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Daily Development for Tuesday, June 24,
2003
by: Patrick A. Randolph,
Jr.
Elmer F. Pierson Professor of
Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper
Martin
Kansas City, Missouri
dirt@umkc.edu
CONDOMINIUMS; LIENS; FORECLOSURE: Bizarre
Virginia
decision concludes that
statutory provision that association lien
foreclosure is "subject to" the lien of an institutional first
mortgagee
means that the foreclosure
proceeds must first be applied to pay down the
institutional first mortgage before they can be applied to satisfy
the lien.
Board of Directors v. Wachovia Bank, 2003 WL 21308907
(6/6/03)
This incredible decision will almost certainly be
corrected by statute, and
can thereafter
be filed simply as additional support for the editor's thesis
that more transactions-savvy lawyers need to be
appointed to our nation's
appellate
courts. There are just too many appellate judges, former
prosecutors and tort lawyers, who slept their way
through property class
dreaming of their
future careers as "courtroom gladiators."
The Virginia statute, consistent with the approach of
the Uniform
Condominium Act and Uniform
Common Interest Ownership Act,
provides
that association liens have priority as of the time of the
recording of the declaration except as to a small
class of protected
interests - notably
(for our purposes) the lien of a first mortgage or deed
of trust held by an institutional lender. (The
uniform acts to not stipulate
that the
loan must be that of an institutional lender).
It appears from the case that Virginia permits private
foreclosure of
condominium liens.
In this case, as likely has been done thousands of
times under these statutes nationwide, the
association noticed a
foreclosure sale
"subject to all existing liens." It notified Bank of the
foreclosure. Bank had a first deed of trust
recorded in 1996, apparently
after the
filing of the association's declaration. The association
intended
that the buyer at foreclosure
would have to contend with the first
mortgagee upon purchasing the interest.
The bank filed a motion to enjoin the sale, seeking a
declaration that the
association had an
obligation to apply the proceeds of the sale first to
satisfaction of the Association's lien.
Amazingly, the Supreme Court of Virginia agreed with
the lender's
position, concluding that
the language of the Virginia statute should be
read to compel the application of the association's foreclosure
proceeds
first to satisfaction of the
bank lien. Even more amazing is the fact that
the court says nothing about whether this sale would
then be viewed as
the foreclosure of the
bank's lien, and whether the bank has any
responsibility to comply with the provisions of law or contract
to
accelerate its lien claim and
establish a default prior to the foreclosure
that began as an association lien foreclosure.
The court notes that the statute itself says nothing
about disbursement of
proceeds from lien
foreclosures. Instead, the court relies entirely upon
language in the Virginia Condominium statute that
states that the lien of
a condominium
statute shall be "subject to" the institutional first lien.
The court's rationale that good statutory construction
compels the result
it reaches is derived
from its view of the purposes that the legislature had
in mind when it prioritized first lien mortgages in
the way that it did.
The analysis is so
contrary to established American lien foreclosure
practices that you have to read it to believe
it. So here it is:
"[W]e conclude that the
General Assembly intended to balance
the interests of the holder of a first
deed of trust and those of a
unit owners' association by providing . .
. that the satisfaction of
the institutional lender's first mortgage
. . . be a term of the public
sale of an individual condominium unit by
the unit owners'
association when seeking to satisfy its inferior lien for
unpaid
assessments.
A contrary result permitting
the sale proceeds to be used to satisfy
the lien of the unit owners' association,
other lesser
encumbrances, and potentially disbursing the residue of the
sale
proceeds to
the defaulting former owner, without applying those
proceeds to satisfy the
first deed of trust, would put the
institutional lender holding the first
deed of trust at a serious
disadvantage with respect o its ability to
protect its security
interest in the condominium unit.
The purchaser and new owner
of the condominium unit would have no
obligation to pay the
lender the sums unpaid on the lender's
first deed of trust. The
lender would be placed at risk that the
new owner might permit
damages to the unit before the lender
could foreclose. The other
detrimental possibilities are numerous and
of great potential
consequence, such as the prospect of
inadequate fire insurance
coverage in thee vent of unexpected fire
damage to the unit.
Additionally, the original owner would no
longer own the unit
and, thus, would have less incentive to
satisfy the debt secured by
the lender's deed of trust. . .
"
The dissent adequately refutes the claims made in the
above paragraph,
as could any law student
who had completed a course in real estate
finance. It explains that the "conflict" in the statutory
language that the
majority uses as its
touchstone is entirely made up, and that the statutory
analysis is specious and simply a cover for a policy
based determination
that ought to be left
to the legislature. As to the senior lender's interest,
the dissent points out that the purchaser at lien
foreclosure obviously has
the interest in
protecting its investment by keeping up on the loan, while
the bank still has the old lender on the hook, thus
enhancing the liklihood
of payment.
The dissent doesn't address the fire insurance argument, but
anyone with knowledge of loan instruments knows that
even the most
basic mortgage, coupled
with the standard lender's policy, gives the
lender the opportunity to obtain notice of a in insurance lapse and
the
opportunity to advance monies secured
by the mortgage to cure such
lapse and
prevent any harm to the mortgagee's interest.
The dissent mentions, in a footnote, that the bank's
lien here was a home
equity line of
credit. The statute says "first mortgages or deeds of
trust"
so it appears that the original
purchase money lien was paid off. But
even worse would be the conclusion that even junior equity lenders
are
treated as "first mortgagees" simply
by being recorded prior to the
condominium lien default, even if they are junior to the purchase
money
paper. The court is unclear
on this point.
Comment 1: One of the many things wrong with the
opinion, as noted, is
the entire
avoidance of the impact of this decision on future practice.
Here are a few of the unanswered
questions:
1. If, as it appears, the condominium lien
foreclosure is a private action,
does
this opinion create a duty to notify the senior institutional
lender,
even if there is no contract
right?
2. If the senior lien has not been accelerated,
is there still a duty to apply
the
proceeds to pay off amounts not yet due?
3. Most importantly, is this in fact a
foreclosure of the senior lien, or
does
the senior lien continue to exist, with the right to continually
suck
up any proceeds from any lien
foreclosure proceeding in the future?
Comment 2: Perhaps the above speculation will all be
moot, since it
appears unlikely there
will ever again be a condominium lien foreclosure
in Virginia while the court's ruling stands.
Would you?
This decision is so bad for condominiums, and by
extension for lenders
with security
interests in them, one must wonder why Wachovia Bank
paid a lawyer to take this position on its
behalf. Does Wachovia have no
lien
interests in any other condominium units in Virginia? If it does,
this
decision, if it stands, will cost
the Bank far more than it gains.
Comment 3: Although this is clearly a policy based
reading of the statute,
it should be
noted that interpreting the words "subject to" to mean
"conditioned on prior payment of" could conceivably
alter the
construction of thousands of
statutes around the country whose drafters
intended the more traditional result indicating that the
foreclosure sale
would lead to a title
encumbered by the prior interest.
Comment 4: So far as the editor can tell, until this
case is either reheard
or reversed by
legislation, condominium lien collections in Virginia will
be at a dead stop. When everything gets cleaned
up, unpaid liens in
many cases will have
reached the point of uncollectability in many cases
because of the size, and the impact on the ability of
associations to
conduct their maintenance
duties will be put in jeopardy. As Virginians
are learning in more ways than one: when it
rains, it pours.
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