June 2012 Bar Bulletin
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June 2012 Bar Bulletin

Wake-up Call: Snoozing Lender Loses Lien Rights

By Magnus R. Andersson and Jennifer T. Karol

 

For years, it seems mortgage lenders have paid little to no attention when condominium associations judicially foreclose on their assessment liens. Perhaps believing they were fully secure in their position as first-position lien holder, but for the association's super-priority as to six months of regular assessments,1 many mortgage lenders have barely participated in assessment foreclosure lawsuits where they were named as a defendant - and in some cases, they have not participated at all. A recent case out of the Court of Appeals shows the dangers of that approach.

The case is Summerhill Village Homeowners Association v. GMAC Mortgage, LLC.2 The main takeaway from Summerhill - for both mortgage lenders and condominium associations - is that non-participating mortgage lenders risk losing their entire security if the association forecloses on its assessment lien. And, in a somewhat surprising part of the decision, the Court of Appeals held that a mortgage lender does not qualify as a redemptioner, per se, when a lien is foreclosed.

The relevant facts of Summerhill were as follows. The condominium association filed an action to judicially foreclose an assessment lien against a delinquent owner. In addition to the unit owner, the association also named the mortgage lender as one of the defendants. The mortgage was secured by a deed of trust in favor of Mortgage Electronic Registrations Systems (MERS). MERS was served with the summons and complaint, which it forwarded to GMAC, which was the servicer of the mortgage loan. However, GMAC did not respond to the lawsuit. The association obtained a default judgment and proceeded with a sheriff's sale. A third party purchased the unit at the sale (for $100 more than the default judgment).

After the sheriff's sale, GMAC, which in the meantime had filed its own foreclosure action after the owner became delinquent on her loan, moved to intervene in the association's foreclosure action.3 GMAC asked the court either to vacate the default judg­ment/decree in favor of the association or to allow GMAC to redeem the unit.

The Court of Appeals began its analysis by looking to RCW 64.34.364(3), which creates an exception to the general rule of priorities: "first in time, first in right." Under RCW 64.34.364(3), assessment liens are afforded superior-priority over previously recorded mortgages and deeds of trust to the extent of six months of regular assessments.

The court also looked to the official comments to RCW 64.34.364, which state:

As a practical matter, mortgage lenders will most likely pay the assessments demanded by the association which are prior to its mortgage rather than having the association foreclose on the unit and eliminate the lender's mortgage lien.

The court noted that the mortgage lender had precisely that opportunity. MERS was served with the lawsuit and forwarded the pleadings to GMAC, the loan servicer. The problem was that for whatever reason GMAC failed to facilitate payment of the assessment lien before the sheriff's sale or to respond to the action. The sale therefore extinguished the lender's deed of trust according to the Summerhill court.


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