Recent economic circumstances have created a perfect breeding ground for a new type of creature: the “zombie property.”1 Zombie properties have proven to be the inevitable result of the collapse of the subprime mortgage industry in 2008-09. After defaulting, many mortgagors (owners or borrowers) simply vacated their homes. Many believed that a foreclosure action meant they no longer owned or could reside in the property; others moved out, attempting to put their problems behind them.
Mortgagees (lenders), on the other hand, were faced with a multitude of foreclosure filings, escalating costs and legal fees, and declining property values. Many lenders stalled or stopped prosecuting foreclosure cases, thus never finalizing a sheriff’s sale. The underlying property remained titled in the name of the original homeowner, who had abandoned the property, but the lender remained unwilling to finalize the foreclosure proceeding. Stuck in this state of limbo, a “zombie property” is born.
Before 2006, there were approximately 10,000 new foreclosure filings annually in Wisconsin.2 Beginning in 2006, the number of new foreclosure cases began to aggressively rise, reaching a peak of 30,668 in 2009.3 Although the situation in Wisconsin is merely a microcosm of how the issue is playing out across major U.S. cities, Wisconsin statutes and recent case law provide some real-world experience to analyze and address the zombie property problem.
The Wisconsin Supreme Court Case – Preparedness 101: Zombie Apocalypse4
With perhaps the first state supreme court case in the nation on this issue, Bank of New York Mellon v. Carson,5 Wisconsin has been launched into the foray of zombie property eradication. A summary of Carson properly arms the discussion.
Shirley Carson, a 62-year-old widow, owned a single-family home on Milwaukee’s northwest side.6 In January 2011, the Bank of New York Mellon filed a foreclosure action against Carson in Milwaukee County. She decided to vacate the house, believing that the bank was going to take the property. On June 13, 2011, the court issued a default judgment and set a six-month redemption period.7 The bank never took the property to a sheriff’s sale.
Kail Decker, Marquette 2008, is a Milwaukee assistant city attorney, focusing on nuisance abatement, municipal law, and litigation. He coauthored the Wisconsin Supreme Court amicus brief that was submitted in Carson on behalf of the city. He provided the city’s perspective in this article.
Justin Mertz, Marquette 2008, is an attorney at Kerkman & Dunn, Milwaukee, where he focuses on business litigation, real estate, foreclosure defense, and representing debtors in chapter 11 cases and workouts. He provided the homeowner’s perspective in this article.
Benjamin Payne, Marquette 2002, is a partner at Hanson & Payne LLC, Milwaukee, representing financial institutions in collection litigation and serving as bankruptcy counsel for individuals and companies. He provided the lender’s perspective in this article.
Seventeen months after judgment was entered, Carson still held title to the property. However, her abandoned property was repeatedly vandalized and ransacked and was eventually boarded.8 Milwaukee issued Carson citations and fines for ordinance violations.9 Carson could not pay the forfeitures and fees, but she made monthly payments of $25 to the city of Milwaukee.10 Until receiving notice from Milwaukee of outstanding code violations, Carson appeared to be completely unaware of the status of her former home.
In November 2012, Carson sought help from Legal Action of Wisconsin, whose attorneys tried a new approach to compel action by the bank. Carson filed a motion to amend the original judgment on the basis that the property was abandoned, thus falling under Wis. Stat. section 846.102.11 Consequently, the motion argued that the mortgagee must, under the language of the statute,bring the property to a sheriff’s sale, and requested that a sale occur within five weeks after entry of the amended order.12 The circuit court denied the motion, reasoning that Wis. Stat. section 815.04 allows judgments to be “executed at any time within five years,” meaning that only the mortgagee could elect a five-week abandonment period provided by Wis. Stat. section 846.102.13 The zombie lived on; Carson appealed.
The Wisconsin Court of Appeals reversed, stating that the “five-week redemption period … depends on the condition of the property, not the [mortgagee’s] preference.”14 The Bank of New York appealed to the Wisconsin Supreme Court.
In a case that will have statewide effect on mortgages, foreclosure law, and neighborhood stability, the Wisconsin Supreme Court affirmed in favor of Carson. In its opinion, the supreme court set out to resolve two main issues: “First, we are asked to determine whether Wis. Stat. § 846.102 authorizes a circuit court to order a mortgagee to bring a property to sale. Second, we are asked whether a court can require a mortgagee to bring a property to sale at a certain point in time.”15 The court answered “yes” to both. As Justice Bradley stated in the four-justice majority opinion, “permitting sale at any time within five years after judgment is entered would exacerbate the problem that the statute was meant to ameliorate.”16
The court held that the “plain language” of the statute grants the circuit court the authority and duty to order a bank to sell abandoned property.17 However, the court stopped short of holding that all foreclosing mortgage holders could be compelled to sell a property.18 Instead, the court drew a distinction between the abandoned-property statute (which has mandatory language) and the nonabandoned-property statute (which gives the mortgagee discretion to proceed).19
The impact of this ruling depends on whether you look at it from the point of view of the mortgagor, the mortgagee, or the municipality. The remainder of this article explores these differing perspectives.
The Homeowner’s Dilemma: “You Hear the Door Slam” 20
From the homeowner’s perspective, the Carson case helps clarify what has been a gray area in foreclosure law: what happens if the property is never sold at foreclosure? Homeowners who are in default of their mortgage loan often decide that it would simply be easier to surrender the property than deal with it any longer – but they do not always understand the ramifications of doing so. Homeowners forget that property taxes, special assessments, razing costs, and abatement of public nuisance issues remain their responsibility until legal title actually changes at a sheriff’s sale.21
These individuals (in particular, many subprime borrowers22) often do not understand their legal rights and responsibilities in the event of default or an eventual foreclosure proceeding – which has exacerbated the zombie property problem. The worst of the zombie properties have deteriorated beyond repair and are burdened by so much property tax that they are unsellable.
After defaulting, many mortgagors (owners or borrowers) simply vacated their homes.
Although cities such as Milwaukee have an obligation to enforce building code violations to improve and stabilize neighborhoods, excessive enforcement can cause the goals of these ordinances to backfire. In Milwaukee, for example, some landlords seem to be at a constant impasse with the Department of Neighborhood Services (DNS). Coupled with property tax liabilities, the fees and penalties that accompany DNS ordinance violations have, at times, forced some property owners into bankruptcy. However, to a property owner’s dismay, not even bankruptcy will absolve a mortgagor’s responsibility to comply with building code violations.23 As such, the public policy surrounding Wis. Stat. section 846.102 seems not only well intentioned, but perhaps necessary through the eyes of a homeowner who is truly down-and-out.
As a counterpoint to lenders who may disagree with the Carson decision (or disagree with the underlying statute), there is nothing in Wis. Stat. section 846.102 that actually forces the lender to purchase the zombie property at an eventual sheriff’s sale, or to even begin a foreclosure proceeding in the first place. The Carson holding, therefore, is somewhat limited.
First, there must be a pending “action for enforcement of a mortgage lien.”24 Second, there must be a finding of “abandonment.”25 Only if those hold true, will the property theoretically be forced to a sale within the five-week statutory period. What remains unclear is what exactly would occur if no one bids at the forced sheriff’s sale.26 Or what if the lender is the winning bidder, but never actually confirms the sale?27 Similarly, it remains unclear whether a court would approve a sale to a third party for, say, one dollar.28
Despite these unanswered questions, from the homeowner’s viewpoint, the Carson case correctly applies the law and gives homeowners a weapon in their arsenal to limit their exposure. Perhaps it also gives homeowners another reason to stay in their homes for as long as possible.
The Lender’s Response: “There’s Nowhere Left to Run”
Any good zombie extermination plan should begin with a containment strategy, because zombies beget zombies. But in the Carson court’s effort to further what it believes was the legislature’s intent (that the abandoned-property statute “prompts faster sales with fewer requirements”29 to limit blight caused by zombie properties), the majority inadvertently unleashed the zombie property on Wisconsin’s historic and established foreclosure procedures – with disastrous consequences.
Wisconsin Foreclosure Summary 2004-2014
In its effort to eliminate the zombie property, the Carson court held that the abandoned-property foreclosure statute authorizes a court to compel a mortgagee to bring an abandoned property to sale within a reasonable time after the five-week redemption period. However, what the Carson court did not say was whether a court can compel the mortgagee to bid on the property at the sheriff’s sale, leaving open the possibility that the property may never sell at a sheriff’s sale and that the foreclosure action may never end. And just like that, the zombie foreclosure action rises, shuffling unartfully behind the zombie property.
Few life experiences prompt philosophical reexamination of the big picture like a zombie outbreak, and the unintentional creation of the newest member of the zombie family should give us pause for reflection. The current zombie property epidemic invites us to tune out for a moment the shouts from the crowd that “the bank should take the property back!” and the sounds of properties being stripped of their copper plumbing, and reevaluate the mortgage lender’s role in the zombie property outbreak.
It is important to keep in mind that mortgage lenders are not “business partners” with the people to whom they lend money (as they would be if, for example, it were the lender’s role to pick up the pieces when a borrower becomes unable or unwilling to fulfill his or her responsibilities). It is also important to keep in mind that mortgage lenders never owned the property later abandoned by a borrower, such that the mortgage lender should be forced to “take the house back” when a loan goes into default.
Mortgage lenders are investors and the real estate on which they hold a mortgage serves as nothing more than one possible means of recovering the investment if the borrower defaults on the loan. Figuratively, the property owner is the guy who takes his shoes off then gets off the elevator, leaving the mortgage lender to shrug awkwardly when the next person gets on. Holding a mortgage on the shoes doesn’t mean that you have to step into those shoes, and being the only one in the elevator when it smells like that doesn’t necessarily mean it’s your fault.
What the Carson court did not say was whether a court can compel the mortgagee to bid on the property at the sheriff’s sale, leaving open the possibility that the property may never sell at a sheriff’s sale and that the foreclosure action may never end.
If a distressed property has been abandoned by its owner and is worth little more than the balance of outstanding taxes and assessments on the property, why would the mortgage lender, which is already certain to take a loss on the loan secured by a zombie property, want to go even further out of pocket to clean up the owner’s mess? The Carson decision seems to conflate conducting a sheriff’s sale with the property actually selling at a sheriff’s sale, but if no one bids on a property at a sheriff’s sale, when does the foreclosure action end? Can the court in the foreclosure action order the mortgagee to conduct endless sheriff’s sales or order the mortgagee to bid on the property against the mortgagee’s will?
A foreclosing plaintiff can move to dismiss a foreclosure case before or after entry of the judgment of foreclosure, but under the circumstances described in Wis. Stat. section 805.04(2), dismissal of a case is not mandatory but discretionary. Accordingly, it is not clear that a plaintiff can end a foreclosure of an abandoned property by seeking dismissal of the action.
Other questions of interest to mortgage lenders raised by the Carson decision include the following:
1) How can the foreclosure court compel a mortgagee to take a judgment of foreclosure against its will and who will establish the amount of the mortgage debt if the mortgagee plaintiff refuses to?30
In Carson, the plaintiff had already obtained a judgment of foreclosure voluntarily, then the defendant moved to amend the judgment to compel a sale of the property upon expiration of the five-week abandoned-property redemption period; but in a case in which an interested party moves for a determination of abandonment before entry of the judgment of foreclosure, a plaintiff could simply refuse to submit judgment papers and an accounting of the amount owed on the underlying obligation, leaving that responsibility to the party moving for the determination of abandonment.
2) What if the mortgagor has abandoned the property, but the mortgagee intends to rent the property to a new tenant under the authority of its mortgage or assignment of leases and rents? Is the property really “abandoned” if the mortgagee as assignee under an assignment of leases and rents has secured the property or intends to rent it again?
A foreclosing plaintiff may be able to fend off a motion for a determination that the property has been abandoned by arguing that the mortgagee, as assignee under an assignment of leases and rents, intends to lease the premises to a third party.
3) Assume a court enters a judgment of foreclosure with a six-month redemption period and a waiver of the deficiency judgment on an owner-occupied property, then the owners move out two months after entry of the judgment thinking they have no liability to the bank for the deficiency. Can the city move to amend the judgment of foreclosure to compel sale under the abandoned-property redemption period?
If so, the mortgage lender could also amend the judgment of foreclosure to preserve its right to rendition of a deficiency judgment against the mortgagors because mortgage lenders are not statutorily required to waive the deficiency under the abandoned-property foreclosure statute.
4) What if the court enters a judgment of foreclosure and sets a mandatory sale date on an abandoned property, but the mortgage lender does not want to conduct a sheriff’s sale because the lender believes the property is valueless?
The mortgage lender could satisfy its mortgage on the property after entry of the judgment of foreclosure, thereby eliminating the basis of the foreclosure cause of action, but it is not clear whether the Carson decision authorizes the court to compel the foreclosing plaintiff to coordinate a sheriff’s sale of the property regardless of the mortgage satisfaction.
5) What if the court enters a judgment of foreclosure ordering the sale of an abandoned property on a date five weeks after entry of the judgment of foreclosure and then, three weeks after entry of the judgment of foreclosure, the property is broken into, stripped of all plumbing and electrical wiring, and damaged to the point that it is no longer worth more than the balance of the unpaid real estate taxes? Can the mortgagee still be compelled to submit the property to a sheriff’s sale?
From the mortgagee’s perspective, the takeaway from Carson is that a foreclosing plaintiff could be compelled to take a judgment of foreclosure and conduct a sheriff’s sale of a property approximately five weeks after entry of the judgment of foreclosure, regardless of how valueless the property may have become since the commencement of the foreclosure action. Accordingly, it is likely that many mortgage holders will opt not to file foreclosure actions on unoccupied distressed properties, seeking money judgments on the mortgage note instead, and will act quickly to terminate foreclosure actions involving properties that become unsellable during the pendency of the foreclosure action.
The Municipality Steps In: “They Terrorize Y’awl’s Neighborhood”
Municipalities have a great interest in addressing the problems associated with abandoned properties, and the Carson case clears a path for municipalities to take action. A municipality can compel the sale of abandoned properties and breathe life into them before delinquent taxes, blight, and criminal activity make them the taxpayers’ problem. Regardless of whether mortgagors or mortgagees are to blame for the problem, Carson provides municipalities with a nuisance-abatement tactic that can correct or prevent a public nuisance caused by a zombie property.
Before Carson, municipalities were essentially subsidizing the losses incurred by certain lenders and property owners for their bad loans. Lenders and property owners would decide to walk away from certain foreclosed properties when it was in their best interests, leaving no interested party behind. As a result of each party acting in its own best interests, neighborhoods were left to suffer as zombie properties became a target for thieves and vandals.
Carson provides municipalities with a nuisance-abatement tactic that can correct or prevent a public nuisance caused by a zombie property.
Eventually the municipality’s taxpayers would take on the burden when the county or city would take the property back for delinquent taxes. Not only would a municipality lose tax revenue, but also it would absorb ongoing property maintenance costs and potentially the cost to raze any dilapidated buildings. However, Carson provides municipalities with a way to avoid subsidizing certain lenders and property owners.
A city, village, town, or county may submit evidence in an existing foreclosure case to show that the subject property has been abandoned by the debtor. To participate, the municipality need not be a party in the case. By skipping the step of intervening, a municipality can act quickly and more efficiently. Speed is important because the sooner a municipality can provide evidence in a foreclosure case, the faster that property will go to a sheriff’s sale. The sooner the property goes to a sheriff’s sale, the more likely it is to sell and not become a neighborhood blight or taxpayer burden. While some may characterize this as an unwelcome governmental intrusion into a private mortgage action, the parties to these types of cases have created a rippling harm that affects their neighbors and customers. The public interest in preventing or correcting this harm through an expedited sale justifies the municipality’s involvement.
Lenders might try to find problems with the Carson holding, but the equitable nature of foreclosure actions will allow courts to fashion reasonable and equitable ways of addressing each point. As remedial examples: plaintiffs who refuse to compute judgment amounts or unilaterally satisfy mortgages waive their right to recover any money from the sale; occupied properties will likely not meet the definition of “abandoned” under Wis. Stat. section 846.102(2); dismissal to avoid a statutory duty is not an equitable remedy; and nothing stops a lender from seeking a deficiency judgment if a prior judgment waiving deficiency is reopened.
The state has chosen to put the burden of eradicating zombie properties on lenders. As a result, lenders should act with the knowledge that they could end up being compelled to sell a property, which should reduce the number of abandoned properties. Lenders should survey a property before starting a foreclosure action to determine whether it is worth taking to sale, monitor each property after filing a foreclosure action, take it to sale quickly if the mortgagor abandons it, and take more affirmative steps to preserve properties that are subject to foreclosure. The Carson holding is a significant step toward preventing vacancies, reducing the effect of abandoned homes on neighborhoods, and exterminating zombie properties in our neighborhoods.
Conclusion: “You’re Out of Time”
Regardless of one’s perspective, the Carson holding represents a significant change in the dynamic between mortgagors and mortgagees that existed before February 2015. Mortgagor attorneys are determining how to best use the holding to free their clients from liability and financial burdens. Mortgagee attorneys are determining how to best advise their clients and handle the possibility of an order compelling a sheriff’s sale. Municipal attorneys are able to participate in foreclosure cases as a nonparty to improve and preserve neighborhoods. As the three interested groups of parties react to the recent Carson holding, this field of law is likely to generate unique legal arguments and demand thoughtful legal advice as the national debate continues.
1 See, e.g., www.nolo.com/legalencyclopedia/zombie-foreclosures.html for a description of the term.
2 See, e.g., Russ Kashian & David Welsch, “A Regional Examination of Foreclosures in Wisconsin,” Industrial Geographer 2010, vol. 7, issue 1, pp. 19-38.
3 See Fig. 1; Wisconsin Court System: Publications, reports and addresses; Civil Disposition Summaries (2004-2014).
4 U.S. Dep’t of Health & Human Servs., Centers for Disease Control & Prevention, “Preparedness 101: Zombie Apocalypse,” May 16, 2011, Ali S. Khan blog post. In an effort to disseminate information on natural disasters, the CDC committee wrote a blog post with the zombie reference, which would become a trending topic on Twitter and eventually crashed the CDC website on May 19, 2011.
5 Bank of New York Mellon v. Carson, 2015 WI 15, 361 Wis. 2d 23, 859 N.W.2d 422.
6 Bank of New York v. Carson, 2013 WI App 153, ¶ 2, 352 Wis. 2d 205, 841 N.W.2d 573.
7 Id. ¶ 4; pursuant to Wis. Stat. section 846.101, the bank elected to waive any deficiency judgment against Carson.
8 Id. ¶ 5.
9 See, e.g., Milwaukee Cnty. Case No. 2012TJ950.
10 Appellant Ct. App. Brief at p. 6, available at wscca.wicourts.gov.
11 Wis. Stat. section 846.102(1) reads, in part: “In an action for enforcement of a mortgage lien if the court makes an affirmative finding … that the mortgaged premises have been abandoned by the mortgagor … judgment shall be entered as provided in 846.10 except that the sale of such mortgaged premises shall be made upon the expiration of 5 weeks from the date when such judgment is entered” (emphasis added).
12 Carson, 2013 WI App 153, ¶ 6, 352 Wis. 2d 205; Wis. Stat.
13 Carson, 2013 WI App 153, ¶ 7, 352 Wis. 2d 205.
14 Id. ¶¶ 12, 14.
15 Carson, 2015 WI 15, ¶ 14, 361 Wis. 2d 23.
16 Id. ¶ 37.
17 Id. ¶ 20.
18 Id. ¶ 20 n.9. “We decline to interpret the similar language in Wis. Stat. 846.101 and 846.103 as it is not at issue in this case.”
19 Id. ¶ 24 (citing Carson, 2013 WI App 153, ¶ 12, 352 Wis. 2d 205). Notably, the language in the neighboring statutes is strikingly similar, so similar challenges under other provisions may occur in the future.
20 All quoted lyrics are taken from Michael Jackson, “Thriller.” Thriller. Epic Records, Nov. 30, 1982. Vinyl.
21 See Wis. Stat. § 74.53. Notably, even if property is held by an LLC, members of that LLC are still subject to liability for certain costs.
22 These are typically described as borrowers with a credit score of less than 600. Thus subprime mortgages (technically, the loans) will demand a higher interest rate due to the increased risk that the borrower will default.
23 See 11 U.S.C. § 362(b)(4). The automatic stay does not apply to a governmental unit’s police or regulatory power.
24 Wis. Stat. § 846.102(1).
25 See Wis. Stat. section 846.102(2), listing the factors a court can consider to determine whether a property is abandoned.
26 Legally speaking, title would, to the homeowner’s detriment, remain with the homeowner.
27 See Wis. Stat. § 846.165.
28 See Wis. Stat. § 846.165(2). The trial court must be “satisfied” that “fair value of the premises” has been paid. Arguably the value of a zombie property may be nothing, or perhaps negative. What is clear is that leaving zombie properties to rot, with no action, certainly does not help.
29 Carson, 2015 WI 15, ¶ 33, 361 Wis. 2d 23.
30 See Wis. Stat. § 846.10 (establishing the amount of the mortgage debt is a requirement of a judgment of foreclosure).