Norman D. Farnam
The Wisconsin Court of Appeals recently issued an unpublished decision that has the potential to significantly increase the risks associated with condominium lending in the State of Wisconsin, both on individual units and on condominium developments. In the case Walworth State Bank v. Abbey Springs Condominium Association, Inc., No. 2014AP940, 2015 WL 1333691 (Wis. Ct. App. March 26, 2015) (unpublished), the court declared that Walworth State Bank was not entitled to the return of amounts it paid under protest to a condominium association to cover delinquent assessments foreclosed in a prior foreclosure action.
In a foreclosure action, Walworth State Bank foreclosed two condominium units in the Abbey Springs development, including the junior condominium lien of the association, and the bank purchased the units at sheriff’s sale. As the bank was preparing to sell the units, the association notified the bank that the unit owners would not be permitted to use certain amenities owned by the association until and unless all delinquent assessments owed by the former unit owners, but foreclosed by the bank, were paid in full. Under pressure to complete the sale, the bank paid the delinquent assessments under protest and filed an action in circuit court for return of the amounts paid.
The amenities in question were recreational facilities, including a clubhouse, golf course, yacht club, restaurants, boat storage, and boat launching facilities. Unit owners paid separate and additional assessments to the association for the privilege of using such facilities. However, the association banned any unit owner who was not current on any assessments owed to the association from use of the facilities, including common and special assessments. Based on this policy, even though the condominium lien on the units had been foreclosed, and even though neither the bank nor the new unit owners personally were obligated to pay the delinquent assessments, the association still had the power to prohibit the new unit owners from using the amenities until all delinquent assessments related to the units were paid.
The circuit court ruled in favor of the bank concluding that the association was not entitled to collect foreclosed liens. The association appealed, and in an unpublished opinion, the court of appeals reversed. The court of appeals found the bank’s arguments based on Wisconsin’s Condominium Ownership Act unconvincing and found that the association’s policy “merely created a pay-to-play requirement.” The court explained that the bank, and any subsequent purchasers, “were under no obligation to pay the delinquent assessments and were free to utilize other recreational facilities in the area.” The court also rejected the bank’s argument that the association’s policy rendered the bank’s title unmarketable or, at least, adversely affected its marketability. The court concluded that, even if the market value of the units was reduced, the units were still marketable because the bank could freely convey its title.
A petition for review of the court of appeal’s decision was filed with the Wisconsin Supreme Court on April 24, 2015, so it remains to be seen whether the court of appeal’s decision will stand. Unless the decision is reversed, lenders should take extra caution in making any loans that will be secured by condominium property, either to individual unit owners or to developers. The ruling of the court of appeals essentially means that, although condominium associations cannot directly pursue the bank and subsequent owners for previous unpaid assessments after a foreclosure action, associations still effectively can hold such parties ransom by denying them the privileges to use the amenities of the association as long as the assessments remain unpaid.
It is important to note that in the Abbey Springs case, the amenities in question are owned by the condominium association and are not common elements owned in common by the unit owners. However, the court’s opinion does not rely on this distinction, suggesting that associations might impose similar restrictions on the use of regular common elements of the association. If the Supreme Court grants the petition to hear the case, this distinction may become important.
In short, the Abbey Springs decision appears to significantly increase the risks to lenders of engaging in any financing arrangement that is or will be secured by condominium property, and lenders should ensure that their loan approval process includes a careful review and analysis of all condominium documents and a thorough risk assessment of the same.
If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at email@example.com or (608) 257‑2281 or your Stroud attorney.
DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice. This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship. You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.