Consumer Finance Insights
March 2, 2015

Three Legal Developments Regarding Condo and Homeowners’ Association “Super-Priority” Liens

Last September we wrote about an emerging legal trend permitting condo and homeowners’ associations to extinguish lenders’ first mortgages by foreclosing on statutory “super-priority” liens that arise from unpaid association fees.  Since that time, three new judicial developments have emerged that lenders should be aware of when guarding their mortgage liens against super-priority liens.

First, Nevada’s federal district court held that the U.S. Constitution’s Supremacy Clause bars associations from using state super-priority statutes to extinguish mortgages “insured by a federal agency under the [Federal Housing Administration (FHA)] insurance program.”  Citing Eighth and Ninth Circuit precedent, and the federal program’s aim of expanding homeownership to the less affluent, the court ruled that state laws cannot “impede or condition the implementation of federal policies or programs” or “limit[] the effectiveness of the remedies available to the United States.”  Therefore, the state super-priority statute “cannot operate to undermine the federal agency’s ability to obtain title after foreclosure and resell the property.”  As a result, the association’s claims for quiet title and slander of title were dismissed with prejudice, despite the association’s completed foreclosure under the state super-priority statute.

Second, the Massachusetts Appeals Court held that Massachusetts’s super-priority statute, M.G.L.A c. 183A, Section 6, does not allow associations to have multiple super-priority liens at the same time.  The Massachusetts statute provides associations a super-priority lien for the fees unpaid during the six months prior to commencement of the action to enforce the super-priority lien.  In this case, the association kept filing new actions to enforce new super-priority liens every time another six months passed without association fees being paid.  The court ruled that the association was only permitted to have one super-priority lien for the first six-month period of unpaid fees because to hold otherwise would render the statute’s six-month limit “superfluous.”  Further, the court noted that the Massachusetts statute and the model Uniform Condominium Act Section 3-116 were intended to equitably balance “the need to enforce collection of unpaid association fees” with the “obvious necessity for protecting the priority of the security interests of mortgage lenders.”

Third, a Nevada federal district court held that if an association’s super-priority foreclosure deed recites in general terms that the association complied with the super-priority statute’s notice requirements, then the lender is “required to come forward with evidence that a genuine issue of fact remains for trial as to notice.”  Bourne Valley Court Trust v. Wells Fargo Bank, N.A., 2015 WL 301063, at *4 (D. Nev. Jan. 23, 2015), appeal docketed, No. 15-15233 (9th Cir. Feb. 9, 2015).  There, summary judgment was granted in favor of the association against the lender because the lender failed to offer evidence either that it did not receive the required notice or that there were “other procedural irregularities” which prevented the lender from paying off the super-priority lien in time to avert the association’s foreclosure.  Thus, being able to offer evidence regarding lack of notice is critical to success on that issue.

Lenders should keep these legal developments in mind when guarding their mortgage liens against association super-priority liens.