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    Supreme Court Downs Condo Policy on Unpaid Assessments after Foreclosure

    Joe Forward

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    May 5, 2016 – The Wisconsin Supreme Court, by a 5-2 majority, recently ruled that a condominium policy violated Wisconsin law by restricting a new condo owner's access to condo amenities, like a golf course, if the prior condo owner's assessments remained unpaid after foreclosure.

    The Abbey Springs Condominium Association, together with Abbey Springs Inc., maintained a policy that prohibited owners from using recreational facilities – including access to a golf course, swimming pool, tennis courts, a yacht club, boathouse, and restaurants – unless unpaid condo assessments were paid in full within 90 days of the assessment date.

    Under the policy, unpaid assessments followed the condo unit. Thus, new owners who purchased a condo unit with outstanding assessments attached to it could not use the condo’s recreational facilities unless balances were paid in full.

    Walworth State Bank, which bought two condos at a sheriff’s sale and paid outstanding assessments to ensure the properties could be resold, challenged the policy. It argued that the outstanding assessments were eliminated with a foreclosure judgment.

    In Walworth State Bank v. Abbey Springs Condominium Association, 2016 WI 30 (April 29, 2016), the Wisconsin Supreme Court (5-2) agreed with the bank.

    “We hold that Abbey Springs’s Membership and Guest Policy effectively revived the lien against the property that the [foreclosure judgment] entered against Abbey Springs and the former unit owners had extinguished,” wrote Justice Rebecca Bradley, authoring her first majority opinion since joining the supreme court in October 2015.

    Justice Shirley Abrahamson, joined by Justice Ann Walsh Bradley, wrote a dissenting opinion. Abrahamson said condo policies can restrict the use of property to compel payment of delinquent assessments without violating Wisconsin law.

    How It Got There

    The Walworth County Circuit Court entered a foreclosure judgment with outstanding mortgage loans of $855,000. It also ruled that Abbey Springs and the former unit owners were forever barred from “all right, title, interest, lien, or equity of redemption.”

    Before sheriff’s sale, Abbey Springs informed the bank of its policy restricting access to recreational facilities based on outstanding assessments that followed the units, regardless of liens eliminated by foreclosure. Abbey Springs suggested that the bank inform potential condo purchasers of the policy in sheriff’s sale notices.

    The bank purchased the properties at sheriff’s sale and found new buyers several months later, but the closing fell through when the buyers realized that outstanding assessments of more than $13,000 may restrict their access to recreational facilities.

    At that point, the bank paid the assessments and sued, asking the circuit court to declare that the condo policy violated Wisconsin’s foreclosure laws.

    The circuit court granted summary judgment to the bank, concluding new owners could not be jointly and severally liable for prior outstanding assessments incurred by former owners. The court also concluded that the policy affected the quality and marketability of the property’s title, and awarded Walworth State Bank a $13,225 reimbursement.

    However, the court of appeals reversed, noting that Walworth State Bank was never required to pay the outstanding assessments and statutes that govern liability for assessments do not govern liability for unpaid assessments after sheriff’s sale.

    Supreme Court Majority reverses Appeals Court

    Justice R. Bradley noted the case presents “an issue of first impression that is not directly controlled by Wisconsin case law or the Wisconsin Statutes.”

    The majority explained that under Wis. Stat. section 703.165(2), grantees are jointly and severally liable with grantors for all unpaid assessments against the grantor for his or share of the common expenses up to the time of the voluntary grant. …”

    The key phrase in that statute is “voluntary grant.” “Walworth State Bank’s position is that in an involuntary grant, a new owner cannot be held jointly and severally liable for the outstanding assessments of the prior owner,” Justice R. Bradley wrote.

    “The liability of a new owner for the outstanding debt of the prior owner under the circumstances of an involuntary grant is not directly addressed in Chapter 703 and it is not this court’s place to speak where the legislature is silent,” she wrote.

    However, the majority explained that although unpaid assessments constituted liens on the condo units, the foreclosure judgment extinguished those liens.

    “[N]othing in the Foreclosure Judgment prevents Abbey Springs from suing the former unit owners to recover that debt,” Justice R. Bradley wrote. “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.”

    Dissent

    The two dissenting justices disagreed with the majority’s view that the condo policy impermissibly revived a lien that was extinguished with a foreclosure judgment.

    “Abbey Springs’ recreational use policy does not in any way revive the extinguished lien,” wrote Justice Abrahamson, noting that Abbey Springs, through its policy, is simply using restrictions on recreational facilities to leverage payment of unpaid assessments.

    “Restrictions on the use of the unit itself are permissible under Wisconsin law,” she wrote. “If use of the unit may be restricted, surely a restriction on the use of the association’s recreational facilities is permissible. …”

    She noted the supreme court has previously upheld rental restrictions on property, and the appeals court has ruled that rental restrictions remain in force after foreclosure sale.

    Justice Abrahamson also noted that placing restrictions on recreational facilities did not grant Abbey Springs a claim of right, title, or interest in the condo units.

    She said the majority’s ruling could be logically extended to extinguish restrictions imposed by homeowners’ associations after foreclosure, including restrictions on repair and maintenance, or the architecture or placement of homes.