KNA Family LLC v. Fazio

• Decision Date: 06 July 2016
• Docket Number: No. 2015AP771.,2015AP771.
• Citation: 371 Wis.2d 564,884 N.W.2d 534 (Table)
• Parties: KNA FAMILY LLC, Plaintiff–Respondent, v. Peter FAZIO and Shari Fazio, Defendants–Appellants.
• Court: Wisconsin Court of Appeals

371 Wis.2d 564

884 N.W.2d 534 (Table)

KNA FAMILY LLC, Plaintiff–Respondent,

v.Peter FAZIO and Shari Fazio, Defendants–Appellants.

No. 2015AP771.

Court of Appeals of Wisconsin.

July 6, 2016.

¶ 1 PER CURIAM.

Peter and Shari Fazio appeal a judgment of foreclosure involving commercial real property located in Barron County. The circuit court granted KNA Family LLC's motion for summary judgment, concluding KNA Family was entitled to a foreclosure judgment as a matter of law and there were no genuine issues of material fact regarding any of the Fazios' affirmative defenses. In particular, the court rejected the Fazios' affirmative defense based on an alleged violation of Cal. Civil Code § 2943,¹ concluding California law did not apply in any manner to this foreclosure action. The court also rejected the Fazios' affirmative defense based on an alleged breach of the duty of good faith and fair dealing, concluding there was no competent evidence that KNA Family or its predecessors engaged in unfair conduct. The court entered a judgment of foreclosure and directed that, at a future time, rental income from the property being held in receivership would be applied to reduce the amount of the judgment.

¶ 2 We reverse and remand for further proceedings. We conclude the Fazios have stated and adequately supported a valid affirmative defense for a violation of Cal. Civil Code § 2943, which, if proved at trial, could reduce the amount of the foreclosure judgment. Likewise, we conclude the Fazios have stated and adequately supported a valid affirmative defense for a breach of the duty of good faith and fair dealing. On remand, should a judgment of foreclosure be entered, the circuit court is directed to exercise its equitable discretion with respect to the application of the receivership funds to the amount of the judgment.

BACKGROUND

¶ 3 We summarized the background facts concerning this foreclosure in a prior appeal:

On October 25, 2000, the Fazios acquired a commercial property located at 2500 Pioneer Avenue in Rice Lake. As part of the transaction to acquire the property, the Fazios executed a promissory note in favor of Wells Fargo Bank, National Association, in the amount of $1,100,000. The note was secured by a mortgage on the Pioneer Avenue property. The note and mortgage were subsequently assigned to U.S. Bank.

KNA Family LLC v. Fazio, No.2014AP2971–FT, unpublished slip op. ¶ 2 (WI App May 19, 2015) (footnote omitted) (hereafter KNA Family I ). The above-referenced note was originally scheduled to mature on November 1, 2010, but, by the parties' agreement, the term was extended until July 1, 2012. Id., ¶ 3.

¶ 4 U.S. Bank commenced the present foreclosure action on June 17, 2013. In addition to the remaining $869,695.02 of principal due on the note, U.S. Bank sought interest accrued at both default and non-default rates, servicer expenses, and administrative fees. U.S. Bank also filed an ex parte emergency motion seeking the appointment of a receiver to collect income produced by rental activity on the Pioneer Avenue property, which property consisted of a commercial building leased to OfficeMax, Inc., for use as a retail store. The circuit court ultimately ordered the appointment of a receiver in October 2013.

¶ 5 The Fazios answered the complaint, denying they were in default on the note. They also raised numerous affirmative defenses, including that U.S. Bank was “barred from [obtaining] relief due to its conduct in preventing or interfering with defendants' performance of their obligations under the agreements” and that U.S. Bank had violated Cal. Civil Code § 2943. The Fazios reasoned that § 2943 required U.S. Bank to prepare and deliver a beneficiary statement and payoff demand statement, which it had failed to timely do in response to the Fazios' written requests. See KNA Family I, unpublished slip op. ¶ 4. These allegations also formed the basis for the Fazios' counterclaim against U.S. Bank.

¶ 6 On February 6, 2014, U.S. Bank assigned its rights and interests under the note and mortgage to KNA Family. Id., ¶ 5. KNA Family was substituted as plaintiff in the foreclosure action, but U.S. Bank remained a party for purposes of the Fazios' counterclaim. Id.

¶ 7 The previous appeal addressed whether the circuit court properly dismissed the Fazios' counterclaim against U.S. Bank for failure to state a claim. The circuit court concluded that, under the mortgage's governing law provision, Wisconsin, not California, law applied. Id., ¶¶ 6–7. The court therefore held Cal. Civil Code § 2943 was inapplicable. Id. In an opinion issued on May 19, 2015, we reversed, concluding California law applied to the counterclaim pursuant to the governing law provision, because U.S. Bank's alleged failure to timely provide beneficiary and payoff demand statements “clearly relate[d] to the Fazios' performance of their obligations under the loan documents—without knowing the amount due, the Fazios could not satisfy their obligation to pay off the remaining balance of the note.” Id., ¶ 13.

¶ 8 Moreover, we rejected U.S. Bank's argument that Wisconsin law applied due to an exception in the governing law provision for “enforcement of Mortgagee's STATUTORY POWER OF SALE and all other remedies granted hereunder and the creation, perfection and enforcement of all mortgage liens and security interests created pursuant to the Loan Documents.” Id., ¶ 14. We observed that the Fazios' counterclaim did not “relate in any way” to any of the matters addressed by the exception and that “even if U.S. Bank had never commenced the instant foreclosure action, the Fazios would still have had a claim against U.S. Bank for its alleged violations of Cal. Civil Code § 2943.” Id.

¶ 9 Meanwhile, KNA Family filed a motion for summary judgment in the foreclosure proceedings, which the circuit court orally granted at a motion hearing on January 16, 2015, later memorialized in a written order. It is undisputed that the Fazios' last payment occurred on April 20, 2012, and that the Fazios failed to pay the interest and principal due on the note's maturity date of July 1, 2012. The court subsequently entered a judgment of foreclosure in favor of KNA Family.

¶ 10 The circuit court rejected the Fazios' affirmative defenses as a matter of law. First, it observed at the motion hearing it had “previously ruled that California law requiring a payoff statement as a condition precedent to a foreclosure does not apply”—an apparent reference to the court's determination regarding the law governing the Fazios' counterclaim, which was subsequently reversed on appeal. See supra ¶¶ 7–8. Second, the court, in its written order, rejected the Fazios' affirmative defense alleging breach of the duty of good faith and fair dealing, concluding there was no evidence of any inequitable or unfair conduct on the part of KNA Family or its predecessors in interest.

¶ 11 The circuit court also determined the Fazios failed to substantiate their allegation that U.S. Bank's failure to timely provide a payoff statement scuttled a potential sale of the property to Torrey Realty Holdings, Inc., prior to the note's maturity. Rather, the admissible evidence showed Torrey declined to complete the purchase because its principal officer found the terms of the OfficeMax lease unacceptable. Although Peter Fazio and his son, Joe Fazio, averred the sale could not be completed due to U.S. Bank's failure to timely provide a payoff statement, the circuit court determined those averments did not create a genuine issue of material fact because they were not made with the requisite personal knowledge. The Fazios appeal.

DISCUSSION

¶ 12 We review a grant of summary judgment de novo. Burgraff v. Menard, Inc., 2016 WI 11, ¶ 20, 367 Wis.2d 50, 875 N.W.2d 596. The summary judgment methodology is one of long standing and need not be repeated in its entirety here. See Tews v. NHI, LLC, 2010 WI 137, ¶ 4, 330 Wis.2d 389, 793 N.W.2d 860. It is sufficient to note that summary judgment is appropriate if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. See Burgraff, 367 Wis.2d 50, ¶ 20, 875 N.W.2d 596 ; see also Wis. Stat. § 802.08(2).² “The inferences to be drawn from the underlying facts contained in the moving party's material must be viewed in the light most favorable to the party opposing the motion.” Kraemer Bros. v. U.S. Fire Ins. Co., 89 Wis.2d 555, 567, 278 N.W.2d 857 (1979).

¶ 13 Here, there is no dispute that KNA Family has made a prima facie case for summary judgment. At a minimum, and as KNA Family alleged, the Fazios breached the note by failing to pay the principal and interest due on the extended maturity date. However, the parties dispute: (1) whether the Fazios have stated an affirmative defense under California law for a violation of Cal. Civil Code § 2943 ; and (2) whether there is a genuine issue of material fact that precludes summary judgment on the Fazios' affirmative defense for breach of the duty of good faith and fair dealing. In addition, and regardless of the outcomes involving the Fazios' affirmative defenses, the Fazios argue the circuit court erred by failing to apply rents collected by the receiver to the principal amount of the note before calculating interest.

I. Applicability of California Civil Code § 2943

¶ 14 In the prior appeal, we discussed certain requirements of Cal. Civil Code § 2943, as that statute pertained to the Fazios' counterclaim against U.S. Bank. See KNA Family I, unpublished slip op. ¶¶ 9–10. The Fazios argue they have stated an affirmative defense against KNA Family in the foreclosure action based on violations of the same statutory provisions at issue in the prior appeal regarding a lender's obligation to timely provide payoff and beneficiary statements. See § 2943(b)(1), (c). Under the statute, an “entitled person” may recover damages resulting from the beneficiary's—i.e., the bank's—willful failure to timely prepare and deliver...