Can a lender be forced to take a foreclosed property to sheriff’s sale even if it doesn’t want to? After three recent conflicting opinions released by the Wisconsin Court of Appeals, the answer in Wisconsin is, “We don’t know.” The answer appears to turn on whether the court has adjudged the property abandoned.
The “Time of Shedding and Cold Rocks” of 2008 resulted in a large number of foreclosures and created the phenomena of “zombie” properties. Simply put, a zombie property is a property no one wants. Facing foreclosure and often unable to afford to maintain their property, many owners choose to abandon their property and assume that the bank will complete the foreclosure process and take the abandoned property to sheriff’s sale. In fact, many lenders start foreclosures only to subsequently decide not to complete the process. Usually the abandoned property has fallen into disrepair, is subject to taxes, fines, and other unpaid obligations, or is otherwise more of a liability than the lender is willing to take on. This leaves the owner on the hook for the property and creates the potential for blight. Urban areas such as Milwaukee have been hit especially hard. The District I Wisconsin Court of Appeals out of Milwaukee recently decided three cases in which owners of zombie properties sought to compel lenders to complete their foreclosures by taking the properties to sheriff’s sales.
In the first case, an unpublished decision filed July 30, 2013, Deutsche Bank received a judgment of foreclosure of its mortgage with a three-month redemption period. See Deutsche Bank National Trust Co. v. Matson, No. 2012AP1981, 2013 WL 3884142 (Wis. Ct. App. July 30, 2013) [hereinafter Matson I]. The property owner, Matson, abandoned the property, and it fell into disrepair. Deutsche Bank elected not to proceed with a foreclosure sale and instead forgave the underlying debt and recorded a satisfaction of its mortgage. Matson filed a motion seeking to enforce the foreclosure judgment and force Deutsche Bank to sell the property. Matson claimed that Deutsche Bank was required under Wis. Stat. § 846.103(2) to sell the property at the end of the redemption period.
Wis. Stat. § 846.103(2) provides that “sale of the mortgaged premises shall be made upon the expiration of 3 months from the date when such judgment is entered.” The court concluded that the statute does not require the bank to take the property to sheriff’s sale (in other words, the word “shall” is directory rather than mandatory). The court concluded that the statute describes a particular process that a lender must follow, but only if the lender takes the property to sheriff’s sale. The statute does not require that the property be sold immediately upon expiration of the redemption period.
In the second case, a published decision filed November 26, 2013, Bank of New York received a judgment of foreclosure with a three-month redemption period on a property owned by Carson. See Bank of New York v. Carson, 2013 WI App 153, 352 Wis. 2d 205, 841 N.W.2d 573, review granted, 2014 WI 50, 354 Wis. 2d 860, 848 N.W.2d 857. Carson abandoned the property with the bank’s knowledge at around the time Bank of New York initiated its foreclosure action. Carson did not maintain the property. 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 court found that the statute does not limit who has the power to elect the five-week redemption period and, as a result, the trial court should have granted Carson’s request to amend the judgment to a judgment of foreclosure of abandoned property under § 846.102. In other words, the court found that it is not solely within the lender’s discretion to declare a property abandoned, and the homeowner has the power to petition the court for such a declaration. Significantly, the court also concluded that the use of the word “shall” in the statute is mandatory and requires that abandoned property must be sold without delay. Despite the apparently contrary holding by the same court in Matson I regarding the meaning of “shall” in the foreclosure statute, the Carson court did not cite to Matson I or attempt to explain why the same court reached a different result.
In the third case, an unpublished decision filed March 18, 2014, the court was presented with facts essentially the same as in Matson I. See Arch Bay Holdings LLC—Series 2008B v. Matson, No. 2013AP744, 2014 WL 1011467 (Wis. Ct. App. Mar. 18, 2014) [hereinafter Matson II]. In fact, the property owner in Matson I was the same property owner as in Matson II, but the case involved a different Milwaukee-area property owned by Matson. The Matson II court came to the same conclusion as the Matson I court, finding that the lender had no obligation under Wis. Stat. § 846.103(2) to sell the property at any particular time notwithstanding the fact that the statute states that the sale “shall” take place upon expiration of the redemption period. Despite its apparently contrary holding in Carson, the court again made no effort to explain the different outcomes.
The most obvious difference between the Carson case, on the one hand, and the Matson cases, on the other hand, is the statute upon which the property owner brought the claim. In the Carson case, the property owner brought her claim under Wis. Stat. § 846.102, which relates to abandoned property. In Carson, the court found that the legislature could not have intended that lenders may “leave properties in limbo for years” because cities like Milwaukee have an interest in “preserving the condition and appearance of residential properties” to “reduce and prevent neighborhood blight, to ameliorate conditions that threaten the health, safety and welfare of the public, to promote neighborhood stability and residential owner occupancy by preserving the condition and appearance of residential properties, and to maintain residential property values and assessments.”
Conversely, in Matson I, the court found that there were compelling reasons against requiring the lender to complete its foreclosure sale. The court concluded that “requiring a sheriff’s sale simply does not make sense in circumstances where it is in neither the lender’s nor borrower’s interest to do so: for instance, when there is a post-judgment loan modification between the lender and borrower, or when the borrower pays the debt shortly after the expiration of the redemption period.” Even though none of these reasons applied to the property owner in Matson I, and the property had, in fact, been abandoned by Matson, the court evidently reached its conclusion because Matson’s claim was brought under Wis. Stat. § 846.103(2), rather than Wis. Stat. § 846.102.
It is not clear that these cases can be reconciled. However, it appears that the overriding factor in whether a lender can be compelled to complete its foreclosure action is whether the property is adjudged abandoned. According to the District I Court of Appeals, if lenders could not be compelled to complete foreclosures of abandoned properties, such a result would “strip individuals in Carson’s situation of any remedies at law and allow lenders to leave properties in limbo for years.” On the other hand, if properties are not adjudged abandoned (even if they actually are abandoned), “requiring a sheriff’s sale essentially puts the borrower in control over the aggrieved lender’s recovery, which . . . creates an incentive for a borrower to commit waste.”
The Carson case is currently on appeal to the Wisconsin Supreme Court, and it is hoped that the court will offer more clarity in this area and give more guidance to lenders dealing with zombie properties. For the time being, however, the law in this area remains undecided, and lenders should be cautious at all steps of the foreclosure process, including the initial decision of whether to initiate foreclosure actions, particularly if lenders have any concerns regarding whether they may ultimately want to sell (and own) the mortgaged property.
If you have any questions about how the information in this article may affect you or your business, please contact Norm 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.