Crown Life Ins. Co. v. LaBonte

• Decision Date: 01 March 1983
• Docket Number: No. 81-1955,81-1955
• Citation: 111 Wis.2d 26,330 N.W.2d 201
• Parties: , 36 UCC Rep.Serv. 1232 CROWN LIFE INSURANCE COMPANY, Plaintiff-Respondent, v. Jack L. LaBONTE, Defendant and Third-Party Plaintiff-Appellant, Lawrence J. Esser and George T. Esser, individually and d/b/a Eagle Investment Company, Third-Party Defendants-Respondents.
• Court: Wisconsin Supreme Court

Page 201

330 N.W.2d 201

111 Wis.2d 26, 36 UCC Rep.Serv. 1232

CROWN LIFE INSURANCE COMPANY, Plaintiff-Respondent, v. Jack L. LaBONTE, Defendant and Third-Party Plaintiff-Appellant Lawrence J. Esser and George T. Esser, individually and d/b/a Eagle Investment Company, Third-Party Defendants-Respondents.

No. 81-1955.

Supreme Court of Wisconsin.

Argued Feb. 3, 1983.

Decided March 1, 1983.

William A. Nohr (argued), Milwaukee, for defendant and third-party plaintiff-appellant; David H. Hutchinson, Grace M. Masson and Walsh & Nohr, Milwaukee, on brief.

David A. Jarvis (argued), Milwaukee, for plaintiff-respondent; Joseph D. Masterson and Quarles & Brady, Milwaukee, on brief.

Joseph C. Niebler (argued), Milwaukee, for third-party defendants-respondents; John T. Clark and Miller & Niebler, S.C., Milwaukee, on brief.

BEILFUSS, Chief Justice.

This is an appeal from a judgment entered in favor of the plaintiff in an action to enforce a guaranty.

The action was commenced by the Crown Life Insurance Company (Crown) against Jack LaBonte demanding $45,000 pursuant to a contractual guaranty. The guaranty was executed as part of a $180,000 loan made by Crown to Diversified Holdings, Inc. (Diversified). The promissory note executed on June 15, 1971, was originally between Diversified and Richter-Schroeder Company, Inc., Crown's loan correspondent, and was secured by a mortgage on an apartment building. Richter-Schroeder lent the $180,000 to Diversified to provide the construction financing for a 20-unit apartment building to be constructed in Milwaukee. After the construction was completed the note and mortgage were assigned to Crown. As contemplated in the original transaction, Crown provided the permanent financing.

LaBonte was an officer, director and 50 percent shareholder of Diversified. As a part of the entire transaction he executed a guaranty of the note and mortgage. ¹ The guaranty guaranteed payment of the entire debt until the note and mortgage had been assigned to Crown. Following this assignment the guaranty guaranteed payment of the first $45,000 of the mortgage debt. The guaranty provided in pertinent part:

"2. Unconditionally and absolutely, jointly and severally, guarantee the due and punctual payment of the first $45,000.00 principal of the Note to be paid after the assignment of the Note and Mortgage from Mortgagee to Crown Life Insurance Company, the interest thereon and any other moneys due or which may become due thereon, and the due and punctual performance and observance by the Debtor of all the other terms, covenants and conditions of the Note and Mortgage...

"3. ... it being the intention hereof that the Guarantors shall remain liable as principal as to and until the Note and Mortgage have been assigned to Crown Life Insurance Company and the first $45,000.00 of the principal of the Note and Mortgage to be paid, with interest thereon, and any other sums due or to become due thereon, shall have been fully performed and observed by the Debtor, notwithstanding any act, omission or thing which might otherwise operate as a legal or equitable discharge of the Guarantors.

"...

"5. Agree that this Guaranty may be enforced by the Mortgagee without first resorting to or exhausting any other security or collateral or without first having recourse to the Note or any of the property covered by the Mortgage through foreclosure proceedings or otherwise; provided, however, that nothing herein contained shall prevent the Mortgagee from suing on the Note or foreclosing the Mortgage or from exercising any other rights thereunder and if such foreclosure or other remedy is availed of only the net proceeds therefrom, after deduction of all charges and expenses of every kind and nature whatsoever, shall be applied in reduction of the amount due on the Note and Mortgage and the Mortgagee shall not be required to institute or prosecute proceedings to recover any deficiency as a condition of payment hereunder or enforcement hereof....

"...

"9. Make this Guaranty on condition that the liability of the Guarantors hereunder shall terminate at such time as the unpaid principal balance of the Note shall have been reduced to $135,000.00 or less following the purchase of the Note by Crown Life Insurance Company."

Shortly after the assignment of the loan documents and the guaranty to Crown, Diversified conveyed the property for $255,000 to Eagle Investment Company (Eagle), a partnership in which Lawrence and George Esser were partners (Essers). Eagle subsequently sold the property and since then the property has been subject to numerous conveyances. The property was a "troubled development" and as early as 1973 Crown had difficulty collecting on the note and mortgage. There is further evidence that the property was subject to bad management, including mismanagement following the appointment of several receivers pursuant to a 1976 foreclosure action instituted by University National Bank which held a third mortgage on the property. ²

Between May of 1976 and April of 1977, Crown received only two payments on its mortgage and instituted its own foreclosure action on April 22, 1977, but did not join either Diversified or LaBonte. Crown obtained a judgment in the amount of $228,000, which included approximately $173,000 in principal. ³ At the subsequent sheriff's sale, the property was sold to Crown, the only bidder, for $182,000. LaBonte received notice of the confirmation hearing but did not attempt to challenge the sale. The sale was subsequently confirmed by the trial court.

The difference between the sale price and Crown's judgment was approximately $47,000. Crown commenced this action in October of 1978 to collect $45,000 of this deficiency from LaBonte based on the guaranty. LaBonte filed a third-party claim against the Essers and Eagle seeking indemnification in the event that LaBonte was held liable to Crown on the guaranty. A trial was held to the court. At the close of Crown's case the trial court granted LaBonte's and the Essers' motion to dismiss in an oral decision from the bench. The court reasoned that LaBonte's liability under the guaranty was extinguished because the application of the proceeds of the sheriff's sale reduced the principal below $135,000. However, the trial court vacated the order upon a motion for reconsideration, holding that under the unambiguous language of the contract "the creditor may apply the proceeds from the sale of the collateral to the unguaranteed portion of the debt even where the partial guaranty is limited to the first portion of the debt."

The trial court granted judgment in favor of Crown and dismissed the third-party complaint. In determining the amount of the award the court found that $190,000 was the fair value of the collateral, and that $213,796.20 was owed to Crown as of the date of the sheriff's sale. It therefore applied $190,000 against the debt and awarded $23,796.20 on the guaranty, $20,000 in attorneys' fees and $1,478.67 in disbursements. LaBonte appealed and we accepted the appeal on certification from the court of appeals.

The first issue on appeal is whether the proceeds of the foreclosure sale can be applied as payments to the mortgage debt under the terms of the guaranty to extinguish LaBonte's liability under the guaranty. We hold that the unambiguous language of the guaranty, in light of the circumstances surrounding its execution, demonstrate that the parties intended that proceeds obtained from the foreclosure and forced sale of the collateral should be applied first to the unguaranteed portion of the loan. Therefore, LaBonte's liability under the guaranty was not discharged by the application of the proceeds to the mortgage debt.

LaBonte contends that under the terms of the guaranty his liability was discharged because the application of the sale proceeds to the mortgage debt constituted payment of the first $45,000 principal and reduced the outstanding balance of the note and mortgage below $135,000. Crown replied that the guaranty unambiguously provides that proceeds received from a forced sale are not payment under the terms of the guaranty and therefore do not extinguish the guaranty unless they are sufficient to pay the entire mortgage debt.

A guarantor's liability depends upon the particular terms of his or her engagement. Continental Bank & Trust Co. v. Akwa, 58 Wis.2d 376, 388, 206 N.W.2d 174 (1973). "In construing contracts of guaranty as in construing other contracts, the important question is: What did the parties intend?" Sentinel Co. v. Smith, 143 Wis. 377, 379, 127 N.W. 943 (1910). The construction of a written contract is normally a question of law which may be reviewed independently on appeal. Jones v. Jenkins, 88 Wis.2d 712, 722, 277 N.W.2d 815 (1979). The determination of whether the application of the proceeds of the sale of the collateral to the mortgage debt extinguished LaBonte's liability under the guaranty depends on the intent of the parties in executing the contract.

The trial court, construing the terms of the contract, held that it unambiguously allowed the creditor to apply the proceeds to the unguaranteed portion of the debt where the guaranty is limited to the first portion of the debt. An examination of the language of the contract in light of the circumstances of its execution, and the case law in other jurisdictions lead us to the conclusion that the trial court correctly construed the intent of the parties under the contract.

We first examine the language of the guaranty as the best indicator of the parties' intent. In Matter of Estate of Alexander, 75 Wis.2d 168, 181, 248 N.W.2d 475 (1977). Paragraph 2 of the guaranty provides that the guarantor promised the "due and punctual payment" of the first $45,000 of the mortgage debt following the assignment to Crown. This unambiguous language required prompt, timely and voluntary payment of the first $45,000. The application of the proceeds from the...