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By Roger D. Winston and Joseph E. Lubinski
A recent decision by the District of Columbia Court of Appeals, [enhanced version available to lexis.com subscribers], brings into renewed focus the tension between condominium/homeowner associations and lenders when it comes to payment of delinquent association assessment charges. In Chase Plaza Condominium Association, Inc. v. JPMorgan Chase Bank, N.A., the court determined that an association's statutory "super-priority" lien for unpaid assessments took priority of position, not just priority of payment, over the lender's mortgage lien. This ruling has significant implications for both lenders and associations.
In the growing number of states that have adopted some variation of "superliens," residential and commercial associations are granted a statutory assessment lien as security for the collection of at least some portion of the assessments. As quoted in the Chase opinion, the District of Columbia Condominium Act provides that an association's lien is "'prior to any other lien or encumbrance except [among other things] … [a] first mortgage … or [first] deed of trust … recorded before the date on which the assessment sought to be enforced became delinquent.'"
However, this priority of mortgages and deeds of trust is limited under the Act to the extent of any superliens. In jurisdictions such as the District of Columbia that have adopted superliens, the association's assessment lien is senior to mortgages and deeds of trust "to the extent of the common expense assessments based on the periodic budget adopted by the unit owners' association which would have become due in the absence of acceleration during the 6 months immediately preceding institution of an action to enforce the lien."
At issue in the Chase case was the effect of the association foreclosing its assessment lien. Was the association's lien only a priority of payment, such that following foreclosure by the association the lender's mortgage lien remains (subject to the association's right to collect the superlien, often up to six months' assessments), or a true priority of lien, such that the association's foreclosure wipes out the lender's mortgage lien? Put differently, does the initiation of an assessment lien foreclosure action expose a lender to risk that its collateral will be lost, or only that the association has a first right to payment of a portion of the foreclosure proceeds?
Disagreeing with the trial court that ruled the association lien was a priority of payment lien only, the Court of Appeals held that foreclosure of the association's assessment lien extinguished the lender's mortgage lien. The court based its decision on common law principles of lien priority and the absence of a clear intent in the association's governing documents to subordinate the association's assessment lien as against mortgages and deeds of trust. Interestingly, the court reached this conclusion even though the District of Columbia foreclosure laws do not require notice of the foreclosure to the lender. This means that lenders may be wiped out by an association's assessment lien foreclosure without any notice or opportunity to cure.
Obviously, the potential for the lender to fail to receive notice is very problematic. It is not clear it is problematic as a constitutional matter in those states that permit the association to foreclose non-judicially, given the weight of authority that has refused to treat such non-judicial proceedings as state action. But it is still problematic as a policy matter.
Chase is not the first case to interpret an association’s superlien. Courts in Washington and Nevada have previously confronted the same issue (with the decisions split on whether a mortgage lien survives an assessment lien foreclosure). Recognizing this emerging issue, earlier this year, the Joint Editorial Board of the Uniform Laws Commission (JEB) amended Section 3-116 of the Uniform Common Interest Owner Act (UCIOA) to resolve any ambiguity in a manner consistent with the Chase holding.
The JEB comments to the UCIOA state that the revised lien priority language "makes clear that the association’s lien has true priority over the lien of an otherwise first mortgage lender to the extent of the [superlien amount]. Thus, if the association conducts a foreclosure sale of its association lien and the first mortgagee does not act to redeem its interest by satisfying the association’s [superlien], the mortgagee’s lien would be extinguished." Notably, the JEB revisions make it clear that the association’s lien foreclosure can extinguish the otherwise-first mortgagee’s lien only if the mortgagee is given notice. However, the laws of each jurisdiction may or may not require such notice. Also, providing effective notice is often challenging, particularly when the loans have been securitized.
On the heels of the Chase decision, the Nevada Supreme Court, in SFR Investments Pool 1, LLC. v. U.S. Bank, N.A., issued an opinion holding that a homeowners association (HOA) lien is a true super-priority lien which, if foreclosed upon, extinguishes a first deed of trust.
In states such as Nevada that had depressed real estate values and significant delinquent HOA assessments, HOAs were foreclosing on liens for assessments, and third parties were buying homes at the resulting HOA foreclosure sales. Although it was generally accepted that the HOA's foreclosure extinguished the homeowner's title and interest in the home, the question of whether such foreclosure also extinguished a first deed of trust was not clear.
In SFR Investments, the Nevada Supreme Court, [enhanced version available to lexis.com subscribers], noted that the Nevada HOA lien statute is based on the Uniform Common Interest Ownership Act of 1982, and that the court could look to the drafters' comments and the law of other states to interpret the Act. The court ultimately reasoned that a portion of an HOA lien was superior to a first deed of trust, and it rejected the first deed holder's arguments that the HOA statute only provided a payment priority.
To support its analysis, the court found that notice of an HOA foreclosure sale must be given to junior lienholders, and to senior lienholders who ask for notice. The court reasoned that a junior lienholder can simply pay off an HOA lien or establish an escrow account to pay HOA dues—two actions which, if not provided for by the lender, result in an inequity of the lender's own doing when the lender loses its first deed of trust.
In addition, the court rejected the first deed holder's other arguments, including that:
• Any super-priority HOA lien must be judicially foreclosed upon, as opposed to non-judicially foreclosed upon.
• A non-judicial foreclosure of an HOA lien violates due process.
• A lender-savings clause in the HOA's CC&R's—which explicitly subordinates a HOA lien to that of a first deed of trust—is ineffective given that the statute does not allow the HOA superlien to be varied.
Although the opinion holds that a non-judicial foreclosure by an HOA generally extinguishes a first mortgage interest, it leaves several other issues unaddressed. For example, the opinion does not address whether an HOA foreclosure is invalid if a first trust holder attempts to pay off the underlying lien, but the HOA refuses to provide the amount of the lien or refuses to allow the lender to tender payment. This appears to be a common occurrence in Nevada, with some HOAs arguing that they are either prohibited or not obligated to provide the amount of the lien. The opinion also declines to address whether an HOA foreclosure is invalid if the sale is not properly noticed by the HOA.
Finally, it is not clear if an HOA foreclosure is void as commercially unreasonable if the sale price is unreasonably low. Houses sold at HOA foreclosures often sell for a tiny fraction of the market value of the property. If such a sale can extinguish a first deed of trust, the lender may be left with a significant unsecured debt and the homeowner is left with a very large deficiency judgment to the lender.
The effects of the Chase and SFR Investments decisions (and the revisions to UCIOA) are significant for both lenders and associations. For associations struggling from the effects of nonpayment of assessments, these decisions may provide a powerful tool for collecting delinquent assessments. By contrast, for lenders, these decisions complicate loan enforcement strategies on current loans and may require modification to underwriting requirements and loan document escrow provisions in the future. In addition, these interpretations may result in new lender requirements for association documents to require waivers, notices, and/or opportunities for lenders to cure.
Ballard Spahr’s Real Estate Department advises developers, associations, lenders, and borrowers on issues pertaining to community structuring, governance, and lien enforcement. For more information about this decision and its application, please contact Roger D. Winston at 301.664.6201 or email@example.com, or Joseph E. Lubinski at 303.299.7359 or firstname.lastname@example.org.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.
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