The District of Columbia Court of Appeals recently reversed a lower court’s ruling, and held that foreclosure of the super-priority portion of a condominium assessments lien could extinguish a previously recorded first position deed of trust.
In so holding, the Court held that the lender had standing to sue and protect its interest under the previously recorded deed of trust as holder of the promissory note secured thereby.
Nevertheless, under the District of Columbia Condominium Act, D.C. Code § 42-1901.01 et seq., the condominium assessment lien enjoyed super-priority for six-months of condominium assessments against the first deed of trust, which was therefore extinguished upon foreclosure of the super-priority lien.
A copy of the opinion is available at: http://www.dccourts.gov/internet/documents/13-CV-623plus.pdf
Borrower financed the purchase of a condominium unit by executing a promissory note for $280,000, secured by a deed of trust on the unit. Borrower defaulted on his mortgage payments, and failed to pay his required monthly condominium-association assessments. Condominium Association recorded a condominium-assessment lien on the unit in the amount of $9,415. At the time the lien was recorded, a title search revealed the first deed of trust.
Condominium Association commenced foreclosure proceedings, seeking to recover six months’ worth of unpaid assessments. The notice of foreclosure sale specified that the foreclosure sale would not be subject to the first deed of trust. Appellant Foreclosure Purchaser (“Foreclosure Purchaser”) purchased the unit for $10,000 at the foreclosure sale.
Soon thereafter, appellee lender (“Lender”) initiated foreclosure proceedings on the unit in light of Borrower’s failure to make his mortgage payments. Upon discovering that Condominium Association had already foreclosed on the unit, Lender filed a complaint against Condominium Association and Foreclosure Purchaser requesting that the trial court void the foreclosure sale and declare that Lender held title to the unit. After rejecting the Condominium Association’s challenge to the Lender’s standing to foreclose under the deed of trust, the trial court determined that Condominium Association could not lawfully extinguish the first deed of trust. To that end, the court voided the foreclosure sale and declared that Lender had superior title to the unit. Condominium Association and Foreclosure Purchaser appealed.
As to the issue of the Lender’s standing to foreclose under the deed of trust and standing to protect its interest, the Court of Appeals explained that “[u]nder District of Columbia law, the holder of a negotiable instrument indorsed in blank is normally entitled to foreclose, including through foreclosure proceedings.” Op. at 6. Moreover, the Court noted that the Lender could protect its interests under the promissory note even if it is not a successor in interest under the deed of trust, because “the rights under the Deed of Trust follow the note.” Op. at 7 n.2 .
As to the title issue, you may recall, the District of Columbia Condominium Act, D.C. Code § 42-1901.01 et seq. (“DCA”), permits a condominium association to impose an assessment lien against a unit. The Act affords an assessment lien higher priority than a previously recorded first deed of trust for six months of unpaid assessments, but affords an assessment lien lower priority for any additional unpaid assessments. D.C. Code § 42-1903.13(a)(1)(B) & (a)(2). Consequently, the DCA “effectively splits condominium assessment liens into two liens of differing priority: (1) a lien for six months of assessments that is higher in priority than the first mortgage or first deed of trust – sometimes called a ‘super-priority lien’ – and (2) a lien for any additional unpaid assessments that is lower in priority than the first mortgage or first deed of trust.” Op. at 15.
On appeal, the Condominium Association and Foreclosure Purchaser (collectively, “Appellants”) argued that pursuant to the DCA, Condominium Association was permitted to foreclose on the super-priority portion of the lien, and to distribute the proceeds first to satisfy its lien, and then to satisfy any remaining liens. Appellants asserted that after distribution of the sale proceeds, any unsatisfied liens or encumbrances, including a first mortgage or first deed of trust, are extinguished. Thus, the foreclosure sale purchaser takes title to the property free of a first mortgage or first deed of trust. Although Lender conceded that Condominium Association’s lien was superior to its deed of trust for six-months of assessments, Lender argued that regardless of priority, the foreclosure does not extinguish a first deed of trust.
Recognizing that the DCA does not expressly address what happens where the Condominium Association forecloses solely on the super-priority portion of the lien, the Court found persuasive the common law canon of foreclosure law that “liens with lower priority are extinguished if a valid foreclosure sale yields proceeds insufficient to satisfy a higher-priority lien.” Op. at 15.
Consequently, the Court rejected Lender’s argument contending that Condominium Association had higher priority but could not extinguish the first deed of trust. “Such an interpretation would be a significant departure from the basic principle that foreclosure on a higher priority lien extinguishes lower-priority liens” and “[t]he language of §42-1903.13(a)(2) does not suggest that the District of Columbia Council intended such a departure.” Op. at 17.
Buttressing that conclusion, the Court indicated that the Act’s legislative history and the official comments to the Uniform Common Interest Ownership Act (“UCOIA”) and the Uniform Condominium Act (“UCA”) – two acts upon which the §42-1903.013(a)(2) was modeled –revealed that the drafters “understood that foreclosure on the super-priority lien could extinguish a first mortgage or first deed of trust, but expected that mortgage lenders would take the necessary steps to prevent that result, either by requiring payment of assessments into an escrow account or by paying assessments themselves to prevent foreclosure.” Op. at 18-19.
Accordingly, the Court of Appeals vacated the summary judgment ruling in favor of Lender, and remanded the case to the trial court to consider the claim that the foreclosure price of $10,000 was unconscionably low.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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