Opinion ID: 2219026
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Heading: Guaranty Limitations

Text: Partners contend that after a mortgagor's default, a mortgagee may sue the guarantors of the mortgagor's debt, but the recovery is limited to the difference between the amount owed and the fair market value of the mortgaged real estate if the mortgagee does not first foreclose on the real estate. In First Interstate Bank of Fargo v. Larson, 475 N.W.2d 538 (N.D.1991), we held that the anti-deficiency statute, NDCC § 32-19-07, applies to general partners who guaranty their partnership's notes which are secured by a mortgage. Because a general partner's guaranty is not a separate obligation from the underlying note, the general partner's liability is not founded on the guaranty, but on the note itself. Therefore, a mortgagee suing on a general partner's guaranty after the partnership's (mortgagor's) default, is subject to the rights and limitations enumerated in the anti-deficiency statute. Larson would have been dispositive of this appeal, but we specifically held that its application would be applied prospectively only. As the mortgage, note, and guaranties were signed by Partners in 1985, Larson, decided in 1991, has no bearing on their case. Larson, supra, at 545 citing State v. Klein, 63 N.D. 514, 249 N.W. 118 (1933) [The rights and obligations of contracting parties cannot be altered by subsequent legislation or judicial decision.]. In 1985, the law with respect to the liability of general partners as a result of their guaranties of the partnership's mortgage, was controlled by the Court's decision in Mandan Sec. Bank v. Heinsohn, 320 N.W.2d 494 (N.D.1982) overruled by Larson, supra . In Heinsohn, the majority of this Court held that a general partner who personally guaranteed payment of a partnership note secured by a mortgage, changed the nature of the partner's obligation on the debtand as a result the partner was not only jointly liable on the note, but was jointly and severally liable on the guaranty. Because the liability of the general partner on the guaranty was not founded on the underlying note secured by the mortgage, the anti-deficiency statute did not preclude recovery on the individual guaranty and the creditor could collect on the guaranty without first foreclosing on the real property. See also Bank of Kirkwood Plaza v. Mueller, 294 N.W.2d 640 (N.D.1980) [shareholder's personal guaranty of corporation's note secured by mortgage was a separate and distinct obligation as opposed to their obligations as shareholders, so creditor not bound by anti-deficiency statute and may sue on guaranty without first foreclosing]. [1] Partners' reliance on Stewart v. Henning, 481 N.W.2d 230 (N.D.1992) and First Nat'l Bank & Trust of Williston v. Ashton, 436 N.W.2d 215 (N.D.1989) is misplaced. In Ashton, individuals executed a promissory note secured by a mortgage and simultaneously executed personal guaranties on the mortgage debt. Upon default, the mortgagee sued the individuals on their personal guaranties, and we concluded that the individuals had not executed guaranties as defined under section 22-01-01, NDCC, because the signers were both the principal debtors and guarantors. Therefore, the anti-deficiency statutes were applicable. In Partners' case, Partners were not the principal debtors on the mortgage under the majority holding in Heinsohn. In Stewart, two shareholders, as individuals, and a corporation executed a promissory note in favor of Stewart. The corporation, as security for the note, gave Stewart a mortgage on real property and a security interest on personal property. After default on the promissory note, Stewart sued the individuals for its balance. The notes were secured by a mortgage on real property and a security interest on personal property. Relying on First State Bank of Cooperstown v. Ihringer, 217 N.W.2d 857 (N.D.1974), we held that a creditor may proceed against the personal property or the real property in no particular order. Because the shareholders were not mortgagors, the creditor could also proceed on the debt before foreclosing on the properties, but if that option is taken, the anti-deficiency statute, NDCC § 32-19-07, limited the creditor's recovery to the difference between the amount due on the note plus cost and the fair market value of the property as determined by a jury. Stewart is factually inapposite to Partners' case. Partners guaranteed the partnership's note, the guaranties were separate obligations from the note, and so the anti-deficiency statutes do not apply. Applying the law at the time the contract was entered into, Partners' obligation of repayment is not founded on the note, but on their personal guaranties. Heinsohn, supra . Therefore, the anti-deficiency statutes do not apply to this action, and Norwest is not bound by their limited options upon the default of the mortgagor. See NDCC § 32-19-07; Ihringer, supra . Norwest is free to collect the entire amount guaranteed jointly and severally by Partners without first resorting to foreclosing on the real estate, and without limiting its recovery to the difference between the fair market value of the real estate and the amount due on the note.