Daily Development for
Wednesday, April 19 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

CONDOMINIUM ASSESSMENTS; LIEN PRIORITY: A consolidation and extension agreement which merges a first lien and a subsequent mortgage creates a mortgage that continues to have "first lien" status as against liens of homeowner's associations that have statutory priority against all but first liens. Dime Savings Bank of New York, F.S.B. v. Levy, 615 N.Y.S.2d 218 (Sup. Ct. 1994). This potentially important decision deals with New York Real Property Law Section 399-z, which, like statutes in many jurisdictions, gives condominium homeowners' associations "superpriority" liens to enforce common charges. There is an exception for first lien mortgages, which retain priority over subsequently arising homeowner's liens. Here, prior to any association lien arising, the unit owner borrowed on the basis of a second lien mortgage from the same lender as the first lien mortgage. Later, still prior to the association lien arising, the first lien lender consolidated the first and second mortgages into a consolidated single mortgage and extended the term.

An earlier New York decision in a separate case, Societe Generale v. Charles and Company Acquisition, Inc., 597 N.Y.S.2d 1004, had held that the consolidated debt does not by the consolidation process become a first lien mortgage with priority over association liens. The consolidated debt would have a "bifurcated" priority. This case, however, rejects the reasoning of Societe Generale, arguing that the result in that case would frustrate condominium homeowners attempting to borrow on the security of the equity in their condominium units. Lenders, apparently, would be uncertain about the amount of equity available for security, since the equity could be eroded by subsequently arising association liens.

Comment: The answer to the court's concern is, of course, may be that the balance in question has already been struck by the statute, and the balance is in favor of protecting the association from bearing the risk of defaults by unit owners that wipe out association maintenance lien claims. Note that the court's concern about the first lien lender being "shut out" from lending further on the property does not extend to other lenders who are not first lien lenders. Such lenders continue to risk junior priority, leaving the first lien lender with a quasi-monopoly in terms of lending opportunities with the borrower.

It will be interesting to see how far the competing interests at stake take this case and this issue. The issue is not just a condominium issue, of course. Many common interest ownership statutes, applicable to subdivisions and planned unit developments, also have "superpriority" lien provisions.

Then there is the even more provocative issue for the editor - does the court suggest that a consolidation of mortgages A (a first mortgage) and B (a later one) that increases the secured debt beyond the amount originally secured by A would 100% "prime" junior lienholders arising after A but before B? As many of you know, this is a question that is not fully resolved. There is some authority that would support such a result, at least where mortgage A provides that it can be renewed or revised. It's like an "open end" future advances clause. What are DIRT readers' thoughts on this one?

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260. Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.