Changes on the Horizon for Community Association Foreclosures?
A recent Washington D.C. appellate court’s decision, while not binding in Colorado, could make waves in the community association industry, especially if judges in other jurisdictions, including our own, take notice. The case is Andrea Liu v. US Bank. In 2014, Liu purchased a condominium unit at foreclosure auction – on the association’s lien, not the bank’s note. As such, she bought the condominium, valued at approximately $700,000, for a mere $17,000, the balance of the debt owed to the association.
Like in Colorado, community associations in D.C. have a super-priority lien, which is a lien that takes priority even over the first mortgage, to the extent of six months of assessments. The remainder of the association’s lien is junior to the mortgage holder’s interest. Because of the impact of the super-priority lien, it is standard for lenders, when an association commences foreclosure proceedings, to pay, at a minimum, the super-priority portion of the lien to not lose its interest in the property.
In the Liu case, the bank attempted to pay the balance, but only after the foreclosure had already taken place. The bank filed its foreclosure action against the original owner (the owner that had failed to pay the association assessments and was therefore foreclosed upon) and included Liu, the purchaser at the association’s foreclosure sale. The court, at the Superior Court level (which in Colorado, would be our District Court), found in favor of the bank stating in its opinion, “it would be an inequitable windfall and contrary to the parties’ expectations to permit Ms. Liu to disavow the bank’s mortgage … and would impose an enormous foreclosure deficiency on [the previous owner] if Ms. Liu’s purchase is not subject to the bank’s lien.”
The appellate court reversed the decision earlier this month, confirming that Liu was the owner of the property, not subject to the bank’s lien, which had been extinguished through the association’s foreclosure, including the super-priority portion of its lien.
This case was decided in this manner partly due to when the association’s foreclosure took place, prior to April 7, 2017. In Washington D.C., the legislature addressed association foreclosure and changed the law, effective April 7, 2017, to state that associations could choose to foreclose either:
- On the six-month super-priority lien, which would extinguish any existing mortgage holder’s interest; or
- On the entire balance due, but the deed of trust would remain in place, and any purchaser at sale would take subject to that interest.
Prior to the law change and due to uncertainty regarding the interpretation of the statute, community associations would expressly state in their foreclosure suit that the property would be sold at the foreclosure sale subject to the lender’s mortgage. In Liu, the appellate court expressly rejected this part of the argument and stated that notwithstanding the express representations made by the association that the first mortgage would survive the association’s foreclosure sale, Ms. Liu bought the property free and clear of that interest.
In Colorado, we have a similar super-priority lien statute, without the “choice” above of which portion of the lien to foreclose. Typically, the association would foreclose on its lien, both the super-priority portion and the remaining balance. Currently, banks will, at a minimum, pay the super-priority portion of the lien in order to not lose their interest in the property (i.e., any subsequent purchaser at the association’s foreclosure sale would take subject to the first mortgage). If courts in Colorado start to reject this practice, it could mean good news for community associations. Commencing a foreclosure upon an unpaid assessment lien, could mean payment in full by the banks in order to protect their interest, rather than just payment of the super-priority portion – which would lead to quicker collection of the debt for associations.
For questions or to discuss how this could impact your association, contact Cornerstone at firstname.lastname@example.org or at 720.279.4351.