This week, Governor Walker signed into law revisions to Wisconsin’s foreclosure statutes that give lenders more flexibility to deal with foreclosed, abandoned properties (known as “zombie properties”). Lenders now will have a year after a court finds a property is abandoned to decide whether to take the zombie property to sheriff’s sale or release the property from the lender’s mortgage. The new law became effective April 26, 2016 and applies to all abandoned properties, both residential and commercial.
Wisconsin Act 376 is the legislature’s reaction to the Wisconsin Supreme Court’s decision in The Bank of New York Mellon v. Carson, 2015 WI 15, 361 Wis. 2d 23, 859 N.W.2d 422. In Carson, the Court ruled that lenders may be forced by the homeowner to bring a zombie property to sale within a reasonable time after the statutory five-week redemption period has run. The Milwaukee home at issue in Carson was abandoned at the time the foreclosure was commenced. The Court noted that the bank did not secure the property and the home was repeatedly burglarized and vandalized and damaged by fire. The City had sent the homeowner notices of accumulated trash and debris, as well as overgrown weeds, grass and trees. The homeowner was assessed $1,800 in fines by Milwaukee.
The bank took no additional steps to complete the foreclosure for 16 months after it took a foreclosure judgment. In an unusual move, the homeowner asked the court to find her property abandoned and force the bank to take it to sheriff’s sale. However, the trial court determined it did not have authority to force the bank to sell the property. The Supreme Court disagreed, ruling that the homeowner could move for a finding of abandonment and that the lender was required to take the property to sale.
Act 376 amends Wis. Stat. § 846.102 to clarify that lenders may take the zombie property to sheriff’s sale any time after the five-week redemption period, but are not required to do so. Instead, no later than 12 months after entry of judgment, the lender must either:
- Hold a sale of the property and have the sale confirmed under Wis. Stat. § 846.165; or
- Release or satisfy the mortgage lien and vacate the foreclosure judgment.
The foreclosure law is further revised to provide that the owner cannot ask the court to find that the property is abandoned, as the homeowner did in Carson. However, the city, town, village, or county in which a property is located may request that the court deem the property abandoned. This gives municipalities the power to move foreclosure actions forward if the lender will not do so even though the municipality is not a party to the foreclosure lawsuit.
In the event that the lender fails to sell the abandoned property or release its mortgage within 12 months of entry of judgment, the revised statute authorizes any party to the foreclosure action, including the homeowner, as well as the city, town, village, or county in which the property is located, to move the court to compel the lender to take the property to sheriff’s sale and have the sale confirmed.
The revised statute leaves some open questions and issues. First, it is important to recognize that the lender’s obligation to sell or release the property is only triggered if there is a finding of abandonment. The lender has no obligation to complete a foreclosure on a property (even one that is, in fact, abandoned) until a court finds that the property is abandoned. Therefore, a lender should only ask the court for a finding of abandonment if it is committed to completing the foreclosure and wants the benefit of the shortened redemption period.
As drafted, the revisions appear to assume that the finding of abandonment will happen at the same time that the foreclosure judgment is entered. In practice, the property might be abandoned (or the lender might discover that it is abandoned) long after entry of a foreclosure judgment. The timing of the lender’s obligations is 12 months from the entry of “the judgment,” which appears to refer to the foreclosure judgment. It is not clear what happens to the timing if there is a finding of abandonment after entry of the foreclosure judgment.
It also should be noted that the lender’s obligations are to be completely fulfilled within the 12-month window. That appears to mean that the lender cannot start the sale process at the end of 12 months, but must conduct the sale and get the sale confirmed within 12 months. However, there does not appear to be any practical consequence if a lender fails to observe this deadline but is on the way to completing the foreclosure anyway.
The revised statute is silent as to what happens if no one bids at a compelled sheriff’s sale. A lender is not required to submit an opening bid. If no one bids, and the property is not sold, it is not clear what happens next. Presumably, the lender may avoid this issue by releasing the property from its mortgage. However, at least one trial court has ordered the lender to submit a bid and have the sale confirmed.
Finally, it should be noted that a lender may elect to release its mortgage but pursue a judgment on the note if the lender has not previously waived its right to a deficiency judgment. It also should be noted that a lender who does not waive its right to a deficiency judgment and elects the longer redemption period nevertheless appears to be entitled to the 5-week redemption period upon a finding of abandonment.
In sum, the revisions to the foreclosure law give a lender more flexibility to deal with abandoned properties after a foreclosure action has been commenced. However, the revisions also give municipalities the power to bring a motion in the foreclosure action and compel the bank to decide whether it is going to sell the property or walk away.
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 Doug Scriver 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.