Update to DC Condo Super Priority Case Law

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 condominium foreclosures in D.C. 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 any first mortgage or deed of trust. Any unpaid assessments beyond a Super-Priority Lien are lower in priority to a first mortgage or deed of trust (the “Junior Condo Lien”).

In 2014, under Chase Plaza Condo. Ass’n v. JPMorgan Chase Bank, N.A., the D.C. Court of Appeals held that an association’s foreclosure of its Super-Priority Lien wiped out a first deed of trust when the proceeds from the foreclosure were insufficient to satisfy the 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 that decision was that lenders were henceforth recommended to satisfy an association’s Super-Priority Lien in advance of a condominium foreclosure sale to ensure that their first mortgage’s lien priority was preserved. If a Super-Priority Lien was satisfied, the association could proceed with its sale, but it would be subject to the lender’s first deed of trust. In 2017, the D.C. Condo Law was amended such that Notice of a Condo Foreclosure had to be sent to all junior lienholders of record, including lenders holding a first deed of trust, and that 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 AND foreclose on its Super-Priority Lien. In doing so, the Court held that an association could not foreclose on its Super-Priority Lien AND 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 would 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 6 months, and accordingly, the association could only foreclose on its Super-Priority Lien because that is all it had.

Within the past week, the D.C. Court of Appeals rendered yet another decision regarding condominium foreclosures. In 4700 Conn 305 Trust v. Capital One, N.A., the Court held that where an association was foreclosing on a condominium lien for an amount greater than its Super-Priority Lien, the super-priority lien was included. Since the 2017 amendment to the D.C. Condo Law, condominium foreclosures going forward will always alert lenders as to whether their first deeds of trust are at risk based on which split condominium lien the association is foreclosing on as stated within its Notice of Sale. However, prior to the 2017 amendment, associations often foreclosed on the entire condominium lien. Based on this recent Court of Appeals decision, when associations foreclosed on their entire condominium lien pre-2017, they were effectively foreclosing on their Super-Priority Lien. If the Super-Priority Lien was not satisfied prior to those sales, lenders’ first deeds of trust would have been wiped out. Moreover, pre-2017, the D.C. Condo Law did not require that Notice of Condo Foreclosure Sales be sent to any holders of a first deed of trust or junior lienholders. Thus, many lenders may not have even known that their deeds of trust were at risk of being extinguished. While this is unsettling, the Court has left open the possibility of arguments based on equitable or contractual principals. For example, this decision has left lenders with recourse in arguing that those prior foreclosure sales could be deemed a) invalid due to unconscionable sale prices, and b) invalid due to the unconstitutionality of the D.C. Condo Law at that time due to the lack of notice requirement to lenders. The D.C. Court of Appeals 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.

If you have questions or concerns regarding this recent case and how it affects your loans including the constitutionality of this process, please contact us at tracy.buck@rosenberg-assoc.com or x2233; Sara Tussey at sara.tussey@rosenberg-assoc.com at x2207 or our general mailbox at info@rosenberg-assoc.com to communicate with one of our partners.