Condo assessment lien trumps first mortgage (again)

Category: Prevent Foreclosure Published: Friday, 25 December 2015 Written by Super User

Rhode Island condo lenders got coal in their Christmas stockings when the RI Supreme Court held that foreclosure of an assessment lien extinguishes a first mortgage. Twenty Eleven LLC v. Michael Botelho [RI, 12/5/2015), 2015 WL 7873599.] Rhode Island is the fourth jurisdiction (in addition to Arkansas, the District of Columbia and Nevada) to hold that foreclosure of a common interest community's assessment lien trumps a first mortgage. Rhode Island adopted the "split lien" theory, declaring unpaid assessments up to the super-priority amount prior to a first mortgage, and remaining amounts subordinate to the mortgage. A trend toward assessment lien superiority over first mortgages has been gaining steam since 2014.

Michael Botelho bought a Warwick RI condo with a $114,000 mortgage; when his dues became delinquent, the condo association foreclosed its lien for unpaid dues. Twenty Eleven bought Botelho's unit at the foreclosure sale and sought to quiet title to the unit and prevent foreclosure of the first mortgage. The Supreme Court considered whether the lien foreclosure extinguished a prior recorded mortgage whose holder failed to redeem its interest following the sale.

Rhode Island is among the states with "superlien" statutes which grant super-priority to an association's lien for unpaid dues (usually expressed as a number of months' of dues). The super-priority is six months' dues in Rhode Island, plus foreclosure costs and attorneys' fees, capped at $7,500. The statute doesn't specify what happens if foreclosure proceeds are insufficient to pay the mortgage, but general principles of foreclosure law extinguish lower priority liens when superior liens are foreclosed if proceeds are insufficient to pay both.

The Rhode Island Supreme Court noted the unconventionality of the split-lien concept, but rattled off three safeguards: First, as a practical matter, lenders can pay the delinquent assessments and avoid loss of their mortgage security. Second, lenders can escrow assessments. The third safeguard was the clincher here: a first mortgagee can redeem the association's super-priority lien after foreclosure by paying the past-due amounts plus attorneys' fees and costs.

The mortgagee did none of these. The Supreme Court said the loss of its mortgage was the lender's own fault.

(Editors Note: The new ruling is not yet included in this document on Westlaw.)

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