February 4, 2014
by Brian S. Sommer
RCO Legal, P.S.
USFN Member (Alaska, Oregon, Washington)
On April 23, 2013, Washington’s governor signed into law Senate Bill 5541. The bill provides a one-word amendment to RCW 6.23.010, Washington’s redemption statute, clarifying who may redeem a property sold at completion of a judicial foreclosure. The relevant portion of the prior law, enacted in 1899, stated that only a lienholder “subsequent in time” to the foreclosed lien qualifies as a redemptioner. Under standard origination practices, a mortgage would most often arise prior in time to a condominium association (COA) super-priority lien. The amendment took effect July 28, 2013 and clarifies that a lienholder “subsequent in priority” can redeem.
The “subsequent in time” phrase was interpreted in a 2012 appellate case, Summerhill Village Homeowners Association v. Roughley, to bar extinguished mortgage lenders from redeeming if foreclosed judicially by a COA super-priority lien. 270 P.3d 639 (Wash. App. 2012), amended by and reconsideration denied by 2012 Wash. App. LEXIS 1579 (July 6, 2012). Washington law, RCW 64.34.364(3), provides a COA with a super-priority lien senior to each mortgage for an amount equal to six months of assessments. In Summerhill, the mortgagee did not defend the COA collection lawsuit or pay the six-month super-priority lien prior to the COA sheriff sale. A third party purchased the condominium at the sheriff sale for $10,302, and the $191,800 mortgage was extinguished. The mortgagee argued that “subsequent in time” means “subsequent in priority.” The court held that the statute is unambiguous and ruled in favor of the sheriff sale purchaser. The court reasoned: “The legislature created the super-priority lien and did not amend the redemption statute. There is no sign of legislative confusion as to the difference between a lien subsequent in time and a lien prior in time but junior in priority.” The mortgagee in Summerhill did not appeal to the Washington Supreme Court.
Following Summerhill, the same Court of Appeals division published BAC Home Loan Servicing, LP v. Fulbright, 298 P.3d 779 (Wash. App. Apr. 8, 2013), review granted, No. 88853-1 (Sep. 4, 2013). Summerhill and Fulbright have identical fact patterns and statutes in question, but the mortgagee in Fulbright raised additional legal arguments not raised in Summerhill. Nevertheless, the Court of Appeals again held that the mortgagee extinguished by the COA super-priority lien was not a qualified redemptioner. The appellate court stated that the opinion was written to “amplify” Summerhill.
The Summerhill and Fulbright holdings created a cottage industry where third parties purchased condominiums at sheriff sales for a fraction of their value and free from an extinguished lienholder’s right to redeem. Besides the financial losses suffered by lienholders, the holdings exposed foreclosed borrowers unable to seek bankruptcy protection to deficiency judgments. In Washington, a foreclosure by a senior lienholder does not preclude the extinguished junior lienholder from suing on the note. See Beal Bank, SSB v. Sarich, 167 P.3d 555, 558 (Wash. 2007).
On September 4, 2013, the Washington Supreme Court granted Bank of America’s petition for review of Fulbright. When reviewing Fulbright, the Court of Appeals was not presented with the issue of retroactive application of SB 5541 because Fulbright was published on April 8, 2013, while the governor signed SB 5541 into law on April 23, 2013. However, the issue of retroactivity of SB 5541 is one of three issues presented by Bank of America in the petition for review accepted by the Supreme Court. In all likelihood, Fulbright will supersede the Summerhill reasoning. An opinion is expected in summer 2014.
Generally, statutory amendments apply prospectively. An amendment may apply retroactively when curative or remedial. However, retroactive application cannot supplant vested, contractual, or constitutional rights. A gray issue raised by enterprising sheriff sale purchasers is that SB 5541, which took effect on July 28, 2013, only applies to sheriff sales that occurred after July 28, 2013. Typically, a COA redemption period is one year from the sheriff sale date. Sheriff sale purchasers assert that the pool of redemptioners is a vested right established on the date of the sheriff’s sale. In comparison, the extinguished mortgagee would argue that SB 5541 was intended to apply retroactively, or the amendment has “immediate prospective application” and applies to the unexpired part of the redemption period. Severson v. Penski, 677 P.2d 198 (Wash. App. 1984). This matter was recently argued at the trial court level, and the trial court judge ruled in favor of the mortgagee. The sheriff sale purchaser plans to appeal.
Until the Supreme Court in Fulbright has the final word and the untold number of COA sheriff sales that occurred prior to July 28, 2013 run their course, uncertainties remain for lienholders.
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