The decision here is a good one to keep handy for use in dissuading clients who wish to guarantee their childrens loans from doing so. The question is whether anything can be done for those clients who persist in their intent, so that they dont wind up in the Schlueters position.
Clearly, it is insufficient to merely strike the standard waiver of notice from the guaranty, even if the bank consents to this. The common law rule is that absolute guarantors are not entitled to notice of default, regardless of whether there is a waiver of notice in the guaranty.
At least, however, striking the waiver could create an ambiguity, suggesting that the purpose of removing the waiver was to require notice.
In addition, such an act could create a defense of misrepresentation under First National Bank & Trust Co. v. Notte, 97 Wis.2d 207, 293 N.W.2d 530 (1980), if the lenders agent indicated at closing that the effect of striking the provision was to require notice.
A good cross-examiner should be able to have a field day with a bank employee who suggests that the purpose of striking the waiver was anything other than to require notice.
Given the uncertainty entailed in merely striking the waiver provisions from the guaranty, however, a far better practice would be to advise clients not to guaranty loans on property (or automobiles) without an express provision that they are entitled to notice of any lapse of insurance.
In practice, this is a sound and economically efficient policy. The decades-old common law rule is markedly out-of-place with both modern expectations and economic efficiency.
There is no sound reason to require notice of default, where the default consists solely of failure to make payments on the note, because notice wouldnt enable the guarantor to protect himself anyway.
However, a policy that guarantors are entitled to notice of default in the form of a lapse of insurance would benefit not just the guarantor, by enabling him to take action to protect himself, but would benefit the lender as well.
Presumably, the Schlueters are responsible people who would have been unable to sleep at night if they had known they were on the hook for tens or hundreds of thousands of dollars, all for want of an annual insurance premium of a couple hundred dollars.
Also presumable is that, having received notice of the lapse, they would have done whatever necessary to obtain replacement coverage. The result of this would be that, instead of a judgment that may or may not be collectible, M&I Bank would long ago have received a check from some insurance company.
In an age when property insurance is ubiquitous and relatively inexpensive, there is sound reason for the Supreme Court to reconsider the continued applicability of a longstanding common law rule formulated when default almost invariably meant failure to make payments on the loan, rather than failure to insure the collateral.
– David Ziemer
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David Ziemer can be reached by email.