Johnson Bank v BV Nicolet, LLC (WI)

Summary: Wisconsin courts require the application of the five “interest of justice” factors before issuing a default judgment, and denying a motion to reopen without considering these factors is an abuse of discretion.

Johnson Bank v BV Nicolet, LLC, 2011 AP 002186 (Wis. Ct. App., 2012).

Facts: BV Nicolet, LLC purchased property in Grand Chute, Wisconsin containing several townhomes. Johnson Bank loaned $3,365,000, secured by a mortgage on the property. The two members of the LLC, Albert Belmonte and Lawrence Starkman, as well as Brendan Sullivan executed commercial guaranties holding them personally liable to Johnson Bank for BV Nicolet’s debt. When the loan matured, BV Nicolet failed to pay the outstanding balance and Johnson Bank subsequently filed a complaint to foreclose on the property and enforce the guaranties of Belmonte, Stark, and Lawrence. BV Nicolet and Belmonte failed to file a timely answer to the complaint and Johnson Bank motioned for a default judgment.

BV Nicolet and Belmonte filed a motion to enlarge the time to answer, and the trial court denied it. BV Nicolet and Belmonte then moved to reopen the default judgment, arguing they should be relieved from judgment because Johnson Bank engaged in “fraud, misrepresentation, or other misconduct” and extraordinary circumstances warranted such relief. The defendants produced an affidavit in which Starkman alleged that a Johnson Bank officer provided him with a “Reconstructed Operating Statement Year Projection” showing a gross profit of $34,100 each month on the property. The officer further represented that the projection was created using actual data acquired through the bank’s receivership on the property. The affidavit alleged that BV Nicolet relied on this statement in purchasing the property, but later learned it generated less than $20,000 each month in gross income. The defendants asserted this misrepresentation was the direct cause of BV Nicolet’s failure to repay the loan.

Johnson Bank, in its own affidavit, asserted it was not appointed as receiver on the property, and the officer did not create a “Reconstructed Operating Statement Year Projection” for BV Nicolet. The affidavit also stated that BV Nicolet was “well aware” that the rental income would be insufficient to satisfy the mortgage and expenses. The Circuit Court of Kenosha County denied the defendant’s motion to reopen, concluding that Johnson Bank had not engaged in fraud or misrepresentation and no “extraordinary circumstances,” pursuant to Wis. Stat. § 806.7(1)(h), were present to justify relief. BV Nicolet and Belmonte appealed this decision arguing an abuse of discretion by the circuit court.

Holding:  Reversed and Remanded. The court of appeals agreed that the Circuit Court abused its’ discretion by failing to apply the “five interest of justice factors” in determining whether the circumstances were extraordinary under §806.7(1)(h). This statute allows a court to provide relief to a party from a judgment for eight reasons, paragraphs (a) through (h), with (h) being a catch-all relief for “any other reasons justifying relief.” Mindful of competing interests of finality of judgments and fairness in resolving disputes, courts denying relief under §806.7(1) must consider the five “interests of justice” factors in its decision.

The factors are not a comprehensive list and a court should consider other relevant factors; but, courts must consider the following: (1) whether the judgment was the result of the conscientious, deliberate, and well-informed choice of the claimant; (2) whether the claimant received the effective assistance of counsel; (3) whether relief is sought from a judgment in which there has been no judicial consideration of the merits and the interest of deciding the particular case on the merits outweighs the finality of judgments; (4) whether there is a meritorious defense to the claim; and, (5) whether there are intervening circumstances making it inequitable to grant relief. Wisconsin’s courts of appeal will find a circuit court erroneous in exercising its discretion when it fails to apply the five factors to determine whether extraordinary circumstances warranted reopening a default judgment.

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By: ATG Underwriting Department | Posted on: Wed, 07/25/2012 - 9:34am