First Dakota National Bank v. Graham

#27189-a-JMK

2015 S.D. 29

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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FIRST DAKOTA NATIONAL BANK, Plaintiff and Appellant,

v.

DAVID GRAHAM, JUSTIN GRAHAM,
DONALD GRAHAM and DENNIS GLATT, Defendants and Appellees.

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APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA

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THE HONORABLE SUSAN M. SABERS
Judge

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STEVEN K. HUFF
SHEILA S. WOODWARD of
Johnson, Miner, Marlow
Woodward & Huff, Prof. LLC
Yankton, South Dakota Attorneys for plaintiff
and appellant.

THOMAS J. NICHOLSON of
Nicholson, Tschetter, Adams & Nicholson
Sioux Falls, South Dakota Attorneys for defendant and
appellee David Graham.

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CONSIDERED ON BRIEFS
ON MARCH 23, 2015

OPINION FILED 05/13/15
JASON KW KRAUSE of
Dorothy & Krause Law Firm, PC
Sioux Falls, South Dakota Attorneys for defendant and
appellee Justin Graham.

CLAIR R. GERRY of
Gerry & Kulm Ask, Prof., LLC
Sioux Falls, South Dakota Attorneys for defendant and
appellee Donald Graham.

JAMES E. MCMAHON
LISA PROSTROLLO of
Murphy, Goldammer & Prendergast, LLP
Sioux Falls, South Dakota Attorneys for defendant
and appellee Dennis Glatt.
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KERN, Justice

[¶1.] In this contract action, the lender seeks to enforce separate commercial

guaranties against the individual guarantors. The guaranties were executed to

secure the indebtedness of the borrower. The guarantors moved for summary

judgment, claiming that the guaranties were unenforceable because no

indebtedness existed after the lender bought the mortgaged property at a

foreclosure sale for the full amount and extinguished the borrower’s obligation. The

circuit court agreed and granted the guarantors summary judgment. We affirm.

BACKGROUND

[¶2.] Huron Hospitality II, LLC owned and operated the Crossroads Hotel &

Event Center (the Hotel) in Huron, South Dakota. In 2008, Huron Hospitality

obtained a loan from First Dakota National Bank for $2,960,000 in exchange for a

promissory note and mortgage on the Hotel. To further secure the obligation, First

Dakota obtained separate commercial guaranties from the Huron Hospitality

shareholders: Donald Graham, Justin Graham, Dennis Glatt, and David Graham

(the Guarantors). Guarantor David Graham managed and operated the Hotel.

[¶3.] In July 2012, Huron Hospitality failed to make timely payments on the

note. First Dakota gave Huron Hospitality and the Guarantors notice of the

default. Neither Huron Hospitality nor the Guarantors cured the default.

However, on July 3, 2012, Guarantor Glatt and his wife wrote to First Dakota

expressing concern over David Graham’s management of the Hotel. Specifically,

they stated that “David cannot manage this property/investment any longer and

[we] are looking for help in the resolution of this.” The Glatts listed specific

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problems with Graham’s management, actions, and decisions. They requested that

an independent management company be hired to take over the Hotel.

[¶4.] In August 2012, First Dakota filed an amended complaint for

foreclosure and receivership against Huron Hospitality under SDCL chapter 21-49.

In its complaint, First Dakota alleged that Huron Hospitality had defaulted on its

note and that the parties’ mortgage specifically permitted the appointment of a

receiver during a foreclosure proceeding. In its prayers for relief, First Dakota

sought a judgment declaring that the amount due on the note was $2,817,998.69,

with interest accruing from August 8 until the date of entry of a judgment in favor

of First Dakota at a rate of $774.52 per day. First Dakota also requested that the

court assess late charges, attorneys’ fees, and sales tax thereon. First Dakota

further requested that the mortgaged property “be decreed to be sold by the Sheriff

of Beadle County, South Dakota,” and “[t]hat the proceeds of the sale be brought

into court and be applied in payment of the amount due First Dakota as found by

the court’s judgment, including all costs and disbursements of this action and of all

sale, pre- and post-judgment interest, and reasonable attorneys’ fees, sales tax and

expenses.” First Dakota requested that it “may become the purchaser at the

sheriff’s sale the same as any other bidder,” and that it “may bid at the sale the full

judgment debt.” It asserted that Huron Hospitality stipulated to the appointment

of Kelly Inn, Ltd. as “the receiver for the duration of the litigation[.]”

[¶5.] Huron Hospitality did not answer First Dakota’s amended complaint,

and First Dakota moved the circuit court for entry of a default judgment and for

permission to foreclose on the property. On October 15, 2012, after a telephonic

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hearing at which Huron Hospitality did not appear, the circuit court entered a

default judgment against Huron Hospitality and granted First Dakota a “default

judgment for foreclosure against HH LCC [(Huron Hospitality)].” The court’s order

provided that First Dakota was entitled to a default judgment against Huron

Hospitality in the amount of $2,914,764.02, plus pre- and post-judgment interest

and authorized expenses. The court ordered that the mortgaged premises be sold at

public auction under the direction of the Sheriff of Beadle County. First Dakota

was authorized by the court to bid “this judgment amount, $2,914.764.02, plus any

post-judgment interest, attorney fees until date of sale, and all Receiver incurred

expenses and any other indebtedness incurred by [First Dakota] on [Huron

Hospitality’s] behalf during the receivership.”

[¶6.] On December 18, 2012, Beadle County Sheriff Doug Solem issued a

return of foreclosure sale to the circuit court. The return indicated that a sale was

held on December 18 and that the sheriff sold the mortgaged property “to the

highest bidder at public auction[.]” First Dakota was the highest (and only) bidder.

The return provided that “the selling price was $3,076,706.83, with no offsets or

other expenses. There was no surplus or deficiency.” The circuit court confirmed

the sale and ordered that the property remain under the control and management

of the receiver “until the property is redeemed as provided by law or the expiration

of the redemption period, whichever should occur first[.]” The court further ordered

that the sheriff “shall make and deliver a deed to the purchaser of the property at

the expiration of the period of redemption[.]”

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[¶7.] After obtaining the property and after the expiration of the redemption

period, First Dakota listed the Hotel for sale with a commercial real estate agency.

First Dakota continued to utilize Kelly Inn to manage the hotel. The Hotel did not

sell, and First Dakota informed the Guarantors in writing that it would enforce the

guaranties unless one or more of the Guarantors arranged for an assignment of the

Hotel or paid the debts incurred by First Dakota. None of the Guarantors

responded to First Dakota’s demands.

[¶8.] In November 2013, First Dakota filed a complaint against the

Guarantors to enforce each “Commercial Guaranty” and alleged that each

Guarantor owed First Dakota $3,241,883.03, plus costs, disbursements, attorneys’

fees, sales tax on said fees, and other expenses associated with First Dakota having

to run the Hotel. The Guarantors, each represented by separate counsel, answered

and denied that any obligation existed under the guaranty contracts. Guarantor

Glatt moved for summary judgment, which motion Guarantors David, Justin, and

Donald Graham later joined. First Dakota filed a cross-motion for summary

judgment.

[¶9.] A hearing was held on July 28, 2014. Guarantors argued that because

no debt remained between Huron Hospitality and First Dakota after the foreclosure

sale, there existed no obligation for Guarantors to guarantee. Counsel claimed that

First Dakota could have enforced the guaranties after First Dakota obtained its

default judgment against Huron Hospitality. First Dakota, however, chose to

proceed through foreclosure and bid on the property in full satisfaction of the debt.

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Guarantors argued that First Dakota could not enforce the guaranties, because

there was no deficiency from the sale and the debt was completely extinguished.

[¶10.] In response, First Dakota submitted that South Dakota’s foreclosure

laws have no bearing on the Guarantors’ obligations under the guaranties.

According to First Dakota, its decision to make a “credit bid” at the auction, which

bid extinguished Huron Hospitality’s debt, is immaterial. Rather, the language of

the “Commercial Guaranty” controls and provides that the Guarantors agreed to

pay the debt, whether barred or unenforceable, for any reason. First Dakota further

argued that any decision concluding that the indebtedness was extinguished by the

foreclosure sale would give the Guarantors a windfall by not holding them

responsible for what they agreed to pay. Finally, First Dakota explained at the

summary judgment hearing that it did not intend to keep the hotel and recover the

full obligation from Guarantors, stating, “We would be glad to turn over the keys to

this hotel to the guarantors when they pay us their guarantee.”

[¶11.] At the conclusion of the hearing, the court issued an oral ruling. The

court recognized that the Guarantors were not part of or expressly protected by the

foreclosure sale. However, the court found significant First Dakota’s choice to bid at

the auction and to bid the entire amount of Huron Hospitality’s obligation. First

Dakota was not obligated to make that decision, but in doing so, left no surplus or

deficiency on Huron Hospitality’s obligation to First Dakota. Relying on the

language of the guaranty contracts, the court ruled that without indebtedness for

the Guarantors to guarantee, the guaranties were unenforceable. The court

granted the Guarantors summary judgment and denied First Dakota’s motion.

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[¶12.] First Dakota appeals with the following issue: “By entering a credit bid

at the foreclosure sale of the hotel property serving as partial collateral for its loan

to Huron Hospitality, LLC, did First Dakota National Bank release Huron

Hospitality’s Guarantors from their separate contractual obligations?”

STANDARD OF REVIEW

[¶13.] We review a circuit court’s decision to grant summary judgment “to

determine only whether a genuine issue of material fact exists and whether the law

was correctly applied. If there exists any basis which supports the ruling of the

trial court, affirmance of a summary judgment is proper.” Jacobson v. Leisinger,

2008 S.D. 19, ¶ 24, 746 N.W.2d 739, 745 (quoting Cooper v. James, 2001 S.D. 59,

¶ 6, 627 N.W.2d 784, 787).

ANALYSIS

[¶14.] First Dakota submits that “the foreclosure proceedings adjudicated

only the claims between First Dakota as the lender and Huron Hospitality as the

borrower.” Thus, according to First Dakota, the circuit court erred when it ruled

that First Dakota’s credit bid at the foreclosure sale extinguished the Guarantors’

obligations under the commercial guaranties. First Dakota directs this Court to the

waiver language in the guaranties that authorized First Dakota to elect to foreclose

on the property in any fashion that it deemed appropriate. It then claims that its

election to foreclose on the property was not to affect the Guarantors’ obligations.

First Dakota further cites cases from other courts for the proposition “that the

extinguishment or satisfaction of the borrower’s debt does not extinguish

contractual obligations under a guaranty.”

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[¶15.] The Guarantors, however, claim they are not seeking protection

through the foreclosure action. Rather, they contend that their obligations under

the guaranties depend entirely on whether there is any indebtedness of Huron

Hospitality to First Dakota. Based on the guaranty language and undisputed facts,

the Guarantors aver no indebtedness exists, because First Dakota (1) chose to

foreclose on the property, (2) specifically sought to recover “the total balance due,”

plus attorneys’ fees, interest, and expenses, (3) bid the full amount at the

foreclosure sale, and (4) specifically directed that the proceeds of the foreclosure sale

be applied to the amount due to First Dakota by Huron Hospitality.

[¶16.] “A guaranty is a promise to answer for the debt, default, or miscarriage

of another.” SDCL 56-1-1; W. Petroleum Co. v. First Bank Aberdeen, 367 N.W.2d

773, 776 (S.D. 1985). It is collateral to the principal obligation. Robbins & Stearns

Lumber Co. v. Thatcher, 453 N.W.2d 613, 615 (S.D. 1990). “The liability of a

guarantor will not be enlarged beyond the plain and certain import of the guaranty

contract and any ambiguous or uncertain terms in a guaranty will be interpreted

most strictly against the party who prepared it.” Id.

[¶17.] From our review of the language of the guaranty contracts, the

Guarantors’ obligation is unambiguously connected to the existence of the

indebtedness of Huron Hospitality to First Dakota. In particular, the guaranties

provide that each Guarantor “absolutely and unconditionally guarantees full and

punctual payment and satisfaction of the Indebtedness of Borrower to Lender.”

However, First Dakota contends that the Indebtedness under the guaranties means

something different than money owed by Huron Hospitality to First Dakota. In

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First Dakota’s view, the Indebtedness under the guaranties is the full amount the

Guarantors agreed to pay if Huron Hospitality failed to pay. First Dakota submits,

therefore, that it is completely immaterial to this case that First Dakota

extinguished Huron Hospitality’s debt through foreclosure of the Hotel—the

Indebtedness under the guaranties remains.

[¶18.] “INDEBTEDNESS” is defined in the Commercial Guaranty to include

amounts that are owed or will be owed by Huron Hospitality to First Dakota. Here,

there is no amount owed or owing. However, Indebtedness further includes “other

obligations and liability of” Huron Hospitality “and any present or future judgments

against” Huron Hospitality “originated by Lender or another or others; barred or

unenforceable against Borrower for any reason whatsoever; for any transactions that

may be voidable for any reason (such as infancy, insanity, ultra vires or otherwise);

and originated then reduced or extinguished and then afterwards increased or

reinstated.” (Emphasis added.) First Dakota relies on this language for the

proposition that the Guarantors’ obligation continues despite the fact that Huron

Hospitality’s debt was extinguished in the foreclosure sale. This conclusion might

be true under different facts. Here, however, First Dakota directs this Court to no

evidence that Indebtedness, as it is defined in the guaranties, exists. Besides there

being no amounts owed or owing from Huron Hospitality to First Dakota, there is

also no “obligation or liability against Borrower” that is “barred or unenforceable

against Borrower for any reasons whatsoever.” See Guaranty, INDEBTEDNESS.

On the contrary, the sheriff’s return from the foreclosure sale provided that, as a

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result of a sale to the highest bidder, no surplus or deficiency resulted. Further,

First Dakota has not sold the Hotel.

[¶19.] Nonetheless, First Dakota contends that the Guarantors specifically

waived the right to claim that First Dakota’s election to enter a credit bid at the

sheriff’s sale would have any effect on the Guarantors’ obligation under the

guaranties. First Dakota quotes the waiver language that “Guarantor also waives

any and all rights or defenses based on suretyship or impairment of collateral

including, but not limited to, any rights or defenses arising by reason of (A) any ‘one

action’ or ‘anti-deficiency’ law or any other law which may prevent Lender from

bringing any action, including a claim for deficiency, against Guarantor, before or

after Lender’s commencement or completion of any foreclosure action, either

judicially or by exercise of a power of sale[.]” See Guaranty, GUARANTOR’S

WAIVER, Second (A) (emphasis added). First Dakota directs this Court to cases

from other jurisdictions and submits that, based on the waiver language, it could

“handle the foreclosure as it deemed advisable” and not extinguish the Guarantors’

contractual obligation under the guaranties. We disagree.

[¶20.] First Dakota reads this waiver language too broadly and without

regard to the facts of this case. The Guarantors are not attempting to assert a right

or defense to First Dakota’s claim under a “one action” rule. A “one action” rule

provides that “a creditor must seek to recover on the property through judicial

foreclosure before recovering from the debtor personally.” McDonald v. D.P.

Alexander & Las Vegas Boulevard, LLC, 123 P.3d 748, 750 (Nev. 2005); contra

SDCL 21-47-5. The purpose of this rule is to prevent creditors from “attempting

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double recovery by seeking a full money judgment against the debtor” while also

“seeking to recover the real property securing the debt.” McDonald, 123 P.3d at

751. Similarly, the Guarantors do not rely on a defense under an “anti-deficiency

law”—no deficiency existed after the foreclosure sale. See, e.g., SDCL 21-47-15 to -

17; Miners & Merchants Bank v. Braden Forestry Servs., Inc., 374 N.W.2d 123, 125

(S.D. 1985). Moreover, the Guarantors are not asserting a right or defense under

“any other law which may prevent Lender from bringing any action, including a

claim for a deficiency, against Guarantor, before or after Lender’s commencement or

completion of any foreclosure action.” See Guaranty, CONTINUING GUARANTEE

OF PAYMENT AND PERFORMANCE. Rather, the Guarantors assert that First

Dakota cannot enforce the guaranties under these facts because there exists no

Indebtedness as it is defined under the guaranties and Huron Hospitality has no

remaining obligation to First Dakota.

[¶21.] Moreover, the cases relied on by First Dakota are distinguishable. In

Du Quoin State Bank v. Daulby, the bank brought a foreclosure action against the

borrower and ultimately purchased the mortgaged property for the full amount of

the borrower’s debt. 450 N.E.2d 347, 348 (Ill. App. Ct. 1983). The bank re-sold the

property and incurred a deficiency. Relying on the provision of the guaranty that

the guarantor’s liability “would not be affected or impaired by ‘any sale . . . or other

disposition of any said indebtedness . . . or of any security or collateral thereof,’” the

bank demanded the guarantor pay the deficiency. Id. The Illinois court upheld the

bank’s enforcement of the guaranty based on the specific guaranty contract

language. Id. at 348-49. Here, although the guaranty gave First Dakota the

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authority to direct the manner of the sale of the Hotel, “as Lender in its discretion

may determine,” it did not provide that the Guarantors’ liability would not be

affected or impaired by any such sale. See Guaranty, GUARANTOR’S

AUTHORIZATION TO LENDER (F). Furthermore, this case is factually dissimilar.

Here, the Hotel has not been sold by First Dakota and First Dakota is not

proceeding against the Guarantors for any deficiency. Rather, First Dakota

possesses the Hotel and is seeking a judgment against each Guarantor in the

amount of $3,241,883.03—the total due on the promissory note.

[¶22.] In Victory Highway Village, Inc. v. Weaver, the borrower defaulted on a

loan with the Small Business Administration (SBA). 634 F.2d 1099, 1100 (8th Cir.

1980). Thereafter, the SBA purchased the property at a foreclosure sale and later

sold the property at an auction. The sale resulted in a deficiency balance on what

would have been the borrower’s loan obligation. In a subsequent suit, a federal

district court ruled that the SBA waived its right to collect a deficiency judgment

against the borrower under Minnesota law and ordered that the borrower’s

indebtedness be discharged. See Dalton Motors, Inc. v. Weaver, 446 F. Supp. 711 (D.

Minn. 1978). Two guarantors of borrower sought release from their obligation

under the guaranty agreements. The guarantors relied on the fact that the SBA

waived its right to collect the deficiency against the borrower and the fact that the

borrower’s debt was extinguished. Victory Highway Village, Inc., 634 F.2d at 1100-

01. The Eighth Circuit Court of Appeals held that Minnesota’s waiver law did not

apply to the guarantors and that the language of the guaranty contracts “were

unconditional in nature” and “specific and straightforward.” Id. at 1102. The

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court, therefore, ruled “that under the provisions of the guaranty contract, even

construed in light of Minnesota law, the guarantors were not discharged by the

statutory waiver against a deficiency judgment from the principal[.]” Id. at 1103.

Here, however, the Guarantors are not relying on a statutory waiver defense, there

is no deficiency, and the language of the guaranty contract is different.

[¶23.] By comparison, the Guarantors direct this Court to State Bank of

Young America v. Fabel, 530 N.W.2d 858 (Minn. Ct. App. 1995). The lender

commenced foreclosure proceedings against mortgaged property and purchased the

borrower’s property at a sheriff’s sale for slightly more than was owed on the

mortgage. Id. at 860. Thereafter, the lender sold the property and realized a

deficiency, which amount it sought to obtain from the guarantors. The guarantors

moved to dismiss, claiming the proceeds of the sale extinguished the borrower’s

debt. The court noted that the case did not involve a situation where there was a

deficiency from the foreclosure sale—the underlying debt was fully recovered. Id. at

863. The court further relied on the guaranty language, which did not extend the

guarantors’ obligation beyond the existence of principal and interest to be paid, and

ruled that the guaranty could not be enforced. Similarly, here, the Guarantors

guaranteed Huron Hospitality’s debt—“they did not guarantee that [First Dakota]

would not experience a loss in its subsequent sale of the property. Nor did they

guarantee that [First Dakota] would make sound business decisions.” See id. at

862; First Fed. Sav. & Loan Ass’n v. Scherle, 356 N.W.2d 894 (N.D. 1984).

[¶24.] Even so, First Dakota contends that if we affirm the circuit court’s

ruling, we will “create a new rule requiring any lender that commences a

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foreclosure action to get a deficiency judgment against the borrower to preserve its

rights under any guaranty.” Our decision is controlled by the facts of this case and

the language of the guaranties, which are distinguishable from the facts in Du

Quoin, 450 N.E.2d at 348 and Victory Highway Village, Inc., 634 F.2d at 1103.

Because there is no debt before us that is alleged to be barred or unenforceable, the

circuit court did not err when it ruled that First Dakota could not enforce the

guaranties against the Guarantors and granted the Guarantors summary

judgment.

[¶25.] GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and

WILBUR, Justices, concur.

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