Powerful Mortgage Lien Priority Statute Protects Lenders

February 24, 2014

A recent unpublished Court of Appeals decision upholds the lien of a mortgage lender over construction liens in a receivership action, once again emphasizing the importance of the statutory protections for lenders under Wis. Stat. § 706.11(1). Wis. Stat. § 706.11(1) provides that certain listed categories of lenders can rely on this statute to be sure that any mortgage executed to such lender will have priority over any lien filed after the recording of the mortgage, except for specific exceptions like taxes and special assessments. The priority provided under the statute is frequently relied upon by lenders, particularly when involved with financially troubled construction projects, which have been the subject of numerous Chapter 128 receiverships in recent years.

The priority granted under the statute was not the issue in this case, but rather, to whom the priority was available. The categories of lenders listed include, among others, state and federal banks, savings and loan institutions, credit unions and mortgage bankers. This case turns on 706.11(1)(f), a “mortgage executed to a mortgage banker as defined in [Wis. Stat.] 224.71(3).”

This consolidated appeal case, In Re DOC Milwaukee, LP v. DOC Milwaukee LP et. al, No. 2012AP1610, unpublished slip op. (Wis. Ct. App. Feb. 20, 2014), involved a failed real estate construction project, where the lender, Specialty Finance Group LLC (SFG), loaned money to the project developer, DOC Milwaukee LP (DOC Milwaukee), for construction. The project began construction in 2007 but ultimately failed and several contractors, including Butters Fetting, the HVAC contractor, and Klein-Dickert, the glass installation contractor, filed liens after they were not paid. The DOC Milwaukee receivership action was filed in June 2009. The project was later sold at auction, but the proceeds of the sale were not enough to cover all the liens on the property.

There are two receivership actions involved here. In addition to the DOC Milwaukee receivership action, a prior separate receivership action was initiated when SFG’s parent company also failed and was placed under the control of the FDIC. The FDIC formed 2010-1 SFG Venture, LLC (together with SFG, “Venture”) which was assigned the SFG note and mortgage.

The issue presented that would determine whether or not the lender was entitled to the priority under the statute was whether Venture is a “mortgage banker” and therefore protected under Wis. Stat. § 706.11(1)(f). If Venture is a mortgage banker, Venture’s lien is prior to the liens of Butters Fetting and Klein-Dickert, the contractors. Venture argues that under the plain language definition of “mortgage banker” under Wis. Stat. § 224.71(3)(a)1, Venture satisfies the criteria, since Venture “originate[d] the loan for itself, as payee on the note evidencing the loan” secured by the recorded mortgage. The contractors do not dispute that, and also do not dispute that Venture is not excluded by another subsection of 224.71(3)(b), but instead argue that Venture cannot be a “mortgage banker” unless it is a registered mortgage banker, citing another related statute. The court of appeals ultimately disagrees with the contractors.

Because Wis. Stat. § 706.11(1) only references Wis. Stat. § 224.71(3) and not the related statute cited by the contractors, the court agreed that they must use the narrow definition of mortgage banker. The court concludes that Venture is a mortgage banker and is entitled to the protection of the mortgage priority statute, thus the case was remanded by the court reversing the awards to the contractors and with directions to the trial court that any sums paid to the contractors must be returned to Venture.

It remains to be seen as to whether this issue will be appealed to the Wisconsin Supreme Court, or if another party, with better facts and circumstances, could make a convincing legal argument as to why a mortgage banker should not be allowed to have its mortgage priority protected. To date, courts have consistently held the mortgage priority statute is strong protection for lenders, indeed.

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