Foreclosure Fiasco Costing Taxpayers Nearly $200,000

Normally, the biggest risk for the city in acquiring a building via property tax foreclosure is that it ends up with a dilapidated structure that needs to be demolished.

But a vacant, eight-unit apartment building at 8940 N. Michele St. broke the mold. Through an unusual series of circumstances, a $100,000 profit became a $192,000 loss.

City Wide Investments, which owns a number of rental properties in Milwaukee, had accumulated an approximately $49,000 debt to the city after failing to pay property taxes from 2012 to 2015. The city took ownership of the then-vacant property in January 2016 via foreclosure. Later that year, City Wide was scheduled to appear before the Common Council to pay the back taxes and have the property returned, but no representative appeared. In March 2017 the Department of City Development sold the property for $150,000 after receiving only one bid after listing it for sale.

Then things went sideways.

City Wide filed for Chapter 11 bankruptcy just weeks after the sale and, in an effort to get the property back, accused the city of engaging in a “fraudulent transfer” wherein an asset is placed out of reach of creditors without the debtor receiving “reasonably equivalent value” in return. Often the bankruptcy court would order the property returned to the debtor (i.e. reversing the sale of a car sold to a friend for less than it’s worth), but, given that the city already sold it, that was out of the question.

The firm, wholly owned by Muskego resident John Nazario, also accused the city of failing to get the fair market value of the property when it did sell it.

Using a third-party appraisal, City Wide contended that its former property was actually worth $340,000. The city argued that it was worth $150,000, and, at most, the court should award that amount, less the unpaid property taxes, returned to City Wide. The property was assessed by the city for $217,600 at the time of the sale, but DCD didn’t list the property for that much, given the estimated scope of work to repair the vacant building. The city additionally argued that City Wide’s primary creditor was RPM Services and Management, a firm also wholly owned by Nazario, and that the bankruptcy would benefit Nazario and punish the city. Furthermore, the city argued, that Nazario’s decision to invest $95,000 in renovating the property showed that not paying the property taxes was a choice, not a result of poverty.

Bankruptcy court judge Susan Kelley ruled in City Wide’s favor in 2017, giving the property a value of $330,000 and issuing a $281,000 judgment against the city (the value of the property, less the unpaid taxes). The city paid $101,000 in 2019, reflecting the proceeds from selling the property, while it appealed the case.

But the city lost its appeal in 2021 when federal judge Brett Ludwig upheld the bankruptcy court’s ruling.

“The City’s appellate arguments thus amount to little more than complaints that the bankruptcy court accepted City Wide’s witnesses’ testimony on valuation as more credible than the testimony and argument offered by the City. But dissatisfaction with a trial court’s properly supported factual findings is not a basis for reversal on appeal,” wrote Ludwig. “The City does not sell foreclosed properties at auction and it typically does not list its foreclosed properties with a real estate broker. The City has only itself to blame for any problems arising from its own chosen procedures for foreclosing on and selling properties with overdue taxes.”

Ludwig concluded that the bankruptcy court’s refusal to find the city’s $150,000 sale price as fair value is not a reversible error.

Assistant city attorney Hannah Jahn presented the case to the Finance & Personnel Committee in September 2021, requesting $192,000 to close the matter as part of a court-approved compromise. The amount includes the unpaid judgment as well as an interest penalty. “I would like to point out the unique and favorable nature of paying this claim,” said Jahn. “The city of Milwaukee will essentially pay itself.”

Instead of paying City Wide, the city transferred money internally to clear the equivalent amount of overdue property tax payments on other properties City Wide owns. The council unanimously approved the deal after Alderman Michael Murphy expressed concern that the administration was raiding the council’s contingency fund to pay the back taxes.

The City Wide properties that received property tax clearances were 2258 S. Chase Ave. ($59,662.13 overdue at the time of the deal’s September 2021 approval), 2335 S. 7th St. ($31,426.58), 1313-1315 W. Rogers St. ($30,582.05), 3039 S. 7th St. ($29,653.30), 2214 S. 15th St. ($26,396.62), 1725 S. 24th St. ($22,437.89) and 2146 S. 16th St. ($545.98).

The bankruptcy case was closed in October. City Wide was represented by Leverson, Lucey & Metz S.C. attorney Leonard Leverson on the bankruptcy case.

But the remaining properties, now with almost all of their back taxes eliminated, have not escaped city scrutiny. As recently as Thursday, the Department of Neighborhood Services reinspected the Chase Avenue property following a December complaint (no violation found says the record system).

The S. 24th St. property is subject to a condemnation case, as DNS ordered the house on the property to be demolished in Feb. 2021 following a fire. It hired a process server to serve Nazario at his Muskego home in March, but after five attempts the individual was unsuccessful. In December 2021, following a complaint of squatters, DNS issued an order violation for City Wide to secure the vacant property.

Nazario is also again not paying property taxes to the tune of $52,108.88 according to the city’s online records system. The Chase Avenue property has $21,241.28 in unpaid taxes from 2020 and 2021. The other six properties have unpaid balances only from 2021. The taxes on an eighth property owned by City Wide, 5437 N. 38th St., are paid in full.

Today, the N. Michele St. property is owned by Berrada Properties, the 2017 acquirer, and was most recently assessed at $365,700. The new owner faces a civil lawsuit brought by the Wisconsin Attorney General for its tenant practices.