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COURT OF APPEALS
DECISION
DATED AND FILED
December 17, 2009
David
R. Schanker
Clerk of Court of Appeals
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NOTICE
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This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official
Reports.
A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See Wis. Stat. § 808.10 and Rule 809.62.
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Appeal No.
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STATE OF WISCONSIN
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IN COURT OF
APPEALS
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DISTRICT II
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Federal National Mortgage Association,
Plaintiff-Third-Party
Plaintiff-Respondent,
v.
Scott T. Lewis and April D. Lewis,
Defendants,
First Midwest Bank,
Defendant-Respondent,
Illinois Process Servers, Inc. and ABC Insurance Company,
Third-Party Defendants,
Daniel L. Parise and Helen M. Parise,
Third-Party Defendants-Appellants.
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APPEAL
from a judgment of the circuit court for Walworth County: ROBERT
J. KENNEDY, Judge. Reversed and cause remanded for
further proceedings.
Before Vergeront, Lundsten and Storck, JJ.
¶1 PER CURIAM. Appellants Daniel Parise
and Helen Parise purchased a home after a foreclosure sale. They appeal the circuit court’s order
establishing the right of First Midwest Bank (Midwest)
to acquire the property from them. Midwest was a second mortgage holder who was not joined
as a party at the time of the foreclosure sale to the first mortgage holder, Federal
National Mortgage Association (Federal).
For the reasons that follow, we conclude that the circuit court erroneously
exercised its discretion when fashioning the terms on which Midwest has the
right to acquire the property from the Parises. Accordingly, we reverse and remand for
further proceedings consistent with this opinion.
BACKGROUND
¶2 This case started as a simple foreclosure action. Federal, as the first mortgage holder,
commenced this foreclosure action in March of 2003. The foreclosure summons and complaint named
owners of the residence and a second mortgage holder, Midwest. Federal retained Illinois Process Service,
Inc., to serve the summons and complaint on Midwest, but, unknown to Federal,
its process server failed to properly serve Midwest.
¶3 In May of 2003, Federal was granted by default a
non-deficiency foreclosure judgment with a six-month redemption period. In November of 2003, the property was sold at
sheriff’s sale to Federal for $206,236.82, the amount of its judgment. The sheriff’s sale was confirmed, and a
sheriff’s deed was given to Federal.
Federal listed the home with a realtor and, on May 11, 2004, the Parises purchased the home
for $166,000.00. As a result, Federal
incurred a loss of approximately $40,000.
¶4 About eight months later, Midwest
filed a motion to reopen the default judgment of foreclosure. Midwest was
not properly served and, for that reason, the circuit court reopened the
judgment and vacated it. Later, Federal
joined the process server and the Parises as third-party defendants. Federal sought damages for the improper
service against the process server. The Parises counterclaimed
against Federal for damages.
¶5 On November 5, 2007, about four years after the sheriff’s
sale and about three and a half years after the purchase by the Parises, a trial to the
court was held. All parties had the
opportunity to put on evidence of the value of the property at the time of the
sheriff’s sale and at the time of trial, but only the Parises presented such evidence in the form
of opinion evidence from Mr. Parise.
¶6 The circuit court held that Midwest
was entitled to equitable subrogation of the mortgage. The circuit court wrote that Midwest “may redeem by paying the sum of Two Hundred Six
Thousand Two Hundred Thirty-seven and 82/100 ($206,237.82) Dollars, at which
time the first mortgage lien is revived, and the junior lienholder (FIRST
MIDWEST) becomes subrogated thereto.”
The court ruled that, if Midwest paid the clerk of courts that sum, Midwest would be entitled to a sheriff’s deed or a court deed
to the property.
¶7 The circuit court also concluded that, if Midwest opted to
“redeem” the property, the Parises
were entitled to damages against Federal.
The court calculated the damages by adding the purchase price
($166,000), the out-of-pocket improvement expenses paid by the Parises
($44,000), and real estate taxes for 2004 through 2006 ($8,730.13), for a total
amount of $218,730.13.
¶8 Finally, if Midwest opted to redeem, the circuit court
established for the Parises an “ultimate equity of redemption,” that is, an
amount the Parises could pay to Midwest to retain their property. The amount was set at $301,224.89 and was
comprised of the amount the court determined Midwest would have paid to
purchase the property, $206,236.82,
and the amount of Midwest’s mortgage plus accrued
interest, attorney fees, and costs of prosecuting and defending the action up
to November of 2007, $94,988.07.
¶9 Under the court’s ruling, Midwest
was required to exercise its “right of redemption” on February 20, 2008. If Midwest chose to do so, the Parises, in turn, could “redeem” the property from Midwest by paying it $301,224.89 on that same date.
DISCUSSION
¶10 In fashioning equitable relief for Midwest, the circuit court
relied on Buchner v. Gether Trust, 241 Wis. 148, 5 N.W.2d 806
(1942). We agree that Buchner
provides the framework for a resolution of this case, but we conclude that the
circuit court erroneously exercised its discretion in applying Buchner
to the facts of this case.
¶11 A court of equity has the power to fashion a remedy to meet the
needs of a particular case. See Prince v. Bryant, 87 Wis. 2d 662, 674, 275
N.W.2d 676 (1979). We therefore apply an
erroneous exercise of discretion standard in reviewing decisions made in equity
by the circuit court. Lueck’s Home
Improvement, Inc. v. Seal Tite Nat’l, Inc., 142 Wis. 2d 843, 847, 419 N.W.2d 340 (Ct. App.
1987). We will uphold the circuit
court’s decision if we find that the court examined the relevant facts, applied
a proper standard of law, and, using a demonstrated rational process, reached a
reasonable conclusion. McCleary v.
State, 49 Wis.
2d 263, 277-78, 182 N.W.2d 512 (1971).
¶12 The Parises contend that the circuit court failed to fashion an
appropriate equitable remedy because, if Midwest elects to “redeem,” the Parises, who are innocent, will be put in a worse position
and Midwest will be put in a better
position. The Parises’ argument contains
the implicit assumption that, at the time of the sheriff’s sale, Midwest, as
holder of a second mortgage, could not have benefitted from notice because the
property was worth no more, and likely much less, than the first mortgage held
by Federal. Thus, there would have been
insufficient equity in the property to apply any funds toward the second
mortgage held by Midwest.
¶13 Although we do not agree with all of the particulars of the
Parises’ arguments, we do agree that the relief ordered by the circuit court
must be vacated because it inequitably harms the Parises
and potentially provides an unfair windfall to Midwest. We begin with a discussion of the case that
all of the parties agree provides guidance, Buchner.
¶14 In Buchner, the plaintiffs purchased property as
a result of a mortgage foreclosure proceeding.
A junior judgment lienholder, Gether Trust, was named as a party in the
mortgage foreclosure, but was not served.
Buchner, 241 Wis.
at 150. The Buchner court
rejected the Trust’s argument that a foreclosure proceeding resulted in
complete destruction of the first mortgage as a lien, thereby promoting the
junior lien to a first lien and leaving title in the property subject to the
lien of the Trust. The court explained
that, when a subordinate lienholder has been deprived of the opportunity to
participate in foreclosure proceedings, that lienholder retains the same rights
he or she would have had, but no more:
[W]here a senior mortgage has been foreclosed without
making the claimant of a subordinate lien a party, the proceedings are not null
and void but leave the holder of the subordinate lien with the same rights that
he would have had, had he been made party to the foreclosure proceedings. This implies that his rights are not
improved, or the rank of his judgment lien advanced. The rights of the subordinate lien claimant
duly served with process in the foreclosure of a senior mortgage are to pay the
mortgage or to redeem the property.
These rights are unimpaired and unchanged by the defective foreclosure....
[T]he junior lien claimant may bring an action to redeem provided he does not
lose his rights by laches.... [W]e discover no case holding that the rights of
the junior claimant are improved or increased by the defect in the foreclosure
proceedings. In accordance with quite
elementary principles of justice, his position is preserved and equity will
not permit that he suffer any disadvantage from the failure to include him as a
party. [At the same time, it] would be
utterly unfair to do more than this.
Id. at 152-53 (emphasis added;
citations omitted). The court went on to
say:
Changes in the form of remedies do not affect
substantive rights. It does not matter
what label is put upon the attempt, whether by the purchaser at foreclosure
sale or the holder of a junior lien, to arouse the conscience of a court of
equity. Under the code, the facts are
stated, and if in a substantive sense equitable rights are disclosed the
court will give such remedies as are appropriate to those rights.
Id. at 153 (emphasis
added). Thus, Buchner
teaches that the remedy given a junior lienholder must be equitable under the
circumstances.
¶15 Before moving on, we note that we will assume, without
deciding, that the law requires that the property be offered to Midwest at some price.
We acknowledge it might be argued that under Buchner a
court may, if equity permits, simply extinguish the rights of a junior lienholder. But we do not address this question because
the Parises do
not present developed argument on it.
Thus, we focus our attention on whether the price set by the circuit
court was equitable.
¶16 We begin our analysis of the facts with a discussion of the
value of the property at the time of the sheriff’s sale. This amount is important because, if it was
no more than the outstanding first mortgage, then there would have been insufficient
equity in the property to cover any of the second mortgage held by Midwest. In that
event, logic dictates that Midwest was not
harmed by lack of notice. There are
three reasons why we conclude that there is no dispute that the property’s
value was no more than the first mortgage amount.
¶17 First, at the sheriff’s sale, a sale that by law must be
advertised,
no one offered to pay more than the first mortgage amount.
¶18 Second, when later put up for sale with a realty firm, the
property sold for substantially less than the first mortgage amount. There was a stipulation at the time of trial
that: “After obtaining an appraisal on
the property on May 11th, 2004, the Parises
offered to purchase and did purchase the property from the plaintiff for
$166,000.” Mr. Parise testified at trial
that the purchase was made through a realtor and that, at the time of the
purchase, he was not aware that the property had been subject to a sheriff’s
sale. There is nothing indicating that
this sale was anything but an arm’s length transaction.
¶19 Third, none of the parties, including Midwest, presented
evidence indicating that the property was worth more than the first mortgage amount
at the time of the sheriff’s sale. Cases
such as Buchner put Midwest on
notice that equity is a primary consideration in such matters. Thus, Midwest
had an incentive to show that it was harmed by the lack of notice by presenting
evidence that the value of the property exceeded the amount of the first
mortgage. Midwest’s
failure to do so supports the view that the property’s value did not exceed the
first mortgage amount.
¶20 We conclude that the only reasonable inference from the record
is that the value of the property at the time of the sheriff’s sale was no more
than the amount of the first mortgage.
It follows that there is no reason to believe that Midwest
would have benefitted from exercising any of the rights of a junior lienholder. Rather, the only reasonable inference is
that, if Midwest had exercised its rights, it
would have, as Federal did, added to its loss.
¶21 It is true that Midwest is an
innocent party, but it is an innocent party that suffered no harm. This leads us to the problem with the circuit
court’s remedy. In an effort to treat
Midwest fairly, the court determined that it would permit Midwest
to acquire the property for the amount it might have paid for the property if
it had received notice, namely one dollar more than Federal’s successful bid of
$206,236.82. Presumably, Midwest will
exercise this option only if the current value of the property is significantly
higher than this purchase price, thus putting Midwest
in a better position than if it had received notice in the first instance. This remedy runs afoul of Buchner,
which tells us that the junior lienholder’s position should not be either improved
or diminished.
¶22 The remedy also fails to treat the Parises fairly. As the circuit court noted, the Parises are “faultless”
in this matter. Like a typical home
buyer, the Parises purchased a property listed with a realty company, paid what
must be assumed was market value at the time, and proceeded to make
improvements, both with their own labor and by paying for improvements. In the normal course, if they chose to do so,
they could sell the property for its current fair market value. Thus, equitable treatment of the Parises would be to
compensate them for their home at its fair market value. So far as we can discern, there is little
reason to think that the amount the Parises will
receive if Midwest decides to purchase their
home would be equal to the home’s current value.
¶23 In light of the circumstances, especially the fact that Midwest
was not harmed by lack of notice, we conclude that the only reasonable remedy
that gives Midwest back its lost opportunity is to permit Midwest to acquire
the property at its current fair market value.
We acknowledge that the Parises’
attorney gave the circuit court little to work with. The record discloses that the attorney did
not name any experts by a deadline and that Midwest moved to exclude expert
testimony, but we do not know what would have happened had the Parises’ attorney
attempted to put on an expert regarding current fair market value. What did happen is that the attorney
presented only the opinion of Mr. Parise.
Still, with so much at stake for the Parises, we conclude that the circuit court
should have either credited Mr. Parise’s testimony regarding current value or
directed the parties to provide reliable current fair market value information
before issuing an order.
¶24 Accordingly, on remand, if Midwest remains interested in
exercising its right to purchase the property, the circuit court should hold an
evidentiary hearing to determine the current fair market value of the property
and then permit Midwest to acquire the property by paying that amount to the Parises. We are mindful that Midwest may not be
interested in paying the current fair market value of the property because, if
that amount is correctly determined, Midwest
gains nothing—the amount it would pay would be equal to the value of the asset
it acquires. But that is precisely the
point. This remedy returns Midwest to the position it would have been in had it
received proper notice, a position in which it had no prospect of gaining an
advantage by exercising its options.
¶25 As noted above, the Parises
counterclaimed against Federal for damages.
It is unclear to us whether the $12,492.31 the court’s order requires
Federal to pay the Parises in addition to
$206,237.82 (which Federal would receive from Midwest)
is based on Federal’s liability on the counterclaim or on the court’s
assessment of the equities among the three parties. In either case, it is unnecessary for us to
address this aspect of the court’s decision. Federal will not be required to pay this
amount, or any amount, in order for Midwest to
have the option of purchasing the property for its fair market value. Nothing in our opinion precludes the Parises from pursuing
their counterclaim.
CONCLUSION
¶26 For the above reasons, we remand to the circuit court for
further proceedings consistent with this opinion.
By the Court.—Judgment reversed and cause remanded
for further proceedings.
This
opinion will not be published. See
Wis. Stat. Rule 809.23(1)(b)5.