Published in the ECHO Journal, August 2011
Tips on Maintaining the Critical Priority of your Foreclosure Judgment
A recent appellate decision from the First District Court of Appeal in San Francisco (Diamond Heights Village Association v. Financial Freedom Senior Funding Corp) highlights the necessity to record judicial foreclosure judgments. In that case, the association recorded assessments liens against a condominium unit after the unit owner failed to pay maintenance assessments for several years. Rather than non-judicially foreclose those assessment liens, the association sued the owners for judicial foreclosure of the assessment liens.
Judicial foreclosure is a remedy available to associations to obtain a court-ordered sale of a condominium unit to satisfy unpaid assessments. An important distinction between non-judicial and judicial foreclosure is the ability in a judicial foreclosure to obtain a deficiency judgment (a money judgment) against the owner in the event that the foreclosure sale of the unit does not satisfy the assessment obligation. In other words, a judicial foreclosure does not limit the association to recover just the unit; it allows sale of the unit and a potential money judgment as well.
In Diamond Heights, the association judicially foreclosed the assessment liens but did not record the foreclosure judgment in the applicable county. Due to several bankruptcy filings by the owner, the association was prevented from selling the unit. After the association obtained its foreclosure judgment, the owner applied for and obtained a reverse mortgage on the unit that became a first mortgage on the unit. Because the association did not record its earlier obtained foreclosure judgment, the title report obtained by the lender apparently failed to identify the association’s judgment.
When the association learned that the owner had obtained new first mortgage, it sued the owners and the mortgage lender, challenging the priority of the mortgage lender’s lien. The court held that because the association obtained a foreclosure judgment, the earlier recorded assessment liens no longer had effect. Because the association did not record the foreclosure judgment, it did not have a security interest in the unit, and even if it did, it was junior to the mortgage lender’s lien. Even though the association recorded its assessment liens before the mortgage lender recorded its mortgage lien, the association was held to be in a junior position to the mortgage lien. This is because the assessment liens were “merged” into the association’s foreclosure judgment, but that judgment was never recorded, depriving the association of priority over the mortgage lender.
This case illustrates the importance of promptly recording in the relevant county any judgments obtained for unpaid assessments. California follows the “first in time, first in right” rule with respect to lien priorities. That means that the party that records its lien first has the first right to any foreclosure sale proceeds.
One way to avoid this result is for an association to take advantage of a special exception afforded to community associations under the Civil Code. Usually, a holder of lien on real property must look to the real property first to satisfy any obligation secured by the real property. For instance, a mortgage lender must foreclosure its mortgage lien on the real property collateral before attempting to collect from the borrower. In fact, in residential lending, the mortgage lender may only collect the loan by foreclosing on the underlying real property. Community associations enjoy an exception to this rule. A community association can record an assessment lien for unpaid assessments, but it is not required by law to foreclose on that lien. Instead, an association can record its assessment lien and then sue the owner in court for a money judgment in the amount of the unpaid assessments. This, in effect, gives the association a security interest in the unit at the time the assessment lien is recorded (establishing its priority) while it pursues the defaulting owner in court for a money judgment of the unpaid assessments.
While judicial foreclosure can provide an association with an effective way to collect unpaid assessments, the decision on how to proceed depends in the circumstances of each case. Consultation with experienced legal counsel can assist an association in making the best decision on how to collect unpaid assessments, either by non-judicial foreclosure, judicial foreclosure, or by pursuing a money judgment.
Paul Windust is a partner at the Alamo Office of Berding & Weil. He has over 15 years of experience in both commercial and residential real estate law, commercial and contract law, creditor’s rights and bankruptcy. He speaks regularly at ECHO seminars and writes articles for the ECHO Journal.