• Home
  • Education
  • News and Resources
  • Advocacy
  • Associate Members
  • Contact
  • Click to open the search input field Click to open the search input field Search
  • Menu Menu
News
Advocacy, News

Executive Letter: Wisconsin Supreme Court Upholds Priority of Secured Creditor Under Receivership Rules

WI Supreme Court

Rose Oswald PoelsBy Rose Oswald Poels

I am happy to report that the Wisconsin Supreme Court (Court) recently released a unanimous decision which protects secured creditors’ interests under receivership rules. The Court’s decision addressed the issue of whether properly perfected secured creditor interests were subject to unsecured creditor interests under receivership rules. The Wisconsin Bankers Association (WBA) filed an amicus brief on behalf of the membership given the significance of the issue. I have outlined below some of the facts of the case, the court’s rationale, and decision.

Background

The case involves a dispute between a secured lender and unsecured creditor residents of an insolvent independent senior-living facility formerly known as The Atrium of Racine (The Atrium). Bank of New York Mellon Trust Company (BONY) is the trustee under the terms of a November 1, 2002 Trust Indenture between the Elderly Housing Authority of the City of Racine and BONY’s predecessor trustee. The indenture describes series 2002A Fixed Rate Revenue Bonds and series 2002B Extendable Rate Adjustable Securities, each issued in the aggregate principal amount of $4,025,000. Payments of principal, premium, and interest were secured by promissory notes in the aggregate principal amount of $8,050,000 and were further secured by a mortgage and security interest also dated November 1, 2002.

The Atrium defaulted on its May 1, 2017 interest payment and stipulated with BONY to an assignment for the benefit of creditors and the appointment of a receiver pursuant to s. 128.08(1)(b), Stats. The receiver assumed management of The Atrium and, with BONY’s consent, proceeded to market The Atrium for sale. Residents of The Atrium, however, claimed entitlement to the sale proceeds, asserting claims for entrance fees paid to The Atrium in connection with residency agreements. On the receiver’s motion for declaratory relief, the circuit court properly held that the residents’ claim for entrance fees were not secured claims entitled to priority payment from the proceeds of the asset sale.

On July 31, 2019, the circuit court affirmed the receiver’s sale of The Atrium assets, but the residents objected to the disbursement of the sale proceeds to BONY. The parties agreed to hold the proceeds of the sale in trust pending appeal.

In July 2021, the Wisconsin Court of Appeals issued an unpublished opinion holding that the residents’ claims had priority over the properly perfected security interest of the bondholders. The result of the decision elevated the obligation to refund the entrance fees above the first mortgage securing bonds, the proceeds of which were used to finance the senior facility.

The Wisconsin Supreme Court agreed to review the issues presented by the dispute. The principal issue on appeal was whether a secured lender’s properly perfected mortgage and security interest have priority over resident claims for entrance fees from the proceeds of the sale of the building and assets. A secondary issue on appeal was whether the residents’ appeal was timely and sufficient to confer appellate jurisdiction. In filing its amicus brief on behalf of the membership, WBA was focused on the principal issue on appeal.

Wisconsin Supreme Court Decision

As outlined in the Court decision, the residents of The Atrium relied upon provisions within documents executed between The Atrium and BONY and a statement required under securities regulations regarding the risks of investing to assert that the bondholders contracted away the superiority of their mortgage lien. The Court disagreed with the residents.

The Court looked to the receivership statutes for resolution of the issue. Section 128.17, Stats. establishes an order of payment for how a receiver is to distribute proceeds of a sale among the estate’s creditors. The order is to follow: (i) the actual and necessary costs of preserving the estate subsequent to the commencement of the proceedings; (ii) costs of administration including a reasonable attorney’s fee for the representation of the debtor; (iii) wages, including pension, welfare, and vacation benefits, due to workmen, clerks, traveling or city salespersons or servants, which have been earned within three months before the date of the commencement of the proceedings, not to exceed $600 to each claimant; (iv) taxes, assessments and debts due the United States, Wisconsin, or any county, district, or municipality; (v) other debts entitled to priority; (vi) debts due to creditors generally, in proportion to the amount of their claims, as allowed; and (vii) after payment of the foregoing, the surplus, if any, shall be returned to the debtor.

The Court determined that “other debts entitled to priority” encompasses mortgages under s. 706.11, Stats. which grants priority to mortgages that are executed by a state or national bank. The Court also determined that “debts due to creditors generally, in proportion to the amount of their claims, as allowed” applied to unsecured claims. The parties of the case agreed the bondholders were secured creditors and the residents were unsecured creditors and under the order set forth under receivership rules, the claims of the secured creditors would have priority over those of unsecured creditors. However, the residents further argued the bondholders subordinated their secured interest to the residents’ interest in their entrance fees.

The Court looked to case law and the Restatement of Property in its review of how a party is to subordinate a security interest. The residents pointed to definitions of “permitted liens” and “permitted encumbrances” in documents executed between The Atrium and BONY.

The executed mortgage included language which stated, “permitted encumbrances” include “[l]iens permitted under Section 5.12(b) of the [Project Contract].” According to the Project Contract, “Permitted Liens shall consist of … [e]ntrance fees or similar funds deposited by or on behalf of such residents[.]” The residents argued that if the financing documents grant either permitted liens or permitted encumbrances priority over the bondholders’ mortgage lien, the entrance fees must be refunded before the mortgage is paid.

The Court looked to the language of the contract and mortgage which the relevant terms included the following:

“Pursuant to the Mortgage, the Corporation has granted to the Trustee a first mortgage lien on the campus currently owned by the corporation…subject in each case to Permitted Liens as defined in the Project Contract.”

“This Mortgage constitutes a direct and valid lien on and security interest in the Mortgaged Property subject only to Permitted Encumbrances.”

While the language of the mortgage states the mortgage is subject to permitted encumbrances, the Court concluded nothing within the documents subordinated the bondholders’ mortgage. The documents contemplate the possibility entrance fees could take priority over the bondholders’ mortgage, but the provisions within do not create a lien, nor accord it priority over a properly perfected mortgage. The residents never attempted to create liens. Having never become liens, the residents’ claims are unsecured claims and recovery of the fees would not trump the bondholders’ perfected security interest of the mortgage; the order set forth in s. 128.17 must be applied to the payments from the sale proceeds.

The Court also reviewed the use of the finding in M&I First National Bank v. Episcopal Homes Management Inc., 195 Wis. 2d 485, 536 N.W.2d 175 (Ct. App. 1995), by the Court of Appeals in its decision to deem the residents’ claim superior to the bondholders’ lien.

The Episcopal Homes case involved a senior-living facility that defaulted on bond repayments. In that case, a group of roughly 1,700 bondholders bought more than $11 million in bonds to fund the construction of a facility. Under a series of financing documents, the bondholders held a security interest in an account containing approximately $1,000,000 in entrance fees. The residency agreements subordinated entrance fee repayments to the bondholders’ lien. After default on bond repayment, the bondholders claimed a secured interest in a segregated entrance fee account funds. Based upon language of the rental agreements, the Court of Appeals concluded the entrance fees were effectively security deposits under Wis. Admin. Code sec. ATCP 134.02(11). Based upon language within agreements, administrative code, and public policy, the Court of Appeals held the residents’ entrance fees were protected from the bondholders’ interests.

The residents in The Atrium case claimed their entrance fees were like those interests of the residents in the Episcopal Homes case. However, the Court determined the facts between Episcopal Homes and The Atrium were different and that the equitable powers used by the Court of Appeals in the Episcopal Homes against a segregated account containing funds traceable to residents’ entrance fees could not be used in The Atrium case as sections 706.11 and 128.17, Stats. so clearly grant the bondholders’ mortgage lien unequivocal superiority. The Court concluded it has no legal authority to extend the Court of Appeals decision in Episcopal Homes beyond a segregated account of entrance fees not in receivership to reach the distinct proceeds from the sale of real property subject to a perfected mortgage lien. The Court could not disregard the plain language under Chapter 128.

I am certainly sympathetic to the residents impacted by the Court’s decision. However, the unanimous decision does uphold Wisconsin’s clear priority order under receivership rules and under s. 128.17, Stats., that the bondholders, given their security interest of the perfected mortgage, were entitled to payment from the proceeds of the sale of The Atrium assets before payment to unsecured creditors, the residents.

I wish to thank the BoardmanClark law firm and Attorney James Bartzen in particular for their assistance with drafting and filing WBA’s amicus brief for this case.

At time of release of this letter, the opinion had not yet been posted to the Court’s website, however, it may be viewed on the WBA Compliance Page.

Print 🖨
March 29, 2023/by Hannah Flanders
Tags: Advocacy, Executive Letter
Share this entry
  • Share on Facebook
  • Share on X
  • Share on WhatsApp
  • Share on Pinterest
  • Share on LinkedIn
  • Share on Tumblr
  • Share on Vk
  • Share on Reddit
  • Share by Mail
https://www.wisbank.com/wp-content/uploads/2023/03/WI-Supreme-Court.jpg 375 564 Hannah Flanders https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Hannah Flanders2023-03-29 15:03:162023-03-29 15:03:16Executive Letter: Wisconsin Supreme Court Upholds Priority of Secured Creditor Under Receivership Rules
You might also like
Pens, papers, and clipboards laid out on conference table Getting Involved With the Society of Bank Executives
Group of businesspeople sitting together in meeting Executive Letter: Lend Your Talents and Shape Your Industry
Executive Letter: Creating Equity and Inclusion Through Leadership
WBA Staff Advocacy Fundraiser Yields Over $12.5K
Thank You, 2021 WBA Advocacy Officers!
Executive Letter: Is Your Bank Getting the Most Out of Membership?
Executive Letter: FinCEN Resources for Beneficial Ownership Information Reporting Rule
Street view of Wisconsin State Capitol building Executive Letter: Taking the Lead on Advocacy
Search Search

Categories

  • Advocacy
  • Community
  • Compliance
  • Credit Unions
  • Education
  • Member News
  • News
  • Products
  • Resources
  • Uncategorized

Recent Posts

  • Katie Steffel Promoted to Vice President – Retail Loan Operations at Bank First
  • Cybersecurity Without the Checklist: Adapting to the CAT’s Sunset
  • Prevail Bank Welcomes Ruthie Dickinson as New Mortgage Loan Originator
  • National Exchange Bank & Trust Joins Take Root Milwaukee
  • Executive Letter: Record-Breaking Capitol Day Demonstrates Power of Unified Industry Voice

Archives

  • May 2025
  • April 2025
  • March 2025
  • February 2025
  • January 2025
  • December 2024
  • November 2024
  • October 2024
  • September 2024
  • August 2024
  • July 2024
  • June 2024
  • May 2024
  • April 2024
  • March 2024
  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • September 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • December 2020
  • November 2020
  • October 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • May 2019
  • April 2019
  • March 2019
  • November 2018
  • September 2018
  • August 2018
  • June 2018
  • April 2018
  • March 2018
  • January 2018
  • November 2017
  • October 2017
  • September 2017
  • May 2017
  • April 2017
  • December 2016
  • November 2016
  • August 2016
Wisconsin Bankers Association logo
  • About
  • Community
  • Subsidiaries
  • Staff

questions@wisbank.com

608-441-1200

4721 S Biltmore Ln.
Madison, WI 53718

Get our Newsletter!
Subscribe

© 2025 Wisconsin Bankers Association. All rights reserved. | Website Design by Bizzy Bizzy
Link to: Compliance Column: What Wisconsin’s Transfer by Affidavit Form Means for Bankers Link to: Compliance Column: What Wisconsin’s Transfer by Affidavit Form Means for Bankers Compliance Column: What Wisconsin’s Transfer by Affidavit Form Means for ... Link to: Executive Letter: CFPB Releases Final Section 1071 Business Data Collection Rule Link to: Executive Letter: CFPB Releases Final Section 1071 Business Data Collection Rule Executive Letter: CFPB Releases Final Section 1071 Business Data Collection...
Scroll to top Scroll to top Scroll to top

This site uses cookies. By continuing to browse the site, you are agreeing to our use of cookies.

OKLearn more×

Cookie and Privacy Settings



How we use cookies

We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.

Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.

Essential Website Cookies

These cookies are strictly necessary to provide you with services available through our website and to use some of its features.

Because these cookies are strictly necessary to deliver the website, refusing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.

We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.

We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.

Other external services

We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.

Google Webfont Settings:

Google Map Settings:

Google reCaptcha Settings:

Vimeo and Youtube video embeds:

Privacy Policy

You can read about our cookies and privacy settings in detail on our Privacy Policy Page.

Terms of Use
Accept settingsHide notification only

Subscribe

* indicates required








Membership