KNA Family LLC v. Fazio (WI)

Summary: Where the mortgage agreement stipulates that a certain a State’s law shall govern certain provisions under the contract, counterclaims brought under such State's laws are valid, regardless of whether an action has occurred in another State where the property is located.

KNA Family LLC v. Fazio, 364 Wis.2d 409 (Wis. App. 2015).

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Facts: The Fazios acquired commercial property located in Wisconsin, and executed a promissory note in favor of Wells Fargo Bank, National Association. The note was secured by a mortgage, both of which were subsequently assigned to U.S. Bank. When the Fazios failed to make payments, U.S. Bank commenced a foreclosure action against the Fazios, alleging that they were in default due to their “failure to pay all interest and principal due on the loan on its extended maturity date.” The Fazios answered the complaint, denying they were in default, and filed a counterclaim stipulating that the mortgage expressly stated that it was governed by and construed in accordance with the laws of the State of California. Further, California Civ.Code § 2943 required U.S. Bank to prepare and deliver a beneficiary statement and a payoff demand statement to the Fazios within twenty-one days of their requests, and that the Fazios had made such a request and U.S. Bank failed to respond.

U.S. Bank assigned its rights and interests under the note and mortgage to KNA Family, LLC. KNA Family was substituted as plaintiff in the foreclosure action, but U.S. Bank remained a party for purposes of the Fazios' counterclaim. U.S. Bank moved to dismiss the counterclaim, asserting that it failed to state a claim of which relief could be granted. U.S. Bank argued that Wisconsin law applied. The circuit court held for U.S. Bank. The Fazios appealed.


Holding: Reversed and Remanded. On appeal, the court held that California law applied to the Fazio’s counterclaim. The mortgage agreement contained a paragraph which stated, as a general matter, that the loan documents were be governed by and construed under California law “in all respects, including ... matters of construction, validity, enforceability, and performance[.]” The Fazios' counterclaim pertained to U.S. Bank's alleged failure to timely provide beneficiary and payoff demand statements when requested. The alleged failures clearly related 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.

Further, the counterclaim did not relate to U.S. Bank's statutory power of sale or any other remedy granted by the loan documents, nor did it relate to the creation, perfection, or enforcement of a mortgage lien or security interest, which could be governed by Wisconsin law. Even if U.S. Bank had never commenced the foreclosure action, the Fazios would still have had a claim against U.S. Bank for its alleged violations of Cal Civ.Code § 2943. After U.S. Bank filed suit against the Fazios, the Fazios properly chose to bring their § 2943 claim as a counterclaim in the Wisconsin foreclosure action, rather than as an independent claim in California court. However, they were not required to do so, and their choice to do so did not bar them from pursuing a remedy that they were otherwise entitled to pursue under the mortgage's governing law provision.

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By: ATG Underwriting Department | Posted on: Thu, 05/12/2016 - 10:04am