Recently, the Wisconsin Supreme Court ruled in Bank of New York Mellon v. Carson, 2015 WI 15 (Feb. 17, 2015), that a circuit court has the authority to order a lender holding a foreclosure judgment to hold a sheriff’s sale on an abandoned property within a reasonable time after the redemption period has expired. The Wisconsin abandoned premises statute, Wis. Stat.  §846.102, provides in relevant part that “the sale of [abandoned] premises shall be made upon the expiration of 5 weeks from the date when [foreclosure] judgment is entered.” Prior to Carson, it was generally understood that this statute was created for the exclusive benefit of the foreclosing lenders, providing them with the shortened five-week redemption period. The Carson decision changes that understanding because now defaulting borrowers can use the statute to force a foreclosing lender to sell the abandoned property. The Carson decision is a game-changer and will unquestionably affect the way mortgage lenders do business in Wisconsin.

Background

On January 25, 2011, Bank of New York (the “Bank”) filed a foreclosure action against Carson for defaulting on loan payments on her Milwaukee residence. All attempts by the special process server to serve Carson were unsuccessful, as she had previously vacated the property. The Bank published a notice of foreclosure and registered the property as abandoned with the City of Milwaukee. After Carson did not file her answer or otherwise dispute the foreclosure, the trial court entered default judgment in the Bank’s favor. The circuit court also directed the property to be sold after the three-month redemption period as Carson’s residence was no longer owner occupied.

The Bank did not sell the property after expiration of the three-month period and did not maintain the property. Neither did Carson. The property fell into disrepair and was repeatedly burglarized and vandalized. The City of Milwaukee began issuing citations to Carson for various building code violations. After accumulating approximately $1,800 in fines from the city, Carson filed a motion with the circuit court requesting to amend the judgment to include a finding that the property was abandoned and to order the Bank to sell it upon expiration of the redemption period. The circuit court denied Carson’s motion, finding that Wis. Stat. §846.102 did not specifically grant the circuit court such authority. Carson appealed, arguing that the statute did in fact authorize the circuit court to order sale of the property.

The Wisconsin Court of Appeals agreed with Carson and reversed. It reasoned that the plain language of Wis. Stat. §846.102 allowed any party to prove the abandonment and to elect the five-week election period. Bank of New York. v. Carson, 2013 WI App 153, ¶¶12-14, 352 Wis. 2d 205, 841 N.W.2d 573. The Court of Appeals concluded that once a lender obtains a foreclosure judgment, it cannot simply walk away from the abandoned property and cannot elect not to enforce its right to sell it. The Court of Appeals further reasoned that “the plain language of the statute directs the court to ensure that an abandoned property is sold without delay.” The Bank appealed to the Wisconsin Supreme Court.

Affirming the Court of Appeals’ decision, the Supreme Court agreed that the plain language of Wis. Stat §846.102 authorizes a circuit court to order a lender to sell the abandoned premises as the legislature intended the word “shall” of the statute to be mandatory. Carson, 2015 WI 15, ¶20. The Supreme Court also rejected the Bank’s argument that because the statute provided no time limit for the sale of the abandoned property, the Bank had five years to execute the judgment. The Supreme Court reasoned that the legislature intended a prompt sale of the abandoned properties and that the Bank’s interpretation of Wis. Stat. §846.102 “would allow mortgagees to initiate foreclosures, but fail to bring the properties to sale for an extended period of time, leaving the properties in legal limbo.” Id., ¶37. The Supreme Court pointed out to various studies on the effects of abandoned properties on local communities and concluded that the legislative intent of Wis. Sta. §846.102 was to help municipalities deal with abandoned properties in a timely manner. Id., ¶40. The Supreme Court concluded that the circuit court must order the abandoned property to be brought to sale within a reasonable time after the redemption period, and that it is up to the circuit court’s discretion to determine what constitutes a reasonable period of time.

Practical Considerations for Lenders

As Justice Prosser opined in his concurring opinion, which was joined by two other Justices, “the majority opinion radically revises the law on mortgage foreclosure.” Id., ¶71 (Prosser, J., concurring) (emphasis added). Indeed, prior to Carson, lenders in Wisconsin had the right to sell the abandoned property at a sheriff’s sale but could choose not to do so due to commercial or any other concerns. Under the Carson holding, however, these are no longer valid options as lenders can no longer walk away from the abandoned property or sit indefinitely on their right to sell it. Mortgage lenders must now carefully consider whether to foreclose on abandoned or “depressed value” properties. Following Carson, obtaining a foreclosure judgment on the abandoned property may jeopardize the lender’s control over its options with regard to that property. Surely, determining whether foreclosure is commercially justified presents certain difficulties to lenders as they may not necessarily know about the condition of a particular property at the time of commencement of foreclosure action. It is not clear what exactly lenders must do if the abandoned property does not sell at a sheriff’s sale. Also, one of the potential negative consequences of Carson for Wisconsin consumers, recognized by the Supreme Court’s concurrence, is that “costs of borrowing money to finance residential real estate transactions are likely to go up, and some potential borrowers will be denied loans altogether.”  Id., ¶73. (Prosser, J., concurring).