Court Rules Bank’s Mortgage is Junior to Unrecorded Land Contract

April 4, 2016

The Wisconsin Court of Appeals recently upheld a summary judgment ruling in favor of Kathleen Mertz, who had an unrecorded land contract that the court found to be senior to a lender’s mortgage.  The court determined that the lender, Fair Finance Corporation, had, at the very least, constructive notice of Mertz’s unrecorded land contract, and therefore, did not take its mortgage interest in the property in good faith, as is required to have priority of title under Wis. Stat. § 706.08(1)(a).

In Fair Finance Corporation v. Roomates, LTD, et al., 2015AP728 (March 17, 2016), Fair Finance brought a foreclosure action against Roomates, LTD and Kathleen Mertz.  As noted by the court in its decision, the history of the property at issue is complicated.  In the 1990s, Mertz entered into a land contract for the purchase of the subject property with the property’s former owners.  The outstanding balance under the contract was to be paid by February 28, 1997, but two five-year contract extensions were entered into in 1997 and 2005.

In July 1997, new owners financed the property with a mortgage from Lincoln State Bank, and in August 1997, the new owners transferred title to Roomates.  In 2004, Lincoln State Bank filed an action against Roomates to foreclose the mortgage on the property.  Lincoln State Bank learned of Mertz’s interest in the property and amended its complaint to add Mertz as a defendant to foreclose her land contract.

During the Lincoln State Bank foreclosure, Roomates redeemed the property by re-financing with Fair Finance.  Roomates subsequently defaulted on the Fair Finance mortgage in June 2014, and Fair Finance filed an action to foreclose on the property.  Fair Finance alleged it was the current holder of a promissory note executed by Roomates, secured by a mortgage on the property.  Fair Finance also alleged that Roomates was the owner of the property and Mertz was a tenant.  Mertz answered that she had an interest under an unrecorded land contract executed prior to Fair Finance’s mortgage and asserted that her interest in the property was senior to Fair Finance’s.

Both Fair Finance and Mertz moved for summary judgment.  Fair Finance argued that 1) pursuant to Wis. Stat. § 706.08(1)(a), its interest in the property was superior to Mertz’s because it took its mortgage interest for valuable consideration and in good faith, and 2) the terms of the land contract established the contract “is subordinate to any present or future mortgages” on the property. Mertz argued that 1) Fair Finance had notice of her interest in the property and, therefore, did not take its interest in the property in good faith, and 2) Fair Finance may not rely on the land contract to establish its priority interest over her.  The circuit court agreed with both of Mertz’s arguments and granted her motion for summary judgment.

The Wisconsin Court of Appeals affirmed the circuit court decision granting summary judgment in favor of Mertz. The appeals court acknowledged that § 706.08(1)(a) provides that a subsequent mortgage has priority over a prior unrecorded interest in property, but only if the mortgagee obtained its interest in good faith and for valuable consideration. The court found that the only issue in the case was whether Fair Finance obtained its interest in good faith, and further held that a mortgage is obtained in good faith if it is obtained without notice of existing rights in the land.  Sources of notice can include recording and public records, as well as observation of possession or use of the land itself.  According to the court, there was no question that Fair Finance had at least constructive notice of Mertz’s interest in the property, and therefore, did not take its interest in good faith and did not have priority of title over Mertz.

In support of its ruling, the court found that prior to closing on Fair Finance’s loan to Roomates, a title insurance policy was issued, which contained a notation that Lincoln State Bank had initiated an earlier foreclosure action on its mortgage and that a lis pendens had been filed for that action.  Fair Finance argued that the lis pendens did not identify Mertz as a named defendant, and therefore, did not provide the requisite notice. However, the court held that had Fair Finance acted upon the information in the title commitment, it would have discovered that Mertz was a named defendant in the foreclosure action and had an alleged interest in the property.

In a secondary argument, Fair Finance contended that its interest was still superior to Mertz’s because the land contract expired prior to the initiation of the foreclosure action and also because a provision in the land contract provided that it was subordinate to any present or future mortgage.  The court was similarly unpersuaded by these arguments and summarily dismissed them. The court found that Fair Finance was not a party to the contract, and therefore, did not have standing to enforce its terms.

The takeaway from Fair Finance is that even constructive notice of existing rights in land can be sufficient to deem that a subsequent interest was not obtained in good faith.  Perhaps an even more basic lesson is to conduct due diligence.  In this case, the court seemed to take the position that had Fair Finance taken even a second look at the title commitment, it would have easily discovered that Mertz was claiming an interest in the property.

If you have any questions about how the information in this article may affect you or your business, please contact Norman Farnam at or Jennifer Luther at 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.