August 1, 2013
by David R. Edwards
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)
There is a storm brewing in the Vermont lower courts over the extent to which homeowners association dues are allowed super-priority status over a foreclosing mortgagee’s lien. These issues are governed by 27 V.S.A. § 3-116(c), which provides that a homeowners association is afforded super-priority status for association dues for “the six months immediately preceding the institution of an action to enforce the lien.” While this has historically been viewed as a simple calculation of the dues that came due in the six months immediately preceding a foreclosure action, some of the lower courts have begun to accept homeowners association arguments that the extended period of time that the mortgage lien is in foreclosure should be added to their super-priority status.
The score is now 3-2, with the majority of courts holding the six months means six months plus the amounts that accrue while a mortgage is in foreclosure. The minority view holds that the statute is not ambiguous and must be enforced as written; six months means six months. The slim majority have found that the increasingly long time that judicial foreclosures take to get to sale have left HOAs with increasing losses. The majority view is that the priority lien held by the HOA is limited by statute to six months when viewed retroactively from the date of the foreclosure, but the priority can also run past the foreclosure date to the time of sale. Their rationale is that increasing delays are often caused by the lender and the value of the ongoing common area upkeep inures to the mortgagee’s benefit by maintaining resale values.
Thus far, all of the court decisions arise in foreclosure cases initiated by mortgagees. However, mortgagees should consider whether, in foreclosures initiated by an HOA, the priority condominium lien should be limited to the six months prior to the foreclosure. In such cases, there can be no argument that the mortgagee is causing delay in the foreclosure proceeding. Further, a limitation to six months’ dues in such cases would deter unscrupulous associations from jumping quickly into foreclosure proceedings and relying on the mortgagee to pay post-filing assessments, rather than engaging in workouts with homeowners. Finally, mortgagees should look into mortgagor delays that occur during loss mitigation and bankruptcy to limit their exposure to excessive priority claims of associations that accrue post-foreclosure.
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Summer USFN Report.