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Connecticut: State Supreme Court Ruling regarding Foreclosures Filed by Condominium Associations

Posted By USFN, Tuesday, August 02, 2016
Updated: Tuesday, July 19, 2016

August 2, 2016

by Jennifer M. McGrath
Hunt Leibert – USFN Member (Connecticut)

Under the Common Interest Ownership Act (CIOA), C.G.S. §§ 47-200, et seq., condominium associations have a statutory lien on every unit for common charges and fines with a nine-month priority over recorded security interests. While an association is required to give mortgagees notice prior to commencing a foreclosure on a unit, it may rely on the land records to determine the identity of mortgagees and, in cases where assignments are not timely recorded, a secured party may not have notice and could miss its law day in the event that the foreclosure goes to judgment. Consequently, liens for common charges have long been a concern for mortgagees and loan servicers, but a recent decision by the Connecticut Supreme Court has provided new grounds to challenge an association’s foreclosure action that can result in dismissal of the case.

Under CIOA, a foreclosure of common charges cannot be commenced without certain conditions precedent, including a vote by the executive board to commence the foreclosure or (in accordance with an amendment to the statute effective July 1, 2010) the option to adopt a standard foreclosure policy. C.G.S. § 47-258(m). This prerequisite was at issue in The Neighborhood Association, Inc. v. Limberger, 321 Conn. 29 (Apr. 26, 2016).

In Limberger, the plaintiff commenced a foreclosure for unpaid common charges; the defendant moved to dismiss, contending that the court lacked subject matter jurisdiction because the plaintiff failed to either vote at executive session to commence the foreclosure, or to adopt a standard foreclosure policy in accordance with CIOA procedures. In opposition, the plaintiff asserted that its executive board had in fact adopted a “standard collection policy” pursuant to CIOA. The association categorized the policy as an “internal business operating procedure,” claiming that it is not subject to the stringent requirements of notice and opportunity to comment that attach to rules adopted by an association.

CIOA does not define an internal business operating procedure. This prompted the Court to examine statutory construction rules, extra textual sources, and the legislative intent to determine whether the foreclosure policy constituted a rule. The Court reasoned that “internal business operating procedures” connotes daily business activities and not policies that impact unit owners’ rights and obligations. Accordingly, the Court held that “[g]iven the real and substantial effect that such matters could have on the circumstances under which unit owners will incur financial obligations and potentially lose their residence, we cannot reasonably construe the policy as anything but a rule.” Id. at 42. The association was, therefore, required to provide notice of the proposed foreclosure policy to all unit owners and an opportunity to comment before the rule was adopted. Having failed to comply with CIOA procedure, the plaintiff could not prove a condition precedent to commencing its foreclosure, and the Supreme Court remanded the matter with instructions to dismiss the case.

Counsel for lenders and servicers should be mindful that liens for delinquent common charges are creatures of statute. Similar to a mechanic’s lien foreclosure, an association’s failure to comply with CIOA’s statutory requirements is a jurisdictional defect that gives defendants grounds to seek dismissal for lack of subject matter jurisdiction. The ruling in Limberger also poses the question of what the decision means for cases filed since the 2010 amendment to C.G.S. § 47-258(m) where plaintiffs have made the same error in adopting foreclosure policies.

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