By Keith Gauer
On May 13, 2015, the South Dakota Supreme Court ruled against a bank seeking to enforce four separate personal guaranties relating to the indebtedness owed by a corporate borrower in connection with the Crossroads Hotel & Convention Center in Huron. Prior to pursuing the individual guarantors, the bank completed a foreclosure action on the hotel and convention center property. Following the entry of judgment in the foreclosure, the bank submitted a bid at the foreclosure sale in the full amount of the judgment. Consistent with South Dakota’s foreclosure laws, the Court held that the bank’s submission of its credit bid at the foreclosure sale amounted to a full satisfaction of the indebtedness due and owing under the note. As such, the Court ruled against the bank on its attempt to pursue the guarantors, allowing the guarantors to escape liability.
Based upon this case and established South Dakota foreclosure law, banks should carefully consider their strategy in foreclosure actions where the indebtedness is also subject to personal guaranties. If the bank desires to pursue the guarantors in addition to the foreclosure, the bank can pursue one of two options. First, the bank could initially seek judgment against the guarantors for the full amount of the indebtedness. If the guarantors fail to pay the debt in full, the bank can then pursue a foreclosure action to collect the balance. As a second option, the bank could preserve a deficiency as part of the foreclosure action by having the property appraised and seeking a court order allowing the bank to bid the appraised value at the foreclosure sale. Assuming the court accepts the appraisal and allows the bank to credit bid only an amount equal to the value of the property at the sale, the bank can then pursue a claim against the guarantors for any deficiency. If the bank fails to take one of these two steps, the bank’s submission of its bid at the foreclosure sale will generally result in the satisfaction of the indebtedness irrespective of the amount of the bid, and any guarantors will be released from any further obligation.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.