Opinion ID: 2214876
Heading Depth: 3
Heading Rank: 1

Heading: Legal meaning of personally liable for the debt

Text: ¶ 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.