Marilyn Casanova v. Michael S. Polsky, Esq.

2023 WI 19SUPREME COURT OF WISCONSIN
CASE NO.: 2019AP1728 & 2019AP2063
COMPLETE TITLE: 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 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 Wise, member of
Creditor Committee, Earl Christianson, member
of Creditor Committee and Marian Bloch, member
of Creditor Committee,
Appellants,
Var Krikorian, Ruth Minton, Richard Minton,
Walter Steidl, Irene Miller, Marian Kornwolf,
Marjorie Speckhard, Delores Torphy, Geraldine
Baumblatt, Joan Peterson, John Rowland,
Julianne Rowland, Lorraine Pavelcik, Marilyn
Iselin, Metta Reiker, Prudence White, Elaine
Oetlinger, Esther Wulff, Helen Veenstra, Rev.
Dr. Ross Henry Larson, Fred and Nancy Flofer,
Winifried Wiser, Nazaly Bagdasian, Robert
Callaway, Estate of Elaine Zlevor, Marshall
Cushman, Bernard Braun, Patricia Braun, Bob
Ottum, Holly Ottum, Joyce Ottum, Jeanne Haas,
Gloria Murphy, Ralph Anderson, Doris Beuttler,
Genevieve Hostak, Marlene Weichmann, Mary
Mueller, Wood Family Trust and Mary Holtz,
Claimants-Appellants,
v.
Michael S. Polsky, Esq. , Receiver and The Bank
of New York Mellon Trust Company, N.A.,
Respondents-Petitioners.
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,
2
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 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, Mark H. Larson, Successor Trustee of
the Ross H. Larson and Willetta J. Larson
Revocable Trust of 2015, 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
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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
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-Petitioners.
REVIEW OF DECISION OF THE COURT OF APPEALS
Reported at 399 Wis. 2d 322, 964 N.W.2d 544(2021 – unpublished)
OPINION FILED: March 16, 2023
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: September 9, 2022
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Racine
JUDGE: Michael J. Piontek and David W. Paulson
4
JUSTICES:
REBECCA GRASSL BRADLEY, J., delivered the majority opinion for a
unanimous Court.
NOT PARTICIPATING:
ATTORNEYS:
For the respondents-petitioners, there were briefs filed by
Katherine Stadler, Carla O. Andres, Michael S. Polsky, and
Godfrey & Kahn, S.C., Madison, and Beck, Chaet, Bamberger &
Polsky, S.C., Milwaukee. There was an oral argument by Katherine
Stadler and Joseph M. Peltz.
For the plaintiffs-appellants, there was a brief filed by
John A. Becker and Becker & French, Racine. There was an oral
argument by John A. Becker and Thomas M. Devine.
An amicus curiae brief was filed by James E. Bartzen and
Boardman & Clark LLP, Madison, for the Wisconsin Bankers
Association.
5
2023 WI 19NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
Nos. 2019AP1728 & 2019AP2063
(L.C. No. 2007CV1133)
STATE OF WISCONSIN : IN SUPREME COURT
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 FILED
Creditor Committee, Patricia Teernstra, member
of Creditor Committee, Andrew Mikaelian, member
of Creditor Committee, Marcella Mikaelian, MAR 16, 2023
member of Creditor Committee, Josephine Brooks,
member of Creditor Committee, Evelyn Odell, Sheila T. Reiff
member of Creditor Committee, Laurence Freer, Clerk of Supreme Court
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,
Var Krikorian, Ruth Minton, Richard Minton,
Walter Steidl, Irene Miller, Marian Kornwolf,
Marjorie Speckhard, Delores Torphy, Geraldine
Baumblatt, Joan Peterson, John Rowland,
Julianne Rowland, Lorraine Pavelcik, Marilyn
Iselin, Metta Reiker, Prudence White, Elaine
Oetlinger, Esther Wulff, Helen Veenstra, Rev.
Dr. Ross Henry Larson, Fred and Nancy Flofer,
Winifried Wiser, Nazaly Bagdasian, Robert
Callaway, Estate of Elaine Zlevor, Marshall
Cushman, Bernard Braun, Patricia Braun, Bob
Ottum, Holly Ottum, Joyce Ottum, Jeanne Haas,
Gloria Murphy, Ralph Anderson, Doris Beuttler,
Genevieve Hostak, Marlene Weichmann, Mary
Mueller, Wood Family Trust and Mary Holtz,
Claimants-Appellants,
v.
Michael S. Polsky, Esq. , Receiver and The Bank
of New York Mellon Trust Company, N.A.,
Respondents-Petitioners.
REBECCA GRASSL BRADLEY, J., delivered the majority opinion for a
unanimous Court.
REVIEW of a decision of the Court of Appeals. Reversed.
¶1 REBECCA GRASSL BRADLEY, J. After the Atrium, a
senior-living facility, defaulted on debt service payments to a
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Nos. 2019AP1728 & 2019AP2063
group of bondholders, the facility filed a petition for
receivership.1 The court-appointed receiver sold the Atrium's
assets, generating more than $4 million in proceeds. According
to the receiver, the Atrium owed the bondholders more than $6
million, secured by a valid mortgage lien on the Atrium's
estate. Many of the Atrium's residents claimed they were
entitled to the proceeds of the sale because, under their
residency agreements, they were owed reimbursement of the
entrance fees they paid to the Atrium. The circuit court
concluded the bondholders' mortgage lien was superior to the
residents' entrance fee claims.2 The court of appeals reversed,
applying M&I First National Bank v. Episcopal Homes Management,
Inc., 195 Wis. 2d 485, 536 N.W.2d 175 (Ct. App. 1995) to deem
the residents' claims superior to the bondholders' lien.3
¶2 Before this court, the residents concede the
bondholders possess a valid, perfected mortgage lien on the
Atrium's estate, but the residents argue (1) the bondholders
contracted away the superiority of their mortgage lien, and (2)
1 A receivership is a sequestration of an insolvent estate's
assets, and a receiver is an impartial manager of those assets.
Admanco, Inc. v. 700 Stanton Drive, LLC, 2010 WI 76, ¶32, 326
Wis. 2d 586, 786 N.W.2d 759; see also, BNP Paribas v. Olsen's
Mill, Inc., 2011 WI 61, ¶101, 335 Wis. 2d 427, 799 N.W.2d 792(Roggensack, J., concurring).
2 Judge David W. Paulson, Racine County, presided. As
proceedings continued, Judge Michael J. Piontek and later Judge
Jon E. Frederickson rotated onto the case.
3 Casanova v. Polsky, Nos. 2019AP1728 & 2019AP2063,
unpublished slip op. (Wis. Ct. App. July 30, 2021).
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Nos. 2019AP1728 & 2019AP2063
Episcopal Homes grants entrance fee claims superiority. We
disagree and hold: (1) Under Wis. Stat. § 128.17 (2021–22), the
bondholders' mortgage lien is superior to the residents'
contract claims;4 (2) the bondholders did not contract away the
superiority of their lien; and (3) Episcopal Homes does not
apply to the proceeds from the sale of real property with a
properly perfected mortgage lien. We therefore reverse the
decision of the court of appeals.
I. BACKGROUND
A. Bay Pointe Project and Financing Documents
¶3 The Atrium of Racine, Inc. was a nonprofit corporation
that owned and operated a 76-unit senior-living facility. In
2002, the Atrium sought to build an assisted-living home called
Bay Pointe. To finance the project, the Atrium contracted with
the Elderly Housing Authority of the City of Racine (the
Authority) to issue bonds. The Authority sold the bonds to Bank
One Trust Company, National Association,5 trustee for a group of
approximately 800 investors (the Bondholders' Trustee). To
effectuate this transaction, various parties entered into a
series of contracts: a Project Contract between the Atrium and
the Authority; a Mortgage and Security Agreement (the Mortgage)
between the Atrium and the Authority (which assigned its
4All subsequent references to the Wisconsin Statutes are to
the 2021–22 version unless otherwise indicated.
5Bank One is the predecessor in interest to New York Mellon
Trust Company, N.A., which now serves as the Bondholders'
Trustee.
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Nos. 2019AP1728 & 2019AP2063
interest to the Bondholders' Trustee); and, between the
Authority and the Bondholders' Trustee, a Trust Indenture
(collectively, the Financing Documents). As required by
securities regulations, the bond underwriter6 prepared an
Official Statement summarizing the material terms and conditions
of the bond issuance as well as the risks of investing. Because
the Official Statement is not a contract, it was not signed by
any party, nor was it incorporated by reference into any
contract.
¶4 The Project Contract established the process by which
the bonds would issue as well as the terms and conditions
governing the Atrium's construction expenditures. Under its
terms, the Authority would issue and sell revenue bonds,
depositing the proceeds into a Project Fund from which the
Atrium would draw to cover construction expenses.7 Under the
Mortgage, the Atrium pledged its real estate, tangible personal
property, revenue, and proceeds of the foregoing to the
Authority as collateral for repayment of the bond proceeds.
6A bond underwriter purchases bonds from an issuer and
distributes those bonds to the public. Sec. Indus. Ass'n v. Bd.
of Governors of Fed. Rsrv. Sys., 468 U.S. 207, 217 n.17 (1984).
By purchasing and selling bonds on its own account, an
underwriter assumes all risk of loss from the issuer. Id. at
218 n.18.
7The proceeds from the sale of the bonds were a loan from
the Authority to the Atrium, for which the Atrium signed
promissory notes documenting its duty to repay the Authority.
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Nos. 2019AP1728 & 2019AP2063
¶5 Bank One purchased $8,050,000 in Atrium bonds from the
Authority under the Trust Indenture,8 which assigned to Bank One
(as Bondholders' Trustee) the Authority's Mortgage lien on the
Atrium's estate. After purchasing the bonds, Bank One perfected
its security interest in the real estate by filing the Mortgage
with the Racine County Register of Deeds. It also filed a UCC
financing statement with the Wisconsin Department of Financial
Institutions, which documented Bank One's security interest in
the Atrium's assets and perfected its security interest in
collateral other than real estate.9 No party disputes the
bondholders possess a properly perfected mortgage lien on the
Atrium's estate.
B. Residency Agreements
¶6 Before moving into the Atrium, each resident signed a
residency agreement10 requiring the resident to pay an entrance
8A trust indenture is a "document containing the terms and
conditions governing a trustee's conduct and the trust
beneficiaries' rights." Trust indenture, Black's Law Dictionary
919 (11th ed. 2019).
9The parties do not dispute that when New York Melon
succeeded Bank One in interest, all necessary continuation,
assignment, and name-change documents were filed with the State.
Over time, the Atrium altered the form, substance, and
10
language of these agreements for new residents. The record
contains six different versions of the agreement, but the
differences among them do not affect our analysis.
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Nos. 2019AP1728 & 2019AP2063
fee ranging from $40,000 to $238,000.11 Collectively, Atrium
residents had paid over $7.5 million in entrance fees at the
time this suit started. Upon moving out of the Atrium, each
resident's entrance fee would be partly refundable when a new
resident moved into the Atrium and paid an entrance fee. To
calculate a refund, the Atrium used one of two formulas
depending on which version of the residency agreement the
resident signed. The first formula provided for a flat 90%
refund. The second formula used an "option ratio," under which
the refund varied based on the value of the new resident's
entrance fee. Once a new fee was paid, the Atrium used that
money to refund the entrance fee paid by the former resident.
Entrance fees were deposited in the Atrium's general operating
account——commingled with the funds for day-to-day expenses——
rather than a segregated account.
C. Receivership
¶7 This suit arose when the Atrium defaulted on its debt
service payments to the bondholders. Under Wis. Stat. ch. 128,
the Atrium commenced a voluntary assignment for the benefit of
Certain agreements required Atrium residents to pay a
11
security deposit in addition to an entrance fee. In the
conclusion section of their brief, the residents request we hold
"the residents are entitled to reimbursement of their entrance
fees and security deposits out of the proceeds of the sale of
the Atrium before payment to the Bondholders." The residents do
not, however, develop any argument regarding security deposits
specifically; rather, the residents ask us to treat their
entrance fees as security deposits under Episcopal Homes. As
explained in this opinion, the bondholders' properly perfected
mortgage lien has priority over the residents' claims with
respect to the proceeds from the sale of real property.
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Nos. 2019AP1728 & 2019AP2063
creditors in the circuit court. The court appointed a receiver,
vesting him with "all of the usual powers . . . pursuant to
Chapter 128 of the Wisconsin Statutes[.]" The court
specifically authorized the receiver "to sell any and all
property of the [Atrium] free and clear of all liens, with all
liens attaching to the proceeds of sale in the order of their
priority, through public or private proceedings, in any
commercially reasonable manner, subject to the prior approval of
[the] Court."
¶8 The receiver notified the Atrium's creditors and other
interested parties of his appointment and requested they file
their verified claims with the circuit court. Residents
individually filed proofs of claim for refund of entrance fees
collectively totaling more than $7 million. One resident, Dr.
Ross Henry Larson, moved for the creation of a resident
committee under Wis. Stat. § 128.10. The circuit court granted
Dr. Larson's motion but emphasized the narrow scope and limited
duties of the committee:
The Court's already indicated that I have reservations
about any committee that has power to [a]ffect a power
of the receiver. . . . If it's necessary that I
authorize a resident creditors committee, I will do
so. But I'm being very, very specific here that the
duties of that committee will not interrupt or overlap
with the receiver's duty, but those resident
committees can be obviously to advise. It'll be a way
for [the receiver] to interact with all of the
creditors without having to go through 70 different
notices and approvals.
¶9 The bondholders filed their own proof of claim for
$6,264,620.65. The receiver noted the bonds were "secured by
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Nos. 2019AP1728 & 2019AP2063
first position properly perfected security interests and
mortgages" and determined the Atrium owed the bondholders' trust
more than $6,097,000. As for cash in the Atrium's estate, the
receiver found only two accounts, neither holding funds
sufficient to continue operating the Atrium——or to pay the debt
owed to the bondholders. The first account was a "general
operating account" containing $80,795.11; the second was a
"Resident Trust Account" containing less than $3,000. According
to counsel for the receiver, the Resident Trust Account "did not
have entrance fees deposited" into it. Instead, it held "some
minimal amount of funds that [were] paid by the residents for
various services at the debtor's facilities[.]"
¶10 Given the extent of the claims against the Atrium's
estate and its meager amount of cash, the receiver moved for
authorization to enter into a listing agreement and sell the
Atrium's assets. The receiver concluded a sale would maximize
the estate's value for the benefit of the creditors. After the
circuit court granted the receiver's motion, the receiver
entered into a listing agreement with Senior Living Investment
Brokerage, Inc.
¶11 Along with the motion for authorization to sell the
assets, the receiver moved for permission to use the Atrium's
revenue to continue operating the facility. The residents
objected to this motion. Allowing the receiver to spend the
Atrium's revenue, they argued, would "dissipate[]" the Atrium's
assets and leave "nothing . . . available for the return of
millions of dollars in entrance fee funds." In response to this
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Nos. 2019AP1728 & 2019AP2063
objection, the receiver again noted the bondholders' secured
interest in the Atrium’s assets. Without authorization to use
the Atrium's assets, he determined the Atrium would be forced to
close. The circuit court granted the receiver's motion.
¶12 Months later, the receiver moved for declaratory
relief, requesting the circuit court declare the bondholders'
Mortgage lien superior to the residents' entrance fee claims.
The residents again objected, and filed a motion for summary
judgment "in the amount of $7,983,739" asking the court to
impose a constructive trust in that amount. The residents also
filed a motion for declaration of interest, maintaining the
Financing Documents, along with the Official Statement,
established the superiority of their entrance fee claims. After
briefing, the court held a joint hearing on the parties'
motions.
¶13 In an April 2018 order, the circuit court granted the
receiver's motion for declaratory relief and denied the
residents' motion for summary judgment. In its written
decision, the court found (1) the residents were not entitled to
a constructive trust on any proceeds from the sale of the
Atrium's assets and (2) none of the Financing Documents or the
Official Statement subordinated the bondholders' Mortgage lien
to the residents' entrance fee claims. Despite having both of
their motions denied, the residents did not appeal this order.
D. Sale of the Atrium
¶14 More than a year later, with the priority dispute
resolved, the receiver found a suitable buyer for the Atrium, a
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Nos. 2019AP1728 & 2019AP2063
senior-housing and healthcare company called PC39. The parties
negotiated an Asset Purchase Agreement (APA), and set the sale
price of the Atrium at $5,500,000. The sale included all of the
Atrium's real and personal property but excluded any liability
relating to the residents' entrance fees. Under the APA, the
proceeds from the sale were to be paid to the bondholders.
¶15 The receiver moved for authorization to proceed with
the sale pursuant to the APA, but the residents objected, citing
the APA's payment of proceeds to the bondholders. The parties
filed a stipulation requesting an order for the proceeds to be
held in escrow pending resolution of the residents' objection.
In the stipulation, the residents noted their intention to
appeal the April 2018 order on payment priority. The receiver
and the trustee jointly responded to the residents' objection,
arguing the deadline for appealing the April 2018 decision had
long passed; therefore, the residents had waived their right to
appeal the order.
¶16 In resolving the residents' objection, the circuit
court issued two orders. The first, entered on July 31, 2019,
authorized the receiver to sell the Atrium's assets, while the
second required the receiver to hold the sale proceeds in escrow
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Nos. 2019AP1728 & 2019AP2063
pending appeal. About a week later, the sale closed, and the
receiver placed the net proceeds of $4,711,518.7812 in escrow.
E. Appeals
¶17 Soon after the sale closed, the residents filed a
proposed order with the circuit court on September 6, 201913
reiterating the substance of the April 2018 order but adding:
"This order is final for the purposes of appeal." Later that
day, the receiver sent the court a letter in response, again
emphasizing the residents' window for appeal had passed. He
also asserted "[t]here [was] no basis to modify or vacate the
2018 Order[.]" The court did not respond to either letter.
¶18 Around this time, the residents appealed the July 31,
2019 sale order.14 Thereafter, the circuit court entered the
residents' proposed order on October 17, 2019, reaffirming the
substance of the April 2018 priority order and stating the new
order was final for purposes of appeal.15 The residents appealed
this order, not the April 2018 order.16
12According to a status report filed by the receiver, the
total amount placed in escrow reflects the Atrium's list price
minus "Court-approved professional fees, the commission owed to
Senior Living Investment Brokerage, Inc., a deferred maintenance
credit to the Buyer in the amount of $250,000, taxes, and other
customary prorations pursuant to the Asset Purchase Agreement,
as amended, the Sale Order and the Stipulation."
13Only the cover letter, but not this proposed order,
appears in the appellate record.
14 This appeal was docketed as appeal No. 2019AP1728.
15Like the proposed order, the order entered by the circuit
court is not in the appellate record.
16 This appeal was docketed as Appeal No. 2019AP2063.
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Nos. 2019AP1728 & 2019AP2063
¶19 On appeal, the two cases were consolidated, and the
court of appeals reversed the circuit court's priority judgment.
Relying on Episcopal Homes, the court of appeals concluded "the
rights of the Residents to their entrance fees and security
deposits are superior to the Bondholders' rights to the Atrium's
assets[.]"17 In addition to their priority argument, the
residents also contended "[t]he receiver violated his fiduciary
duty to the residents when he took the side of one creditor over
another." The court of appeals rejected this argument.18
¶20 On August 27, 2021, the bondholders and the receiver
filed a petition for review, presenting the following two
issues: (1) "May an undocumented, unrecorded lien——created by
judicial fiat——have priority over the Trustee's properly
perfected first mortgage and security interest?" and (2) "Did
the Court of Appeals (and, by extension, this Court) lack
jurisdiction over these appeals by virtue of the failure to
appeal from a final order dated April 23, 2018?" We granted
review on both issues. Without filing a petition for review or
cross-review, the residents in their briefing again claimed the
receiver violated his fiduciary duties. The receiver filed a
motion to deem the issue forfeited, to which the residents filed
a response. We "decline[d] to foreclose our right to consider
[the question]" and ordered supplemental letter briefing, which
the parties submitted.
17 Casanova, Nos. 2019AP1728 & 2019AP2063, ¶18.
18 Id., n.12.
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Nos. 2019AP1728 & 2019AP2063
II. STANDARD OF REVIEW
¶21 "Whether to grant 'a declaratory judgment is addressed
to the circuit court's discretion.' When the exercise of
discretion turns on a question of law, however, our review is"
independent. Talley v. Mustafa Mustafa, 2018 WI 47, ¶13, 381
Wis. 2d 393, 911 N.W.2d 55 (quoting Olson v. Farrar, 2012 WI 3,
¶24, 338 Wis. 2d 215, 809 N.W.2d 1).
¶22 This case requires us to determine the priority of a
properly perfected mortgage lien interest, which is a question
of statutory interpretation. See BNP Paribas v. Olsen's Mill,
Inc., 2011 WI 61, ¶37, 335 Wis. 2d 427, 799 N.W.2d 792.
"Statutory interpretation presents a question of law" this court
reviews independently. Teigen v. Wis. Elections Comm'n, 2022 WI
64, ¶12, 403 Wis. 2d 607, 976 N.W.2d 519 (citing T.L.E.-C. v.
S.E., 2021 WI 56, ¶13, 397 Wis. 2d 462, 960 N.W.2d 391).
Additionally, this case requires us to interpret contracts, also
a question of law this court reviews independently. Tufail v.
Midwest Hosp., LLC, 2013 WI 62, ¶22, 348 Wis. 2d 631, 833
N.W.2d 586 (citing Ehlinger v. Hauser, 2010 WI 54, ¶47, 325
Wis. 2d 287, 785 N.W.2d 328).
III. DISCUSSION
A. Finality of the April 2018 Order
¶23 As a threshold matter, the bondholders and the
receiver ask us to conclude the residents forfeited their right
to appeal the circuit court's decision on priority. They argue
the April 2018 order was final for purposes of appeal. Because
the residents did not appeal that order until July 2019, they
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Nos. 2019AP1728 & 2019AP2063
argue the residents lost the right to appeal it. For the
purpose of deciding the important substantive issue of law
presented by the dispute over priority, we assume without
deciding the April 2018 order was not final and the residents
properly appealed the circuit court's July 31, 2019 order
establishing the superiority of the bondholders' Mortgage lien
over the residents' entrance fee claims.
B. Financing Documents
¶24 Relying on provisions of the Financing Documents and
the Official Statement, the residents assert the bondholders
contracted away the superiority of their Mortgage lien. Certain
provisions, they argue, subordinated the bondholders' Mortgage
lien to the contractually required repayment of the residents'
entrance fees. We disagree.
¶25 The receivership statutes control the resolution of
this issue. When an entity is placed under receivership, the
receiver may, with court permission, "sell assets and distribute
the proceeds of the sale." BNP Paribas, 335 Wis. 2d 427, ¶42.
Upon closing, the receiver must distribute the proceeds among
the estate's creditors pursuant to Wis. Stat. § 128.17, which
establishes the order of payment:
(1) The order of distribution out of the debtor's
estate shall be as follows:
(a) The actual and necessary costs of preserving
the estate subsequent to the commencement of
the proceedings.
(b) Costs of administration including a
reasonable attorney's fee for the
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Nos. 2019AP1728 & 2019AP2063
representation of the debtor.
(d) Wages, including pension, welfare and
vacation benefits, due to workmen, clerks,
traveling or city salespersons or servants,
which have been earned within 3 months
before the date of the commencement of the
proceedings, not to exceed $600 to each
claimant.
(e) Taxes, assessments and debts due the United
States, this state or any county, district
or municipality.
(f) Other debts entitled to priority.
(g) Debts due to creditors generally, in
proportion to the amount of their claims, as
allowed.
(h) After payment of the foregoing, the surplus,
if any, shall be returned to the debtor.
Section (f) describes certain secured claims and encompasses
mortgages under Wis. Stat. § 706.11, which grants priority to
mortgages "executed to a state or national bank." This
provision includes the Mortgage because the Bondholders' Trustee
is a national bank association. Section 706.11(1) provides that
when "[a]ny mortgage executed to a state or national bank" "has
been duly recorded, it shall have priority over all liens upon
the mortgaged premises and the buildings and improvements
thereon . . . filed after the recording of such mortgage" with
exceptions only for certain categories of liens under which the
residents' entrance fee claims undisputedly do not fall.
¶26 Secured creditors like the Bondholders' Trustee have
"the right, on the debtor's default, to proceed against
collateral and apply it to the payment of the debt." Secured
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Nos. 2019AP1728 & 2019AP2063
creditor, Black's Law Dictionary 465 (11th ed. 2019). A secured
creditor "cannot have his security taken away from him without
his consent." BNP Paribas, 335 Wis. 2d 427, ¶44 (quoting Wis.
Brick & Block Corp. v. Vogel, 54 Wis. 2d 321, 326, 195
N.W.2d 664 (1972)).
¶27 Section (g) describes unsecured claims. BNP Paribas,
335 Wis. 2d 427, ¶115 (Roggensack, J., concurring) ("Paragraph
(1)(g) addresses the distribution to unsecured creditors.").
Unlike secured creditors, unsecured creditors have "no property
interest in the debtor's assets[.]" BNP Paribas, 335 Wis. 2d
427, ¶43. Accordingly, when distributing proceeds from the sale
of an estate, a receiver must satisfy debts held by secured
creditors before satisfying those held by unsecured creditors.
See id., ("[U]nsecured creditors are entitled to distribution of
any proceeds of a sale only after priority claims have been
satisfied." (citations omitted)).
¶28 The parties agree the bondholders are secured
creditors and the residents are unsecured creditors. Both seek
first payment from the proceeds of the sale of the Atrium's
assets, which are insufficient to pay either claim, much less
both. Typically, those facts alone would settle this dispute:
Because Wis. Stat. § 128.17 prioritizes the claims of secured
creditors over those of unsecured creditors, the bondholders
would receive first payment. In this case, however, the
residents argue the bondholders subordinated their secured
interest to the residents' interest in their entrance fees.
16
Nos. 2019AP1728 & 2019AP2063
¶29 To subordinate a secured interest, a secured creditor
usually signs a subordination agreement, a contract modifying
"the priorities that would otherwise exist." Scotiabank de
Puerto Rico v. Brito (Plaza Resort at Palmas, Inc), 469
B.R. 398, 408 (B.A.P. 1st Cir. 2012); see also, Restatement
(Third) of Property § 7.7 cmt. a (1997) (explaining a
subordination agreement is a document "reducing [a] mortgage's
priority below that of some other interest or group of interests
in the real estate to which the mortgage would otherwise be
superior"). The residents do not contend the bondholders signed
a subordination agreement. Instead, they argue the bondholders
consented in the Financing Documents and the Official Statement
to the subordination of their Mortgage. Although "[i]t is true
that a subordination can be incorporated" into any contract, see
Restatement (Third) of Property § 7.7 cmt. a, the Official
Statement is not a contract and the Financing Documents do not
contain any provision subordinating the bondholders' Mortgage.
¶30 The residents first point to the definitions of
"permitted liens" and "permitted encumbrances" in the Official
Statement, Project Contract, and the Mortgage. The parties
construe these phrases to include entrance fees. We agree with
this construction. The Mortgage states "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
therefore argue if the Financing Documents grant either
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Nos. 2019AP1728 & 2019AP2063
permitted liens or permitted encumbrances priority over the
bondholders' Mortgage lien, entrance fees must be refunded
before the Mortgage is paid.
¶31 The residents direct our attention to the phrase
"subject to" as it appears in both the Official Statement and
the Mortgage. The Official Statement provides, in relevant
part:
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.
(Emphasis added.) The Mortgage contains similar language:
This Mortgage constitutes a direct and valid lien on
and security interest in the Mortgaged Property
subject only to Permitted Encumbrances.
(Emphasis added.) Neither provision subordinates the
bondholders' Mortgage.
¶32 Because the Official Statement is not a contract, it
is incapable of containing a subordination agreement. It is not
an agreement at all, in whole or in part. The residents contend
the Official Statement must be "controlling" because there is no
other explanation for why it exists. To the contrary, it exists
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Nos. 2019AP1728 & 2019AP2063
because the government says it must.19 The residents accurately
argue the Official Statement serves as a notice to investors of
investment risks and "what claims might be superior to theirs,"
but nothing in the Official Statement actually subordinates the
bondholders' Mortgage.
¶33 Undefined in the only contract in which the pertinent
language appears, the phrase "subject to" must take its ordinary
meaning. See Town Bank v. City Real Est. Dev., LLC, 2010 WI
134, ¶33, 330 Wis. 2d 340, 793 N.W.2d 476 ("We construe []
contract language according to its plain or ordinary meaning")
(citing Huml v. Vlazny, 2006 WI 87, ¶52, 293 Wis. 2d 169, 716
N.W.2d 807). As used in the Mortgage, it means "to be affected
by or possibly affected by (something)." Subject to, Merriam-
Webster's Collegiate Dictionary, https://unabridged.merriam-
webster.com/collegiate/subject%20to (last visited Jan. 9, 2023).
See, e.g., 15 U.S.C. § 77j(a)(1) ("[A] prospectus
19
relating to a security other than security issued by a foreign
government or political subdivision thereof, shall contain the
information contained in the registration statement"); Wis.
Stat. § 551.303(2)(a) (requiring "[a] copy of the latest form of
prospectus filed under the Securities Act of 1933"); 17 C.F.R.
§ 240.15c2-12 ("Prior to the time the Participating Underwriter
bids for, purchases, offers, or sells municipal securities in an
Offering, the Participating Underwriter shall obtain and review
an official statement that an issuer of such securities deems
final as of its date, except for the omission of no more than
the following information: The offering price(s), interest
rate(s), selling compensation, aggregate principal amount,
principal amount per maturity, delivery dates, any other terms
or provisions required by an issuer of such securities to be
specified in a competitive bid, ratings, other terms of the
securities depending on such matters, and the identity of the
underwriter(s).").
19
Nos. 2019AP1728 & 2019AP2063
In construing a statute, the court of appeals embraced this
definition "as suitable for the facially broad phrase 'subject
to.'" State v. Quisling, 2018 WI App 35, ¶25, 382 Wis. 2d 272,
915 N.W.2d 730. To be affected by or possibly affected by
something is not necessarily to be trumped, dominated, or primed
by it. These provisions merely contemplate the possibility
entrance fees could take priority over the bondholders'
Mortgage; they do not create a lien, much less accord it
priority over a properly recorded mortgage.
¶34 The residents' entrance fees are nothing more than
unsecured, contingent liabilities of the Atrium. As the
residents themselves concede, their entrance fees are not liens
and the residents never attempted to create liens. Although the
Mortgage is subject to Permitted Encumbrances, which include
liens permitted under Section 5.12(b) of the Project Contract,
the entrance fees never became liens on the real property of the
Atrium. Having never become liens, the residents' unsecured
claims for recovery of their entrance fees could not possibly
trump the bondholders' Mortgage.
¶35 Other provisions on which the residents rely likewise
merely acknowledge superior claims might exist. Section 5.12(a)
of the Official Statement provides:
[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.
(Emphasis added.) The Project Contract similarly states:
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Nos. 2019AP1728 & 2019AP2063
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[.]
(Emphasis added.). The key word in these provisions is "may."
Like "subject to," this word does not subordinate the
Mortgage. It most naturally conveys only "a possibility." May,
Black's Law Dictionary 1000 (8th ed. 2004); see also, May,
Webster's Second New International Dictionary 1517 (citation
omitted). In effect, these provisions merely convey there is a
possibility Permitted Liens could be superior to the Mortgage
lien. Possibilities are not realities; the residents never
attempted to create liens on the Atrium's real property, and
these provisions do not subordinate the bondholders' secured
lien to the residents' unsecured claims for entrance fees.
¶36 The residents cite one more provision, Section 3.8 of
the Mortgage, which reads:
Section 3.8. Permitted Encumbrances. Except for the
Permitted Encumbrances, Obligor will not enter, create
or suffer to be created any further Lien upon the
Mortgaged Property, or any part thereof, whether or
not prior to or subordinate to or on a parity with the
Lien of this Mortgage, without the prior written
consent of the Trustee[.]
(Emphasis added.) Notwithstanding the fact the residents have
disclaimed having any liens on the Atrium's real property,
nothing in this provision subordinates the Mortgage to any
Permitted Encumbrance or "any further Lien." Regardless of
whether the residents possess liens or not, this provision says
nothing about the priority accorded to them. Notably, Section
21
Nos. 2019AP1728 & 2019AP2063
3.8 contemplates the Permitted Encumbrances or other Lien may be
merely "subordinate to or on a parity with" the Mortgage lien;
nevertheless, the Atrium agreed it would not "enter, create or
suffer to be created any further Lien"——even one subordinate to
the Mortgage——without the prior written consent of the
Bondholders' Trustee. The residents present no evidence the
Bondholders' Trustee consented to subordination of the
bondholders' Mortgage.
¶37 Nothing in the Financing Documents or the Official
Statement subordinates the bondholders' Mortgage. The
provisions cited by the residents merely contemplate the
possibility that the Mortgage could be subordinated to other
liens. Nothing in the Financing Documents or the Official
Statement creates any liens or other encumbrances, much less
subordinates the mortgage to them. We therefore apply Wis.
Stat. § 128.17, which accords the bondholders' Mortgage
priority.
C. Episcopal Homes
¶38 The residents next rely on Episcopal Homes——a court of
appeals decision not binding on this court. Friends of Frame
Park, U.A. v. City of Waukesha, 2022 WI 57, ¶63, 403 Wis. 2d 1,
976 N.W.2d 263 (Rebecca Grassl Bradley, J., concurring)
(explaining this court is not bound by the decisions of the
court of appeals); see also State v. Yakich, 2022 WI 8, ¶31, 400
Wis. 2d 549, 970 N.W.2d 12. We need not consider whether that
case was correctly decided because, contrary to the residents'
22
Nos. 2019AP1728 & 2019AP2063
analysis, Episcopal Homes differs materially from the present
case as a matter of both fact and law.
¶39 Episcopal Homes involved a senior-living facility that
defaulted on bond repayments. Episcopal Homes, 195 Wis. 2d at
492. In that case, a group of roughly 1,700 bondholders bought
more than $11 million in bonds to fund the construction of a
facility called DeKoven. Id. at 490. Under a series of
financing documents, the bondholders held a security interest in
an account containing approximately $1,000,000 in entrance fees.
Id. at 492–93. DeKoven's residency agreements subordinated
entrance fee repayments to the bondholders' lien. Id. at 492.
After DeKoven defaulted on its bond repayments, the bondholders
claimed a secured interest in the segregated entrance fee
account funds. Id.
¶40 The circuit court granted summary judgment in favor of
the DeKoven residents and imposed a constructive trust against
the entrance fee account. Id. at 496. The court of appeals
affirmed, concluding DeKoven had contracted with each resident
as landlord and tenant; accordingly, the court deemed the rental
agreements leases. Id. at 489, 506. Based on the language of
the rental agreements, the court concluded the entrance fees
were effectively security deposits under Wis. Admin. Code § ATCP
134.02(11), governed by the public policy espoused in the
administrative code. Id. at 507, 509. Because Wisconsin Admin.
Code § 134.06(3) prohibits using standard forms to place
additional conditions on the return of security deposits, the
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Nos. 2019AP1728 & 2019AP2063
court determined any subordinating provisions in the rental
agreements were unenforceable. Id. at 511–12.
¶41 The court of appeals also upheld the circuit court's
imposition of a constructive trust against the segregated
entrance fee account. Id. at 514. It held the subordination
provisions unconscionable because they violated public policy.
Id. at 513. Additionally, the court concluded the bondholders
would have been unjustly enriched if those provisions were
enforced. Id. Because the court decided the elements of a
constructive trust were satisfied, it affirmed the circuit
court. Id. at 514.
¶42 The residents in this case claim their entrance fees,
like those paid by the DeKoven residents, constitute security
deposits. In their view, the sale proceeds represent "what is
left of their entrance fees" entitling them to the proceeds
under Episcopal Homes. Misconstruing Episcopal Homes, the court
of appeals adopted the residents' arguments and ignored
Wisconsin law governing the priority of properly perfected
mortgage liens over unsecured claims with respect to proceeds
from the sale of mortgaged real estate.
¶43 Episcopal Homes is inapplicable to the facts of this
case. In Episcopal Homes, the court of appeals exercised
equitable powers against a segregated account containing funds
traceable to the residents' payment of entrance fees. In
contrast, the residents of the Atrium seek to usurp a first
priority lien on the proceeds from the sale of real property.
Whatever equitable powers courts may possess, nothing in law or
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Nos. 2019AP1728 & 2019AP2063
equity authorizes courts to disrupt the statutorily prescribed
priority of secured lenders. See Law v. Siegel, 571 U.S. 415,
421 (2014) (citing Norwest Bank Worthington v. Ahlers, 485 U.S.
197, 206 (1988) ("We have long held that 'whatever equitable
powers remain in the bankruptcy courts must and can only be
exercised within the confines of' the Bankruptcy Code.")). In
this case, Wis. Stat. §§ 706.11 and 128.17 grant the
bondholders' Mortgage lien unequivocal superiority. The
residents' argument for extending Episcopal Homes beyond a
segregated account of entrance fees not in receivership to reach
the materially distinct proceeds from the sale of real property
subject to a perfected mortgage lien asks this court to
disregard the plain language of chapter 128. We have no legal
authority to do so.
D. Fiduciary Duties
¶44 As a final matter, the residents challenge the court
of appeals' decision holding the receiver did not violate his
fiduciary duties to the residents when he moved the circuit
court to issue an order on priority. Casanova v. Polsky, Nos.
2019AP1728 & 2019AP2063, unpublished slip op., ¶18 n.12 (Wis.
Ct. App. July 30, 2021). This argument is underdeveloped. The
residents do not engage in any detailed analysis to support this
argument and do not request any relief to remedy the receiver's
alleged breach of fiduciary duty. Because we need not address
underdeveloped arguments, we decline to address this claim.
Papa v. Wis. Dep't of Health Servs., 2020 WI 66, ¶42 n.15, 393
Wis. 2d 1, 946 N.W.2d 17; see also, Teigen v. Wisconsin
25
Nos. 2019AP1728 & 2019AP2063
Elections Comm'n, 2022 WI 64, ¶45, 403 Wis. 2d 607, 976
N.W.2d 519 (lead op.).
IV. CONCLUSION
¶45 Under Wis. Stat. § 128.17, the bondholders' Mortgage
lien has priority over the residents' entrance fee claims. No
provision of the Financing Documents subordinates the
bondholders' lien, and Episcopal Homes does not extend to the
proceeds from the sale of real property with a properly
perfected mortgage lien. The bondholders are therefore entitled
to first payment from the proceeds of the sale of the Atrium's
assets.
By the Court.—The decision of the court of appeals is
reversed.
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Nos. 2019AP1728 & 2019AP2063
1