Legal Update: The Wisconsin Supreme Court Provides Associations a Powerful Tool in the Fight Against Blight

The Wisconsin Supreme Court has taken a stand against banks that are dragging their feet foreclosing properties that have been abandoned by their owners.  This court decision will be of substantial benefit to some Wisconsin condominiums facing the problem of a vacant unit and a bank that seeks to bury its head in the sand.  This widespread practice by the banks has damaged many communities across the nation, and the court decision seeks to stop it.

The problem scenario for Wisconsin condominium associations is this:  A homeowner’s unit was worth less than the purchase price, or the owner was otherwise experiencing financial difficulty.  The owner moved out and stopped paying the lender and stopped paying common expense assessments.  The lender started foreclosure proceedings, but did not follow through to finish taking over the property.  The court process stalled.

This was not by accident, as the lender had a lawyer who intentionally took his or her foot off the gas.  Most observers believe a bank makes this decision for one of two reasons:  It does not wish to show the bad loan on its books, or it simply does not want the responsibility of owning the unit, which of course includes paying assessments. The result is that the association is stuck with an abandoned, non-paying unit, even though the association continues to pay for insurance and other maintenance costs to protect the bank’s collateral.

In some particularly egregious cases, abandoned units were used by transients, the units were stripped clean of valuable metal or other materials, and criminal activity sometimes occurred.  In addition, because there is no one living in or maintaining these properties, they had problems that affected other units—such as pipes bursting, bug infestation, mold, fires, etc.

The bank’s decision not to complete its foreclosure on the abandoned units causes them to sit in legal limbo.  In such a situation, the association may be hesitant to move forward with foreclosure of its own because the bank’s mortgage (which is also a lien on the unit), is superior to the association’s lien.

As our clients know, we have long taken the position with lenders that they have a choice:  Take the property, fix it and sell it, or give it up like the owner did so the association can take steps to stop the blight.

The Wisconsin Supreme Court recently addressed the problem of these stalled foreclosures.    The Court held that when the trial court determines that a property is “abandoned,” it can order the bank to hold a Sheriff’s Sale (auction) within a “reasonable time” after the expiration of the redemption period.  (This is the time period after the foreclosure judgment in which the owner has the right to pay off the mortgage).  Requiring that a Sheriff’s Sale take place within a “reasonable time” will speed up the process of the bank taking ownership of a property.

While there are sure to be many new questions raised by this ruling, the decision has the potential to fix one of the neighborhood-destroying problems arising from the recent financial crisis.

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