No Delay in the Day of Reckoning: Foreclosing Creditors Can Execute Against Guarantors Before the Foreclosure Sale
May 2011
Some counsel for guarantors in judicial foreclosure cases believe that lenders must first complete foreclosure sales and have liquidated deficiencies before they can execute against guarantors. In a recent decision in Sterling Savings Bank v. Silverton Station, et al., Case No. 6:10-cv-6121AA (D. Or. Jan. 31, 2011), Chief Judge Ann Aiken ruled to the contrary. Judge Aiken ruled that Sterling could execute against guarantors before completing the foreclosure sale.
In Silverton Station, Sterling held a trust deed on commercial real property. In addition, three guarantors had guaranteed the debt. Sterling prevailed on summary judgment, then submitted a proposed form of judgment which included a money judgment against the three guarantors. The guarantors objected to Sterling's proposed from of judgment, arguing that "the judgment must provide that Plaintiff can only execute against the guarantors for any deficiency remaining after the foreclosure sale of the real property." The proposed judgment contained no such limitation and required no such delay.
i) The Guarantors' Argument.
The guarantors argued that the proposed judgment violated ORS 86.770(3) and ORS 88.060(2), because it allowed immediate execution on the entire judgment debt against the guarantors. The guarantors argued that these two statutes prohibited Sterling from enforcing any money judgment against the guarantors until it had first sold the subject property at a foreclosure sale and had a liquidated deficiency balance. In effect, the guarantors argued that these two statutes require delay, and then limit the guarantors' liability to the amount of any liquidated deficiency balance remaining after the sale.
In support of their argument, the guarantors first quoted ORS 86.770(3). That statute reads as follows:
"[I]n a judicial foreclosure of a trust deed that is not a residential trust deed the judgment must provide that if the sale proceeds are insufficient to satisfy the judgment, execution may issue for the amount by which the unpaid balance of the obligation secured by the trust deed exceeds the net sale proceeds payable to the beneficiary."
The guarantors then quoted ORS 88.060(2), which reads as follows:
"The judgment may be enforced by execution as an ordinary judgment for the recovery of money, except as in this section otherwise provided:
* * *
(2) When the judgment is also against the defendants or any one of them in person, and the proceeds of the sale of the property upon which the lien is foreclosed are not sufficient to satisfy the judgment as to the sum remaining unsatisfied, the judgment may be enforced by execution as in ordinary cases."
The guarantors argued that under the quoted statutory language, Sterling was required to first sell the property and only then collect any remaining deficiency from the guarantors. As further support for their argument, the guarantors argued that the original text of ORS 86.770(3) had expressly referenced guarantors, and that the original text of ORS 86.770(4) had expressly reserved actions against guarantors only "for a deficiency that remains after a judicial foreclosure." Federal Deposit Ins. Corp. v. Burdell, 307 Or. 285, 289-290, 766 P.2d 1032 (1988) (citing Or. Laws 1981, Chap. 811, § 1). The guarantors argued that because the original text of ORS 86.770 had expressly referenced guarantors, the present version of that statute should be construed to reference guarantors as well (even though it no longer mentions guarantors).
ii) Sterling's Argument.
Sterling argued that the present text of ORS 86.770(3) simply provides that a deficiency may be enforced after a judicial foreclosure, as long as the trust deed involved is not a residential trust deed. Sterling argued that the plain text of that statute as presently drafted addresses only lenders' rights against borrowers. It says nothing whatsoever as to lenders' rights against guarantors.
Sterling made a similar argument as to ORS 88.060(2). Sterling argued that the plain text of that statute as presently drafted makes no reference to guarantor liability. Sterling argued that ORS 88.060(2) thus addresses lenders' rights only against borrowers, not lenders' rights against guarantors. Sterling further argued that ORS 88.060(2) as presently drafted simply provides that a deficiency may be enforced against a borrower when a money award is against the borrower personally (as opposed to a judgment in an in rem foreclosure without personal liability).
After arguing that neither ORS 86.770(3) nor ORS 88.060(2) governed Sterling's rights against the guarantors, Sterling argued that the terms of the guaranties themselves, as contracts, instead governed Sterling's rights against the guarantors. All of the guaranties contained the following terms:
"If Guarantor fails to promptly perform its obligations under this . . . Guaranty, lender may from time to time, and without first requiring performance by Borrower or exhausting any or all security for the loan . . . compel Guarantor to perform its obligations hereunder, and to collect . . compensation for all loss, cost, damage, injury and expense sustained or incurred by Lender . . . ." (Emphasis added).
Moreover, all of the guaranties contained the following additional terms:
"Guarantor hereby waives all rights and defenses that Guarantor may have because the obligations guaranteed hereby are secured by real property. This means, among other things, that:
(a) Lender may collect from Guarantor under this Guaranty without first foreclosing on any real or personal property pledged or . . . owned by Borrower; . . . ." (Emphasis added).
Sterling thus argued that the terms of the guaranties themselves made it clear that Sterling was not required to complete the foreclosure sale process before executing against the guarantors, and that Sterling was not limited to collecting from the guarantors just the amount of any liquidated deficiency.
iii) The Court's Ruling.
In her written opinion, Judge Aiken agreed with Sterling. She adopted Sterling’s proposed form of judgment and explained that:
"The plain language of the statutes cited do not expressly, or even implicitly, forbid a creditor from pursuing recovery from a guarantor prior to foreclosure, particularly when that right is granted by contract. Rather, they simply authorize a deficiency judgment after foreclosure and sale of the relevant property."
Conclusion
There is no delay in the day of reckoning for guarantors in judicial foreclosure cases. Creditors may execute against such guarantors as soon as they obtain a judgment.
Sanford R. Landress is a partner at Greene & Markley. His practice focuses on the representation of business debtors and creditors in bankruptcy proceedings. He can be reached at sanford.landress@greenemarkley.com or (503) 295-2668.
A version of this article appeared in the Oregon State Bar Debtor-Creditor Section's spring 2011 newsletter.
