Norman D. Farnam
Janell M. Oudenhoven
The Wisconsin Supreme Court has held that condominium associations may not bar use of amenities for unpaid condominium fees on a foreclosed condominium unit. The Supreme Court decision is significant to lenders because it reverses the Court of Appeals’ holding that a condominium loan or condominium development loan could not be secured by a mortgage that was truly in first position. Before the Supreme Court’s holding, associations could place payment obligations on units that would effectively survive any foreclosure action, giving the association a super priority over the lender. This logic could apply to any property governed by an association with lien rights and rulemaking authority.
In a foreclosure action, Walworth State Bank foreclosed two condominium units in the Abbey Springs development, including the association’s junior condominium liens. The bank purchased the units at sheriff’s sale. As the bank was preparing to resell the units, the association notified the bank that the new unit owners would not be permitted to use the clubhouse, golf course, yacht club, restaurants, boat storage, and boat launching facilities unless and until all delinquent assessments owed by the former unit owners were paid in full.
The association’s policy banned any unit owner who owned a unit that was not current on any assessments owed to the association from use of the amenities. Significantly, the association recognized that its lien was foreclosed and it was not claiming that Walworth State Bank or the new owners actually owed the delinquent assessments. Nevertheless, the association claimed the power to prohibit the new unit owners from using the amenities until all delinquent assessments related to the foreclosed units were paid.
Under pressure to complete the sale and under protest, the bank paid the delinquent assessments and filed an action in circuit court for return of the amounts paid. The circuit court ruled in favor of the bank concluding that the association was not entitled to collect on what was in essence foreclosed liens.
The association appealed and the Court of Appeals reversed. The Court of Appeals 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 Supreme Court now has reversed the Court of Appeals, holding that the association policy impermissibly and “effectively revived the lien against the property that” had been foreclosed. In other words, the association was using its policy to leverage payment from the new owners, even though it had no lien and the owners had no payment obligation, by tethering a payment obligation under the policy to the foreclosed units. “What Abbey Springs is foreclosed from doing is perpetually saddling the property and all subsequent owners with debt owed by the former unit owners unless and until that debt is paid.”
The Supreme Court’s ruling is important because when a lender makes a loan to purchase a condominium unit or to finance a condominium developer, the lender wants to secure repayment of that loan with a first position mortgage. The Court of Appeals decision suggested a method for associations to organize and adopt policies that would create a payment obligation on the condominium units for past debts that a lender could not get rid of through foreclosure. The association’s ability to leverage payment even after foreclosure would effectively take priority over the lender’s mortgage. In the authors’ opinion, the same logic could apply to homeowner’s associations or other similar ownership schemes where owners pay assessments and have rights that can be taken away by the association. The Supreme Court decision clarifies that an association cannot set policies that create inextinguishable payment obligations on property for non-payment by previous owners.
If you have any questions about how the information in this article may affect you or your business, please contact Norman Farnam at firstname.lastname@example.org 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.