Heartland Credit Union v. Chocolaterian LLC

• Decision Date: 28 October 2021
• Docket Number: 2020AP002154
• Parties: Heartland Credit Union, Plaintiff-Appellant, v. Chocolaterian LLC and Leanne Cordisco, Defendants, Duane Beckett, Defendant-Respondent.
• Court: Wisconsin Court of Appeals

Heartland Credit Union, Plaintiff-Appellant, v. Chocolaterian LLC and Leanne Cordisco, Defendants, Duane Beckett, Defendant-Respondent.

No. 2020AP002154

Court of Appeals of Wisconsin, District IV

October 28, 2021

Not recommended for publication in the official reports.

APPEAL from an order of the circuit court for Dane County No 2019CV3402: JACOB B. FROST, Judge. Affirmed in part; reversed in part and cause remanded with directions.

Before Blanchard, P.J., Kloppenburg, and Fitzpatrick, JJ.

FITZPATRICK, J.

¶1 Heartland Credit Union brought a mortgage foreclosure action against Chocolaterian LLC in the Dane County Circuit Court. Heartland appeals an order of the circuit court which granted the motion of Duane Beckett, a junior lienholder, to confirm a sheriff's sale of real property belonging to Chocolaterian ("the property").

¶2 Chocolaterian borrowed money from Beckett, and a mortgage to secure that loan was recorded. Later, Chocolaterian executed a promissory note with Heartland ("Note 1"), and a mortgage to secure that debt was recorded. Beckett agreed to subordinate his mortgage to Heartland's mortgage for Note 1. A few months later, Chocolaterian executed a second promissory note with Heartland ("Note 2").

¶3 Chocolaterian failed to pay its debts to Heartland. Heartland filed a complaint against Chocolaterian requesting a foreclosure judgment. The complaint also requested a money judgment against Chocolaterian for the amounts due under Note 1 and Note 2. Beckett was named as a defendant in that action because of his status as a lienholder. The circuit court entered a judgment of foreclosure on Heartland's mortgage. The circuit court also entered judgment against Chocolaterian for the amounts due under Note 1 and Note 2.

¶4 At a sheriff's sale of the property, Heartland made a "credit bid" of $499, 000, ^[1] an amount greater than the amount due to Heartland under Note 1, but less than the amount due under Note 1 and Note 2 combined. Heartland moved to confirm the sale, but the circuit court concluded that Heartland was not entitled to credit bid more than the amount due under Note 1. The court allowed Heartland to withdraw its confirmation motion so that a second sheriff's sale could be held. Before a second sheriff's sale could be conducted, Beckett moved to confirm the sheriff's sale based on the credit bid made by Heartland at the prior sale. The circuit court granted Beckett's motion, but did not confirm the sale based on Heartland's credit bid of $499, 000. Rather, at Beckett's request, the circuit court allowed Heartland to have a credit bid in the amount of $451, 774.29 (the amount due to Heartland under Note 1) but required Heartland to pay Beckett $47, 225.71 in satisfaction of his junior lien (the difference between Heartland's credit bid on Note 1 and the $499, 000 credit bid of Heartland at the sale). Heartland appeals.

¶5 For the reasons that follow, we conclude that the circuit court correctly ruled that Heartland was not entitled to credit bid more than the amount due to Heartland under Note 1. However, we also conclude that the court erred in granting Beckett's confirmation motion regarding the sheriff's sale that was held because Beckett lacked statutory authority as a junior lienholder to move for confirmation of the sale based on Heartland's $499, 000 credit bid. Our decision necessarily requires reversal of the circuit court's order that required Heartland to pay $47, 225.71 to Beckett to satisfy Beckett's junior lien. We therefore remand for the circuit court to order a second sheriff's sale of the property.

BACKGROUND

¶6 Chocolaterian was a business located in Middleton, Wisconsin. Chocolaterian borrowed approximately $50, 000 from Beckett to purchase real estate, and Beckett recorded a mortgage to secure that loan. One year later, Chocolaterian executed a promissory note with Heartland for $416, 000-Note 1- as well as a recorded mortgage to secure that debt. On the same day that Chocolaterian and Heartland executed Note 1 and that mortgage, Heartland and Beckett entered into an agreement that subordinated Beckett's mortgage to Heartland's mortgage for Note 1 (the "subordination agreement"). Other terms of the subordination agreement will be discussed later in this opinion. The following year Heartland and Chocolaterian executed a second promissory note-Note 2- in the amount of $73, 045.

¶7 After Chocolaterian fell behind in its payments owed to Heartland, Chocolaterian and Heartland entered into a forbearance agreement in which it was agreed that Heartland's mortgage constituted a first priority lien securing Chocolaterian's debts to Heartland Chocolaterian would have limited additional time to voluntarily sell the property; and Chocolaterian would have a 30-day redemption period if Heartland initiated a mortgage foreclosure action against Chocolaterian. Beckett was not a party to that forbearance agreement.

¶8 Chocolaterian defaulted on its debts to Heartland, and Heartland filed a complaint naming Chocolaterian and Beckett as defendants.^[2] The complaint sought, in pertinent part, a money judgment against Chocolaterian for the amounts due under Note 1 and Note 2, a foreclosure judgment requiring that Chocolaterian's property be sold at a sheriff's sale, and enforcement of the 30-day redemption period as agreed in the forbearance agreement. Notably, and as is discussed later in this opinion, the complaint alleged that Note 1 is secured by Heartland's mortgage, but the complaint itself did not allege that Note 2 is secured by that mortgage.

¶9 Beckett answered the complaint and admitted that his mortgage was junior to Note 1. However, Beckett also alleged in his answer that his mortgage had priority over Heartland's Note 2.

¶10 Heartland filed a summary judgment motion requesting a judgment of foreclosure of mortgage and a money judgment. Heartland did not assert in its detailed motion that its mortgage secured Note 2 in addition to Note 1. Beckett did not object to Heartland's summary judgment motion.

¶11 The circuit court granted Heartland's motion and entered a money judgment against Chocolaterian for the amounts due under Note 1 and Note 2-a total of $520, 343.90 ($451, 774.29 due under Note 1 and $68, 569.61 due under Note 2). The circuit court also entered a judgment of foreclosure on Heartland's mortgage. The court determined that Heartland's mortgage secures Chocolaterian's payment obligations under Note 1; the court did not state that Heartland's mortgage also secures Note 2 ("The Mortgage on the Property secures Chocolaterian's payment obligations under Note 1."). The judgment required that the property be sold at public auction under the direction of the Dane County Sheriff after expiration of the 30-day redemption period. The circuit court further directed that the proceeds of the sale "shall first be applied to the amounts due to [Heartland] under Note 1, and upon confirmation of sale, the Clerk shall pay out the proceeds of that sale to [Heartland] … up to the amount so adjudged due to [Heartland]."

¶12 Heartland was the only bidder at the sheriff's sale. The parties do not dispute that Heartland entered exclusively a credit bid for the property in the amount of $499, 000. As noted, the amount of that credit bid was greater than the amount due to Heartland under Note 1, but less than the overall amount due to Heartland under Note 1 and Note 2.

¶13 Heartland filed a motion in the circuit court to confirm the sheriff's sale.^[3] In that motion, Heartland asserted that the sale, if confirmed, would not result in a surplus for Beckett, reasoning that it was a credit bid, so "no actual money exchanged hands" from which a surplus could be drawn. Beckett did not object to confirmation of the sale. Instead, Beckett contended that a sale of the property based on Heartland's credit bid would result in a surplus payable to Beckett in the amount of approximately $47, 000. More specifically, Beckett argued that his mortgage was subordinated only to Note 1 and that Heartland's credit bid was an amount greater than that due under Note 1, so the sale resulted in a surplus equal to the difference between Heartland's credit bid and the amount due under Note 1.

¶14 At the hearing on Heartland's confirmation motion, the circuit court^[4] concluded that Heartland had not been entitled to credit bid more than the amount due under Note 1. The court allowed Heartland to withdraw its confirmation motion, stating: "The unfortunate consequence of [Heartland's credit bid of $499, 000] is that we then have to start over with another sale." After the hearing, the circuit court issued a written order which stated:

1. The amounts owed to Heartland Credit Union pursuant to Note 1 are the only amounts secured by the Mortgage and the only amount that can be credit bid before having to then pay the lien held by Duane Beckett.

2. The amounts owed to Heartland on Note 2 are not secured by Heartland's Mortgage and do not take priority over the amounts secured by Mr. Beckett's lien.

3. As explained in the Judgment, the amounts owed on Note 1 are to be paid first from proceeds of sale of the mortgaged property, followed by the amounts owed to Mr. Beckett as secured by his mortgage.

¶15 Before a second sheriff's sale could be conducted, Beckett filed his own motion to confirm the first sale. Beckett requested that the circuit court order an award of what Beckett contended were "surplus funds" within Heartland's credit bid beyond the amount due to Heartland under Note 1. Heartland responded, in part, that Beckett had no authority as a junior lienholder to move for confirmation of the sale.

¶16 The circuit court granted Beckett's motion to confirm the sale and concluded that Beckett was...