The Michigan Court of Appeals, in a recent published decision, reaffirmed the principle that a personal guaranty of a loan is a separate and distinct contract from the loan itself with separate and distinct remedies. So, just because a lender has sued a borrower and guarantor, does not mean that the lender has to ask the court for all of the relief that the lender may be entitled to in that one suit.
Often times when a lender makes a commercial loan to a company as a borrower, the lender will require the principal of the company to sign a personal guaranty of the loan as additional security for the loan. The guaranty usually has language making clear that the guarantor is responsible for payment of the loan in the case of a default by the company-borrower; and that the lender can seek to collect on the loan from the borrower or the guarantor in any order the lender deems fit.
Nevertheless, certain statutory and common law requirements would seem to place limits on the lender’s ability to enforce a guaranty separate from enforcing the loan documents. But Michigan courts have generally refused to enforce those limits.
For instance, Michigan’s foreclosure by advertisement statute provides that a lender who is pursuing foreclosure by advertisement (as opposed to judicial foreclosure) is prohibited from taking any other action to collect the debt secured by the mortgage until the foreclosure by advertisement is completed with the sheriff’s sale. MCL § 600.3204(1)(b). This limit might appear to prevent a bank form seeking to collect on a guaranty until after the foreclosure by advertisement is completed, but Michigan courts have rejected that argument. See Greenville Lafayette, LLC v Elgin State Bank, 296 Mich App 284; 818 NW2d 460 (2012). Specifically, Michigan courts have held that because a guaranty is a separate contract, enforcing the guaranty is not an attempt to collect on the debt secured by a mortgage. Thus, a court will permit a lender to both sue on a guaranty and foreclose on a property by advertisement, simultaneously.
Similarly, Michigan’s pleading requirements generally mandate that a party filing a lawsuit join all of its possible claims that arise out of the same transaction or occurrence, against the opposing party in one lawsuit. This requirement might appear to require a lender who has sued a borrower and a guarantor for breach of contract to also include all claims against the borrower relating to the mortgage (i.e., claims for foreclosure, appointment of a receiver, etc.) because they involve “the transaction or occurrence that is the subject matter of the action.” But the Michigan Court of Appeals recent confirmed that because a claim for foreclosure of a mortgage (a statutorily governed cause of action) relies on establishing different proofs than a claim for breach of a loan agreement and guaranty (which are purely contractual matters) a lender can bring separate and successive claims for breach of the loan agreement/guaranty and equitable remedies such as foreclosure and the appointment of a receiver. Marketplace of Rochester Hills Parcel B, LLC v Comerica Bank, ___ Mich App ___: ____ NW2d ___, March 17, 2015 (Docket No. 318894). That is, a lender can bring a claim for breach of contract (seeking to recover the amounts due under the loan) before, after or at the same time as attempting to collect the debt through other means such as the appointment of a receiver, foreclosure of a mortgage or enforcement of a guaranty.
The practical lesson practitioners can take from these decisions is that attempts to oppose a lender’s efforts to collect on a guaranty separately from the loan itself (or other measures to collect on the loan) should be focused on substance and not procedure; Michigan courts grant lenders great deference in pursuing separate remedies against guarantors and borrowers.
To learn more, contact Leif Anderson directly at [email protected]