Opinion ID: 987954
Heading Depth: 2
Heading Rank: 3

Heading: Guaranty Principles

Text: ¶79 The rights and obligations of a guarantor are separate and distinct from those of the debtor, as the guarantor's obligations arise from the terms of the guaranty contract. Bank Mut. v. S.J. Boyer Constr., Inc., 2010 WI 74, ¶54, 326 Wis. 2d 521, 785 N.W.2d 462 (explaining that a guarantor's rights and obligations are set by contract). One may guarantee the debts of an individual, as well as the debts of a corporation. The legal principles that apply to a guarantor's rights and obligations are based on the terms of the guaranty contract, not on the nature of the debtor. See McFarland State Bank v. Sherry, 2011 WI App 4, ¶1, 338 Wis. 2d 462, 809 N.W.2d 58. ¶80 Under the facts of this case, the Westburgs' obligations under the guaranty contract do not involve consideration of their status as shareholders.8 Rather, in this action, it is the terms of the guaranty contract upon which the validity of Park Bank's actions and the Westburgs' counterclaims depend. Bank Mut., 326 Wis. 2d 521, ¶54. 7 Majority op., ¶¶54-55. 8 The significant legal question that escapes review under the facts of this case is: whether the Westburgs could have relied on a judgment from a successful derivative claim as a defense to Park Bank's claims under the guaranty contracts. Because the Westburgs did not follow the statutory requirements for bringing a derivative claim, we cannot address this question. 5 No. 2010AP3158.pdr ¶81 The guaranty the Westburgs signed is a guaranty of payment.9 Under a guaranty of payment, when the debtor is in default, the creditor is entitled to enforce collection from the guarantor without first seeking collection from other sources. Bank of Sun Prairie v. Opstein, 86 Wis. 2d 669, 677-78, 273 N.W.2d 279 (1979). Stated otherwise, a guaranty of payment is a primary, not a collateral, promise to pay when the debtor defaults. Id. at 678. No efforts to collect on other security are necessary before a creditor may enforce a guaranty of payment against a guarantor. First Wis. Nat'l Bank of Oshkosh v. Kramer, 74 Wis. 2d 207, 212, 246 N.W.2d 536 (1976). ¶82 However, a creditor is not permitted to recover from a guarantor for more than the total debt due. Cont'l Bank, 58 Wis. 2d at 389. Therefore, a guarantor of payment is entitled to an offset from the debt owed by the debtor for the amount that the creditor has obtained from other sources. See McFarland State Bank, 338 Wis. 2d 462, ¶31. ¶83 The majority opinion imprecisely states the law when it combines principles for determining who may bring a derivative claim with the rights and obligations of a guarantor. For example, it posits that Whether a guarantor may raise derivative claims individually in an action seeking payment under a guaranty is a question not previously addressed by Wisconsin courts.10 However, our decisions, as well as 9 The majority opinion also concludes that the guaranty the Westburgs signed is a guaranty of payment. Majority op., ¶58. 10 Majority op., ¶45. 6 No. 2010AP3158.pdr Wisconsin Statutes, specifically provide that only a shareholder or a beneficial owner has standing to bring a derivative claim. Krier v. Vilione, 2009 WI 45, ¶29, 317 Wis. 2d 288, 766 N.W.2d 517 (explaining that Krier could not sue on behalf of EOG Environmental because Krier was not a shareholder and therefore, lacks standing to bring a derivative suit); Borne, 266 Wis. 2d 253, ¶15 (stating that [t]he failure to plead that one was a registered shareholder requires the dismissal of derivative claims); Shelstad v. Cook, 77 Wis. 2d 547, 554, 253 N.W.2d 517 (1977) (explaining that [p]laintiff's special relation to the corporation as a stockholder is intrinsic to the very nature of the [derivative claim] and thus a prerequisite to plaintiff's standing to pursue it); see also Wis. Stat. § 180.0741. ¶84 Furthermore, when one is either a shareholder or a beneficial owner, a derivative claim may be brought only when the specific requirements set out in the statutes have been met. Read, 205 Wis. 2d at 565; see also Wis. Stat. §§ 180.0741-.0744 (setting out those requirements). Stated otherwise, unless a person or entity has the status of shareholder or beneficial owner, Wisconsin case law and statutes preclude standing to bring derivative claims. Krier, 317 Wis. 2d 288, ¶¶18, 29; Borne, 266 Wis. 2d 253, ¶15; Read, 205 Wis. 2d at 565; Shelstad, 77 Wis. 2d at 554; § 180.0741. ¶85 The majority opinion's use of Mid-State Fertilizer Co. v. Exch. Nat'l Bank of Chi. (Mid-State II), 877 F.2d 1333 (7th Cir. 1989), is interesting and merits comment for a number of reasons. First, in Mid-State II, the corporation that was 7 No. 2010AP3158.pdr alleged to have suffered injury from Exchange National Bank's actions was a plaintiff and therefore, it proceeded on seven counts alleging injury to itself. Mid-State Fertilizer Co. v. Exch. Nat'l Bank of Chi. (Mid-State I), 693 F.Supp. 666, 669 (N.D. Ill. 1988). Second, the non-corporate plaintiffs, Lasley and Maxine Kimmel, sued as both shareholders and as guarantors. Id. at 668. Third, the standing question in Mid-State II turned on federal statutes that comprise the Bank Holding Company Act (BHCA) and the Racketeer Influenced Corrupt Organizations Act (RICO), which accorded standing to [a]ny person who is injured in his business or property by reason of anything forbidden [under the acts]. Mid-State II, 877 F.2d at 1334-35 (citing 12 U.S.C § 1975 and 18 U.S.C § 1964(c)).11 ¶86 Only direct injuries are sufficient to afford standing to sue under BHCA or RICO. Id. at 1335. Accordingly, the Kimmels were required to show a direct injury; a derivative injury was insufficient to establish federal standing to bring a claim under either BHCA or RICO. Id. ¶87 Therefore, the question presented in Mid-State II was not whether a guarantor could bring a derivative claim. Rather, the question presented in Mid-State II was whether the Kimmels had pled a direct or a derivative injury. Id. at 1335. The 11 The plaintiffs' principal grievances were controlled by Illinois law. Mid-State Fertilizer Co. v. Exch. Nat'l Bank of Chi. (Mid-State II), 877 F.2d 1333, 1334 (7th Cir. 1989). The court addressed the standing question to determine whether there was federal jurisdiction for the pendent state law claims. Id. at 1334-35. 8 No. 2010AP3158.pdr court reasoned that shareholders' and guarantors' injuries were derivative because [s]uits by shareholders, guarantors, and the like may well be efforts to divert the debtor's assets——to pay off one set of creditors (here, the Kimmels) while keeping the proceeds out of the hands of the firm's other creditors. Id. at 1336. Accordingly, because the court concluded that the Kimmels pled only derivative injury, they did not have standing to proceed on their federal claims. Id. ¶88 The reasoning in Mid-State II supports a guarantor's standing to proceed on a federal claim under BHCA or RICO if the guarantor can show a direct, rather than a derivative injury. Id. at 1336 (Guarantors must be treated as creditors. When they suffer direct injury——injury independent of the firm's fate——they may pursue their own remedies). Likewise in Wisconsin, if a guarantor has a direct injury, the guarantor owns the claim and may proceed on it.12 However, Mid-State II has nothing to do with whether a guarantor has standing to bring a derivative claim grounded in Wisconsin law. ¶89 Wisconsin Statutes limit standing to bring derivative claims to shareholders and beneficial owners. Krier, 317 Wis. 2d 288, ¶29 (explaining that standing to sue based on a corporate injury requires one to be a shareholder); Borne, 266 Wis. 2d 253, ¶15 (same); Shelstad, 77 Wis. 2d at 554 (same); see also Wis. Stat. § 180.0741. A guarantor cannot bring a derivative claim under Wisconsin law if his sole status is that 12 The Westburgs raise a direct claim against Park Bank in regard to freezing their personal money-market account. 9 No. 2010AP3158.pdr of a guarantor. Krier, 317 Wis. 2d 288, ¶¶18, 29; Borne, 266 Wis. 2d 253, ¶15; Read, 205 Wis. 2d at 565; Shelstad, 77 Wis. 2d at 554; see also Wis. Stat. §§ 180.0741-.0744. ¶90 In Wisconsin, a guarantor's rights and obligations are controlled by the guaranty contract. See Bank Mut., 326 Wis. 2d 521, ¶54. On the other hand, a shareholder's rights are established by the articles of incorporation, the corporate bylaws and the Wisconsin Statutes. A guarantor cannot bring a derivative claim, unless the guarantor is also a shareholder or a beneficial owner. However, it is the status as a shareholder or beneficial owner that is necessary to bringing a derivative claim; being a guarantor is never a sufficient status to bring a derivative claim. ¶91 The majority opinion cites Labovitz v. Washington Times Corp., 172 F.3d 897 (D.C. Cir. 1999), as supporting its contention that Mid-State presented persuasive authority for determining whether guarantors have standing to raise derivative claims.13 Standing alone, the above quotation from the majority opinion could cause confusion because it could be read to imply that there are occasions when having the status of a guarantor is sufficient to bring a derivative claim on behalf of a corporation. However, as Mid-State II clearly explains, a guarantor needs a direct injury to sue under either BHCA or RICO. Stated otherwise, even under the federal law considered in Mid-State II, the Kimmels, as guarantors, did not have standing to bring a derivative claim. Mid-State II, 877 F.2d at 13 Majority op., ¶49. 10 No. 2010AP3158.pdr 1335. Accordingly, any concern that the quoted language from the majority opinion may be misinterpreted is quelled because the majority opinion repeatedly concludes that a guarantor cannot bring a derivative claim in Wisconsin. The majority opinion explains [b]ecause each is derivative, the Westburgs have no standing to raise them given that they appear in this action as guarantors.14 I agree with the majority opinion's conclusion that the status of a guarantor is insufficient to bring a derivative claim in Wisconsin.