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A Personal Guarantor Who Does Not Have an Interest in the Property Secured by the Debt Lacks Standing to Assert Wrongful Foreclosure.

In In Re: Bay Circle Properties, LLC., No. 1812536, 2020 WL 1696303 (Ala. April 8, 2020), the Eleventh Circuit dismissed an appeal by a guarantor alleging a wrongful foreclosure, because the guarantor did not own the foreclosed property and therefore lacked Article III standing.  Here are the facts:  Debtor owed for two loans, both secured by real property.  Debtor then declared bankruptcy.  Guarantor (an affiliate of debtor) had also guaranteed both loans.  Creditor then foreclosed on both properties, although both debtor and guarantor allegedly stated their desire to tender the amount owed prior to the sale.

Guarantor then sued the creditor (and added the debtor as a plaintiff in an amended complaint), alleging that creditor did not have a right to foreclose on both properties because the value exceeded the debt balance and because creditor improperly rejected the purported “tender” prior to the sale. The bankruptcy court entered a judgment on the pleadings in favor of the creditor and both the debtor and guarantor appealed. Debtor ultimately settled with creditor and was dismissed from the case. Guarantor remained the lone appellant.

The Eleventh Circuit dismissed the appeal, finding that the guarantor failed to allege the “actual injury personal to him” required for Article III standing. Specifically, the Court noted that the debtor—not the guarantor—was the property owner, therefore any alleged loss by the debtor stemming from the sale of property was purely speculative. The guarantor argued that he was injured because he personally guaranteed the loans at issue and the property could have satisfied or decreased his personal liability to the creditors. The Court found the personal guarantee irrelevant, since the foreclosures satisfied the debt. Even if that were not the case, the Court noted that even if recovery of the lost property value were appropriate, the property was owned by the debtor, and therefore it was unclear how any such recovery would pay off guarantor’s alleged personal liability on creditors’ judgments against him individually. The Court also held that the guarantor failed to meet the more stringent “person aggrieved doctrine” standard for appealing a bankruptcy court order.

This holding should serve as a cautionary warning to any personal guarantors of debt who do not also hold an interest in the property that secures the debt. Personal guarantors should consider obtaining an interest in the property or, at the very least, ensure that they are satisfied with the terms of any loan or repayment agreement  on the front end, as they will have little legal recourse should they have later grievances concerning creditors rights and resources in the event of default.