Court of Appeals Rejects Attempted Restriction of "Mortgage Banker" Priority Provision

On February 20, 2014, the Wisconsin Court of Appeals issued an opinion interpreting the meaning of “mortgage banker” under Wis. Stat. § 224.71(3) and finding that a mortgage holder was entitled to the priority afforded under Wis. Stat. § 706.11(1)(f) despite the original mortgagee not having registered under Wis. Stat. § 224.72(1m) as a “mortgage banker.” As a result of the Court’s decision, the mortgage lien at issue was determined to have priority over construction lien claims on the property and the mortgage holder was entitled to collect first from the proceeds of the sale of the property. In re DOC Milwaukee, LP v. DOC Milwaukee LP, Appeal Nos. 2012AP1610, 2012AP1677 (Ct. App. Feb. 20, 2014).

In re DOC Milwaukee began as a complex receivership action in which numerous claimants were competing for the proceeds of the sale of the remaining asset of the debtor DOC Milwaukee – a failed multi-million dollar hotel construction project in Milwaukee. Among those seeking to collect from the sale proceeds of the hotel building were the current mortgage holder, 2010-1 SFG Venture, LLC (“Venture”) and various construction lien claimants who had performed work on the hotel. In July 2011, the trial court ruled that Venture’s mortgage, originally granted to Specialty Finance Group LLC (“SFG”), was not entitled to the priority afforded by Wis. Stat. § 706.11(1)(d) or Wis. Stat. § 706.11(1)(f) because SFG was neither a “national bank” or a “mortgage banker” as defined by those statutes. As a result, the trial court was required to determine the validity and amount of the other competing lien claims. Most of the competing lien claims were settled or otherwise resolved. However, the construction lien claims of Butters-Fetting Co., Inc. (“Butters”) and Klein-Dickert Milwaukee, Inc. (“Klein-Dickert”), remained contested. The trial court found that Butters had waived its entire lien claim (approximately $402,000) by virtue of the language in the lien waivers it issued to the property’s owner. Klein-Dickert was found to have waived a significant portion of its lien claim ($295,811) by virtue of the language in its lien waivers, but was awarded the non-waived portion of its lien claim (approximately $330,000).

Venture appealed the award of the non-waived portion of Klein-Dickert’s lien claim, challenging the July 2011 decision of the trial court that construction liens took priority over its mortgage lien. Venture contended that its mortgage was entitled to priority either under the “mortgage banker” (Wis. Stat. § 706.11(1)(f)) or the “national bank” (Wis. Stat. § 706.11(1)(d)) provision. Klein-Dickert, in turn, cross-appealed on the issue of lien waiver, arguing that it was entitled to the $295,811 portion of its lien claim that the trial court found it had waived. Butters, meanwhile, filed a separate appeal of the finding that its lien claim was waived in its entirety.

Ultimately, the Court of Appeals based its decision in favor of Venture solely upon the plain language of Wis. Stat. § 706.11(1)(f) that provides that “any mortgage executed to a mortgage banker as defined in s. 224.71(3)” is entitled to the priority provisions of that section (including priority over the construction liens at issue). The Court noted that Wis. Stat. § 224.71(3) defines a “mortgage banker” as any person who “originates loans for itself” or “sells loans or interests in loans to another person.” Applying the plain language of those statutes, and in the absence of any real dispute that SFG met those criteria, the Court found that Venture’s mortgage qualified as one given to a “mortgage banker.” While Butters and Klein-Dickert did not dispute that SFG met the plain language of those provisions, they argued that SFG should have been required by Wis. Stat. § 224.72(1m) to register as a “mortgage banker” in order for its mortgage to enjoy the priority afforded by § 706.11(1)(f). The Court of Appeals rejected this argument, relying upon the plain language of the statutes and finding that nothing in the related statutory provisions or equitable considerations compelled a contrary result. Given its finding that Venture was entitled to priority on its mortgage lien over the construction liens, and that the value of Venture’s mortgage exceeded the sale price of the property, it did not reach the “national bank” priority argument, and it found that the construction lien waiver arguments of Butters and Klein-Dickert were rendered moot (since there would be no remaining funds for these claims even if found not to have been waived). The Court remanded to the trial court with instructions to enter an order consistent with its ruling.

While Wis. Stat. § 224.71(3) has since been amended to apply only to residential mortgages, this opinion holds obvious significance for banks and others holding mortgages where the originating lender may not have been registered as a “mortgage banker” under the Wisconsin Statutes. More broadly, it signals reluctance from the Wisconsin Court of Appeals to compromise the plain language of the statutory priority protections afforded to mortgage holders against competing lien claimants, recognizing the policy considerations considered by the Wisconsin legislature in granting such priority.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Nancy Sennett
Partner
Milwaukee, Wisconsin
414.297.5522
[email protected]

Michael Aprahamian
Partner
Milwaukee, Wisconsin
414.297.5516
[email protected]