Monday, September 23, 2013

FYI: Ill App Ct Rules Successful Full Credit Bid Satisfied Debt Under Wyoming Law, Despite Creditor's Intent to Avoid Redemption at Deflated Price

Applying Wyoming law, the Illinois Appellate Court for the First District recently ruled that a creditor's successful credit bid at the foreclosure sale of the mortgaged property in an amount to satisfy the creditor's obligation will extinguish the mortgage, even where the amount of the bid is intended only to prevent a mortgagor from redeeming the property at a deflated price under Wyoming's lien theory of foreclosure.



A specialty finance company ("Lessor") entered into a lease agreement with an Illinois corporation (the "Lessee").  The lease agreement provided that the Lessor would lease equipment to the Lessee pursuant to various leasing schedules. On lease schedule number one, the equipment that the lessee received was listed at a price of $6,935,000.


According to the Lessor, in January 2008, the Lessor learned that one of Lessee's principals (the "Principal") had previously been convicted and sentenced for participating in a fraudulent scheme involving equipment financing. Consequently, the Lessee offered the Lessor additional collateral in the form of mortgages encumbering Wyoming real estate, in exchange for the Lessor agreeing to finance additional lease schedules.


The Wyoming real estate consisted of six parcels of land owned by the Principal and his family.   The Principal and his son and daughter executed guaranty agreements as consideration for the Lessor's agreement to execute lease schedule number two and future lease schedules. In addition to the guaranties, the Principal's family mortgaged the Wyoming real estate to the Lessor.


The terms of the guaranties stated, in pertinent part: "[the Lessor's] sole and exclusive remedy against [the Principal's family] shall be limited to [the Principal's family's] interest in the Mortgage Premises." The Lessor leased equipment worth a total of $22,077,000.02 to the Lessee under four schedules.


During the summer of 2009, the Lessee defaulted on its lease payments to the Lessor.  Subsequently, the Lessee filed for bankruptcy in the United States Bankruptcy Court for the Northern District of Illinois.  The bankruptcy court entered an order that lifted the automatic stay with respect to the Wyoming real estate that was subject to the Lessor's mortgages. The Lessor then began the process of foreclosing its mortgages on the Wyoming real estate.  On December 1, 2009, the sheriff of Teton County, Wyoming, sold the Wyoming real estate through foreclosure proceedings. The Lessor successfully purchased the Wyoming real estate with a credit bid of $22,743,564.44, which represented the full amount of the debt owed to the Lessor under the lease agreement.


In March of 2010, the Lessor filed a complaint for replevin against the Lessee in Illinois, seeking immediate possession of the leased equipment.  Additionally, numerous other lessors and lenders filed similar complaints against the Lessee.  A bank ("Bank") filed a complaint against the Lessee for judicial foreclosure and declaratory judgment.  The trial court consolidated the multiple complaints into a single action. 


The Lessor filed an answer and affirmative defenses which contested the Bank's right to the equipment that was leased to the Lessee and sought return of the equipment.  The Lessor also filed counterclaims which sought a declaratory judgment that the Lessor was the owner of all of the equipment and that its interests in the equipment were senior to the rights of all other parties.


From June 2010 through July 2011, the Lessor sold five of the six parcels of the Wyoming real estate to unrelated third parties and realized total net proceeds of $2,159,777.05 from the sales of the real estate. The sixth parcel of the Wyoming real estate remained unsold.  The trial court's order stated that all parties with claims to the equipment "retain all heretofore existing rights and claims to the Auction Proceeds." The Lessor filed a proof of claim to the proceeds of the sale of the equipment leased to the Lessee, alleging that after accounting for the proceeds from the sales of the Wyoming real estate, the net amount owed to the Lessor was $17,487,520.30.


The Bank filed a motion for summary judgment against the Lessor, alleging that the Lessee's debt to the Lessor was extinguished because at the foreclosure sale of the Wyoming real estate, the Lessor made a "credit bid" for the full amount of the debt owed by the Lessee to the Lessor.  The trial court found that the Lessor's credit bid satisfied both the obligations under the guaranty agreements and the Lessor's claim against the Lessee.


The trial court reasoned that the effect of a full credit bid under Wyoming law is to extinguish the debt and that the individuals who executed the guaranty agreements did not have an independent debt to the Lessor, and  granted the Bank's motion for summary judgment. The Lessor filed a timely appeal.


Because this matter involved real estate located in Wyoming, the First District ruled that Wyoming law governed its analysis.

The Lessor argued: (1) summary judgment in favor of the Bank was improper because the law of guaranties applied, and therefore the guaranty agreements executed by the Principal's family were independent obligations from the Lessee's debt and therefore the Lessor's purchase of the Wyoming real estate only satisfied the guaranty agreements and not the full debt owed by the Lessee; (2) the trial court made incorrect conclusions regarding the Principal's family's ability to recoup losses from  the Lessee; (3) the "full credit bid" rule – providing that at a foreclosure sale, when a bid is equal to the unpaid principal and interest of the mortgage debt and the bidder takes title to the property, the borrower is released from future obligations – does not apply because no Wyoming court has ever applied the rule in any case; (4) because Wyoming follows a lien theory mortgage foreclosure scheme – where proceeds of a foreclosure sale are first used to satisfy obligations secured by the mortgage being foreclosed, then applied to junior lienholders – the full credit bid was made only to prevent the Principal's family from redeeming the property at a deflated price after the foreclosure, and therefore the Lessor was not bidding on the Lessee's debt, but rather on the Principal's family's obligation.


On the other hand, the Bank argued that the trial court did not err in granting summary judgment arguing: (1) the Lessor's argument is contradictory because the Lessor claimed that its credit bid was valid and enforceable when it obtained title to the Wyoming real estate, but the same credit bid was of no legal significance in reference to the remaining debt owed by the Lessee; (2) that the plain and unambiguous language of the mortgages and guaranties supports the trial court's judgment; (3) the Lessor's credit bid paid the Lessee's obligation in full because it was applied in satisfaction of obligations secured by the mortgage being foreclosed and therefore applied towards the Lessee's underlying debt; and (4) the Bank never based its arguments on the full credit bid rule, rather, the Lessor bid more than $22 million at the foreclosure sale, and that under Wyoming law, the proceeds of a foreclosure sale satisfy the mortgage debt.


Although both the Lessor and the Bank advanced multiple arguments, the First District concluded that the seminal issue was whether the mortgages executed by the Principal's family secured the Lessee's debt.  As you may recall, under Wyoming law, when a lender bids the full amount due to him at a foreclosure sale, the mortgage is satisfied and discharged. Federal Land Bank of Omaha v. Sells, 280 P. 98, 100 (Wyo. 1929); Wyo. Stat. Ann. § 34-4-113(a)(West 2010).  A guaranty agreement is a contract to pay the debt of another, and is secondary to the instrument it guarantees. Belden v. Thorkildsen, 2008 WY 148, ¶ 20, 197 P.3d 148, 154 (Wyo. 2008). 


The First District recognized that Wyoming follows a "lien theory" mortgage foreclosure scheme which states that the proceeds of a foreclosure sale are used to first pay expenses and attorney's fees; then used to satisfy the obligations secured by the mortgage being foreclosed; and then distributed to junior lien holders. Wyo. Stat. Ann. § 34-4-113(a) (West 2010). Any remaining proceeds are paid to the mortgagor as a surplus, while the mortgagor remains liable for any deficiency. Wyo. Stat.  Ann. § 34-4-113(c) (West 2010). After the property has been sold through foreclosure, the mortgagor has the right to redeem the real estate by paying the purchaser the amount of the bid if purchased by the mortgagee under a mortgage. Wyo. Stat. Ann. § 1-18-103(a) (West 2010). "[T]he right to sue for a deficiency is logical to bind a mortgagor to the terms of the initial bargain and prevent redemption at a deflated price after foreclosure. " Fitch v. Buffalo Federal Savings & Loan Ass'n, 751 P.2d 1309, 1312 (Wyo. 1988).


The Lessor argued that the guaranty agreements are separate and distinct obligations from the underlying debts for which they are collateral and that guaranty agreements executed by the Principal's family state that the Lessor's sole, and exclusive remedy against the Principal's family is limited to the their interest in the Wyoming real estate.  However, the First District observed that Wyoming law states that when a lender makes a full credit bid at a foreclosure sale, "the mortgage is satisfied and discharged." Federal Land Bank, 280 P. at 100.  Thus, the First District also examined the plain language of the mortgages to determine what debt the mortgages secured.


The mortgages executed by the Principal's family defined the debt that they secured in the "Secured Debt" section of the mortgages. The mortgages state, in pertinent part:


"Secured Debt: to the extent not prohibited by Laws, Guarantor's unconditional and absolute guaranty of the due and punctual Rent (as defined by the Guaranty) payments due under the Lease Documents and any other monies due or which may become due under the Lease documents ***."


The Lessor argued that in the phrase "Guarantor's unconditional and absolute guaranty," the use of the word "guaranty" shows that the mortgages secured the guaranty agreements executed by the Principal's family, as opposed to the Lessee's debt as a whole. On the other hand, the Bank argued that the mortgages state that the secured debt is the same debt as the Lessee's debt to the Lessor. 


The First District agreed with the Bank's argument, recognizing that in each of the mortgages, the term "Guaranty" is defined as the guaranty agreements.  However, in the definition of "Secured Debt," the phrase "Guarantor's unconditional and absolute guaranty" uses the term "guaranty" in its lowercase form, as opposed to "Guaranty" in its uppercase form. Further, in the same sentence, the term "Guaranty" is used in the uppercase form regarding the definition of the term "Rent." If the parties intended the term "guaranty" to refer to the guaranty agreements executed by the Lessee Principal's family, they could have easily used the uppercase form of the term just as they did later in the same sentence. However, the mortgages state that the Secured Debt is the "unconditional and absolute guaranty of the due and punctual Rent."


The First District applied the meaning of the plain language of all the terms in this clause, and concluded that the Secured Debt as defined in the mortgages is the same debt that the Lessee owed to the Lessor: specifically, the unpaid rent for the leased equipment.  Additionally, the First District highlighted that the mortgages state that "[a]ll sums realized by [the Lessor] shall be applied to the Secured Debt." Therefore, the full amount of the Lessor's bid must be applied to the secured debt. 


The First District concluded that under Wyoming law, and by the Lessor's own admission, the effect of a successful credit bid is to satisfy and discharge a mortgage. Thus, the effect of the Lessor's $22 million credit bid was to satisfy and discharge the mortgages and guaranty agreements executed by the Principal's family. Because the mortgages in this case secured the same debt that the Lessee owed to the Lessor, the Lessor's $22 million credit bid satisfied the Lessee's debt.


Although the First District recognized the Lessor's argument that the purpose of the $22 million credit bid was to ensure that the Principal's family did not redeem the Wyoming real estate at a deflated price under Wyoming's theory of lien foreclosure, the plain language of the mortgage agreements stated that they secured the same debt that the Lessee owed to the Lessor. If the mortgage agreements had stated that only the guaranty agreements executed by the Principal's family were secured, then the Lessor's strategy would have been successful.


Accordingly, the First District affirmed the trial court's summary judgment ruling in favor of the Bank.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois


NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at: