Update: Supreme Court Rules That Zombie Houses Will Be Sold

February 20, 2015

The Wisconsin Supreme Court has ruled that circuit courts may (perhaps must) order lenders to complete foreclosures and bring abandoned properties (known as “zombie properties”) to sheriff’s sale after the five-week redemption period.  The Court further ruled that the circuit court shall order abandoned properties sold within a reasonable time after the redemption period has run as determined by the circuit court.  In the opinion authored by Justice Ann Walsh Bradley and released February 17, 2015, the Wisconsin Supreme Court upheld the decision of the Court of Appeals.  Bank of New York Mellon v. Carson, 2015 WI 2015 (Feb. 17, 2015).

In the Bank of New York case, the homeowner, Carson, abandoned her “former home” at around the time Bank of New York initiated its foreclosure action.  Carson did not maintain the property.  The Court pointed out in detail that the house appeared abandoned at the commencement of foreclosure and that, after entry of the foreclosure judgment, the bank did not take steps to secure the property which ended up being “repeatedly burglarized and vandalized” and damaged by fire.

Bank of New York did not schedule a foreclosure sale after the redemption period expired.  Carson continued to receive notices from the municipality of her ongoing liability for the abandoned property, so she filed a motion asking the court to declare the property abandoned under Wis. Stat. § 846.102 and to compel a foreclosure sale upon the expiration of the shortened five-week redemption period applicable to abandoned property.

Wis. Stat. § 846.102 provides that, if the court finds that the mortgaged premises have been abandoned, “judgment shall be entered [and] the sale of such mortgaged premises shall be made upon the expiration of 5 weeks from the date when such judgment is entered.”  The circuit court determined that it did not have the authority to compel the bank to complete the foreclosure.  The Court of Appeals disagreed.

The majority of the justices held that Wis. Stat. § 846.102 gives circuit courts the authority to order that abandoned properties be sold within a reasonable time after the expiration of the five-week redemption period.  Although it is not entirely clear, it appears that a circuit court may, in fact, be required to order a sale once the circuit court determines that a property is abandoned.

In reaching its decision, the Court examined the “plain language” of Wis. Stat. § 846.102 and found that the word “shall” is mandatory.  In so holding, the Court expressly found the reasoning in Matson I and Matson II – similar Court of Appeals cases interpreting the word “shall” in the foreclosure statute as permissive – unpersuasive on this issue.  The Court also found that the clear intent of the statute was “to help municipalities deal with abandoned properties in a timely manner.”  In fact, the Court points out that the statute permits the introduction of evidence of abandonment by others, presumably non-parties, including interested municipalities.  As a result, the Court held that circuit courts must order that abandoned properties be brought to sale within a reasonable time after the redemption period.  The Court directed circuit courts to consider the totality of the circumstances to determine what constitutes a “reasonable period of time.”

In the concurring opinion written by Justice Prosser (and joined by Justices Ziegler and Gableman), a minority of the justices lament that the majority goes too far to prefer the interests of municipalities blighted by zombie properties.  The concurrence is concerned that the majority decision takes away control of the foreclosure action from the lender.  At the same time, the concurrence appears to argue that the majority’s decision rewrites the foreclosure statute to place the burdens of ownership on the lender prior to completing the foreclosure and while the owner still owns and is responsible for the property.  The concurrence enumerates a number of consequences of the majority opinion that “are not discussed by a majority that is a bit too eager to depict mortgage lenders as the source of the problem.”  For example, the concurrence suggests that, because lenders’ ability to mitigate losses on zombie properties is decreased, future costs of borrowing money may increase and some potential borrowers may be denied loans altogether.

If the decision of the Supreme Court is intended to benefit municipalities by compelling the sheriff’s sale of zombie properties, it is not at all clear the desired effect will be achieved.  Taking the property to sheriff’s sale does not mean the lender will ultimately own the property or even that it will be sold to anyone.  The Supreme Court decision does not tell us what happens, for instance, if the lender declines to submit any opening bid at the sheriff’s sale and no third party bids.  Is the lender off the hook at that point?  Is the lender required to re-notice the sale and go through the process again?  If the property still does not sell, what happens next?  Can the lender vacate its foreclosure judgment or satisfy its mortgage?  It seems inconceivable that a lender could be ordered to bid and forced to take title to a property it does not want.

The lesson for lenders from the Bank of New York case is that decisions about potentially undesirable properties need to be made before commencing the foreclosure process.  It is not uncommon for a lender to determine that a zombie property is not worth owning; however, that decision often is made after the foreclosure is commenced and even after judgment is entered.  In light of the Supreme Court’s decision, lenders are urged to evaluate their options before commencing foreclosure actions.  Once the lender starts a foreclosure action, and particularly once a judgment of foreclosure is entered, the lender may lose control of its foreclosure.  The options available to a lender who is compelled to take a zombie property to sheriff’s sale remain to be seen.

If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at nfarnam@stroudlaw.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.