Marilyn Casanova v. Michael S. Polsky, Esq. ( 2021 )

COURT OF APPEALS
DECISION NOTICE
DATED AND FILED This opinion is subject to further editing. If
published, the official version will appear in
the bound volume of the Official Reports.
July 30, 2021
A party may file with the Supreme Court a
Sheila T. Reiff petition to review an adverse decision by the
Clerk of Court of Appeals Court of Appeals. See WIS. STAT. § 808.10
and RULE 809.62.
Appeal Nos. 2019AP1728 Cir. Ct. No. 2017CV1133
2019AP2063
STATE OF WISCONSIN IN COURT OF APPEALS
DISTRICT II
NO. 2019AP1728
IN RE:
THE ATRIUM OF RACINE, INC., D/B/A THE ATRIUM AND BAY
POINTE:
MARILYN CASANOVA, MEMBER OF CREDITOR COMMITTEE,
AUDREY J. FOX, MEMBER OF CREDITOR COMMITTEE, DR.
MELVIN MIRITZ, MEMBER OF CREDITOR COMMITTEE, LINDA
MIRITZ, MEMBER OF CREDITOR COMMITTEE, EDWARD AND
LOUISE LANGLEIB TRUST, MEMBER OF CREDITOR
COMMITTEE, CARLETON MUSSON, MEMBER OF CREDITOR
COMMITTEE, WILMA MILOVANCEVIC, MEMBER OF CREDITOR
COMMITTEE, HELEN TAYLOR, MEMBER OF CREDITOR
COMMITTEE, LOUIS P. TEICHERET TRUST, MEMBER OF
CREDITOR COMMITTEE, REVEREND FREDERICK MARKS,
MEMBER OF CREDITOR COMMITTEE, JEWEL MARKS, MEMBER
OF CREDITOR COMMITTEE, PATRICIA MEIER, MEMBER OF
CREDITOR COMMITTEE, PATRICIA TEERNSTRA, MEMBER OF
CREDITOR COMMITTEE, ANDREW MIKAELIAN, MEMBER OF
CREDITOR COMMITTEE, MARCELLA MIKAELIAN, MEMBER OF
CREDITOR COMMITTEE, JOSEPHINE BROOKS, MEMBER OF
CREDITOR COMMITTEE, EVELYN ODELL, MEMBER OF
Nos. 2019AP1728
2019AP2063
CREDITOR COMMITTEE, LAURENCE FREER, MEMBER OF
CREDITOR COMMITTEE, DOROTHY KOHL, MEMBER OF
CREDITOR COMMITTEE, KAREN BOERGER, MEMBER OF
CREDITOR COMMITTEE, JACQUELINE WILLIAMSON, MEMBER
OF CREDITOR COMMITTEE, JUDY GLOWINSKI, MEMBER OF
CREDITOR COMMITTEE, ANNE TREDWELL, MEMBER OF
CREDITOR COMMITTEE, MARILYN BAHAM, MEMBER OF
CREDITOR COMMITTEE, ELSIE GOTZMAN, MEMBER OF
CREDITOR COMMITTEE, LUCILLE CIARAMITA, MEMBER OF
CREDITOR COMMITTEE, JOANNE RAMAKER, MEMBER OF
CREDITOR COMMITTEE, JOHANNA SANDER, MEMBER OF
CREDITOR COMMITTEE, THOMAS ESER, MEMBER OF
CREDITOR COMMITTEE, HENRYETTA ESER, MEMBER OF
CREDITOR COMMITTEE, GRACE NELSON, MEMBER OF
CREDITOR COMMITTEE, JANE ODDERS, MEMBER OF
CREDITOR COMMITTEE, DAVID NELSON, MEMBER OF
CREDITOR COMMITTEE, RAY KATT (DECEASED), MEMBER OF
CREDITOR COMMITTEE, LOUISE KATT, MEMBER OF CREDITOR
COMMITTEE, ETHEL HADER, MEMBER OF CREDITOR
COMMITTEE, WARREN LARSEN, MEMBER OF CREDITOR
COMMITTEE, ELLEN LARSEN, MEMBER OF CREDITOR
COMMITTEE, FRANCES SCOTT, MEMBER OF CREDITOR
COMMITTEE, SUSAN PROUTY, MEMBER OF CREDITOR
COMMITTEE, ROBERT RAINEY, MEMBER OF CREDITOR
COMMITTEE, PATRICIA RAINEY, MEMBER OF CREDITOR
COMMITTEE, HELEN ECKHEART, MEMBER OF CREDITOR
COMMITTEE, WILMA WISER, MEMBER OF CREDITOR
COMMITTEE, EARL CHRISTIANSON, MEMBER OF CREDITOR
COMMITTEE AND MARIAN BLOCH, MEMBER OF CREDITOR
COMMITTEE,
APPELLANTS,
V.
MICHAEL S. POLSKY, ESQ., RECEIVER AND THE BANK OF NEW
YORK MELLON TRUST COMPANY, N.A.,
RESPONDENTS.
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NO. 2019AP2063
IN RE:
THE ATRIUM OF RACINE, INC., D/B/A THE ATRIUM AND BAY
POINTE:
MARILYN CASANOVA, MEMBER OF CREDITOR COMMITTEE,
AUDREY J. FOX, MEMBER OF CREDITOR COMMITTEE, DR.
MELVIN MIRITZ, MEMBER OF CREDITOR COMMITTEE, LINDA
MIRITZ, MEMBER OF CREDITOR COMMITTEE, EDWARD AND
LOUISE LANGLEIB TRUST, MEMBER OF CREDITOR
COMMITTEE, CARLETON MUSSON, MEMBER OF CREDITOR
COMMITTEE, WILMA MILOVANCEVIC, MEMBER OF CREDITOR
COMMITTEE, HELEN TAYLOR, MEMBER OF CREDITOR
COMMITTEE, LOUIS P. TEICHERT TRUST, MEMBER OF
CREDITOR COMMITTEE, REVEREND FREDERICK MARKS,
MEMBER OF CREDITOR COMMITTEE, JEWEL MARKS, MEMBER
OF CREDITOR COMMITTEE, PATRICIA MEIER, MEMBER OF
CREDITOR COMMITTEE, PATRICIA TEERNSTRA, MEMBER OF
CREDITOR COMMITTEE, ANDREW MIKAELIAN, MEMBER OF
CREDITOR COMMITTEE, MARCELLA MIKAELIAN, MEMBER OF
CREDITOR COMMITTEE, JOSEPHINE BROOKS, MEMBER OF
CREDITOR COMMITTEE, EVELYN ODELL, MEMBER OF
CREDITOR COMMITTEE, LAURENCE FREER, MEMBER OF
CREDITOR COMMITTEE, DOROTHY KOHL, MEMBER OF
CREDITOR COMMITTEE, KAREN BOERGER, MEMBER OF
CREDITOR COMMITTEE, JACQUELINE WILLIAMSON, MEMBER
OF CREDITOR COMMITTEE, JUDY GLOWINSKI, MEMBER OF
CREDITOR COMMITTEE, ANNE TREDWELL, MEMBER OF
CREDITOR COMMITTEE, MARILYN BAHAM, MEMBER OF
CREDITOR COMMITTEE, ELSIE GOTZMAN, MEMBER OF
CREDITOR COMMITTEE, LUCILLE CIARAMITA, MEMBER OF
CREDITOR COMMITTEE, JOANNE RAMAKER, MEMBER OF
CREDITOR COMMITTEE, JOHANNA SANDER, MEMBER OF
CREDITOR COMMITTEE, THOMAS ESER, MEMBER OF
CREDITOR COMMITTEE, HENRYETTA ESER, MEMBER OF
CREDITOR COMMITTEE, GRACE NELSON, MEMBER OF
CREDITOR COMMITTEE, JANE ODDERS, MEMBER OF
CREDITOR COMMITTEE, DAVID NELSON, MEMBER OF
CREDITOR COMMITTEE, RAY KATT (DECEASED), MEMBER OF
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CREDITOR COMMITTEE, LOUISE KATT, MEMBER OF CREDITOR
COMMITTEE, ETHEL HADER, MEMBER OF CREDITOR
COMMITTEE, WARREN LARSEN, MEMBER OF CREDITOR
COMMITTEE, ELLEN LARSEN, MEMBER OF CREDITOR
COMMITTEE, FRANCES SCOTT, MEMBER OF CREDITOR
COMMITTEE, SUSAN PROUTY, MEMBER OF CREDITOR
COMMITTEE, ROBERT RAINEY, MEMBER OF CREDITOR
COMMITTEE, PATRICIA RAINEY, MEMBER OF CREDITOR
COMMITTEE, HELEN ECKHEART, MEMBER OF CREDITOR
COMMITTEE, WILMA WISER, MEMBER OF CREDITOR
COMMITTEE, EARL CHRISTIANSON, MEMBER OF CREDITOR
COMMITTEE, MARIAN BLOCH, MEMBER OF CREDITOR
COMMITTEE, JAN TEICHERT, MEMBER OF CREDITOR
COMMITTEE, DOROTHY NELSON, MEMBER OF CREDITOR
COMMITTEE, METTA REIKER, MEMBER OF CREDITOR
COMMITTEE, PRUDENCE WHITE, MEMBER OF CREDITOR
COMMITTEE, ELAINE OETLINGER, MEMBER OF CREDITOR
COMMITTEE, ESTHER WULFF, MEMBER OF CREDITOR
COMMITTEE, HELEN VEENSTRA, MEMBER OF CREDITOR
COMMITTEE, REV. DR. ROSS HENRY LARSON, MEMBER OF
CREDITOR COMMITTEE, FRED HOFER, MEMBER OF CREDITOR
COMMITTEE, NANCY HOFER, MEMBER OF CREDITOR
COMMITTEE, WINIFRED WISER, MEMBER OF CREDITOR
COMMITTEE, NAZALY BAGDASIAN, MEMBER OF CREDITOR
COMMITTEE, ROBERT CALLAWAY, MEMBER OF CREDITOR
COMMITTEE, ESTATE OF ELAINE ZLEVOR, MEMBER OF
CREDITOR COMMITTEE, MARSHALL CUSHMAN, MEMBER OF
CREDITOR COMMITTEE, VAR KRIKORIAN, MEMBER OF
CREDITOR COMMITTEE, RUTH MINTON, MEMBER OF
CREDITOR COMMITTEE, RICHARD MINTON, MEMBER OF
CREDITOR COMMITTEE, WALTER STEIDL, MEMBER OF
CREDITOR COMMITTEE, IRENE MILLER, MEMBER OF
CREDITOR COMMITTEE, MARIAN KORNWOLF, MEMBER OF
CREDITOR COMMITTEE, MARJORIE SPECKHARD, MEMBER OF
CREDITOR COMMITTEE, DELORES TORPHY, MEMBER OF
CREDITOR COMMITTEE, GERALDINE BAUMBLATT, MEMBER
OF CREDITOR COMMITTEE, JOAN PETERSON, MEMBER OF
CREDITOR COMMITTEE, JOHN ROWLAND, MEMBER OF
CREDITOR COMMITTEE, JULIANNE ROWLAND, MEMBER OF
CREDITOR COMMITTEE, LORRAINE PAVELCIK, MEMBER OF
CREDITOR COMMITTEE, MARILYN ISELIN, MEMBER OF
CREDITOR COMMITTEE, BERNARD BRAUN, MEMBER OF
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CREDITOR COMMITTEE, PATRICIA BRAUN, MEMBER OF
CREDITOR COMMITTEE, BOB OTTUM, MEMBER OF CREDITOR
COMMITTEE, HOLLY OTTUM, MEMBER OF CREDITOR
COMMITTEE, JOYCE OTTUM, MEMBER OF CREDITOR
COMMITTEE, JEANNE HAAS, MEMBER OF CREDITOR
COMMITTEE, GLORIA MURPHY, MEMBER OF CREDITOR
COMMITTEE, RALPH ANDERSON, MEMBER OF CREDITOR
COMMITTEE, DORIS BEUTTLER, MEMBER OF CREDITOR
COMMITTEE, GENEVIEVE HOSTAK, MEMBER OF CREDITOR
COMMITTEE, MARLENE WEICHMANN, MEMBER OF CREDITOR
COMMITTEE, MARY MUELLER, MEMBER OF CREDITOR
COMMITTEE, WOOD FAMILY TRUST, MEMBER OF CREDITOR
COMMITTEE AND MARY HOLTZ, MEMBER OF CREDITOR
COMMITTEE,
APPELLANTS,
V.
MICHAEL S. POLSKY, ESQ. , RECEIVER AND THE BANK OF NEW
YORK MELLON TRUST COMPANY, N.A.,
RESPONDENTS.
APPEALS from orders of the circuit court for Racine County:
MICHAEL J. PIONTEK and DAVID W. PAULSON, Judges. Reversed and
cause remanded.
Before Reilly, P.J., Gundrum and Davis, JJ.
¶1 REILLY, P.J. This consolidated appeal pits one group of creditors
against another group of creditors. When the Atrium, a seventy-six-unit senior
housing facility, went into receivership in May 2017, it owed its residents
$7,487,000 for “[r]esident entrance fees, deposit fees and trust funds” that the
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residents had paid at the inception of their residency at the Atrium (the Residents).
It also owed $6,097,000 to some 800 individual bondholders who had invested in
the Atrium by purchasing bonds (the Bondholders).1 The circuit court concluded
that the Bondholders have priority over the rights of the Residents to the
remaining assets of the Atrium. We reverse and remand as pursuant to M&I First
National Bank v. Episcopal Homes Management, Inc., 195 Wis. 2d 485, 536
N.W.2d 175 (Ct. App. 1995), the Residents’ entrance fees and security deposits
have priority over the interests of the Bondholders.
Facts
¶2 This case involves the demise of the Atrium, a senior housing
facility in Racine, Wisconsin. The Residents, prior to occupying a unit, were all
required to pay an entrance fee, some a security deposit, and all paid a monthly fee
to live in their unit. Beginning in 1988, the Residents entered into one of six
versions of residency agreements, all of which provided for payment of a fee
typically characterized as an entrance fee of approximately $40,000 to $238,000.
An amount equal to a specified proportion of the entrance fee was to be paid to the
Resident after a Resident terminated occupancy at the Atrium, and while the
agreements vary as to when the Residents would receive reimbursement of the
entrance fees, all of the agreements provided that a portion of the entrance fees
would be reimbursed. Certain of the residency agreements also provided for
payment of a security deposit of approximately $608 to $1800.
1
The Bondholders are represented on appeal by the Bank of New York Mellon Trust
Co., as Trustee for bondholders. New York Mellon Trust is the successor trustee and acting
trustee for the benefit of the Bondholders in this action.
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¶3 The Bondholders’ claims against the Atrium exist as a result of their
purchase of bonds as an investment. In 2002, the Atrium, which was operating as
a senior housing facility, contracted to construct and operate a separate assisted
living facility, called Bay Pointe. Bonds were sold to finance the project, and
various documents were created for investors to review before purchasing the
bonds, including a Prospectus, a Mortgage and Security Agreement, a Project
Contract, and a Trust Indenture. The Bondholders were advised via the Prospectus
and Project Contract that the entrance fees were “refundable resident deposits”
that qualified as “Permitted Liens.” (Emphasis added.) The definition of entrance
fees was contained in both the Project Contract and the Prospectus, which defines
them as:
[T]he fees, other than monthly service charges, paid by
residents of a Facility to the [Obligor/Corporation] for the
purpose of obtaining the right to reside in a Facility,
including any refundable resident deposits described in any
lease or similar residency agreements ….
(Emphasis added.) According to both the Prospectus and the Project Contract,
“Permitted Liens” include “Entrance Fees or similar funds deposited by or on
behalf of such residents.”
¶4 While the Bondholders were granted a first mortgage on the
Atrium’s property, the grant was subject to “Permitted Liens”:
5.12 Restrictions as to Creation of Liens.
(a) The Obligor agrees that it will not create or suffer to
be created or exist any Lien upon its Property other than …
Permitted Liens whenever created, all of which Permitted
Liens may be superior to the Lien of the Mortgage….
The Prospectus also provides that “[p]ursuant to the Mortgage, the Corporation
has granted to the Trustee a first mortgage lien on the campus currently owned by
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the Corporation, and a security interest in certain tangible personal property of the
Corporation, subject in each case to Permitted Liens as defined in the Project
Contract.” (Emphasis added.)
¶5 Accordingly, the Bondholders were aware that their rights were
subject to the repayment of entrance fees and security deposits due to the
Residents. The Prospectus informed each Bondholder that the Residents had
priority with respect to a resident’s entrance fees:
[R]esidents of the facilities that require entrance fees may
have certain rights with respect to their entrance fees and
therefore the entrance fees held by the Corporation may
not be available to pay the Series 2002 Bonds in the event
of a foreclosure.
The effectiveness of the security interest in Pledged
Revenues granted pursuant to the mortgage may be limited
by a number of factors, including … (vi) the rights of
residents and prospective residents in entrance fees paid to
the Corporation; (vii) constructive trusts, equitable or other
rights impressed or conferred by a federal or state court in
the exercise of its equitable jurisdiction.
(Emphasis added.)
¶6 When the Atrium was placed under receivership pursuant to WIS.
STAT. ch. 128 (2019-20),2 both the Residents and the Receiver asked the court for
a determination as to whether the claims of the Residents or the claims of the
Bondholders had priority over the assets of the Atrium. The circuit court issued a
2
All references to the Wisconsin Statutes are to the 2019-20 version unless otherwise
noted.
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decision determining that the Bondholders’ claims had priority over the Residents’
claims.3
¶7 As the receivership action progressed, the Receiver was given
authorization to sell the main asset of the Atrium: the building housing the senior
living complex and assisted living facility. The Residents and the Bondholders
stipulated to the approval of the sale with the proceeds held in trust pending this
appeal.4
Jurisdiction
¶8 As an initial matter, the Bondholders5 assert that we lack jurisdiction
to hear this appeal on the ground that the Residents did not appeal from the
April 23, 2018 order which established priority.6 The Bondholders premise their
argument on United States v. Burczyk, 54 Wis. 2d 67, 194 N.W.2d 608 (1972),
where the court dismissed an appeal as untimely due to the failure of the creditor
3
The Honorable David W. Paulson entered a decision on April 4, 2018, and signed the
order determining priority on April 23, 2018. The case was subsequently assigned to the
Honorable Michael J. Piontek.
4
The Residents appealed from the court’s Order Approving Stipulation to Hold Net Sale
Proceeds in Escrow, entered on July 31, 2019, and just to be safe, the Residents filed a second,
similar draft order containing the “final for purposes of appeal” language approved in Wambolt v.
West Bend Mutual Insurance Co., 2007 WI 35, ¶¶44, 48, 299 Wis. 2d 723, 728 N.W.2d 670.
The circuit court signed that order on October 17, 2019, which the Residents appealed from as
well. We ordered these appeals consolidated.
5
We note that the Respondents in this appeal—the Bondholders and the Receiver—filed
a joint brief. For ease of reading, we will refer to the Bondholders throughout.
6
On December 23, 2019, the Bondholders filed a motion to dismiss this consolidated
appeal, arguing that the Residents did not timely appeal from the April 23, 2018 order. Upon
review of the motion and the objection, we ordered the motion to dismiss held in abeyance,
indicating that the parties could argue that this court lacks jurisdiction in their briefing. We now
deny the Bondholders’ motion to dismiss, as we address the jurisdiction argument on the merits.
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to timely appeal a nonfinal order concerning priority, similar to what occurred in
this case. Burczyk was decided in 1972 when WIS. STAT. ch. 128 contained
specific provisions requiring appeals from interlocutory orders in ch. 128 cases. In
1972, WIS. STAT. § 128.15(1) (1971-72) required that an appeal be commenced
within thirty days of an interlocutory order:
An appeal may be taken from such order within thirty days
from the entry thereof, but not afterwards, in the manner
provided for taking appeals from orders in civil actions.
(Emphasis added.)
¶9 WISCONSIN STAT. § 128.15 (1983-84)7 was modified in 1983 to
eliminate the “thirty day” appeal deadline and made appeals from WIS. STAT.
ch. 128 proceedings uniform with all other appeals via WIS. STAT. § 808.04(1).
1983 Wis. Act 219, § 26. The legislative notes to the amendment of § 128.15(1)
state:
NOTE: The last sentence of [§] 128.15(1), providing an
appeal deadline of 30 days after entry of order, is repealed
for greater uniformity. An appeal must be initiated within
the time specified in [§] 808.04(1).
1983 Wis. Act 219, § 26 (emphasis added).
¶10 WISCONSIN STAT. § 808.04(1) requires that a notice of appeal be
filed within forty-five days “of entry of a final judgment or order” (or ninety days
7
WISCONSIN STAT. § 128.15 has since been amended pursuant to 1997 Wis. Act 253,
§ 123, but the legislative note indicates the amendment “subdivides provision, reorders text and
replaces language for greater readability and conformity with current style.” Thus, § 128.15 is
not substantively different from the 1983 amendment.
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from such entry if notice of entry is not given). (Emphasis added.) In short,
Burczyk has been abrogated by statute, and an appeal in a WIS. STAT. ch. 128
receivership is to be initiated within the time specified in § 808.04(1), which the
Residents did as the April 23, 2018 order was clearly not “a final judgment or
order,” see § 808.04(1), as “[a] final judgment or final order is a judgment, order
or disposition that disposes of the entire matter in litigation as to one or more of
the parties, whether rendered in an action or special proceeding” and, as relevant
here, is “entered in accordance with [WIS. STAT. §§] 806.06(1)(b) or 807.11(2),”
see WIS. STAT. § 808.03(1)(a). The April 23, 2018 order addressed priority, but
left for another day the activity needed to close out the receivership estate. That
final disposition occurred two years later on July 31, 2019, when the court
approved the sale of the Atrium and distribution of proceeds.
¶11 We also find support in Wambolt, where our supreme court
instructed circuit and appellate courts that in the absence of express language
stating that an order is “final for purposes of appeal,” any doubt should be
resolved in favor of hearing the appeal. Wambolt v. West Bend Mut. Ins. Co.,
2007 WI 35, ¶46, 299 Wis. 2d 723, 728 N.W.2d 670 (“[A]bsent explicit language
that the document is intended to be the final order or final judgment for purposes
of appeal, appellate courts should liberally construe ambiguities to preserve the
right of appeal.”); see also Admiral Ins. Co. v. Paper Converting Mach. Co.,
2012 WI 30, ¶27, 339 Wis. 2d 291, 811 N.W.2d 351. The Wambolt language was
rightfully not contained in the April 23, 2018 order, as the case was not terminated
as to any party. With our jurisdiction thus established, we proceed to the merits.
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Standard of Review
¶12 The Bondholders and Residents agree that the question of priority is
a question of law that we review independent of the circuit court’s decision.
Episcopal Homes, 195 Wis. 2d at 498; see also Wisconsin End-User Gas Ass’n v.
PSC, 218 Wis. 2d 558, 564, 581 N.W.2d 556 (Ct. App. 1998) (“The interpretation
of a contract is a question of law which is subject to de novo review.”).
Priority
¶13 The merits of this appeal, factually and legally, are on point with this
court’s decision in Episcopal Homes. Episcopal Homes Management, Inc., like
the Atrium, owned and operated a senior housing facility, which defaulted on its
mortgage obligation. Episcopal Homes, 195 Wis. 2d at 489-93. M&I First
National Bank, the trustee for approximately 1700 bondholders who held
mortgage revenue bonds that financed the construction of the facility, claimed that
its mortgage security interest had priority over the entrance fees (in excess of
$1,000,000) paid by the residents of the housing facility. Id. at 488. The
residency agreements executed by the Residents in this case are similar to the
residency agreements executed by the residents in Episcopal Homes. See id. at
490-92.
¶14 We held in Episcopal Homes that the residency agreements
constituted rental agreements within the meaning of WIS. ADMIN. CODE
§ ATCP 134.02(10) and that “the parties contracted in a landlord/tenant
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capacity.”8 Episcopal Homes, 195 Wis. 2d at 489, 506. The residency
agreements required an entrance fee and monthly payments in exchange for the
use and occupation of the property and therefore constituted a lease. Id. at 500-06.
We adopt our rationale from Episcopal Homes and hold as a matter of law that the
Atrium and the Residents contracted in a landlord/tenant capacity and that the
Atrium residency agreements constituted “rental agreements” within the meaning
of § ATCP 134.02(10) (June 2018).9
¶15 After establishing the legal relationship between the contracting
parties, Episcopal Homes then addressed “whether M&I is entitled to its claimed
priority security interest in the entrance fees fund as against the interests of the
residents.” Episcopal Homes, 195 Wis. 2d at 506. As the parties contracted
within a landlord/tenant relationship, the court applied WIS. ADMIN. CODE
§ ATCP 134, titled Residential Rental Practices, in addressing priority. Section
ATCP 134.02(11) defines “[s]ecurity deposit” as “the total of all payments and
deposits given by a tenant to the landlord as security for the performance of the
tenant’s obligations, and includes all rent payments in excess of 1 month’s prepaid
rent.” Section ATCP 134.06 specifically addresses security deposits and provides
8
We note that in M&I First National Bank v. Episcopal Homes Management, 195
Wis. 2d 485, 501, 536 N.W.2d 175 (Ct. App. 1995), the court found that the residency agreement
established a landlord/tenant relationship despite the provisions in the agreement stating that the
agreement was not a lease. Some of the agreements in this case include similar provisions. We
agree with the court’s reasoning in Episcopal Homes on this point, that despite the language
used, the “construction of the residency agreement” demonstrates that the “fundamental goal was
housing in exchange for rent.” Id. at 503.
9
“‘Rental agreement’ means an oral or written agreement between a landlord and tenant,
for the rental or lease of a specific dwelling unit or premises, in which the landlord and tenant
agree on the essential terms of the tenancy, such as rent. ‘Rental agreement’ includes a lease.”
WIS. ADMIN. CODE § ATCP 134.02(10).
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that “[a] landlord shall” return to the “tenant the full amount of any security
deposit paid by the tenant, less any amounts that may be withheld” pursuant to the
code, upon the tenant vacating the premises. Sec. ATCP 134.06(2), (3) (emphasis
added).
¶16 In a discussion based in part on public policy considerations, the
court found that the entrance fees served as security for the resident’s performance
of their obligations at the termination of the tenancy, thereby constituting a
“[s]ecurity deposit” under WIS. ADMIN. CODE § ATCP 134.02(11). Episcopal
Homes, 195 Wis. 2d at 507, 509 (“The classification of a deposit is based on the
intent of the parties as manifested by their contractual language; however, what
the parties name the nature and function of the deposit is not always controlling.”)
As in Episcopal Homes, the Atrium contractually held the entrance fees and
security deposits for payment of any delinquent fees upon a resident of the Atrium
vacating his or her unit.10 As we said in Episcopal Homes, and which applies
equally to the residents of the Atrium, “the security deposits in this case are
substantial,” but “despite the substantial security deposit, the charges against the
deposit could also be substantial. In a given case, the amount owed [Episcopal]
could consume all, or a great portion of, the entrance fee.” See id. at 509-10.
10
We acknowledge that some of the residency agreements also included language that
the entrance fee is not a security deposit under landlord/tenant law. For the same reasons the
Episcopal Homes court found that the language in the agreements indicating it was not a lease
was not controlling, see supra note 8, we conclude the language in the Residents’ agreements
addressing the entrance fees is not controlling, see Episcopal Homes, 195 Wis. 2d at 501-03. The
residency agreements in this case operate as rental agreements, and the entrance fees operate as
security deposits. See id. at 501-02 (“[T]he labels which parties use in their agreements are not
always controlling,” and “we … must be careful to not alter the true nature of the parties’
contract and the legal relationship which they created by their agreement.” (emphasis added)).
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¶17 In Episcopal Homes, the circuit court imposed a constructive trust
on the entrance fees fund, which we concluded was proper under the
circumstances as the subordination provisions11 contained within the residency
agreement were in violation of the public policy of this state and were
“unconscionable and … unenforceable against the residents” and would “unjustly
enrich M&I.” Episcopal Homes, 195 Wis. 2d at 512-14.
¶18 We need not create a constructive trust in this action as neither party
has been unjustly enriched. The sole question before us is whether the Residents
or the Bondholders have the superior right to the assets being held in the
receivership. We conclude the entrance fees and security deposits paid by the
Residents in this case are superior in priority to the Bondholders’ claims. The
Bondholders were aware from the Prospectus and Project Contract that the
11
The court in Episcopal Homes found the subordination provisions, which stated that
“the resident’s rights under the agreement were subordinate to the first mortgage lien and that the
resident’s claims against [the housing facility] would be unsecured in the event of [the facility’s]
liquidation,” to be ineffective as “form provisions” under WIS. ADMIN. CODE §§ ATCP 134.02(4)
and 134.06(3) (Apr. 1993). Episcopal Homes, 195 Wis. 2d at 511-12 (citing Moonlight v.
Boyce, 125 Wis. 2d 298, 304, 372 N.W.2d 479 (Ct. App. 1985)).
In this case, the Bondholders also argue that some of the Atrium residency agreements
had a subordination clause, and based on our review, it appears only contract six included the
subordination provision, which states: “This Agreement is subject and subordinate to any
mortgage or deed of trust which now or hereafter covers the property of which the Premises is a
part.” We note that since Episcopal Homes, both the state statutes and the administrative code
addressing landlord/tenant law have been amended, compare ch. ATCP 134 (Apr. 1993), with
ch. ATCP 134 (June 2018); see generally 2011 Wis. Act 143, and the previous discussion of
“form provisions” have been removed from ch. ATCP 134. Instead, the code now references
“nonstandard rental provisions.” Sec. ATCP 134.06(3)(a)6., (3)(b). The Bondholders do not
argue that the subordination clause as included in contract six now complies with the current code
provisions under ch. ATCP 134. Accordingly, and as we found in Episcopal Homes, we
conclude that the subordination provisions in the Atrium residency agreements are of no legal
effect, despite the amendments to landlord/tenant law.
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2019AP2063
entrance fees constituted permitted liens and had priority over their claims when
they purchased their bonds. It would be disingenuous to now assert that these
provisions indicating that the entrance fees were permitted liens are meaningless.
Thus, the rights of the Residents to their entrance fees and security deposits are
superior to the Bondholders’ rights to the Atrium’s assets, and as such, the circuit
court erred as a matter of law in its order that the Bondholders have priority over
the entrance fees and security deposits owned by the Residents.12
Conclusion
¶19 We hold that (1) the Residents and the Atrium contracted as landlord
and tenant, (2) their contracts were rental agreements within the meaning of the
law, (3) the entrance fees (and security deposits) were security deposits within the
meaning of the law, and (4) the circuit court erred in giving the Bondholders a
priority security interest over the Residents’ entrance fees and security deposits.
We remand to the circuit court for proceedings consistent herein.
12
The Residents also claim that the Receiver violated his fiduciary duty to the Residents
when he “[took] sides on this issue,” citing to Community National Bank v. Medical Benefit
Administrators, LLC, 2001 WI App 98, ¶7, 242 Wis. 2d 626, 626 N.W.2d 340 (“A receiver is a
fiduciary to all who come within the scope of its receivership.”). The Receiver argues that he
“must distribute proceeds of the sale of the Assets in accordance with the priorities established by
WIS. STAT. §§ 128.17 and 128.18 and as ordered by the Circuit Court,” and in order to
accomplish this duty, “the Receiver is charged with investigating and confirming the priority and
perfection of claimed interests in the Assets of the Receivership Estate.” See, e.g., WIS. STAT.
§§ 128.17, 128.18, 128.19. The Residents’ argument on this issue is undeveloped, with little
citation to legal authority, aside from the above referenced case, in support of its position. See
State v. Pettit, 171 Wis. 2d 627, 646, 492 N.W.2d 633 (Ct. App. 1992). The Receiver moved the
circuit court to rule on the issue of priority so that he could accomplish his duties under WIS.
STAT. ch 128. The Receiver has not breached his fiduciary duty by asking the court to make a
decision as to priority.
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By the Court.—Orders reversed and cause remanded.
Not recommended for publication in the official reports.
17