M & I First Nat. Bank v. Episcopal Homes Management, Inc., No. 94-1294

• Court: Court of Appeals of Wisconsin
• Writing for the Court: NETTESHEIM
• Citation: 195 Wis.2d 485,536 N.W.2d 175
• Decision Date: 21 June 1995
• Docket Number: No. 94-1294
• Parties: M & I FIRST NATIONAL BANK, West Bend, Wisconsin, as Trustee, Plaintiff-Appellant, v. EPISCOPAL HOMES MANAGEMENT, INC., Mary D. Palmer, Robert T. Allen, Earl M. Boulton, Charlotte S. Boulton, Elizabeth A. Brown, Howard G. Brown, Josephine Dietrich, Florence Dietrich, Mary Alice Hammond, Willis R. Hammond, Gordon B. Hoffman, Jessie Hoffman, Eleanor G. Jorgenson, Esther M. Klemp, Ernest Lipman, Samuel Loomis, Mildred G. Macek, Barbara F. Muckler, Dorothy W. Osborne, Irving W. Roane, Ethel V. Roane, Robert Rosenwald, Laura Rosenwald, Marion G. Sanford, Richard C. Thompson, June H. Thompson, Marion Thornbery, Elizabeth Walker, Richard V. Wilkinson, Nancy V. Wilkinson, Helen M. Wilson, James E. Griffiss and Elizabeth H. Miller, Defendants-Respondents, Elderly Housing Authority, Defendant.

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536 N.W.2d 175 195 Wis.2d 485 M & I FIRST NATIONAL BANK, West Bend, Wisconsin, as Trustee,
Plaintiff-Appellant,
v.
EPISCOPAL HOMES MANAGEMENT, INC., Mary D. Palmer, Robert T.
Allen, Earl M. Boulton, Charlotte S. Boulton, Elizabeth A.
Brown, Howard G. Brown, Josephine Dietrich, Florence
Dietrich, Mary Alice Hammond, Willis R. Hammond, Gordon B.
Hoffman, Jessie Hoffman, Eleanor G. Jorgenson, Esther M.
Klemp, Ernest Lipman, Samuel Loomis, Mildred G. Macek,
Barbara F. Muckler, Dorothy W. Osborne, Irving W. Roane,
Ethel V. Roane, Robert Rosenwald, Laura Rosenwald, Marion G.
Sanford, Richard C. Thompson, June H. Thompson, Marion
Thornbery, Elizabeth Walker, Richard V. Wilkinson, Nancy V.
Wilkinson, Helen M. Wilson, James E. Griffiss and Elizabeth
H. Miller, Defendants-Respondents,
Elderly Housing Authority, Defendant. No. 94-1294. Court of Appeals of Wisconsin. Submitted on Briefs Jan. 18, 1995.
Opinion Released June 21, 1995.
Opinion Filed June 21, 1995.

Page 178

[195 Wis.2d 487] On behalf of the plaintiff-appellant, the cause was submitted on the briefs of James O. Huber, Brian W. McGrath, and Bryan B. House of Foley & Lardner, Milwaukee.

On behalf of the defendant-respondent, Episcopal Homes Management, Inc., the cause was submitted on the brief of James W. Hill, and JoAnne Breese-Jaeck of Hostak, Henzl & Bichler, S.C., Racine.

On behalf of the defendants-respondents, Richard V. Wilkinson and Nancy V. Wilkinson, the cause was [195 Wis.2d 488] submitted on the brief of Micheal D. Bannon of DeMark, Kolbe & Brodek, S.C., Racine.

On behalf of individual defendants-respondents, the cause was submitted on the brief of Wesley R. Mueckler of Riegelman & Mueckler, S.C., Racine.

Before BROWN, NETTESHEIM and SNYDER, JJ.

NETTESHEIM, Judge.

The subject of this action is a fund in excess of $1,000,000, holding entrance fees paid by the residents of Lake Oaks at DeKoven (DeKoven), a housing facility for the elderly located in the City of Racine and owned by Episcopal Homes Management, Inc. (EHM). The appellant, M & I First National Bank, West Bend, Wisconsin (M & I), is the trustee for approximately 1700 bondholders who hold mortgage revenue bonds which were issued to finance the construction of DeKoven. When EHM defaulted on the mortgage obligation, M & I claimed a priority security interest in the fund and brought this declaratory action to confirm that claim.

At summary judgment, the trial court rejected M & I's claim and, instead, imposed a constructive trust against the fund on behalf of the DeKoven residents. The court held that the specific provisions of the residency agreements governing refunds of the entrance fees prevailed over other provisions in the agreements which subordinated the residents' claims to the status of unsecured creditors in the event of DeKoven's liquidation.

In so ruling, however, the trial court rejected an argument from one set of residents, Richard V. and Nancy V. Wilkinson, that the residency agreements were rental agreements subject to ch. ATCP 134 of the Wisconsin Administrative Code governing "Residential [195 Wis.2d 489] Rental Practices." The Wilkinsons' situation is unique from the other residents

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because they are the only residents who have vacated the premises. Upon doing so, they demanded that EHM return their entrance fee. EHM failed to respond. Because the court ruled that the residency agreements were not rental agreements, the court rejected the Wilkinsons' claims for twice the amount of their entrance fee along with their costs and attorney's fees pursuant to § 100.20(5), STATS.

M & I appeals the trial court's imposition of the constructive trust. In a separate and prior appeal, the Wilkinsons have appealed the trial court's rejection of their claim that their residency agreement constituted a rental agreement pursuant to WIS.ADM.CODE § ATCP 134.02(10). ¹

We agree with the Wilkinsons that the residency agreements constitute rental agreements within the meaning of WIS.ADM.CODE § ATCP 134.02(10). On this different ground, we affirm the judgment in this appeal brought by M & I. By separate opinion issued this same day in the Wilkinsons' appeal, we reverse the judgment and remand for entry of judgment in accord with our decision.

FACTS

In 1989, the Episcopal Diocese of Milwaukee, Inc., in conjunction with the Elderly Housing Authority of Racine, constructed DeKoven, an eighty-five unit elderly[195 Wis.2d 490] housing complex located in the City of Racine on property owned by the Diocese. The facility was intended as housing for residents sixty-two years of age and older. To finance the project, the Housing Authority issued $8,260,000 of tax-exempt mortgage revenue bonds and the Diocese issued $3,420,000 of its own taxable bonds. The Diocese received the proceeds derived from the sales of these bonds. M & I was appointed as trustee for the approximately 1700 purchasers of the bonds.

In conjunction with this financing arrangement, the Diocese executed various legal documents, including a "Project Contract" and a promissory note to the Housing Authority. By these documents, the Diocese granted M & I a security interest in: (1) the Housing Authority's right to receive payment from the Diocese on the bond indebtedness; and (2) the Housing Authority's right to all the revenues held by M & I as trustee, including the entrance fees fund. The Diocese also executed trust indentures and a mortgage and security agreement which directly granted to M & I a security interest in "all monthly fees, third party payments, rents, issues, profits, income, revenues and receipts derived in any fashion from [DeKoven]." The Diocese later assigned its rights in the project to EHM, a nonprofit corporation which was created by the Diocese for the purpose of managing DeKoven.

DeKoven was designed for independent living. Each of the residents entered into a standard preprinted form contract with EHM entitled "Residency Agreement." Under the agreement, the residents were entitled to the "sole use and benefit" of their assigned unit and "the use of all common facilities." The residents were entitled to live at DeKoven until they were unable to "live as an independent person as [195 Wis.2d 491] determined by DeKoven," at which time the residency agreement could be terminated. Although not included in the agreement, DeKoven offered residents planned activities, the use of a swimming pool, a minibus, a community room, garden plots and access to a barber or beautician and a wellness nurse.

The residency agreement required each resident to pay an initial entrance fee as a condition of admission and thereafter pay a monthly fee. The amount of the entrance fee ranged from $19,800 to $77,250, depending on the size of the living unit. Article 15, entitled "Refund of Entrance Fee upon Termination of Residency Agreement," provided for the return of the entrance fee upon termination less the following deductions:

(i) any amounts owed to DeKoven by the Resident, and

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(ii) any amounts of the Monthly Fee not paid by the Resident as a result of a dispensation granted in accordance with Article 4 of this Agreement, and

(iii) the reasonable cost of refurbishing the Designated Lake Oaks Residence, and

(iv) the amount of Monthly Fee allocated to the Designated Lake Oaks Residence from the Termination Date to the time a new Resident shall be obligated to pay the Monthly Fee but no longer than nine months from the Termination Date.

Article 12, entitled "Subordination Clause," provided, in relevant part:

A]ll rights, privileges and benefits thereunder are and shall be at all times subject to and subordinate to the lien of a first mortgage and the accompanying [195 Wis.2d 492] documents executed (or to be executed or assumed) by DeKoven

Article 16, entitled "Rights of Resident," provided, in relevant part:

This Agreement is not a lease or easement and Resident is not given exclusive possession of a living unit in the Development as against DeKoven. Pursuant to the requirements of Wisconsin law, DeKoven hereby notifies Residents that if DeKoven were to be liquidated, Resident's claim against the assets of DeKoven would be unsecured. This means that creditors with claims secured by such things as mortgages and liens against real and personal property of DeKoven would be paid before any refunds or other payments could be made to Resident.

DeKoven subsequently experienced financial difficulties and EHM defaulted on the scheduled payments due M & I pursuant to the financing documents. At that time, M & I held approximately $1,000,000 in the entrance fees fund. M & I notified EHM that payment of the entire principal and accrued interest was being accelerated and payment on the entire debt was immediately due. ² M & I also laid claim to the entrance fees fund pursuant to the various financing documents which either granted M & I a security interest in those funds or documented such interest.

TRIAL COURT PROCEEDINGS

To confirm its legal right to the entrance fees fund, M & I commenced this declaratory action against EHM, [195 Wis.2d 493] the residents and the Housing Authority. ³ In support, M & I cited to the various financing documents which either created a security interest to M & I in the fund or which recognized such right. M & I contended that it was entitled to apply the entrance fees fund towards the debt owed the bondholders in accord with the bond indentures which specified the disbursement of proceeds in the event of an accelerated debt. ⁴

With the exception of the Wilkinsons, the residents filed a single collective answer. They alleged that the provisions of the residency agreements and the bond indentures which specifically addressed the repayment of the entrance fees should take precedence over the subordination provisions upon which M & I was relying. ⁵ EHM filed an answer echoing this same defense. The Housing Authority filed an answer admitting the allegations in M &...