Guarantors not entitled to notice of default

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Hon. Harry G. Snyder

Guarantors on a real estate note are not entitled to notice that the primary obligors permitted their property insurance to lapse, the Wisconsin Court of Appeals held on Nov. 6.

On Oct. 28, 1997, David S. Schlueter and Dawn M. Schlueter, son and daughter-in-law of Richard W. and Linda J. Schlueter, entered into a mortgage note for $72,800 with M&I Bank.

As security, David and Dawn executed a real estate mortgage in favor of M&I on property located in Hartford. David and Dawn did not qualify for a mortgage on their own, and so, in addition to the real estate mortgage, Richard and Linda signed a guaranty that obligated them to make payments should David and Dawn fail to pay.

The guaranty included a paragraph entitled "Waiver" in which the Schlueters specifically waive notice of default by David and Dawn.

On Aug. 15, 1999, the insurance policy covering the property lapsed. The insurer, American Family, claims to have sent this lapse notification to M&I, but M&I claims that it does not recall receiving any notification nor does it have a copy of notification.

On July 17, 2000, the property securing the mortgage note burned down, and David and Dawn stopped making further payments.

M&I notified the Schlueters of David and Dawn’s default, but they refused to pay.

M&I then brought suit against the Schlueters as the guarantors. Washington County Circuit Court Judge Patrick J. Faragher granted summary judgment to the Schlueters, finding that M&I had notice of the lapse, and failed to notify the Schlueters.

M&I appealed, and the court of appeals reversed in a decision by Judge Harry G. Snyder.

Common Law

The court held that the Schlueters, as guarantors on a real estate note and mortgage, were not entitled to notice of default for failure of the original obligors to carry property insurance on the subject real estate.

The court found the decision of the Wisconsin Supreme Court in Bank of Sun Prairie v. Opstein, 86 Wis. 2d 669, 678, 273 N.W.2d 279 (1979), to be dispositive. There, the court held, "Guaranties of payment are absolute, not collateral promises. …

Unlike the contract of an indorser, there is no condition as to demand and notice of default annexed to a contract of guaranty of payment or of performance. Nor is it any defense for a guarantor of payment as distinguished from a guarantor of collection that the creditor through negligence, or lack of due diligence, lost or dissipated the collateral furnished by the debtor."

"With an absolute guarantee of payment, the law imposes no duty upon the creditor to notify the guarantor of the nonpayment of the note by the principal maker."

Also, in Farmers State Bank v. Hansen, 174 Wis. 100, 103, 182 N.W. 944 (1921), the court held, "no notice of the default of an original promisor is required to be given a guarantor of absolute payment or performance to render him liable on the guaranty."

Waiver

Furthermore, the court found that the language of the Guaranty waived any right to notice that the Schlueters may have had.

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The Guaranty provided, "To the extent not prohibited by law the undersigned expressly waive notice of the acceptance of this Guaranty, the creation of any present or future Obligation, default under any Obligation, …"

The court concluded, "The language of the Guaranty is clear; the Schlueters specifically waived any right to notice of default by David and Dawn and by virtue of the terms of the contract were not entitled to notice."

Good Faith

The court also rejected the Schlueters’ contention that Opstein is distinguishable because M&I breached its duty of good faith and fair dealing.

The court reasoned, "where the contracting party complains of acts of the other party that are specifically authorized in their agreement, we cannot see how there can be any breach of good faith and fair dealing." Accordingly, the court reversed.

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David Ziemer can be reached by email.