McFarland State Bank v Sherry (WI)

Summary: A lender’s acquisition of the mortgaged property at a sheriff’s sale entitles a guarantor to an offset equal to the value of the property.

McFarland State Bank v Sherry, 2010 AP 2473 (Wis. Ct. App., 2011).

Facts: Earl Sherry (Sherry) gave a personal guarantee on a loan, secured by a mortgage on real property, made by his son Rick Sherry and his daughter in law Jolene Sherry and given to the McFarland State Bank (McFarland). The debtors defaulted on the loan and the bank obtained a judgment of foreclosure in the amount of $152,029.83.  McFarland then acquired the property as a successful bidder at a sheriff’s sale. In the order confirming the sale, the court found the value of the house to be $147,000, as proposed by McFarland.  After the court made this finding, Sherry deposited $17,585.82 with the clerk of court.  This is the amount Sherry figured was owed to the bank, plus interest, minus $147,000.  Sherry then moved for relief from judgment arguing that the debt was fully satisfied.  The court denied Sherry’s motion.  Sherry appealed.

After the appeal was filed, Sherry agreed to pay the $147,000 to McFarland in exchange for the house and the right to a deficiency judgment but maintained that he was continuing with the appeal despite the agreement.

Holding: Order reversed and cause remanded. The Court of Appeals disagreed with McFarland’s characterization that the case was moot; finding that preference of money over property is a difference in relief sought.  To determine if Sherry was entitled to an offset, the court focused on Sherry’s common law argument, namely that a creditor is not allowed to recover more than the total debt that is due. A creditor is entitled to one performance, by payment or satisfaction, and if the creditor receives that, the surety is discharged.  If the debt is not fully satisfied, the surety’s duties continue, but are reduced by the amount received.

McFarland argued that the duties of a guarantor are not discharged until the bank collects the monetary judgment in the form of cash. The Court of Appeals held that despite this preference, McFarland submitted a bid and took title to the property, and that this cannot be ignored when calculating what is owed by the guarantor.  This means that the value of the property should be subtracted from Sherry’s duties to McFarland.

The court held that because of the equitable nature of foreclosure proceedings, it would be appropriate to use those equitable powers to fashion a remedy.  It held that the circuit court may use its equitable powers to undo the agreement between Sherry and McFarland, but it must use its powers to ensure that Sherry receive the $147,000 offset.

Opinion Year: 
By: ATG Underwriting Department | Posted on: Wed, 06/20/2012 - 2:21pm