Judicial Spotlight

The Episcopal Homes case involved a senior-living facility that defaulted on bond repayments. In that case, a group of roughly 1,700 bondholders bought more than $11 million in bonds to fund the construction of a facility. Under a series of financing documents, the bondholders held a security interest in an account containing approximately $1,000,000 in entrance fees. The residency agreements subordinated entrance fee repayments to the bondholders’ lien. After default on bond repayment, the bondholders claimed a secured interest in a segregated entrance fee account funds. Based upon language of the rental agreements, the Court of Appeals concluded the entrance fees were effectively security deposits under Wis. Admin. Code sec. ATCP 134.02(11). Based upon language within agreements, administrative code, and public policy, the Court of Appeals held the residents’ entrance fees were protected from the bondholders’ interests.

The residents in The Atrium claim their entrance fees were like those interests of the residents in the Episcopal Homes. However, the Court determined the facts between Episcopal Homes and The Atrium were different and that the equitable powers used by the Court of Appeals in the Episcopal Homes against a segregated account containing funds traceable to residents’ entrance fees could not be used in The Atrium case as sections 706.11 and 128.17, Stats. so clearly grant the bondholders’ mortgage lien unequivocal superiority. The Court concluded it has no legal authority to extend the Court of Appeals decision in Episcopal Homes beyond a segregated account of entrance fees not in receivership to reach the distinct proceeds from the sale of real property subject to a perfected mortgage lien. The Court could not disregard the plan language under Chapter 128.

The Court‘s unanimous decision in this case upholding Wisconsin’s longstanding precedent of priority for properly perfected secured creditors under receivership rules is important. Under s. 128.17, Stats. the bondholders, given their security interest of the perfected mortgage, were entitled to payment from the proceeds of the sale of The Atrium assets before payment to unsecured creditors, the residents.

The Court’s decision may be viewed on the WBA Compliance Page located at: https://www.wisbank.com/resources/ compliance/

Advocate for Your Industry

Join WBA and your bank peers at Capitol Day or the D.C. Summit

Add your voice in support of our industry on the state level at WBA Capitol Day and on the federal level by attending the WBA/ICBA Capital Summit. As a WBA member, you can attend WBA Capitol Day in addition to the WBA/ICBA Capital Summit.* There is no registration fee. Attendees are responsible for their travel and hotel room charges during either event. Join WBA representatives and other Wisconsin bankers on:

» April 26 — WBA Capitol Day, Madison wisbank.com/CapDay

» May 14–17 — WBA/ICBA Capital Summit, Washington, D.C. — icba.org/capitalsummit

Contact WBA’s Rose Oswald Poels at ropoels@wisbank.com, Daryll Lund at dlund@wisbank.com, or Lorenzo Cruz at lcruz@wisbank. com if you have questions or want more information about WBA Capitol Day or the Washington Summit.

*Note: the WBA/ABA Washington Summit was held March 20–22 in Washington, D.C