Casanova v. Polsky
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In this dispute between the residents of a senior-living facility in a receivership over the proceeds generated by the sale of the facility the Supreme Court reversed the decision of the court of appeals reversing the conclusion of the circuit court that Bondholders' mortgage lien was superior to Residents' entrance fee claims, holding that Bondholders' mortgage lien was superior to Residents' contract claims.
After Atrium, the subject senior-living facility, defaulted on debt service payments to Bondholders, it filed a petition for receivership. The receiver sold the assets for more than $4 million in proceeds. Atrium owed Bondholders more than $6 million secured by a valid mortgage lien on the facility's estate, but many of the facility's Residents claimed they were owed reimbursement of the entrance fees they paid to Atrium. The circuit court entered judgment for Bondholders, and the court of appeals reversed. The Supreme Court reversed, holding that Bondholders were entitled to first payment from the proceeds of the sale of Atrium's assets.
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2023 WI 19 SUPREME 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 3 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: SUBMITTED ON BRIEFS: ORAL ARGUMENT: SOURCE OF APPEAL: COURT: COUNTY: JUDGE: March 16, 2023 September 9, 2022 Circuit Racine Michael J. Piontek and David W. Paulson 4 JUSTICES: ZIEGLER, J., delivered the majority opinion of the court, in which ROGGENSACK, C.J., KELLY, and HAGEDORN, JJ., joined. BRADLEY, R.G., J., concurs. KELLY, J., concurs. BRADLEY, A.W., J., dissents, joined by DALLET, J. NOT PARTICIPATING: ATTORNEYS: For the respondents-petitioners, there were briefs filed by Katherine Stadler, Carla Godfrey & Kahn, S.C., O. Andres, Madison, and Michael S. Polsky, 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, Association. 5 for the Wisconsin Bankers 2023 WI 19 NOTICE 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 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, FILED MAR 16, 2023 Sheila T. Reiff Clerk of Supreme Court 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. ¶1 REBECCA GRASSL BRADLEY, J. After Reversed. the Atrium, a senior-living facility, defaulted on debt service payments to a 1 Nos. group of bondholders, receivership.1 the facility 2019AP1728 & 2019AP2063 filed a petition for 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, estate. entitled secured Many to residency entrance by of the a the they mortgage Atrium's proceeds agreements, fees valid of they paid to residents the were the lien sale owed on the claimed because, Atrium's they under reimbursement Atrium. The were their of circuit the 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 bondholders this possess a court, valid, the residents perfected mortgage concede the lien the on Atrium's estate, but the residents argue (1) the bondholders contracted away the superiority of their mortgage lien, and (2) 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). 1 Judge David W. Paulson, Racine County, presided. As proceedings continued, Judge Michael J. Piontek and later Judge Jon E. Frederickson rotated onto the case. 2 Casanova v. Polsky, Nos. 2019AP1728 & unpublished slip op. (Wis. Ct. App. July 30, 2021). 3 2 2019AP2063, Nos. Episcopal Homes grants disagree and hold: bondholders' entrance fee 2019AP1728 & 2019AP2063 claims superiority. We (1) Under Wis. Stat. § 128.17 (2021–22), the 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. A. ¶3 BACKGROUND Bay Pointe Project and Financing Documents 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 Housing Elderly Authority Authority) to issue bonds. of the City of Racine (the The Authority sold the bonds to Bank One Trust Company, National Association,5 trustee for a group of approximately effectuate 800 this investors transaction, series of contracts: (the Bondholders' various parties Trustee). entered To into a 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 All subsequent references to the Wisconsin Statutes are to the 2021–22 version unless otherwise indicated. 4 Bank One is the predecessor in interest to New York Mellon Trust Company, N.A., which now serves as the Bondholders' Trustee. 5 3 Nos. interest to Authority the Bondholders' Trustee); and the Bondholders' (collectively, the Financing securities regulations, the Trustee, 2019AP1728 & 2019AP2063 and, a Documents). bond between Trust the Indenture As required by 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 The Project Contract established the process by which bonds governing terms, would the the depositing issue Atrium's Authority the as well as the construction would proceeds into issue a terms and expenditures. conditions Under and sell revenue Project Fund from bonds, which Atrium would draw to cover construction expenses.7 its the 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. A 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. 6 The 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. 7 4 Nos. ¶5 2019AP1728 & 2019AP2063 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 collateral assets other and than perfected real estate.9 its security No party interest disputes in the bondholders possess a properly perfected mortgage lien on the Atrium's estate. B. ¶6 Residency Agreements Before moving into the Atrium, each resident signed a residency agreement10 requiring the resident to pay an entrance A 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). 8 The 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. 9 Over time, the Atrium altered the form, substance, and 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. 10 5 Nos. fee ranging from $40,000 to $238,000.11 2019AP1728 & 2019AP2063 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. calculate a refund, depending on which resident signed. refund. the the Atrium version of used the one of residency two To formulas agreement the The first formula provided for a flat 90% The second formula used an "option ratio," under which refund varied entrance fee. based on the value of the new resident's 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. ¶7 Receivership 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 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. 11 6 Nos. 2019AP1728 & 2019AP2063 creditors in the circuit court. The court appointed a receiver, vesting usual him Chapter with "all of the 128 specifically authorized of the Wisconsin the powers . . . pursuant Statutes[.]" receiver "to The sell any to court 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. Ross Henry Larson, moved for the committee under Wis. Stat. § 128.10. One resident, Dr. creation of a resident 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 7 Nos. first position properly perfected 2019AP1728 & 2019AP2063 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 two found only accounts, neither holding funds sufficient to continue operating the Atrium——or to pay the debt owed to the operating bondholders. account" The containing first account $80,795.11; was the a "general second "Resident Trust Account" containing less than $3,000. was a 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. circuit court granted the receiver's motion, the After 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 objected to this motion. the facility. The residents Allowing the receiver to spend the Atrium's revenue, they argued, would "dissipate[]" the Atrium's assets and leave "nothing . . . available millions of dollars in entrance fee funds." 8 for the return of In response to this Nos. objection, the receiver again noted interest in the Atrium’s assets. the 2019AP1728 & 2019AP2063 bondholders' secured 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 impose a constructive trust in that amount. filed a motion Financing for declaration Documents, along of with court maintaining Official the court held a joint hearing on the Statement, established the superiority of their entrance fee claims. briefing, to The residents also interest, the the the After parties' motions. ¶13 In an April 2018 order, the circuit court granted the receiver's motion for residents' motion for declaratory summary relief judgment. and In denied its the 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. ¶14 More than a Sale of the Atrium year later, with the priority dispute resolved, the receiver found a suitable buyer for the Atrium, a 9 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 appeal the April 2018 order on payment priority. intention to 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 court issued two orders. residents' objection, the circuit 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 10 Nos. pending appeal. 2019AP1728 & 2019AP2063 About a week later, the sale closed, and the receiver placed the net proceeds of $4,711,518.7812 in escrow. E. ¶17 Soon after the Appeals 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[.]" ¶18 The court did not respond to either letter. 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 According 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." 12 Only the cover letter, but appears in the appellate record. 13 14 not this proposed order, This appeal was docketed as appeal No. 2019AP1728. Like the proposed order, the order entered by the circuit court is not in the appellate record. 15 16 This appeal was docketed as Appeal No. 2019AP2063. 11 Nos. ¶19 2019AP1728 & 2019AP2063 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 filed On August 27, 2021, the bondholders and the receiver a issues: petition for review, presenting the following two (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?" review on both issues. We granted 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. 12 Nos. II. ¶21 to the 2019AP1728 & 2019AP2063 STANDARD OF REVIEW "Whether to grant 'a declaratory judgment is addressed 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. Inc., 2011 WI 61, ¶37, See BNP Paribas v. Olsen's Mill, 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 631, Hosp., LLC, N.W.2d 586 (citing 2013 WI 62, ¶22, 348 Ehlinger v. Hauser, 2010 Wis. 2d 833 WI 54, ¶47, 325 Wis. 2d 287, 785 N.W.2d 328). III. A. ¶23 As a DISCUSSION Finality of the April 2018 Order 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 13 Nos. argue the purpose residents of presented deciding by the lost the the important dispute right over to 2019AP1728 & 2019AP2063 appeal it. substantive priority, we For the of law issue 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. ¶24 the Financing Documents Relying on provisions of the Financing Documents and 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. ¶25 We disagree. 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 estate shall be as follows: out of the debtor's (a) The actual and necessary costs of preserving the estate subsequent to the commencement of the proceedings. (b) Costs of reasonable administration including a attorney's fee for the 14 Nos. 2019AP1728 & 2019AP2063 representation of the debtor. Section (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. (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 "the Secured creditors like the Bondholders' Trustee have right, on the debtor's proceed against collateral and apply it to the payment of the debt." Secured 15 default, to 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." Brick & BNP Paribas, 335 Wis. 2d 427, ¶44 (quoting Wis. 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[.]" 427, ¶43. BNP Paribas, 335 Wis. 2d 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." ¶28 (citations omitted)). The parties agree the bondholders are creditors and the residents are unsecured creditors. secured 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 would over receive residents those of first payment. argue the unsecured creditors, In bondholders this the case, subordinated bondholders however, their secured interest to the residents' interest in their entrance fees. 16 the Nos. ¶29 2019AP1728 & 2019AP2063 To subordinate a secured interest, a secured creditor usually signs a subordination agreement, a contract modifying "the priorities Puerto Rico B.R. 398, (Third) that v. 408 of would Brito (B.A.P. (Plaza 1st Property otherwise Resort Cir. § 7.7 exist." at 2012); cmt. a Scotiabank Palmas, see also, (1997) Inc), de 469 Restatement (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. construe these phrases to include entrance fees. this construction. The parties We agree with The Mortgage states "permitted encumbrances" include "[l]iens permitted under Section 5.12(b) of the [Project Contract]." shall According to the Project Contract, "Permitted Liens consist of . . . [e]ntrance fees or similar funds deposited by or on behalf of such residents[.]" The residents therefore grant argue if the Financing 17 Documents either Nos. permitted liens bondholders' or permitted Mortgage lien, encumbrances entrance fees 2019AP1728 & 2019AP2063 priority must be over the 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. an agreement at all, in whole or in part. It is not The residents contend the Official Statement must be "controlling" because there is no other explanation for why it exists. 18 To the contrary, it exists Nos. because the government says it must.19 2019AP1728 & 2019AP2063 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. 134, ¶33, See Town Bank v. City Real Est. Dev., LLC, 2010 WI 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)." Webster's Collegiate Dictionary, Subject to, Merriam- 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 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 19 Nos. 2019AP1728 & 2019AP2063 In construing a statute, the court of appeals embraced this definition "as suitable for the facially broad phrase 'subject to.'" 915 State v. Quisling, 2018 WI App 35, ¶25, 382 Wis. 2d 272, 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 entrance fees could Mortgage; they do merely take not contemplate priority create a over lien, the the much possibility bondholders' less accord it priority over a properly recorded mortgage. ¶34 The unsecured, residents' contingent entrance liabilities fees are nothing of the Atrium. more As than the residents themselves concede, their entrance fees are not liens and the residents never attempted to create liens. Mortgage is subject to Permitted Encumbrances, Although the 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: 20 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.). Like "subject Mortgage. Black's The key word in these provisions is "may." to," this word does not subordinate the It most naturally conveys only "a possibility." Law Webster's Dictionary Second omitted). New 1000 (8th ed. International 2004); see Dictionary 1517 May, also, May, (citation 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 any nothing having in Permitted this liens provision Encumbrance or on the Atrium's subordinates "any further the real property, Mortgage Lien." to Regardless any of whether the residents possess liens or not, this provision says nothing about the priority accorded to them. 21 Notably, Section 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' consented Trustee to subordination of the bondholders' Mortgage. ¶37 Nothing in the Statement subordinates provisions cited by Financing the the Documents bondholders' residents merely or the Official Mortgage. The 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. Stat. § 128.17, which accords We therefore apply Wis. the bondholders' Mortgage priority. C. ¶38 Episcopal Homes 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. 492. Episcopal Homes, 195 Wis. 2d at 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 administrative code. Code § 134.06(3) by the public policy Id. at 507, 509. prohibits using espoused in the Because Wisconsin Admin. standard forms to place additional conditions on the return of security deposits, the 23 Nos. court determined any subordinating agreements were unenforceable. ¶41 2019AP1728 & 2019AP2063 provisions in the rental Id. at 511–12. The court of appeals also upheld the circuit court's imposition of a constructive entrance fee account. trust Id. at 514. against the segregated It held the subordination provisions unconscionable because they violated public policy. Id. at 513. would have Additionally, the court concluded the bondholders been enforced. Id. constructive court. unjustly enriched if those provisions were Because the court decided the elements of a trust were satisfied, it affirmed the circuit 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. of appeals Wisconsin adopted law Misconstruing Episcopal Homes, the court the governing residents' the arguments priority of and properly ignored perfected mortgage liens over unsecured claims with respect to proceeds from the sale of mortgaged real estate. ¶43 case. Episcopal Homes is inapplicable to the facts of this 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 24 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.")). this case, Wis. bondholders' residents' Stat. Mortgage argument §§ 706.11 lien for and unequivocal extending 128.17 grant superiority. Episcopal Homes In the The 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 disregard the plain language of chapter 128. this court to We have no legal authority to do so. D. ¶44 Fiduciary Duties 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. underdeveloped arguments, we Because we need not address 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 25 also, Teigen v. Wisconsin Nos. Elections Comm'n, 2022 WI 64, ¶45, 403 2019AP1728 & 2019AP2063 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. provision of the Financing Documents subordinates No the bondholders' lien, and Episcopal Homes does not extend to the proceeds from the sale perfected mortgage lien. of real property with a properly The bondholders are therefore entitled to first payment from the proceeds of the sale of the Atrium's assets. By the Court.—The decision reversed. 26 of the court of appeals is Nos. 1 2019AP1728 & 2019AP2063
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