Keeping Your Priorities Straight: The District of Columbia’s Split Priority Statute Allows Condominium Assessments To Prime And Potentially Extinguish First Priority Liens

The District of Columbia Court of Appeals recently confirmed the extensive reach of D.C.’s condominium assessment lien statute, D.C. Code § 42-1903.13 (a) (2001), which empowers a condominium association to foreclose its lien when a unit owner becomes six months behind in payment of condo assessments.  See Chase Plaza Condominium v. JPMorgan Chase Bank, N.A., (D.C. Apr. 17, 2014).  What makes the statute so unusual, and what can be a real surprise for unsuspecting secured lenders, is that the statute permits a condo association to foreclose its lien without satisfying prior liens and, therefore, could result in extinguishment of liens that are senior and prior to the condo association’s lien.  This is precisely what happened in Chase Plaza, which now serves as a powerful reminder that secured lenders active in the D.C. condominium market must be vigilant and take steps to protect themselves against liens for unpaid condo fees.

The D.C. Condo Statute Grants Condo Associations Powerful Super- Priority Lien Rights

While many state legislatures have enacted statutory liens for past due condo assessments, the District of Columbia’s statute contains a powerful tool that, in theory, could permit a lucky buyer to purchase a condominium unit for the cost of six months’ worth of condo fees.  Known as a “super-priority” lien, D.C. Code § 42-1903.13 (a) (2001) authorizes a condo association, to the extent of the sum that equals six months’ of past due condominium assessments, to prime senior, preexisting liens—including first priority UCC and purchase money security interests.  While condo fees in excess of the six-month sum are relegated to their ordinary position in the hierarchy of priorities, the statute creates an incentive for the condo association to initiate a foreclosure sale.  Because of its “super priority” status, the condo lien comes before all other liens regardless of its size, thereby relieving the condo association from raising the cash that ordinarily would be necessary to foreclose the senior lien interest(s).  Unless the purchase price is adequate to satisfy the senior liens, the statute extinguishes any and all senior and prior liens.

The D.C. Court of Appeals Upheld an Auction Sale that Extinguished a Six Figure Lien

In Chase Plaza, the borrower, Brian York, purchased his home in 2005 for $280,000 pursuant to a deed of trust that was later assigned to JP Morgan Chase.  By 2008, Mr. York had defaulted on his mortgage and was six months behind on his condo association fees.  The condo association commenced proceedings to foreclose its super-priority lien, asserting a whopping $9,415 in past due condo fees.  The condo association published a sale notice and notified all parties to the deed of trust that the sale would not be subject to the first deed of trust.  JP Morgan and its nominees failed to object.  A lone bidder showed up at the auction and purchased the condominium unit for $10,000.  Despite having a market value of approximately $200,000, after satisfaction of the condo association’s lien, all that was left of the proceeds to be remitted to JP Morgan was $478.  The foreclosure had the effect of extinguishing JP Morgan’s lien as well as a $60,000 second mortgage—both of which were duly recorded against the property.  In other words, the lucky buyer scored a condo for less than ten percent of its value.  In April 2010, when JP Morgan realized what had happened, it brought a complaint against the condo association and the buyer, arguing that the foreclosure should be set aside and its first priority lien should be reinstated.  The D.C. Court of Appeals upheld the sale and lien extinguishment, but remanded the case to determine whether the purchase price was unconscionable.

How Secured Lenders Can Protect Themselves

Chase Plaza serves as a painful reminder to financial institutions and other lenders of both the power that D.C. law gives condo associations and the downside risk of letting condo fees go unpaid, something that virtually every defaulting mortgage borrower does.  There are some things that secured lenders may do to try to protect themselves.  First, they could treat condo association fees the same way many lenders treat insurance and property taxes and require the borrower to escrow at least six months’ worth of condo fees and assessments.  A second option would be to require the borrower to include condo assessments in its monthly loan payment to permit the lender to make direct payments to the condo association.  Additionally, because condo fees and assessments are often subject to change at the condo association’s discretion, to the extent practicable, secured lenders should consider taking steps to stay apprised of the status of condo fee rates and the existence or likelihood of special assessments.

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