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District of Columbia: Ninth Circuit’s Bourne Valley Ruling to Spark Changes in D.C. Condominium Laws?

Posted By USFN, Wednesday, February 1, 2017
Updated: Friday, January 27, 2017

February 1, 2017

by Kenneth Savitz and Tracy Buck
Rosenberg & Associates, LLC
USFN Member (District of Columbia)

Pre-2010
Prior to 2010, mortgage foreclosure proceedings in the District of Columbia were rarely interrupted by competing enforcement of condominium assessments. D.C. Code § 42-1903.13 stated that condominium assessments were subordinate to a “[first] deed of trust”, except for “the [six] months immediately preceding instruction of an action to enforce the lien.”

Local real estate practitioners unequivocally interpreted “an action to enforce the lien” to be the “[first] deed of trust” holder’s foreclosure sale. Upon completing a foreclosure sale, the first deed of trust holder would tender funds to the condominium association to satisfy assessments owed for the six months prior to the sale. The deed of trust holder would then apply remaining proceeds from the sale to the underlying debt, and any surplus would flow in order of priority to junior lienholders — including the condominium association for remaining assessments owed.

Condominium associations rarely initiated foreclosure because the successful bidder would take ownership subject to a first deed of trust. Only under unique circumstances would condominium associations take action otherwise (i.e., sufficient equity for full recovery or recalcitrant owners). As a result, condominiums simply awaited first deed of trust foreclosures to recover outstanding assessments.

2010-2016
Unexpectedly, in January 2010 the condominium foreclosure landscape shifted when Chase Plaza Condominium Association, Inc. (Chase Plaza) applied a new reading to D.C. Code § 42-1903.13, whereby it interpreted “the lien” to be the condominium association’s assessment lien. According to Chase Plaza’s interpretation, a condominium association held a “super-priority” lien for the most recent six months of assessments and could institute its own “action to enforce the lien.” Following notice of a proposed sale, in which Chase Plaza stated unequivocally that it intended to sell the unit unencumbered, Chase Plaza sold the unit for $10,000. At the time of the sale, the unit was assessed for taxation purposes at $287,800.

In August 2010 Chase Bank (the first deed of trust holder) filed suit in the D.C. Superior Court to have its first deed of trust interest declared continuing and enforceable. Following partial summary judgment in the Bank’s favor, Chase Plaza timely appealed. On August 28, 2014, relying heavily on similar rulings in Nevada and Washington State, the D.C. Court of Appeals issued its opinion declaring that D.C. Code § 42-1903.13 established a “split-priority” lien for condominium assessments, with “super-priority” status given to the most recent six months of assessments owed, and holding that the condominium association may foreclose solely the “super-priority” lien — thereby extinguishing all lower-priority liens, including the first deed of trust. Chase Plaza Condominium Association, Inc. v. JPMorgan Chase Bank, N.A., 98 A.3d 166 (D.C. Cir. 2014). Despite upholding Chase Plaza’s sale, the Court of Appeals noted an interesting question: whether “the lack of a notice requirement renders D.C. Code § 42-1903.13 [ ] unconstitutional either facially or as applied to JPMorgan in this case.” Id. at n.7. As the Bank had not raised the argument, the Court of Appeals did not have reason to fully address it.

Since that ruling, D.C. condominium associations have scheduled “super-priority” lien sales with regularity. To protect its interest, the deed of trust holder is required to pay the most recent six months of assessments, plus all associated attorneys’ fees and costs. However, if the deed of trust holder fails to maintain the ongoing monthly assessments, a new “super-priority” lien will arise six months later. In an effort to prevent future sales (and the accumulation of sometimes exorbitant attorneys’ fees), many lenders seek the assistance of the D.C. Superior Court, although there had been few, if any, challenges to the constitutionality of D.C. Code § 42-1903.13.

Summer 2016 and Onward
The U.S. Court of Appeals for the Ninth Circuit issued its opinion in Bourne Valley Court Trust v. Wells Fargo Bank, NA, 832 F.3d 1154 (Aug. 12, 2016). The court held that Nevada’s opt-in notice statute was facially unconstitutional for violating the holder’s due process rights. While Nevada’s statute at least considered notice to a deed of trust holder, D.C. Code § 42-1903.13 only requires notice to the homeowner and to the mayor. The statute is devoid of any notice requirement for the deed of trust holder, regardless of its status on record.

Following the Bourne Valley ruling, numerous lenders have sought to challenge condominium association sales as unconstitutional. At least one such case (Bayview Loan Servicing, LLC v. 1390 Kenyon St. Corp., No. 16-CV-600) is currently pending before the D.C. Court of Appeals, and the parties are briefing the issue in anticipation of a ruling in spring 2017. Deed of trust holders and servicers should remain alert for upcoming rulings, as the application of D.C. Code § 42-1903.13 could shift dramatically.

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Note for consideration of the USFN Award of Excellence: This article is not a "Feature."

 

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