The uncertainty of foreclosing against abandoned properties has only increased since the Wisconsin Supreme Court’s 2015 decision in Bank of New York Mellon v. Carson, 2015 WI 15, 361 Wis. 2d 23, 859 N.W.2d 422, which reshaped Wisconsin’s real estate foreclosure process. The Carson decision’s interpretation of Wisconsin’s abandoned-premises statute expanded the duties imposed on lenders and servicers foreclosing a mortgage in default, requiring foreclosure plaintiffs to sell an abandoned property after the five-week redemption period.
With recent pushback from the Wisconsin Legislature, one fact is undoubtedly clear: the decision to file a foreclosure action carries enhanced consequences of significant risks for plaintiffs, particularly when the foreclosed property is later abandoned by its owner. Nevertheless, there are options available to reduce the uncertainty and risks associated with foreclosing properties that might later be abandoned by their owners. This article summarizes Carson, lays out its practical effects, and suggests steps to adapt to Carson’simpact.
The Carson Decision
In Carson, Bank of New York Mellon, serving as trustee for the investor of a pool of mortgage-backed securities, foreclosed Shirley Carson’s mortgage pursuant to Wisconsin’s residential-foreclosure statute, Wis. Stat. section 846.101. The circuit court entered a default judgment of foreclosure in favor of the bank. Because Wisconsin is a lien-theory state, Carson, as the property owner, remained liable for post-judgment fines the city of Milwaukee imposed because Carson still held legal title to the property.
After 16 months of no action, Carson moved to amend the foreclosure judgment, citing the abandoned-premises statute and seeking to compel a sheriff’s sale of the property pursuant to Wis. Stat. section 846.102. The circuit court concluded that it lacked authority to order the bank to sell the property at a specific time and denied Carson’s motion. The Wisconsin Court of Appeals reversed the circuit court’s order, and the bank petitioned the Wisconsin Supreme Court for review.
In affirming the court of appeals’ reversal, the supreme court cited the legislature’s intent to treat abandoned properties differently from other properties in foreclosure. Hence, the key inquiry under the abandoned-premises statute is the property’s condition, as opposed to the plaintiff’s desire to protect its equity in the property.
Moreover, the court held that the statute’s plain language authorized the circuit court to specify a precise date for a sheriff’s sale, while leaving the ultimate decision of when to hold the sale to the circuit court’s analysis of the totality of circumstances. This interpretation, according to the supreme court, is consistent with the legislature’s goal of ensuring that abandoned properties are sold quickly and do not become sources of crime and blight in local communities. However, the practical, and drastic, effect of the decision is that circuit courts may compel foreclosure plaintiffs to conduct a sheriff’s sale – whether or not it makes financial sense to do so.
Explanation of Terms
Redemption Defined. In a foreclosure action, a redemption period refers to the period after foreclosure judgment is entered when a property owner (or other lien holder) may recover or redeem the property by paying the judgment amount. The length of the redemption period is premised on whether the lender waives deficiency, or the amount still owed if the property is sold at a foreclosure sale for less than the outstanding debt. As such, the redemption period is one year for one-to-four family residences that are owner-occupied, churches, and farms if deficiency is not waived; and six months for these same types of properties if deficiency is waived. The redemption period for nonresidential properties is six months with deficiency reserved, and three if waived.
Order Appointing Receiver. As with most orders, a plaintiff has discretion to suggest language for the court to include in the order appointing a receiver. An effective order will not only specifically authorize certain duties, such as entering, securing, maintaining, and insuring the property, but also contemplate future circumstances that may affect the property. After detailing the receiver’s duties, a catch-all provision will build in flexibility for the receiver: “[t]he Receiver is given broad discretionary authority to execute the responsibilities set forth in this Order including, but not limited to, determinations as to whether or not certain conduct may be taken and whether such conduct may be deferred until the conclusion of the above-captioned foreclosure action. The Receiver shall consider the equities of the property, and the most responsible methods to execute the responsibilities under this Order.”
Pending Legislation. On January 15, 2016, Assembly Bill 720 was introduced in the Wisconsin Legislature in an attempt to legislatively address Carson’s impact. The bill, among other things, would limit the parties who may seek a finding, and present evidence, of abandonment to the plaintiff or the municipality in which the property is located – not borrower-defendants such as Carson. If enacted, the legislation would also prohibit a court from mandating a sale of an abandoned property when not desired by the plaintiff, and shorten the redemption periods for noncommercial properties in general.
Risk of Foreclosing against Properties Abandoned During the Foreclosure Action
Forcing plaintiffs to sell an abandoned property after the five-week period following the court’s finding of abandonment and entry of judgment presents a number of risks for lenders. Before Carson, a foreclosure plaintiff could use the 12-month period following the entry of a foreclosure judgment to determine whether it was feasible to have the property sold via sheriff’s sale or to release its mortgage lien. After Carson, a circuit court can compel the plaintiff to sell the property when there is a finding of abandonment. In cases in which properties are still occupied by the homeowner at the onset of the foreclosure action, the court, at a later point in the proceedings, is allowed to consider evidence presented on the motion of third parties seeking to have the property declared abandoned.
Admittedly, some plaintiffs have exploited certain loopholes in the judicial foreclosure process, namely obtaining a judgment but never conducting a sale or releasing the mortgage. The result of this less-than-scrupulous practice is the rise of so-called zombie properties – a term used to describe properties in which the homeowner abandons the property after the lender begins a foreclosure action but never actually takes title to the property. By accelerating the period to sell the property, however, the practical effect of Carson is that many abandoned properties will likely be purchased by plaintiffs at the sheriff’s sale.
Options Available to Lenders and Servicers
While it is not possible to prevent an owner in default from abandoning the property, there are three steps that lenders and servicers can take to avoid a judicial finding of abandonment based on evidence presented by third parties. At the same time, these steps may increase the time needed to assess the equities – and the timing – of a sheriff’s sale.
Evaluate the Likelihood of Abandonment as Part of the Pre-foreclosure Review. Before filing a foreclosure complaint, lenders and servicers should specifically assess the likelihood of the homeowner abandoning the property during the proceedings. Based on information obtained from an appraisal, a broker’s opinion of value, or an inspection of the property and the neighborhood, lenders and servicers should affirmatively investigate the condition of the property for abandonment and document any steps taken to remedy ensuing damage or waste. In addition to a physical inspection of the property, a diligent future plaintiff will also investigate its correspondence file with the homeowner and any servicing notes to determine whether the owner threatened abandonment. The correspondence log and notes may also indicate whether a recent request by the owner for a loan modification was denied by the investor on the note.
Appoint a Property Receiver. In situations when there is a likelihood of abandonment and the plaintiff still wishes to foreclose, one option available to plaintiffs is to appoint a receiver pursuant to Wis. Stat. section 813.16(1). A property receiver is charged by the court with protecting and maintaining the foreclosed property.
Notably, the lender is authorized to request a receiver of its own choosing. The property receiver may be an agent of the lender, a court official, or a company offering professional receivership services. Moving the court for a property receiver at the start of the foreclosure process enables a lender to, at a minimum, secure the property and protect it from waste and crime, while avoiding liability for being in actual possession of the property.
To obtain a court-appointed property receiver, a foreclosure plaintiff may rely on an express provision in the mortgage or must show that waste is occurring on the property. Wisconsin courts have held a borrower’s failure to pay taxes and interest is sufficient to demonstrate such waste. After being appointed, the receiver is authorized to carry out the customary powers pursuant to Wis. Stat. chapter 813, including, but not limited to, collecting mortgage payments and rents, making repairs, paying real estate taxes, obtaining insurance, and maintaining utility services.
Once it is evident the property is in danger of being abandoned, it is worthwhile to seek the appointment of a property receiver and avoid both the risk of a compelled sale and the proliferation of unsecured or unmaintained properties.
Affirmatively Plead Abandonment. In situations in which abandonment is apparent, a plaintiff can affirmatively allege abandonment in its complaint. As noted above, an abandoned property may be sold after the five-week redemption period pursuant to Wis. Stat. section 846.102(1) based on an evidentiary showing of abandonment.
Rather than avoid this accelerated redemption period, a plaintiff may actually want to invoke the shortened time period by pleading short and plain statements of the conditions constituting abandonment. This tactic acknowledges the impact of Carson by minimizing uncertainty of an abandonment finding based on the motion of a third party and alerts the court and all parties as to the status of the property and the plaintiff’s intentions from the onset of the case. Moreover, this tactic is premised on the assumption that the plaintiff has evaluated the likelihood of abandonment well before deciding to file a foreclosure action.
For lenders and servicers with regional or national real estate practices, the Carson decision may represent a trend among courts, legislatures, and local municipalities attempting to reduce the number of abandoned properties sitting idly in many communities. Adding to the uncertainty following the Carson decision is the fact that neither Carson nor the abandoned-premises statute explicitly requires a plaintiff to actually bid at the sheriff’s sale, leaving unanswered the question of whether the homeowner is still liable for any taxes or fines. With this uncertainty looming, quick action based on the most up-to-date information about the property and the homeowner is necessary to avoid a judicial finding of abandonment, even if the homeowner has long since vacated.