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April 15, 2013
Court Of Appeals Again Holds That Lenders Cannot Redeem Realty That Is Sold At Public Auction As A Result Of Delinquent Condominium Assessment Liens; Legislative Fix Pending
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Last spring, Division One of the Washington Court of Appeals held in Summerhill Vill. Homeowners Ass’n v. Roughley, ___ Wn.App. ___, 289 P.3d 645 (2012) that lienholders with a lien attaching prior in time, but junior in priority, to a foreclosed super-priority lien for condominium assessments are not entitled to redeem the property following the associated sheriff’s sale.  In the recent case of BAC Home Loans Servicing, LP v. Fulbright, 67608-3-I, 2013 WL 1415972 (Wash. Ct. App. Apr. 8, 2013), Division One of the Washington Court of Appeals rejected arguments against the Summerhill decision by holding that super-priority condominium assessment liens attach to the property at the time they become due rather than the recording date of the associated condominium declaration.  As such, the secured mortgage lender in Fulbright was denied the opportunity to redeem the foreclosed property after it was sold at public auction due to delinquent condominium assessment liens because its mortgage was recorded prior to the time the lien for condominium assessments attached to the property.

In general, real property sold at a sheriff’s sale in Washington is subject to a statutory right of redemption.  This means that certain specified parties (such as junior lienholders or mortgage lenders with a security interest in the property) may redeem or “buy back” the property from the purchaser at a sheriff’s sale by paying the purchaser the bid amount plus other sums.  Washington’s Redemption Statute, Chapter 6.23 RCW, limits this right of redemption to two kinds of parties and their successors in interest: (1) the judgment debtor; and (2) creditors having a lien in the property sold that is subsequent in time to the lien under which the property was sold.  RCW 6.23.010(1) (emphasis added).  The clear intent of the statute is to protect parties that have an interest in the foreclosed real property that is junior to the foreclosed interest that led to the sheriff’s sale.

Washington’s redemption statute, which has been in effect since 1897, is structured on the basic lien priority rule of “first in time, first in right.”  That is, the first lien perfected in a property is generally given priority over subsequently-perfected liens.  The redemption statute does not account for the more modern practice of granting certain classes of liens “super-priority,” which means these liens have priority over earlier-perfected liens.  For example, condominium assessment liens are granted super-priority for up to six months of assessments under RCW 64.34.364(3), and such liens can potentially foreclose out a prior recorded mortgage.  Sewer liens and real property tax liens are also granted super-priority in Washington.

In the Summerhill and Fulbright cases, lenders’ mortgages were foreclosed out by super-priority condominium assessment liens, and the secured lenders failed to cure the assessment liens before the associated sheriff’s sales.  The result of this was that the foreclosed properties in these cases were sold at sheriff’s sales free and clear of the mortgage lenders’ liens, thereby divesting the lenders’ of their interest in the properties.  Although the mortgage lenders attempted to redeem the properties post-sale in order to recoup their interest in the properties, the trial courts held that they were not authorized redemptioners under RCW 6.23.010(1)(b) because their mortgages were recorded prior in time to the foreclosed assessment liens. 

The mortgage lender in Summerhill argued that the phrase “subsequent in time” in RCW 6.23.010(1)(b) was intended to mean “subsequent in priority.”  It also argued that to rule otherwise would lead to the absurd result of allowing only certain junior lienholders to redeem without having any logical basis for the distinction.  Division One of the Washington Court of Appeals held that the statute was unambiguous in its use of the word “time” instead of “priority,” and that only lienholders with an interest in the property that attached subsequent in time to the assessment lien could redeem, regardless of the arguably illogical effect.

In Fulbright, the secured lender argued that the assessment lien did attach prior in time to the condominium assessment lien because the condominium declaration authorizing the assessment was recorded prior to the lender’s mortgage.  Division One of the Washington Court of Appeals rejected this argument.  It held that the condominium declaration merely gives notice of the potential for an assessment lien, and that assessment liens do not come into existence until the assessment becomes due.  As such, a mortgage recorded prior to the assessment coming due cannot be subsequent in time to the resulting assessment lien for redemption purposes.  

The consequences of these decisions are severe from the mortgage lenders’ standpoint.  In both cases, the purchasers at the sheriff’s sale acquired the foreclosed property free and clear of the lenders’ mortgages for a bid well below the market price of the property.  Specifically, the subject property sold for $10,302 in Summerhill and $14,481 in Fulbright.  Moreover, the mortgage lender in Fulbright lost out on a mortgage that secured an obligation of approximately $277,000. 

Thankfully, the Legislature is about to address the unintended consequences of the Summerhill and Fulbright decisions.  Senate Bill 5541, which will tie the right of redemption to relative priority rather than the timing of the attachment of the lien, passed both houses of the Legislature by a wide margin, and should be signed into law by the Governor shortly.

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