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District of Columbia: Another Court of Appeals Decision affecting Foreclosures of Condominium Liens

Posted By USFN, Wednesday, October 17, 2018
Updated: Tuesday, October 16, 2018

October 17, 2018 and November 13, 2018

by Tracy Buck and Sara Tussey
Rosenberg and Associates, LLC — USFN Member (District of Columbia)

On September 13, 2018 the District of Columbia Court of Appeals rendered a decision in 4700 Conn 305 Trust v. Capital One, N.A. in relation to foreclosures of condominium liens. The court considered the issue as to whether a condominium lien covering a period in excess of six months’ worth of outstanding assessments is entitled to super-priority status.

Under D.C. Code § 42-1903.13, condominium associations have a “super-priority lien” over first mortgage lienholders to the extent of six months of the unpaid condominium assessments immediately preceding acceleration. A super-priority lien is superior to all liens, including a first mortgage or deed of trust. Any unpaid condominium assessments beyond a super-priority lien are lower in priority to a first mortgage or deed of trust (the “junior condo lien”).

Some Appellate and Statutory History
In 2014, in Chase Plaza Condo. Ass’n, Inc. v. JPMorgan Chase Bank, N.A., the D.C. Court of Appeals held that an association’s foreclosure of its super-priority lien extinguishes a first deed of trust. This decision was based on the common law principle that foreclosure of a senior lien extinguishes all junior liens where the proceeds from a foreclosure sale are insufficient to satisfy a junior lien. The effect of Chase Plaza was that lenders were henceforth recommended to satisfy an association’s super-priority lien in advance of a condominium foreclosure sale to ensure that the lender’s first mortgage’s lien priority was preserved. If a super-priority lien was satisfied, the association could proceed with its sale; however, its sale would be subject to the lender’s first deed of trust.

In 2017 the D.C. condominium law was amended to require that Notice of a Condominium Foreclosure had to be sent to all junior lienholders of record (including lenders holding a first deed of trust) and that the notice must expressly state whether the association was foreclosing on its super-priority lien or junior condo lien. In March 2018, in Liu v. U.S. Bank N.A., the D.C. Court of Appeals held that an association could not waive its super-priority lien status. In doing so, the court held that an association could not foreclose on its super-priority lien plus advertise and hold the sale out to be subject to a first deed of trust. As such, lenders were thereafter recommended to not rely on advertisements or notices of sale stating that a condominium foreclosure would be subject to any first deed of trust. If the association stated that a condominium foreclosure was to be subject to a first deed of trust, lenders were still advised to satisfy the super-priority lien. Yet, in the Liu decision, the only outstanding assessments were for the most recent six months, and accordingly, the association could only foreclose on its super-priority lien because that was all it had.

More Recently from the Appellate Court
The D.C. Court of Appeals rendered yet another decision regarding condominium foreclosures. In 4700 Conn 305 Trust v. Capital One, N.A. (Sept. 13, 2018), the court held that where an association was foreclosing on a condominium lien for an amount greater than six months of assessments owed, the super-priority lien was included. The court did not consider the impact that this decision might have on condominium foreclosures that occurred prior to the 2017 amendment to the D.C. condominium law. Before the amendment, associations were not required by statute to send a Notice of Foreclosure Sale to any junior lienholders or holders of a first mortgage or deed of trust. Moreover, associations were not required to state within its notice the specific split condominium lien that the association was foreclosing on.

Prior to the 2017 statutory amendment, associations often foreclosed on the entire condominium lien without providing notice to junior lienholders. Based on 4700 Conn 305 Trust, those foreclosures of entire condominium liens included the association’s super-priority lien, effectively extinguishing first mortgages without any notice to its lienholders. While the potential impact of this holding is unsettling, the court left open the possibility for allegations to be raised by lenders based on equitable or contractual principles. For example, 4700 Conn 305 Trust has left lenders with recourse in claiming that those prior foreclosure sales of super-priority liens could be deemed: (1) invalid due to unconscionable sale prices; and (2) invalid due to the unconstitutionality of the District’s condominium law at that time due to the lack of notice requirement to lenders. The appellate court has left these arguments untouched as of yet; and, thus, that is what lenders are left with to defend their mortgage’s existence in these instances.

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