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September 22, 2009Client Alert

Wisconsin Statute Protects Priority of Non-Wisconsin Chartered Bank Mortgages Against Construction Liens

In Lowell Management Services, Inc. v. Geneva National PQC, LLC, No. 2008AP2533 (Wis. Ct. App. Sept. 9, 2009) (recommended for publication), the Wisconsin Court of Appeals ruled that a mortgage recorded by a non-Wisconsin chartered bank after the start of visible construction has priority over a construction lien.

This case involved a failed commercial construction project. Lowell Management Services, Inc. (“Lowell”) was the general contractor for Geneva National PQC, LLC (“Geneva National”). Lowell started visible construction on the project no later than April 20, 2005. Security Bank of Kansas City (the “Bank”), which was chartered in Kansas, recorded a mortgage after Lowell started visible construction. After Geneva National defaulted on its obligations to Lowell, Lowell commenced a lawsuit to foreclose on its construction lien. The appellate court was tasked with deciding a lien priority dispute between Lowell and the Bank.

In general, a construction lien is prior to any lien that originates after the start of visible construction pursuant to Wis. Stat. § 779.01(4). Wisconsin statutes, however, recognize certain exceptions to this general rule. Relevant to this case, under Wis. Stat. § 706.11(1), any duly recorded “mortgage executed to a state or national bank or to a state or federally chartered credit union” obtains priority over a construction lien, even if the mortgage is recorded after the start of visible construction.

Lowell relied on the general rule and argued that its construction lien had priority over the Bank’s mortgage because the Bank’s mortgage was recorded after the start of visible construction. The Bank relied on the exception and argued that its mortgage had priority over Lowell’s construction lien because the term “state bank” includes non-Wisconsin chartered banks.

The Court of Appeals was asked to interpret Wis. Stat. § 706.11(1) and decide whether the term “state bank” is limited only to Wisconsin chartered banks or whether it also applies to non-Wisconsin chartered banks.

While the Court of Appeals recognized that the statute is unclear, it relied, in part, on the fact that one of the purposes of the exception is to encourage banks to finance investment in Wisconsin construction projects. Wanting to encourage non-Wisconsin chartered banks to invest in Wisconsin construction projects and to avoid an “absurd result,” the Court of Appeals ruled that the term “state bank” includes non-Wisconsin chartered banks. Accordingly, the appellate court ruled that the Bank’s mortgage had priority over Lowell’s construction lien, even though the mortgage was recorded after the start of visible construction.

The Lowell decision is important to non-Wisconsin chartered banks because it makes clear that if they finance investment in Wisconsin construction projects, a properly recorded mortgage will have priority over a construction lien, even if the mortgage is recorded after the start of visible construction.

For more information, please contact one of the authors of this alert or your Michael Best attorney.

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