Mazur v. Young

MOORE, J., delivered the opinion of the court, in which DAUGHTREY, J., joined. SHADUR, D.J. (pp. 1023-28), delivered a separate dissenting opinion.

OPINION

In this diversity action we are asked to determine whether, under Michigan law, the guarantor of a land contract is liable to the seller for any deficiency once the seller has elected forfeiture as his remedy. For the reasons discussed below, we conclude that a judgment for possession after forfeiture extinguishes the land contract, leaving no legal basis to pursue further claims against the guarantor. Therefore, in this case, the guarantor is not liable, and we affirm the district court’s entry of summary judgment for the guarantor.

I. BACKGROUND

Roi and Dyan Young, a husband and wife, moved to Michigan in 1993 so that Roi Young could work with Richard Ma-zur. In August of that year, the Youngs found a vacation home in Perrinton, Michigan (“the property”) that they wanted to purchase. Their efforts were frustrated, however, when Roi Young could find financing only at an interest rate that he believed was too high. When Roi Young shared his problem with Mazur, Mazur indicated that “he could buy the property at an unbelievably low rate and just sell it back to [Roi Young].” Joint Appendix (“J.A.”) at 235 (Roi Young dep. at 19). In September 1993, Mazur bought the property for $525,000; Roi Young contributed the $125,000 down payment, and Mazur took out a mortgage on the property for the remaining $400,000.

The Youngs apparently did not want to own the property in their name because Roi Young worked in a litigious business. J.A. at 238. Accordingly, in December *10161993, the parties agreed that Mazur would sell the property not to the Youngs, but to Equitable Benefit Insurance Services, Inc. (“EBIS”), a California corporation of which Roi Young was the sole shareholder. Under the terms of the land contract, EBIS was to pay Mazur according to the payment terms of the mortgage. Additionally, Roi and Dyan Young entered into a guaranty contract with Mazur that “unconditionally guarantee^] to [Mazur] the full and complete performance of all of [EBIS’s] covenants and obligations under [the] Land Contract to the same extent and with the same force and effect as though the undersigned was the primary debtor under the Land Contract.” J.A. at 18 (Guaranty of Land Contract ¶ A).

Sometime during the summer of 1997, EBIS stopped making payments on the land contract, and the Youngs stopped using the property. Eventually, Mazur changed the locks and, in December of that year, he tried to sell the property. Mazur, however, was unable to sell the property because EBIS held the title.

To reclaim the title, in February 1999, Mazur served EBIS and the Youngs with a notice of forfeiture. Mazur filed for possession, and on February 4, 2000, Mazur and EBIS entered into a consent judgment wherein Mazur took possession of the property, EBIS agreed that the land contract had been forfeited, and EBIS waived redemption rights. J.A. at 118. On April 28, 2000, the state trial court dismissed without prejudice Roi and Dyan Young as defendants in the action because of a lack of progress in the case.

According to Mazur, for the next two years he continued to pay installments on the then-refinanced mortgage, utility bills, property taxes, and general maintenance and housekeeping costs. On March 26, 2002, Mazur sold the property for $400,000. Mazur claims that the sale price did not fully satisfy the cost of sale, outstanding property taxes, and the outstanding debt on the mortgage, costing him $41,405.75 out-of-pocket.

To recover that deficiency and other losses, Mazur sued the Youngs in the Gra-tiot County Circuit Court for $274,676.95, alleging that EBIS had breached its land contract with Mazur and that the Youngs were liable as guarantors for all damages that resulted from the breach. On the basis of federal diversity jurisdiction, the Youngs removed the case to the federal district court. Both parties filed motions for summary judgment, and on March 17, 2006, the district eohrt granted the Youngs’ motion and denied Mazur’s. Ma-zur now appeals the district court’s judgment.

II. EFFECT OF THE GUARANTY AGREEMENT

A. Standard of Review

We review de novo a district court’s order granting summary judgment. Himmel v. Ford Motor Co., 342 F.3d 593, 597 (6th Cir.2003). Summary judgment is proper if the evidence, taken in the light most favorable to the nonmoving party, shows that there are no genuine issues of material fact and that the moving party is entitled to a judgment as a matter of law. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Fed.R.Civ.P. 56(c).

Because this is a diversity case, we must apply the choice-of-law rules and substantive law of Michigan, the forum state. Himmel, 342 F.3d at 598. If we confront an issue that “has not yet been resolved by the [Michigan] courts, we must attempt to predict what the [Michigan] Supreme Court would do if confronted with the same question.” Id. In such circumstances, we consider decisions of *1017the Michigan Court of Appeals as well as relevant Michigan Supreme Court dicta, restatements of law, law-review commentaries, and the rules adopted by other jurisdictions. Garden City Osteopathic Hosp. v. HBE Corp., 55 F.3d 1126, 1130 (6th Cir.1995).

B. Default Guaranty Rules

Before considering the specific contract provisions at issue in this case, we briefly review the default rules that govern guaranties and land contracts under Michigan law. Except where the specific terms of the agreement between Mazur and the Youngs override, we apply the default rules. See Restatement (Second) of Contracts § 5 cmt. b (1981) (“Much contract law consists of rules which may be varied by agreement of the parties.”).

When a seller of property seeks redress against a recalcitrant buyer, the seller must make an election of remedies. The seller can choose to pursue either foreclosure or forfeiture, but not both. See Mich. Nat’l Bank v. Cote, 451 Mich. 180, 546 N.W.2d 247, 249 n. 4 (1996) (“If the plaintiff prefers to have money damages under the contract, he should be required to elect that remedy or to foreclose in the circuit court where the defendant will receive credit for the proceeds of the foreclosure sale.” (quoting Mich. Law Revision Comm’n, 5th Annual Repoet 36) (emphasis removed)).

In a foreclosure action under Michigan law, “the court has the power to order a sale of the premises which are the subject of the ... land contract, or of that part of the premises which is sufficient to discharge the amount due on the ... land contract plus costs.” mioh. Comp. Laws § 600.3115. The proceeds of the eourt-or-dered foreclosure sale are applied toward paying down the debt, and the defendant-buyer can keep any surplus that might remain, mich. Comp. Laws § 600.3135(1). Of particular importance for this case, if a foreclosure sale is insufficient to cover the entirety of the debt, “the clerk of the court shall issue execution for the amount of the deficiency” against either the defendant, mich. Comp. Laws § 600.3150, or against any other party liable for the deficiency, mich. Comp. Laws § 600.3160. Thus, when a seller chooses to pursue foreclosure, the plaintiff-seller can keep neither the property nor any surplus from the court-ordered sale, but the defendant, as well as the guarantor, remains liable for any deficiency that remains after the sale of the property. See Mich. Comp. Laws § 600.3160; United States v. Leslie, 421 F.2d 763, 766 (6th Cir.1970).

In contrast, a seller may instead elect to pursue forfeiture. If the seller opts for forfeiture1 and prevails, the seller receives “full possession of the premises.” Mich. Comp. Laws § 600.5744(1). At that point, the seller can keep the property, sell the property, or do with it whatever the seller pleases. What the victorious seller cannot do, however, is continue to pursue the buyer for any deficiency: “[A] judgment for possession after forfeiture of an execu-tory contract for the purchase of premises shall merge and bar any claim for money payments due or in arrears under the contract at the time of trial.” Mich. Comp. Laws § 600.5750 (emphasis added); see also Cote, 546 N.W.2d at 249 n. 1 (“This section is, in effect, a codification — arguably with modifications — of the common-law rule that the forfeiture of an executory contract for purchase of land constitutes *1018an election of remedies, precluding the vendor from later seeking damages for breach of contract.” (citation omitted)); Durda v. Chembar Dev. Corp., 95 Mich.App. 706, 291 N.W.2d 179, 182 (1980) (“It is clear that once the vendor has elected the remedy of forfeiture and proceeded to the point of issuance of a writ of restitution, he cannot recover a deficiency judgment for money due under the contract.”).

Because forfeiture discharges the buyer from liability for the debt, even if there is a deficiency, judgment for possession after forfeiture has important consequences for guarantors. “As a general rule, the guarantor is released from liability if some act or omission on the part of the creditor discharges the principal debt- or of the principal obligation by a rule of law, even if the principal obligation has not been paid.” 38 Am.Jur.2d Guaranty § 96; see also Wilson Leasing Co. v. Seaway Pharmacal Corp., 53 Mich.App. 359, 220 N.W.2d 83, 88-89 (1974) (“Any material alteration of a principal debt or obligation operates to completely discharge any guaranty of that debt or obligation, unless the guarantor consented to the alteration.” (citations omitted)). Thus, as a general rule, a judgment for possession after forfeiture releases a guarantor from liability.

C. The Effect of the Guaranty Agreement

If we simply applied the general rule to the facts of this case, we could reach no other conclusion than that reached by the district court: Mazur’s choice to pursue forfeiture and discharge the buyer, EBIS, also discharged the Youngs as guarantors. We cannot, however, simply apply the general rule. Instead, we must first consider whether the guaranty contract altered the default relationship of the parties. See First Nat’l Bank of Ypsilanti v. Redford Chevrolet Co., 270 Mich. 116, 258 N.W. 221, 223 (1935) (“In construing a contract of guaranty, the intention of the parties should govern. Where the language of the writing is not ambiguous the construction is a question of law for the court, on a consideration of the entire instrument.” (internal quotation marks omitted)). Although we look to the language of the contract, we will not read expansively a guaranty contract. See Bandit Indus., Inc. v. Hobbs Int’l, Inc., 463 Mich. 504, 620 N.W.2d 531, 535 (2001) (“[T]he courts will not assume such an obligation [to take on another’s debts] in the absence of a clearly expressed intention to do so.”).

Mazur asserts that the guaranty contract overrides the default contract rules. First, Mazur argues that “[a] ‘guaranty’ is by its very nature a separate and distinct obligation” under which the Youngs remained liable for EBIS’s default under the land contract, despite the fact that EBIS was no longer liable under the land contract. Appellant’s Reply Br. at 5. Second, Mazur argues that even if the guaranty agreement does not create continuing liability by its own independent existence, the Youngs accepted liability above and beyond that of a normal guarantor and agreed to remain bound regardless of what happened to EBIS.

We conclude that these arguments are without merit.

1. A Guaranty Agreement’s Continuing Liability

Mazur argues that a guaranty is a separate obligation, distinct from the land contract, and the guarantor thus remains liable under the guaranty regardless of the principal’s liability under the land contract. If this were true, then our default rule would not be much of a default rule at all; the guaranty agreement would leave the guarantor responsible for any deficiency regardless of the remedy the seller elects. *1019That is not to say that Mazur’s assertion is totally inaccurate, because a guaranty is “ ‘an independent, collateral agreement by which [the guarantor] undertakes to pay the obligation if the primary payor fails to do so.’ ” First Nat’l Bank & Trust Co. of Ann Arbor v. Dolph, 287 Mich. 219, 283 N.W. 35, 37-38 (Mich.1938) (quoting Bedford v. Kelley, 173 Mich. 492, 139 N.W. 250, 252 (1913)) (emphasis added). Furthermore, Mazur is correct that we have observed that “[t]he guaranty is an obligation separate from the mortgage note” and concluded that, under Michigan law, a creditor may simultaneously proceed against a guarantor and foreclose on a mortgaged property. Leslie, 421 F.2d at 766.

Mazur’s argument fails because of an important difference between Leslie and the instant case: Leslie was decided in the context of a foreclosure action, not a forfeiture action. That a guaranty agreement is an independent, collateral agreement is what allows a seller to proceed against a guarantor without having first exhausted the foreclosure remedy against the buyer. Allowing a seller to proceed against a guarantor in the foreclosure context is simply expeditious, because the guarantor will still be liable for any deficiency that remains after foreclosure— something that is not true following forfeiture. See Cote, 546 N.W.2d at 249 n. 4.

Although not raised by Mazur, Judge Shadur’s dissent makes a compelling argument that a recent, unpublished opinion of the Court of Appeals of Michigan holds that a guaranty contract provides an independent basis for liability even after a forfeiture action. In Richard v. 880 Fair Assocs., Inc., No. 268299, 2006 WL 2355096 (Mich.Ct.App. Aug.15, 2006) (unpublished opinion), the court held that § 5750, which bars collection of a deficiency from a buyer after forfeiture, was no defense for a guarantor because the plaintiffs claims arose under the “the wholly separate and discrete guaranty contract” and was not for “money payments due or in arrears under the [land] contract” that are barred by § 5750. Id. at *3 (quoting Mich. Comp. Laws § 600.5750).

We conclude that Richard is distinguishable from the case at hand. In Richard, the seller was seeking money from the guarantor due to the plaintiff under a “pocket” consent judgment that the buyer and seller agreed to during the forfeiture action. Id. at * 1. Accordingly, § 5750 would not have protected the buyer, let alone the guarantor, because “that liability arose out of the forfeiture proceeding, rather than a separate, subsequent action for amounts due under the land contract.” Id. at *4. Because of the nature of the consent judgment, Richard was actually more like a foreclosure action in that liability continued for the buyer even after the seller received judgment for possession after forfeiture. In Mazur’s case, however, there is no dispute that § 5750 would be a defense for EBIS. Thus, while Richard asked whether a guarantor is liable when the buyer is also still liable, we face the much different question of whether a guarantor is liable when the buyer has been discharged of all liability. In any event, Richard is an unpublished decision, which is not binding under Michigan Court Rules. See Mich. Ct. R. 7.215(C)(1).

We conclude that, although a guaranty agreement is an independent contract, that fact alone does not create liability for the guarantor after the buyer is discharged.

2. The Youngs’ Obligations Under This Guaranty Agreement

The guarantor, through explicit language in the guaranty agreement, can assume additional and lasting obligations to the seller that continue past forfeiture. *1020See Davis v. Yellow Mfg. Acceptance Corp., 242 F.2d 503, 505 (6th Cir.1957) (applying Michigan law and concluding that the appellant was not released from an obligation by discharge of the principal because the obligation was “independent of and additional to his guarantee of the buyer’s performance of the conditional sale contract”). The question before us, and the locus of our principal disagreement with Judge Shadur, is whether the Youngs assumed such a lasting obligation. We conclude that they did not.

At issue is Paragraph D of the guaranty agreement. The relevant portion of Paragraph D reads:

The undersigned’s obligations hereunder shall remain fully binding although Seller may have waived one or more defaults by Buyer, extended the term of performance by Buyer, released, returned or misapplied other collateral at any time given as additional security (including other guarantees), and/or released Buyer from the performance of its obligations under such Land Contract.

J.A. at 18 (Guaranty ¶ D). If forfeiture is simply a fancy word for “release,” then Paragraph D would apply and would trump the default contract rules; that would leave the Youngs liable to Mazur despite the release of EBIS. It is our determination, however, that forfeiture did far more than simply release EBIS from the performance of its obligations under the land contract; forfeiture extinguished the land contract altogether, meaning that the Youngs as guarantors cannot be held liable for damages due to breach of the now-extinguished contract.

As discussed earlier, when a seller elects to seek forfeiture under Michigan law, the seller retakes possession of the property as full satisfaction for the debt and no further obligations remain on either side. Thus, “[fundamentally, forfeiture is rescission.”2 Orzechowski v. Kolodziejski, 281 Mich. 657, 275 N.W. 722, 722 (1937). At the conclusion of a summary proceeding for possession after forfeiture, the seller recovers possession of the land, and the contract is effectively rescinded. There can be no liability for breach of contract under a contract that has been rescinded.3 See Restatement (Second) Of Contracts § 283. In other words, forfeiture is a full and complete remedy. Cote, 546 N.W.2d at 249 n. 4.

Mazur has not identified any precedent to the contrary. In United States v. Beardslee, 562 F.2d 1016 (6th Cir.1977), cert. denied, 439 U.S. 833, 99 S.Ct. 113, 58 L.Ed.2d 128 (1978), and Leslie, we considered the liabilities of guarantors in the context of foreclosure actions, not forfeiture actions, see Beardslee, 562 F.2d at 1018; Leslie, 421 F.2d at 766, which, as explained above, is a dispositive distinc*1021tion. In Davis, we concluded that the contract at issue in that case, unlike the contract at issue here, in “clear terms imposed an obligation upon the appellant” beyond a guaranty, specifically “to repurchase the trucks in the event of default by the buyer and repossession by the seller.” Davis, 242 F.2d at 505. Because we determine Paragraph D to be inapplicable, the general rule applies, and the guarantor cannot be liable for a principal’s breach of a contract that has been rescinded.

Judge Shadur, in his dissent, claims that our reading of Paragraph D essentially renders Paragraphs A and B as dead letter.4 He claims that we are erroneously reading Paragraphs A and B as establishing the guarantor’s obligations post-forfeiture. He is only partly correct; while we do conclude that a guarantor has no obligations post-forfeiture, we read Paragraphs A and B to establish obligations post-remedy. We need not adopt a pre-forfeiture reading of Paragraphs A and B for them to have meaning, as they will have effect when the seller opts for release or foreclosure instead of forfeiture. Therefore, Paragraphs A and B are quite forceful and intact — but they apply only when the seller has elected a remedy that is less than a full and complete remedy.

The inapplicability of Paragraph D is further evident from a plain reading of its terms. Paragraph D maintains the guarantor’s liability when the seller releases the buyer “from the performance of its obligations under such Land Contract.” J.A. at 18 (emphasis added) (Guaranty ¶ D). From the moment that EBIS and Mazur executed the land contract, EBIS held title over the property. Thus, a simple release of the buyer from its obligations would merely allow EBIS to stop paying while retaining title over the property. Forfeiture,, in contrast, is far more than a simple release from obligations.

Judge Shadur concludes — indeed, it is necessary for his argument to succeed-that the Youngs “undert[ook] a greater liability than the buyer under the Land Contract.” Dissent at 12. We respectfully disagree. Paragraph A, by a plain reading, says the exact opposite: “[The guarantor] does hereby unconditionally guarantee to Seller the full and complete performance of all of the Buyer’s covenants and obligations under such Land Contract to the same extent and with the same force and effect as though the undersigned was the primary debtor under the Land Contract.” J.A. at 18 (emphasis added) (Guaranty ¶A). In light of Michigan’s precedent establishing that guaranty contracts shall be read narrowly and by only their plain meaning, Bandit Indus., 620 N.W.2d at 535 (declaring that courts should “apply the principle of strict interpretation to the construction of [a guaranty] contract”); Dillon v. De-Nooyer Chevrolet Geo, 217 Mich.App. 163, 550 N.W.2d 846, 848 (1996) (“Contractual language is construed according to its plain and ordinary meaning, and technical *1022or constrained constructions are to be avoided.”), we cannot conclude that the Youngs’ guaranty contract created any additional liability that would survive forfeiture.

D. Consent

Although a judgment for possession after forfeiture normally discharges a guarantor from liability for a principal’s breach of a land contract, a guarantor might not be discharged if the guarantor consents to the discharge of the principal debtor. See Wilson Leasing Co., 220 N.W.2d at 88-89 (“Any material alteration of a principal debt or obligation operates to completely discharge any guaranty of that debt or obligation, unless the guarantor consented to the alteration.” (citations omitted) (emphasis added)). Mazur argues that the Youngs accepted additional liability because they consented to the discharge of EBIS. Mazur asserts that the same attorney represented EBIS and the Youngs in the state-court forfeiture action.5 The consent judgment for possession after forfeiture was signed by that attorney, so Mazur argues that, because an attorney representing both EBIS and the Youngs signed the consent judgment, the Youngs consented to the discharge of EBIS as the principal debt- or. The judgment, however, listed only EBIS as a defendant, and the Youngs were later dismissed as defendants due to lack of progress in the case.

We need not resolve the question of whether the Youngs consented. The consent judgment at issue was a judgment for possession after forfeiture, which effectively rescinded the contract. Thus, the most that can be said is that the Youngs consented to forfeiture of the contract, which, as explained above, extinguished any liability of both EBIS and the Youngs for damages for breach of the land contract. It would be bizarre to construe the consent judgment as both extinguishing the Youngs’ liability and simultaneously acting as consent for greater liability.

III. FAIRNESS

The soundness of our conclusion that a judgment for possession after forfeiture extinguishes a guarantor’s liability is underscored by considerations of fairness. Judge Shadur suggests that today’s decision is inherently unfair to Mazur, who accommodated the Youngs by agreeing to let them interpose EBIS between Mazur and the Youngs for liability-evading purposes. Mazur, however, does not lose because of the corporate structure the Youngs used; rather, Mazur loses because he made a choice of remedy that he now regrets. Had Mazur opted instead to use foreclosure, it would not have mattered whether EBIS or the Youngs signed the land contract, because both parties would still be liable for any deficiency.

Judge Shadur would prefer that we allow a seller to pursue forfeiture and then, if the seller cannot find a buyer willing to pay enough, allow the seller to seek damages for the deficiency. To do this would be to give Mazur a third type of remedy: “foreclosure plus.” This new remedy would allow the seller to play the market. Just like forfeiture, the seller could keep the property, and if the value increases the seller could keep the surplus. And just like foreclosure, if the value declines the seller could seek the remainder from the buyer or guarantor. Creating this new remedy would contradict Michi*1023gan law: “A land contract seller may not take possession of the property and attempt to sell it and, if unable to do so, seek then to foreclose.” Gruskin v. Fisher, 405 Mich. 51, 273 N.W.2d 893, 901 (1979).

Furthermore, the dissent’s conclusion that a guarantor is still liable following judgment for possession after forfeiture would create an opportunity for sellers to take advantage of unsophisticated guarantors. Such a rule would leave parents, relatives, and other unsophisticated guarantors with a surprising liability, even when the seller chooses not to pursue foreclosure, and even when the buyer returns the property and relinquishes any claim to payments already made under the land contract. Under such a rule, the guarantors would still be liable if the seller was unsatisfied with a later sale of the property — even if the sale was years later. Instead, we conclude that, should sellers wish to establish such lasting and pervasive liability, they cannot claim that it exists as a default, but must instead explicitly negotiate it with the buyers and the guarantors.

IV. CONCLUSION

Because we conclude as explained above that the district court was correct in granting summary judgment, we need not address the district court’s alternate ruling that Mazur’s claim was barred by the statute of limitations applicable to breach-of-contract claims. Accordingly, we AFFIRM the district court’s grant of summary judgment.