The District of Columbia Court of Appeals Sends Shockwaves through Mortgage Lending Industry

Posted in Business & Corporate, Community Associations

A recent case decided by the District of Columbia Court of Appeals has sent shockwaves through the Mortgage Lending Industry and given hope to Condominium Associations and Homeowners Associations at the same time. The issue in Chase Plaza Condominium Association, Inc. v. JP Morgan Chase Bank, N.A., concerned the statutory “super-priority” lien established in the District of Columbia’s Condominium Act which guarantees to an Association a lien superior to a Mortgage or Deed of Trust for assessments incurred six (6) months prior to the initiation of a suit to foreclose the lien. Most states – including Pennsylvania and New Jersey – have similar statutory frameworks because their Condominium and Homeowners Acts are based on a common Uniform Act adopted in whole or in part by the various state legislatures. The question hanging in the air for some time has been what the effect of a foreclosure of the super-priority lien would have on a Mortgage or Deed of Trust – that is, whether foreclosure of the super-priority lien would extinguish a purchase money Mortgage recorded before the assessments fell due.

In the Chase Plaza case, a condominium unit owner became delinquent on his condominium assessment payments. JP Morgan Chase Bank was the holder of a Deed of Trust encumbering the unit under which it was the lender to the unit owner, who had used the funds to purchase the unit. Unable to collect the assessments from the unit owner due to insolvency and later bankruptcy, Chase Plaza foreclosed its lien only to the extent that it represented the period during which assessments fell due under its statutory super-priority lien. Chase Plaza obtained a judgment and followed the prescribed process for listing the unit for a foreclosure sale under District of Columbia law. The unit was then sold at the foreclosure sale to a third party in an amount which would compensate the condominium association for its super-priority lien of assessments. JP Morgan Chase then filed a Complaint seeking to have the foreclosure sale declared void.

The D.C. Court of Appeals reversed the trial Court, which had previously found in favor of JP Morgan Chase and voided the foreclosure sale. The Appeals Court employed a rigorous examination of the D.C. Condominium statute and found that the plain language of the law conferred upon the association a lien superior in priority even to prior recorded mortgages for the assessments falling due six months before initiation of a lien foreclosure action. The Appellate Court’s opinion found that the D.C. Council intended in the Act to ensure the timely payment of assessments, and that a mortgage lender had available remedies such as escrow accounts to preserve the position of its lien of mortgage. This was a welcome event for condominium and homeowners associations, particularly in the current environment where mortgage lenders will often delay in prosecuting a mortgage foreclosure action for their own benefit while associations (and by extension other unit owners) continue to provide services to a unit which is also delinquent for assessment obligations.

Chase Plaza has upended the position taken by the mortgage lending industry that foreclosure of super-priority liens for assessments does not extinguish prior recorded mortgages. Expect to see test cases on similar facts brought by associations in Pennsylvania, New Jersey and other jurisdictions citing Chase Plaza as persuasive authority and urging that those Courts adopt the reasoning of the D.C. Court of Appeals.