D.C. holds Foreclosure of Super-Priority Condo Lien Extinguishes First Mortgage

In 4700 Conn 305 Trust v. Capital One, N.A., the District of Columbia Court of Appeals held that, under pre-2017 law, a Condominium Association could not elect to foreclose its lien for unpaid assessments subject to a first-position deed of trust, where part of the lien enjoyed super-priority, and the remainder being inferior to the deed of trust.  Even though the sale was advertised subject to the deed of trust, the effect of a sale was to extinguish the first deed of trust.   Any attempt to subordinate its super-priority lien, was not permitted by the anti-waiver provisions of D.C. Code § 42-19901.07.  The Court’s analysis was unaffected by amendments made to the statute in 2017 suggesting a sale subject to deed of trust was feasible, noting that such amendment presented its own interpretative challenges.

A copy of the opinion is available here.

Here, Condominium Association recorded a lien for eleven (11) months of unpaid assessments, which amounted to approximately $6,000.  Seeking to enforce the lien, the Association advertised a foreclosure sale as being “subject to the first deed of trust” held by Lender, which was for approximately $308,000.  The successful bidder (“Purchaser”) purchased the Unit at the foreclosure sale for $11,000.   Thereafter, when the Lender sought to foreclose its deed of trust, Purchaser challenged the sale, asserting that the prior foreclosure sale extinguished the Lender’s interest under the deed of trust.  The trial court disagreed, holding that the Purchaser was bound by its agreement (per the notice of sale) to purchase the property subject to the deed of trust.  The Court of Appeals disagreed, holding that the foreclosure of the condominium lien extinguished the Lender’s Deed of Trust.  However, the Court remanded the case for a determination of whether the sale should be invalidated on equitable grounds.

Previously, in Chase Plaza Condo. Ass’n v. JP Morgan Chase Bank, N.A., 98 A.3d 166, 172 (D.C. 2014), the Court recognized the super-priority lien for six-months of unpaid assessments pursuant to D.C. Code § 42-1903.13 (a)(2).  That statute provides District of Columbia condominium associations with a “super-priority lien” over first mortgage lienholders that permits an association to collect up to six months of unpaid condominium assessments by way of foreclosure on a defaulting unit.  Thus, in Chase, the Court held that the effect of the super-priority lien provided that the foreclosing condominium association  “may ‘distribute the proceeds from the foreclosure sale first to satisfy the condominium-assessment lien and then to satisfy any remaining liens in order of lien priority’; and (b) ‘[a]ny liens [including a first mortgage or first deed of trust] that are unsatisfied by the foreclosure-sale proceeds are extinguished, and the foreclosure-sale purchaser acquires free and clear title.’” Op at p. 4 (citing Chase Plaza at 172).

Thereafter, in Liu v. U.S. Bank Nat’l Ass’n, 179 A.3d 871 (D.C. 2018), the Court determined that a condominium association was statutorily prohibited from selling a unit “subject to the first mortgage or first deed of trust” on the unit, while at the same time enforcing its super priority lien.  Id. (citing Liu, at 874).  Notably, the anti-waiver provision under D.C. Code § 42-1901.07 expressly provided that any right under the Condominium Act may not be waived, and that therefore “precludes a condominium association from exercising its super-priority lien while also preserving the full amount of the [first mortgage-holder’s] unpaid lien.”  Id. (citing Liu, at 878).

Thus, here, the Court observed that “if by foreclosing for more than the most recent six months of assessments an association relinquished its super priority lien, this would be tantamount to what the court in Liu held a condominium association may not do expressly or by agreement, namely, subordinate its super-priority lien to a first deed of trust during a foreclosure sale.’”  Op. at 8.  Just as in Liu, the Court determined that this was not permitted.

Finally, the Court rejected the Lender’s argument that a subordinate sale was permitted by amendments to § 42-1903.13, which “require[s] that the foreclosure sale notice expressly state whether the . . . sale is for the six-month priority lien and not subject to the first deed of trust, or for more than the six-month priority lien and subject to the first deed of trust.”  Op. at 9 (citing D.C. Code § 42-1903.13 (c)(4)(B)(ii)). 

Not only did the Court refuse to use subsequent legislation as providing an inference of the intent of the previous statute, but in disregarding the amendment, the Court noted that “[t]he amendment, on its face only a notice provision, presents interpretive challenges of its own as to the Council’s current understanding of whether a super-priority lien can be foreclosed on while preserving junior liens, but it falls well short of demonstrating that under the statute as applied to this 2013 sale, an assessment lien forfeits its super-priority merely because additional arrearages (or fees and costs) are sought in the foreclosure.  We leave construction and application of the amendment to another day.”  Op. at 9.

Thus, vacating the trial court’s order, the Court remanded the case for a determination as to whether the sale should be invalidated on equitable or other grounds.