Personal Guaranties: An Independent Contract from the Note

June 11, 2014

As a continuing free service to our financial institution clients, we provide you with information relating to a March 11, 2014 State of Wisconsin Court of Appeals decision concerning personal guaranties. Olive Portfolio, LLC v. Harrill, 2013 AP 1544.


Key Facts


Pursuant to Promissory Notes, a limited liability company borrowed money from the Bank.  In addition to the Promissory Notes, two members of the limited liability company executed personal guaranties to the Bank.  The Bank refused to renew the Note and although the Bank received an offer for $2,700,000.00 for the real estate, the Bank proceeded with a receivership and received only $950,000.00 in net proceeds when the property was liquidated. 


The Bank then sued the two members on the Personal Guaranties.  The two members asserted numerous affirmative defenses, including failure to mitigate damages and equitable estoppel.  The guarantors alleged that the Bank could have sold the real estate for more money than the Bank ultimately received.


The trial court, and the Court of Appeals, ruled that the guaranties of payment stand as separate contracts from the Notes.  Bank Mutual v. S. J. Boyer Const., Inc., 2010 WI 74.


Court’s Reasoning


A guarantor’s liability arises not from the debt itself, but from a separate contract.  As to a guaranty of payment, the Bank is not obligated to proceed against the principal debtor or to resort to securities given by the principal debtor prior to proceeding against the guarantor.

A failure-to-mitigate defense cannot defeat a guaranty-of-payment claim.  There is no longer any lingering doubt that the failure-to-mitigate affirmative defense is unavailable to a guarantor of payment.  Park Bank v. Westburg, 2013 Wis. 57. 


Because the Notes and guaranties are separate contracts, any action or inaction by the Bank with regard to the limited liability company was irrelevant.  The equitable estoppel affirmative defense also failed and is unavailable to a guarantor of payment. 


Why It Matters


Once it is established that payment is due and outstanding, there are generally no affirmative defenses available to guarantors of payment. 


Banks should get personal guaranties whenever possible, as they be an additional important collection tool available to the Banks and the Bank’s attorney.