Thursday, May 3, 2018

FYI: DC App Ct Holds HOA May Not Foreclose Subject to First Deed of Trust

The District of Columbia Court of Appeals recently held that a condominium association acting on its six-month super-priority lien for unpaid condominium assessments pursuant to § 42-1903.13(a)(2) of the District of Columbia Condominium Act (the "DC Condo Act") may not conduct its foreclosure sale subject to a first deed of trust lien, even if the terms of sale stated that the condo unit would be sold subject to first deed of trust.


A copy of the opinion is available at:  Link to Opinion


Borrower obtained a loan to finance his purchase of a condominium unit (the "Unit") secured by a deed of trust recorded in the land records.  The loan and deed of trust were later assigned to plaintiff mortgagee ("Mortgagee"). Borrower subsequently defaulted on his mortgage payments and condominium assessments.


The Borrower's condominium association (the "Association") sought to foreclose on the Unit pursuant to D.C. Code § 42-1903.13(a)(2), which entitles condominium associations to a super-priority lien for the most recent six months of unpaid assessments.  Throughout 2011 to 2014, the Association scheduled several foreclosure sales, but the sales were cancelled after Mortgagee paid the delinquent assessments to preserve its lien on the Unit. 


In 2014, Borrower defaulted again on his assessments and the Association scheduled a foreclosure sale.  The Association provided notice to Borrower and Mortgagee.  Notably, the Association publicly advertised the sale and that advertisement stated that the Unit would be sold pursuant to D.C. Code § 42-1903.13(a)(2) and "subject to a deed of trust for approximately $589,750."


At the sale, the Unit was sold to third-party purchaser defendant ("Defendant").  The accounting showed that the Association deducted $5,195.28 for almost six months of unpaid assessments, as well of other foreclosure costs and fees, out of the $17,000 purchase price of the Unit paid by Defendant.   Mortgagee attempted to pay the Assessments to stop the sale, but the Association returned the check because it was not received until the day after the sale.  The Association later recorded a deed which included a provision stating: "The hereinafter described property is sold subject to a deed of trust."


Mortgagee filed a complaint for judicial foreclosure against Borrower and later joined Defendant. Both Mortgagee and Defendant moved for summary judgment.  Defendant alleged that she purchased the Unit at a foreclosure sale, free and clear of Mortgagee's lien pursuant to D.C. Code § 42-1903.13(a)(2) and the appellate court's decision in Chase Plaza Condominium Ass'n v. JPMorgan Chase Bank, N.A., 98 A.3d 166, 172 (D.C. 2014). 


The trial court granted the Mortgagee's motion and denied plaintiff's motion.  The trial court acknowledged that law was unclear regarding the effect of the Association's foreclosure sale, pursuant to its super-priority lien, on a mortgagee's first-priority mortgage lien at the time of the sale at issue.  The trial court held that the Unit was clearly sold subject to the first mortgage lien and it would be "an inequitable windfall and contrary to the parties' expectations to permit [Defendant] to disavow [Mortgagee's] mortgage . . . and would impose an enormous foreclosure deficiency on [Borrower] if [Borrower's] purchase is not subject to [Mortgagee's] lien, as was contemplated at the foreclosure sale.  Defendant appealed.


On appeal, the issue was whether Mortgagee's first mortgage lien was extinguished by foreclosure of the Association's super-priority lien under D.C. Code § 42-1903.13(a)(2) despite the advertisement and sale of the Unit subject to the first mortgage lien.


Defendant contended that she purchased the Unit at the foreclosure sale free and clear of Mortgagee's first mortgage lien because the anti-waiver provision of the DC Condo Act precluded the Association from enforcing its super-priority lien subject to Mortgagee's first deed of trust.  Mortgagee argued that trial court correctly granted summary judgment based on equitable and other grounds.


The Court first addressed its prior ruling in Chase Plaza Condominium Ass'n v. JPMorgan Chase Bank, N.A., noting that it had similar facts to the present case.  There, the Court addressed for the first time the proper interpretation of an association's super-priority lien for unpaid assessments under D.C. Code § 42-1903.13(a)(2) and the impact of a foreclosure on a lender's first mortgage. 


As you may recall, under the DC Condo Act, liens for unpaid assessments are split into two liens of differing priority.  An association is granted a higher priority lien over a first mortgage lien for the most recent six months of unpaid condominium assessments.  The Act also grants the association a lien for any remaining unpaid liens beyond the most recent six-month period, but at a lower priority than the first mortgage lien.


In Chase Plaza Condominium Ass'n v. JPMorgan Chase Bank, N.A., the association's foreclosure notice specified that the foreclosure sale of the unit would not be subject to a first mortgage. The unit was purchased by a third-party at the foreclosure sale and lender filed suit seeking the rescission of the sale.  The trial court granted summary judgment in favor of the mortgagee on basis that the purchaser could not lawfully extinguish the first deed of trust. Thus, the foreclosure sale was voided because "the unit had not been sold subject to the first deed of trust."


The Court reversed the trial court's decision noting the well settled principle of foreclosure law that "liens with lower priority are extinguished if a valid foreclosure sale yields proceeds insufficient to satisfy a higher-priority lien." The Court noted that the plain language of the DC Condo Act did not evince an intent to deviate from this general principle.


The Court explained that the legislative history of the DC Condo Act indicated the intent to give associations maximum flexibility in collecting unpaid assessments.  Further, the Court noted that the official comments to the Uniform Common Interest Ownership Act and the Uniform Condominium Act (collectively, "Uniform Acts") suggest that it was understood by lenders that an association's super-priority lien would extinguish a first mortgage and lenders would take steps to avoid this result by requiring payment of assessments into escrow or paying the assessments themselves to avoid foreclosure. 


§ 42-1901.07 of the DC Condo Act provides that "except as expressly provided by this chapter, a provision of this chapter may not be varied by agreement and any right conferred by this chapter may not be waived."  Thus, the Court rejected Mortgagee's argument that Association did not enforce its super-priority lien because terms of sale stated that the Unit would be sold subject to first deed of trust.


The Court held that the DC Condo Act precluded the Association from exercising its super-priority lien while also preserving the full amount of the Mortgagee's unpaid lien as this would effectively constitute a waiver.  Thus, the Court found that the Association enforced its super-priority lien at the sale because it collected only on the most recent six months of unpaid assessments.  Because the proceeds were insufficient to cover the first mortgage lien, the first mortgage lien was therefore foreclosed out.


Notably, the DC Appellate Court did not address whether the sale should be set aside for equitable reasons because the sole count in Mortgagee's complaint was for judicial foreclosure.


The Court found it important to address and reject Mortgagee's additional claims. Notably, the Court found that Defendant was not equitably estopped from claiming that the first deed of trust was extinguished at the sale.  The Court noted that Mortgagee did not reasonably rely on the advertised terms of the foreclosure sale to protect its interest because it attempted to pay the delinquent assessments but failed to do so on time.  Further, the Court noted, Mortgagee did not move to vacate the sale after the Unit for the relatively low price even though it knew the state of the law on super-priority liens was in flux.  The Court also noted that equitable relief is not available when granting such relief would contravene the express provision of a statute, i.e. the anti-waiver provision of the DC Condo Act.


The DC Appellate Court also rejected Mortgagee's claim that a secured party lender and association may agree to subordinate the super-priority lien based on a report ("Report") created by the Joint Editorial Board for Uniform Real Property Acts ("JEB").  In the Report, the JEB presented a scenario where an association may agree with a lender to deliver title clear of its super-priority lien after foreclosure of a first mortgage lien if the proceeds of the sale are first distributed to the association to cover the lien.  The Court explained that the super-priority lien would still exist after the foreclosure. Thus, the Court held, this scenario does not suggest subordination of the super-priority lien, but rather, reinforces its true priority status.


Further, the DC Appellate Court rejected Mortgagee's claim that a super-priority lien may not be enforce through a non-judicial foreclosure because the Act contemplates non-judicial enforcement of liens "unless the power of sale procedures are specifically and expressly prohibited by the condominium instruments." Citing D.C. Code § 42-1903.13(c)(1).  Here, the Association's bylaws explicitly authorized non-judicial foreclosure.


Last, the Court rejected Mortgagee's claim that the Association's foreclosure sale could not have been conducted pursuant to its super-priority lien due to the Association's prior attempts to foreclose.  Mortgagee relied on comments in the Report advising that an association cannot extend a six-month super-priority lien by filing successive actions every six months.


However, the DC Appellate Court found that the comments only apply where a foreclosure action is already pending at the time an association attempts to file an additional foreclosure action. If a foreclosure action is already pending, foreclosure by an association is not necessary and would represent an attempt to extend lien priority beyond six months entitled to priority status.


Accordingly, the DC Appellate Court reversed the trial court's order granting summary judgment to Mortgagee and remanded for further proceedings.





Ralph T. Wutscher
Maurice Wutscher LLP
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