The Power of the Super-Priority Lien
On August 28, 2014, the District of Columbia Court of Appeals held, in Chase Plaza Condominium Association, Inc. v. JPMorgan Chase Bank, N.A., that a condominium association’s foreclosure of its super-priority lien extinguishes all junior liens -- including the first mortgage or first deed of trust on the condominium unit. The super-priority lien consists of the most recent six months of assessments owed by a unit owner to the association. This decision has a significant impact for mortgage lenders and condominium associations in the District of Columbia, as it establishes that a condominium association’s foreclosure on its lien for six months’ worth of assessments can wipe out the first trust holder’s entire security interest in the property. If there are no significant proceeds left after the association’s lien is paid from the proceeds of the sale, the first trust holder’s lien, along with all other liens with lower priority, is extinguished.
The D.C. Condominium Act and the Statutory Lien
Under the D.C. Condominium Act (“Act”), a condominium association has a statutory lien for assessments owed by a unit owner against the unit. Also pursuant to the Act, a condominium association may foreclose on its lien by initiating a non-judicial foreclosure sale in order to enforce its lien. The statutory authority to foreclose on the condominium’s lien may provide substantial relief to an association that suffers financial detriment due to continual delinquency from a non-assessment paying unit owner. It essentially stops the bleeding by allowing the condominium association to sell the property to a new potentially dues-paying owner, and simultaneously recover some, if not all, payments on its condominium lien from the proceeds of the foreclosure sale. Pursuant to Section 42-1903.13(a)(1)(B) of the Act, the association’s lien is prior to any other lien or encumbrance other than a first deed of trust from an institutional lender, recorded before the date on which the assessment sought to be enforced became delinquent. Additionally, Section 42-1903.13(a)(2) of the Act provides that the association’s lien is prior to a first mortgage or first deed of trust described in the section cited above and recorded after March 7, 1991, to the extent of the common expense assessments which would have become due in the absence of acceleration during the six months immediately preceding institution of an action to enforce the lien. It is this provision of the D.C. Condominium Act that creates the super-priority lien for condominium associations.
The basic facts of Chase Plaza Condominium Association, Inc. v. JPMorgan Chase Bank, N.A., involve a unit owner, Brian York, who defaulted on payment of his condominium assessments as well as his mortgage payments. Chase Plaza Condominium Association later foreclosed on its six-month priority lien and the property was sold at the foreclosure sale for $10,000, free and clear of the first trust and any other junior liens. Several months later, when JPMorgan attempted to initiate foreclosure proceedings, it discovered that the property had already been foreclosed upon by Chase Plaza and that its interest may have been extinguished. JPMorgan then brought suit against both Chase Plaza and the foreclosure purchaser, requesting that the court set aside the foreclosure sale and declare that JPMorgan held title to the property.
The first court to hear the case, the trial court, held that foreclosure on a condominium association’s super-priority lien could not extinguish a first deed of trust. While the trial court found that Chase Plaza was statutorily authorized to institute foreclosure proceedings pursuant to the Act, it found the foreclosure sale invalid, reasoning that the property should have been sold subject to JPMorgan’s first deed of trust.
What the Court of Appeals Decided
The D.C. Court of Appeals reversed this ruling, holding that foreclosure of a condominium association’s super-priority lien extinguishes a first deed of trust or first mortgage on the unit.
The D.C. Court of Appeals applied a general principle of foreclosure law in reaching its decision, namely, that liens with lower priority are extinguished if a valid foreclosure sale yields insufficient funds to satisfy a higher priority lien. In other words: valid foreclosure of a senior lien extinguishes all junior liens if there is not enough money left over to satisfy them. The D.C. Court of Appeals described the condominium association’s lien created by D.C. Code § 42-1903.13 as a “split-priority” lien: a lien split into two based on differing levels of priority. As the lien for six months of assessments is higher in priority than the first mortgage, it is the senior lien. Therefore, foreclosure of this senior lien extinguishes all junior liens, including the first mortgage.
The parties in Chase Plaza did not dispute the fact that Chase Plaza’s super-priority lien was higher in priority than JPMorgan’s first deed of trust. However, JPMorgan argued that a foreclosure sale on Chase Plaza’s super-priority lien could not extinguish its first deed of trust. The D.C. Court of Appeals, applying the general principle of foreclosure law and determining the legislative intent of the statute, held that it could.
It must be noted that this is not the end of the story when it comes to the D.C. Court of Appeals’ recent decision. The case was sent back to the trial court to decide JPMorgan’s unresolved claim: whether the foreclosure sale should be invalidated because the purchase price was unconscionably low. Furthermore, the decision may be subject to reversal in the future.
How does the D.C Court of Appeals’ recent ruling affect condominium foreclosure sales?
While it is possible that this decision may be reversed in the future, currently, the decision by the D.C. Court of Appeals in Chase Plaza Condominium Association, Inc. v. JPMorgan Chase Bank, N.A., stands. If a D.C. condominium association has a chronically delinquent owner who owns a unit that is most likely underwater, a condominium foreclosure sale on the association’s super-priority lien may be the solution to stop the bleeding. The association will not recover the full amount of assessments owed, but it will recover some portion of the debt. Additionally, such a foreclosure sale would force the chronically delinquent owner out of the unit, and a new owner would be responsible for payment of assessments after the sale.
Alternatively, since most lenders are well aware of the D.C. Court of Appeals’ recent ruling, it is very likely that the first trust holder will attempt to pay off the super-priority lien in order to protect its interest. Thus, the association may end up recovering six months’ worth of assessments without even having to move forward with the foreclosure sale.