The District of Columbia Court of Appeals recently held that a first deed of trust on a condominium unit may be extinguished by a foreclosure sale that is held to satisfy six months of unpaid condominium assessments. (Chase Plaza Condominium Association Inc. and Darcy LLC v. JPMorgan Chase Bank N.A., 13-CV-623, 2014 WL 4250949 (D.C. Aug. 28, 2014)).
In July 2005, Brian York purchased a unit at the Charles Plaza Condominium in Washington, D.C., which he financed with a loan for $280,000 secured by a deed of trust on the unit. The lender under the deed of trust was First Financial Services Inc.; Mortgage Electronic Registration Systems Inc. (MERS) was named as the beneficiary and nominee of First Financial. MERS assigned its interest in the deed of trust to Washington Mutual. JPMorgan Chase Bank, N.A. (JPMorgan) acquired the deed of trust when it purchased most of the assets of Washington Mutual in 2008.
Mr. York defaulted in his obligations to pay condominium assessments and in his obligations under the deed of trust. In April 2009 the condominium association (Chase Plaza) recorded a condominium assessment lien against the property. It then began foreclosure proceedings against York, seeking to recover $9,415 — six months of unpaid assessments. Chase Plaza took the normal steps to prosecute the foreclosure. Significantly, its notice of foreclosure specified that the sale would not be subject to the first deed of trust.
Darcy LLC purchased the property at the foreclosure sale for $10,000.
In April 2010, JPMorgan initiated a foreclosure proceeding against York under the first deed of trust. Upon discovering that Chase Plaza had already foreclosed, JPMorgan filed suit against Chase Plaza and Darcy seeking a declaration that JPMorgan held title to the unit. The trial court held that Chase Plaza could not lawfully extinguish the first deed of trust, nullified the foreclosure sale because the sale was not subject to the first deed of trust, and held that JPMorgan held title to the unit.
On appeal, The D.C. Court of Appeals first held that JPMorgan had standing to bring the suit because it held physical possession of the original promissory note, a negotiable instrument indorsed in blank. However, JPMorgan lost the case on the merits.
The D.C. Condominium Act contains two important provisions relating to the priority of unpaid assessments. D.C. Code §42-1903.13(a) provides that a condominium association may impose a lien for unpaid assessments, and the lien shall be prior to all liens except [among other things] the lien of a first mortgage or first deed of trust that is recorded prior to the date that an assessment becomes delinquent.
Under D.C. Code §42-1903.13(a)(2), the lien of unpaid assessments for a six-month period is prior to a first mortgage or first deed of trust — it is a super-lien. The appeals court noted that the effect of these statutes was to bifurcate Chase Plaza’s lien rights: it had a super-lien with respect to six months’ assessments, and a lien subordinate to the deed of trust for the balance of the assessments. Because Chase Plaza foreclosed only for six months of assessments, only the super-lien was at issue.
The appeals court noted that under general principles of foreclosure, “liens with lower priority are extinguished if a valid foreclosure sale yields proceeds insufficient to satisfy a higher-priority lien.” The court stated that the parties agreed that Chase Plaza’s super-priority lien had a higher priority than the JPMorgan first deed of trust. Therefore, the court decided that this general rule applies.
D.C. Code §42-1903.13(a) is based on the Uniform Common Ownership Interest Act and the Uniform Condominium Act, which each include super-priorities for six months of assessments. The D.C. law was enacted to provide condominium associations “the maximum flexibility in collecting unpaid condominium assessments.”
The comments to the uniform laws indicate that the foreclosure of the super-priority lien could extinguish first mortgages or first deeds of trust. They anticipated that mortgagees would protect themselves by requiring that borrowers escrow six months of condominium assessments, which could be used for the payment of unpaid assessments, or that mortgagees could pay the assessments themselves to protect their lien positions. Also, mortgagees can buy properties at foreclosure sales of the unpaid assessments.
The District of Columbia Court of Appeals, therefore, held “that a condominium association can extinguish a first deed of trust by foreclosing on its six-month super-priority lien under D.C. Code §42-1903.13(a)(2).” It reversed the trial court’s grant to JPMorgan of summary judgment and remanded the case to the trial court for further proceedings.
Although the holding of Chase Plaza Condominium Association, Inc. and Darcy, LLC v. JPMorgan Chase Bank, N.A. may seem shocking on its face, it is consistent with the applicable statutory language and the general rules regarding foreclosure sales. Often, the same people who do not make their mortgage payments do not pay their condominium or homeowners association assessments. Frequently, association boards wait for mortgagees to foreclose in order to avoid the costs and expenses attendant to prosecuting foreclosure sales of the relatively small amounts of the unpaid assessments. But as many foreclosures do not occur until borrowers are a year or more behind in their mortgage payments, they may also be a year or more behind in the payment of their assessments.
If the foreclosure sale of a first mortgage were to produce a healthy sale price, the first mortgage would be paid in full and there would be enough money to pay the unpaid assessments. However, if the sale price at a first mortgage foreclosure sale is not enough to pay the mortgage in full, without a super-lien position the entire amount of the unpaid assessment would be lost.
Condominium and homeowner associations lobbied very hard for many years to obtain legislative assistance in the collection of unpaid assessments, and having several months of unpaid assessments given a super-lien was the compromise that was reached.
Approximately 20 states have laws that give some assessments a super-priority lien position. Although condominium and homeowner associations may lose many months of assessments when there is a foreclosure sale of a first mortgage or deed of trust (the purchaser starts with a clean slate and is only liable for assessments that accrue after the foreclosure sale), at least the associations will receive the statutory number of months of super-priority assessments — in D.C., six months.
The twist here is that the foreclosure sale of the subject case was by the condominium association, and not by the first mortgagee. The District of Columbia Court of Appeals held that such a sale could have the effect of terminating the first deed of trust.
Comparable law in Maryland
Maryland has similar provisions in both Real Property Article §11-110 (which is a part of the Maryland Condominium Act) and RP §11B-117 (which is part of the Maryland Homeowners Association Act) by virtue of Chapter 387 of the Laws of Maryland of 2011. However, under Maryland law, four months (and not six months) of unpaid assessments have the super-priority that is the focus of this case.
Also, note that JPMorgan apparently did not get notice of the foreclosure sale. When it began its own foreclosure sale, it was surprised to find that Chase Plaza had foreclosed for the unpaid assessments.
JPMorgan held a promissory note that was indorsed in blank. This made JP Morgan the beneficiary of the first deed of trust. In all likelihood, JP Morgan had not recorded in the land records an assignment of that deed of trust. Therefore, there was no way that a person searching only the public records would have been able to know that JPMorgan was the beneficiary of the first deed of trust at the time of the foreclosure sale regarding the unpaid condominium assessments.
Had JPMorgan recorded an assignment of the deed of trust, there would have been public notice of its interest, and Chase Plaza would have had to have given JPMorgan notice of the foreclosure sale.
Additionally, under Maryland law, if the holder of a first mortgage or deed of trust gives notice of its interest to the governing body of a condominium or homeowners association, the first mortgagee is entitled to notice of the filing of a condominium or homeowners association lien. If the condominium or homeowners association does not give the first mortgagee notice of a lien within 30 days after the filing of the lien among the land records, that portion of the lien does not have priority over the first mortgage or first deed of trust. See RP §11-110(f)(4) and §11B-117(c)(4).
Grounds to set aside sale
It is not likely that the foreclosure sale in this case will be upheld on remand and that JPMorgan’s deed of trust will be extinguished. The D.C. Court of Appeals’ last footnote points out that, on remand, the trial court will have to consider JPMorgan’s claim that the foreclosure sale should be invalidated because the purchase price was unconscionably low.
Darcy LLC bought the condominium unit at the foreclosure sale for $10,000. The first deed of trust was in the original principal amount of $280,000, and there was a second mortgage in the amount of $60,000. While there is no assurance that the unit had a fair market value equal to the two debts ($340,000), a sale price of only 3 percent of that amount is almost certainly low enough to be shocking to the conscience of the court, which provides grounds to set aside the sale. This would clearly be the case in Maryland.
Edward J. Levin is Chair of the Real Estate Practice Group at Gordon Feinblatt LLC. He may be reached at firstname.lastname@example.org or (410) 576-1900. Copyright Edward J. Levin 2014. All rights reserved.