On March 6, 2018, the Wisconsin Supreme Court issued a decision which caused Wisconsin mortgage lenders to shudder. In Horizon Bank, N.A. v. Marshalls Point Retreat LLC,1 the Court ruled that the mortgagorbut not the guarantoris bound by the foreclosure court confirming a sheriff's sale for fair value. This is the case even if the mortgagor and the guarantor are both defendants in the same action, and the guarantor does not object to the court's determination that the sale was for fair value. Because foreclosures are governed by a statute and guaranties are contracts, the circuit court is free to separately consider the amount of credit to be applied to the guaranty in the same or a different proceeding. In the wake of Marshalls Point, mortgage lenders are scrambling for a solution to avoid having to litigate the fairness of the foreclosure sale price twice.
Horizon Bank loaned $5 million to Marshalls Point Retreat LLC ("Marshalls Point"), secured by a mortgage on property located in Sister Bay, Wisconsin. Allen S. Musikantow, a member of Marshalls Point, signed a guaranty of payment of the loan. The guaranty provided that "federal law applicable to lender and to the extent not preempted by federal law, the laws of the State of Indiana" would govern the rights of Musikantow, who lived in Florida. In the foreclosure action, Marshalls Point and Musikantow stipulated to the entry of judgment against them by Horizon Bank in the amount of $4,045,555.55.
The parties also agreed in the stipulation that the amount paid to the bank from the proceeds of the sale of the property would be credited as payment on the judgment.2 At the sheriff's sale, Horizon Bank credit bid $2,250,000 for the property. The bank moved the court to confirm the sale as being for "fair value" pursuant to Wisconsin Statutes section 846.165. The bank also waived its deficiency claim against Marshalls Point (thereby reducing the redemption period),3 and sought to have the bid amount credited towards the judgment against Musikantow.
At the confirmation hearing, Musikantow did not object to the confirmation of the sale, but sought language in the confirmation order that said confirmation would not have any collateral estoppel or res judicata effect against Musikantow, asserting that the property was worth more than $10 million. Musikantow further stated he had a witness in the courtroom prepared to testify to the higher value. However, the court adjourned the hearing, and the witness never testified.
At the adjourned hearing, Musikantow said that, although he could produce evidence of value, the evidence was unnecessary because the guaranty provided that federal and Indiana law governed. He also noted that Horizon Bank had commenced a federal lawsuit in Florida to domesticate the judgment against him. The circuit court confirmed the sale, entering an order finding that the $2.25 million price was a "fair and reasonable value for the property."4 However, the court declined to rule on the amount of credit to be applied against the guaranty because, under the guaranty's governing law provision, the court...