of art used to distinguish the borrower's liability, which is a personal obligation, from the mortgagor's liability, which is an obligation limited to the property used to secure the note (debt). ¶ 48 Our Wisconsin analysis is supported by the approach Illinois courts have taken on the subject. In City of Chicago v. Chatham Bank of Chicago, 54 Ill.App.2d 405, 203 N.E.2d 788 (1964), the Illinois Appellate court interpreted a statute that permitted a deficiency judgment against the persons indicated as being personally liable. Id. at 793. The court concluded that Illinois law clearly prohibited a deficiency judgment against the guarantor, and that a guarantor's liability could be enforced only through a separate action brought in a court of law rather than a court of equity. Id. ¶ 49 In reaching this conclusion, the court relied on the traditional rule regarding deficiency judgments: There is a clear and marked distinction between the power of a court of equity to decree mortgage foreclosures and its power to enter personal deficiency judgments. Id. at 792 (quoting Schnur v. Bernstein, 309 Ill.App. 90, 32 N.E.2d 675, 678 (1941)). It noted that a court in equity had jurisdiction over foreclosure by its equity powers, but had authority over deficiency judgments only by virtue of statute. Id. Thus, the appellate court concluded: Had the legislature so intended they could very easily with apt words have expressed their intention to make guarantors liable for a deficiency judgment in a foreclosure action. Id. at 793. ¶ 50 The approach taken in Chatham illustrates the traditional distinction between the equitable nature of the foreclosure and the legal nature of the deficiency. See also Mortgage Syndicate, Inc. v. Do & Go Equipment, Inc., 7 Ill.App.3d 106, 286 N.E.2d 520 (1972). ¶ 51 A similar distinction is encompassed by Wis. Stat. § 846.04, which permits a deficiency judgment within the foreclosure action only against parties personally liable for the debt secured by the mortgage. Wis. Stat. § 846.04(1). Under § 846.04(1), the court shall order judgment for deficiency in the original judgment and separately render it upon confirmation of sale. Id. In other words, upon confirmation of sale, a deficiency judgment against the borrower automatically follows a successful foreclosure action by operation of law, entirely from within the foreclosure action itself. However, under § 846.04, a judgment against a guarantor does not automatically follow a foreclosure judgment. It must be brought as a separate legal cause of action, as was done in the instant case. Thus, while a mortgagee may bring a claim against a guarantor as part of the same legal proceeding, it must bring a separate cause of action and separately prove the guarantor's liability on the contract of guaranty. ¶ 52 In sum, the phrase personally liable for the debt has traditionally been used in foreclosure law to distinguish the borrower's liability on the debt, which is a personal obligation, from the mortgagor's liability, which is an obligation limited to the property used to secure the debt. Because Wis. Stat. §§ 846.04 and 846.103 use this term of art familiar to the law of mortgages, we decline to expand the statute's scope beyond the traditional legal meaning of the phrase.
¶ 53 Our conclusion that the phrase personally liable for the debt secured by the mortgage does not include guarantors of payment is further supported by the principle that a guarantor's liability arises not from the debt itself, but from a separate guaranty contract. Therefore, although guarantors of payment are personally liable for some amount according to the terms of their guaranty contract, they are not personally liable for the debt secured by the mortgage. ¶ 54 Wisconsin law treats the liability of a guarantor as separate and distinct from the liability of the borrower, arising not from the debt itself but from the terms of the guaranty contract. In Continental Bank & Trust v. Akwa, 58 Wis.2d 376, 206 N.W.2d 174 (1973), a guarantor raised certain affirmative defenses based on provisions of the Uniform Commercial Code (UCC). This court, relying on a provision of the UCC stating that [n]o person is liable on [a negotiable] instrument unless his signature appears thereon, Wis. Stat. § 403.401, explained: [The plaintiff] is not proceeding on the Akwa-Downey notes but upon a breach of the contract of guaranty. . . . [A]n action to enforce the liability of the guarantor must be in the form of an action for damages for a breach of the contract of guaranty, and not an action upon the underlying indebtedness. While the affirmative defenses . . . may be fatal to plaintiff's cause of action, if he were proceeding upon the instruments, they are not necessarily fatal to plaintiff's cause of action upon its separate and independent contract of guaranty with the defendants. Id. at 387, 206 N.W.2d 174. ¶ 55 The reasoning in Akwa directly supports our conclusion that guarantors are not personally liable for the debt secured by the mortgage under Wis. Stat. § 846.103(2). It articulates a clear rule that guarantors are liable only according to the terms of their contracts, and are not liable for the debt itself. [12] This principle is codified in the phrase personally liable for the debt secured by the mortgage. We see no reason to believe that this language encompasses parties whose liability arises from an independent contract of guaranty. ¶ 56 This conclusion is further supported by Kramer. In Kramer, as in this case, a corporation executed a mortgage and two individuals guaranteed the amount of the underlying debt. Kramer, 74 Wis.2d at 209, 246 N.W.2d 536. The bank foreclosed and brought a separate action against the guarantors for the deficiency. Id. The defendants argued that the suit against them personally was not timely until an appeal of the foreclosure judgment was resolved. Id. This court held that no efforts to collect from the . . . corporation or to foreclose under the mortgage were necessary as a prerequisite to enforcing the primary liability of these guarantors under their individual guaranties of payment. Id. at 212, 246 N.W.2d 536. We relied on the distinction between a guaranty of collection and a guaranty of payment to conclude that the bank was entitled to pursue the guarantors under a guaranty of payment regardless of what steps were currently being taken to foreclose. Id. at 215, 246 N.W.2d 536. ¶ 57 The Kramer case did not address whether the defendants, as guarantors, were parties personally liable for the debt secured by the mortgage, and could have been included in the foreclosure action on the deficiency judgment. Nonetheless, the case stands for the proposition that guarantors' liability arises from the guaranty contract, not from the debt secured by the mortgage. ¶ 58 In this case, the court of appeals reasoned, applying Kramer, that the Boyers were personally liable for the debt secured by the mortgage because they were primarily liable for the debt. It concluded that [b]ecause they were principal obligors and primarily liable for the debts secured by the mortgages, it follows that the Boyers were `personally liable for the debts secured by the mortgages,' under Wis. Stat. § 846.103(2). Bank Mutual, 316 Wis.2d 266, ¶ 16, 762 N.W.2d 826. ¶ 59 We disagree. The court of appeals' reasoning confused terms. Boyer Construction was personally liable for the debt secured by the [five] mortgage[s]. It was also primarily liable for the debt as it was directly responsible for it. See Black's Law Dictionary 933 (8th ed.2004) (primary liability is [l]iability for which one is directly responsible, as opposed to secondary liability.). By contrast, Steven and Marcy Boyer were neither personally liable nor primarily liable on the debt because they did not sign the notes secured by the mortgages. However, Steven and Marcy Boyer signed the guaranty, a separate contract. They were personally liable on this contract of guaranty and primarily liable on it because they signed the guaranty. The Boyers also were primarily liable on the guaranty in a temporal sense because Bank Mutual did not have to wait for a foreclosure on the mortgages to proceed personally against the Boyers. See Kramer, 74 Wis.2d at 212, 246 N.W.2d 536. ¶ 60 The early Wisconsin cases discuss the distinction between a guarantor of collection and guarantor of payment. As we see it, however, when a guarantor's liability arises from a completely separate contract of guaranty, the guarantor is not personally liable for the debt secured by the mortgage and, in such a case, neither a guaranty of payment nor a guaranty of collection comes within the scope of the redemption statute. [13] A mortgagee may proceed on a guaranty of payment upon a different timeline than it may proceed on a guaranty of collection. In neither case, however, is the guarantor liable for the debt secured by the mortgage; rather, the guarantor is liable for what he or she agreed to in the guaranty. ¶ 61 The Boyers also argue that the phrase nor separately rendered in Wis. Stat. § 846.103 expands the scope of that statute to include guarantors who are liable on a separate document. This phrase, however, merely keeps the language of Wis. Stat. § 846.103(2) consistent with that of Wis. Stat. § 846.04(1), which permits a deficiency judgment to be ordered in the original judgment and separately rendered against the party liable. A court may order a deficiency judgment in the original foreclosure judgment, but cannot actually render the deficiency judgment until after the sale is confirmed. Glover, 117 Wis.2d at 695, 345 N.W.2d 449. [14] The phrase separately rendered, in § 846.103(2) underscores the fact that a deficiency judgment may not be rendered in the foreclosure following a shortened redemption period, nor separately rendered later. It does not refer to a guarantor against whom action may be taken in a separate suit or claim on the guaranty. [15]
¶ 62 Our conclusion that a guarantor's liability under a guaranty of payment arises independent of the debt secured by the mortgage is supported by courts in other states interpreting their anti-deficiency statutes. Anti-deficiency statutes are statutes enacted to limit the rights of secured creditors to recover in excess of the security. Black's Law Dictionary 918 (8th ed.2004). Anti-deficiency statutes may prohibit the mortgagee from obtaining a deficiency in certain situations, such as when the sale is by power of foreclosure, the sale purchaser is the mortgagee, or the property is a purchase money mortgage. [16] ¶ 63 Although states have a wide variety of anti-deficiency legislation with a wide variety of statutory language, courts have generally refused to extend to guarantors the protection of such statutes. [17] This general pattern is illustrated by Bank of Kirkwood Plaza v. Mueller, 294 N.W.2d 640 (N.D.1980), where the defendants unconditionally guaranteed any obligation on a loan from a bank to a corporation. Id. at 641. The bank foreclosed, did not seek a deficiency judgment, and brought a separate suit against the guarantors. Id. at 642. The North Dakota Supreme Court was asked to interpret a statute that permitted mortgagees to seek a deficiency judgment against parties personally liable for that part of the debt. Id. at 643. The guarantors sought protection of the statute, which limited recovery in a deficiency judgment to the difference between the amount of the debt and the fair market value of the land. Id. at 642. ¶ 64 The court first distinguished an earlier case in which a party, who was not on the mortgage, had signed the note and was therefore personally liable on the debt. Id. at 643. The court then noted that the liability in the current case was not based on obligations imposed by the notes or the mortgages given to secure the notes, but on a separate and distinct contract of guaranty. Id. The liability, although it may result in requiring a guarantor to pay the note, is not predicated upon `the terms of the instrument,' but upon a contract entirely separate and distinct. Id. (quoting Northern State Bank v. Bellamy, 19 N.D. 509, 125 N.W. 888, 890 (N.D.1910)). The court declined to extend the scope of the anti-deficiency statutes beyond that which is clear from the statute. Id. (citing Fetzer v. Minot Park District, 138 N.W.2d 601 (N.D.1965)). Finally, concluding that the liability of the guarantors derives wholly from the guaranty agreement, the court proceeded to determine liability based on the terms of the agreement. Id. at 643-44. ¶ 65 The Mueller court's inquiry into who was personally liable for that part of the debt is similar to the underlying issue in this case. Like the statute interpreted in Mueller, Wis. Stat. § 846.103(2) applies only to those parties personally liable for the debt. Like the guarantors in Mueller, the Boyers were not liable according to the terms of the note, but rather were liable according to the terms of a wholly separate and distinct contract of guaranty. ¶ 66 Although Mueller is relevant because of the similarity in language between the North Dakota statute in that case and the language of Wis. Stat. § 846.103(2), other courts have reached similar conclusions based on different statutory language. They have refused to extend anti-deficiency protections on the same grounds on which the court in Mueller based its decision: namely, that a guarantor's liability arises not from the debt but from a separate guaranty contract. [18] Because this principle applies to § 846.103(2) as well, we find the interpretation of anti-deficiency statutes in other states persuasive in our interpretation of § 846.103(2).