Opinion ID: 3160075
Heading Depth: 2
Heading Rank: 1

Heading: The “Super-Priority” Lien

Text: Section 34-36.1-3.16 of the act, titled “Lien for assessments,” is the statutory provision directly at issue in this case. Section 34-36.1-3.16(a) provides that “[t]he association has a lien on a unit for any assessment levied against that unit or fines imposed against its unit owner from the time the assessment or fine becomes due.” Section 34-36.1-3.16(b) goes on to establish the priority of the association’s lien as compared to other encumbrances on the unit. It provides as follows: 4 As a threshold matter, defendant argues that plaintiff does not have standing to assert the association’s statutory lien rights. However, plaintiff is not seeking to assert the association’s lien rights; rather, it is seeking to quiet title to the property in its name. “General Laws 1956 § 34-16-4 provides that any person claiming ‘any interest or estate, legal or equitable, in real estate, including any warrantor in any deed or other instrument in the chain of title to the real estate’ may bring a civil action against other people claiming any adverse interest in the property.” Arnold Road Realty Associates, LLC v. Tiogue Fire District, 873 A.2d 119, 130 (R.I. 2005). The plaintiff, which obtained a condominium lien foreclosure deed to the property from the association, certainly has sufficient interest in the property to bring an action to quiet title. -5- “(1) A lien under this section is prior to all other liens and encumbrances on a unit except: “(i) Liens and encumbrances recorded before the recordation of the declaration and not subordinated to the declaration, “(ii) A first mortgage or deed of trust on the unit recorded before the date on which the assessment sought to be enforced became delinquent, and “(iii) Liens for real estate taxes and other governmental assessments or charges against the unit.” (Emphasis added.) Based on this statutory language, it would appear that a first mortgage recorded “before the date on which the assessment sought to be enforced becomes delinquent,” like defendant’s mortgage here, is senior to a condominium association’s assessment lien. The statute, however, does not stop there. Section 34-36.1-3.16(b)(2) further provides: “The lien is also prior to any mortgage or deed of trust described in subdivision (b)(1)(ii) of this section to the extent of the common expense assessments based on the periodic budget adopted by the [condominium] association    which would have become due in the absence of acceleration during the six (6) months immediately preceding the foreclosure of the interest of the unit owner including any costs and reasonable attorney’s fees not to exceed two thousand five hundred dollars ($2,500), incurred in the collection of any delinquent assessment or other charges by legal proceedings or otherwise and all costs of foreclosure held pursuant to section 34-36.1-3.21, including, but not limited to, publication, advertising and auctioneer costs, said foreclosure costs not to exceed five thousand dollars ($5,000) (for a total aggregate of attorney’s fees and costs of seven thousand five hundred dollars ($7,500)).” It is this portion of the lien that is colloquially referred to as a “super-priority” lien. See 7912 Limbwood Court Trust v. Wells Fargo Bank, N.A., 979 F. Supp. 2d 1142, 1147 (D. Nev. 2013). “Thus, the [a]ct effectively splits condominium-assessment liens into two liens of differing priority: (1) a lien for six months of assessments that is higher in priority than the first mortgage or first deed of trust    and (2) a lien for any additional unpaid assessments that is lower in priority than the first mortgage or first deed of trust.” Chase Plaza Condominium Association, Inc. v. JPMorgan Chase Bank, N.A., 98 A.3d 166, 173 (D.C. 2014) (Chase Plaza); accord Trustees of MacIntosh Condominium Association v. FDIC, 908 F.Supp. 58, 62-63 (D. Mass -6- 1995) (distinguishing between an association’s super-priority lien for delinquent assessments for the six months preceding a foreclosure action, which is superior to a first mortgage, and a lien for any remaining unpaid assessments, which does not enjoy super-priority status); Commissioners’ Comment 2 to § 34-36.1-3.16 (“[S]ubsection (a) provides that the association's lien takes priority over all other liens and encumbrances except those recorded prior to the recordation of the declaration   . However, as to prior first mortgages, the association's lien does have priority for 6 months' assessments based on the periodic budget.”). It is undisputed that § 34-36.1-3.16(b)(2) operates so as to create a super-priority lien for at least some portion of a condominium association’s outstanding assessments. 5 The dispute arises over what effect that super-priority lien, upon its foreclosure, has on a first mortgage. Does the statute operate such that foreclosing on this super-priority lien extinguishes a first mortgage, as plaintiff would have us hold, or does it merely create a payment priority, as defendant suggests? We start by looking at the plain language of the statute. See Zambarano, 61 A.3d at 436. Here, the General Assembly used the words “prior to” to describe the priority of the condominium assessment lien relative to other encumbrances on the unit. This phrase has a very distinctive meaning in the mortgage and lien context. “‘Prior’ refers to the lien, not payment or proceeds[.]” SFR Investments Pool 1, LLC v. U.S. Bank, 334 P.3d 408, 412 (Nev. 2014) (SFR 5 The defendant argues that the super-priority provision of the act has not been triggered in this case because plaintiff never alleged facts in its complaint that substantiate the claim that the association’s lien was for common expenses as required by G.L. 1956 § 34-36.1-3.16(b)(2). However, a review of plaintiff’s complaint reveals that plaintiff did assert that “a portion of [the association’s] lien is prior to the first mortgage or deed; this super[-]priority portion is comprised of six months of common expense assessments   .” On a motion to dismiss pursuant to Rule 12(b)(6) of the Superior Court Rules of Civil Procedure, we must assume this allegation is true and resolve any doubts in plaintiff’s favor. See Chhun v. Mortgage Electronic Registration Systems, Inc., 84 A.3d 419, 422 (R.I. 2014). -7- Investments). “And ‘priority lien’ and ‘prior lien’ mean the same thing, according to Black’s Law Dictionary 1008 (9th ed. 2009): ‘A lien that is superior to one or more other liens on the same property, usu[ally] because it was perfected first.’” 6 SFR Investments, 334 P.3d at 412. To be sure, “[t]he [a]ct does not expressly address what happens when, as in this case, a condominium association forecloses solely on its super-priority lien and the proceeds of the sale are not sufficient to pay off a [first mortgage or] first deed of trust.” Chase Plaza, 98 A.3d at 173. But § 34-36.1-1.08 of the act directs us to look to “[t]he principles of law and equity” to “supplement the provisions of this chapter.” And in this case, “[a] general principle of foreclosure law    potentially provides an answer: liens with lower priority are extinguished if a valid foreclosure sale yields proceeds insufficient to satisfy a higher-priority lien.” Chase Plaza, 98 A.3d at 173 (citing Pappas v. Eastern Savings Bank, FSB, 911 A.2d 1230, 1234 (D.C. 2006)); see Pehoviak v. Deutsche Bank National Trust Co., 5 N.E.3d 945, 951 (Mass. App. Ct. 2014) (noting that “[s]o long as timely and proper notice    is given to junior lienholders, these subsequent liens are extinguished with the foreclosure of a senior mortgage lien”); 59A C.J.S. Mortgages § 838 at 74-75 (2009) (“In the absence of a statute to the contrary, usually, the foreclosure of a valid senior mortgage    will cut off junior liens or encumbrances   .”) (citing United States v. Brosnan, 363 U.S. 237 (1960)). “We are inclined to think that if the [Legislature] had intended to depart from well-settled principles of foreclosure law, it would have done so explicitly.” Chase Plaza, 98 A.3d at 174; see Barrett v. Barrett, 894 A.2d 891, 898 (R.I. 2006) (stating that “[a]s a general principle of statutory construction, we presume the 6 Pursuant to § 34-36.1-3.16(d) of the act, “[r]ecording of the [association’s] declaration constitutes record notice and perfection of the [association’s] lien. No further recordation of any claim of lien for assessment under this section is required but is permitted.” It is undisputed that the association’s declaration of condominium was recorded on April 5, 1985; therefore no further recordation of the association’s lien was required to perfect it. -8- General Assembly knows the state of the law when enacting new legislation”) (citing Shelter Harbor Fire District v. Vacca, 835 A.2d 446, 449 (R.I. 2003)); see also 7912 Limbwood Court Trust, 979 F. Supp. 2d at 1150 (“Moreover, the Nevada Legislature presumably was aware of the normal operation of foreclosure law when it enacted Chapter 116 [of the NRS] in 1991. If the Legislature intended a different rule to apply to [a Homeowner’s Association] foreclosure sale, it could have said so.”). Because the Legislature did not so explicitly depart from these general principles, of which we assume it was aware, we are equally inclined to think it meant to adhere to them. It is therefore our view that when a super-priority lien established by § 34-36.1- 3.16(b)(1)(ii) is foreclosed on, a first mortgage is extinguished. Below, the hearing justice looked only to § 34-36.1-3.16(b)(1)(ii) to determine lien priority rather than looking at the statutory scheme as a whole. See Ryan, 11 A.3d at 71. Undeniably, § 34-36.1-3.16(b)(1)(ii) carves out an exception to the priority assessment lien in favor of a prior-recorded first mortgage. However, § 34-36.1-3.16(b)(2) creates an additional exception by providing that the assessment lien is still superior to a first mortgage under § 3436.1-3.16(b)(1)(ii), up to a certain value. This split-lien concept is indeed unconventional, but the drafters of the UCA were aware that they were creating an unusual statutory scheme. The Commissioners’ Comments to the act describe the split-lien as “[a] significant departure from existing practice,” but go on to say that this scheme was created to “strike[] an equitable balance between the need to enforce collection of unpaid assessments and the obvious necessity for protecting the priority of the security interests of mortgage lenders.” Commissioners’ Comment 2 to § 34-36.1-3.16; see Sisto v. America Condominium Association, Inc., 68 A.3d 603, 611 (R.I. 2013) (noting that the official comments to the act “are to be used as guidance concerning the legislative intent in adopting the -9- chapter”) (quoting America Condominium Association, Inc., 844 A.2d at 127). In any event, the plain language of the statute suggests that “however unconventional, the super[-]priority piece of the [condominium assessment] lien carries true priority over a [first mortgage or] first deed of trust.” SFR Investments, 334 P.3d at 413. And, “if the super[-]priority piece is a true priority lien, then it is senior to the first [mortgage]    and its foreclosure will extinguish the first [mortgage].” Id. at 412 (citing Restatement (Third) Property: Mortgages § 7.1 (1997)); accord BAC Home Loans Servicing, LP v. Fulbright, 328 P.3d 895, 900 (Wash. 2014) (en banc) (noting that as a result of the condominium association instituting a foreclosure action, the first mortgagee’s lien was “reprioritized” and “at that instant [the first mortgagee] became a subordinate junior lienholder whose lien interests were extinguished” following foreclosure). We recognize that this statutory scheme may result in a lien for relatively minimal condominium assessment fees nullifying a security interest on a much larger loan, as is the case here. 7 This concern was not lost on the drafters of the UCA or the other courts that have tackled this issue. In light of this concern, they identify several practical solutions for first mortgagees to avoid extinguishment of their security interest by foreclosure on a super-priority lien. First, “‘[a]s a practical matter, secured lenders will most likely pay the 6    months’ assessments demanded by the association rather than having the association [foreclose] on the unit.’” SFR Investments, 334 P.3d at 413; see Commissioners’ Comment 2 to § 34-36.1-3.16. This payment can then be added on to the principal balance of the mortgage. Another option is for lenders to require payment of assessments into an escrow account, much as they sometimes do with 7 It is unclear what the balance of the mortgage was at the time of the association’s lien foreclosure, but we note that Botelho’s original mortgage was for $114,400. The plaintiff bought the property at the foreclosure sale for $21,000, $13,501.57 of which was sent to defendant as surplus (which it did not accept), meaning that the lien for outstanding assessments was for only $7,498.43. -10- insurance premiums or real estate taxes. See Chase Plaza, 98 A.3d at 175 (citing UCA § 3-116, cmt.2). Regardless of whether or not lenders choose to employ these safeguards, the bottom line is that “statutory principles of priority, not the monetary value of the respective liens, control.” 7912 Limbwood Court Trust, 979 F. Supp. 2d at 1151. The defendant argues that the language “to the extent of” in § 34-36.1-3.16(b)(2) suggests that this provision operates merely as a payment preference. That is, if a first mortgagee were to foreclose, the provision would merely ensure that the condominium association would get paid first “to the extent of” its priority outlined in § 34-36.1-3.16(b)(2) before the first mortgagee could reap any funds from the foreclosure sale to satisfy its own mortgage. We disagree. The phrase “to the extent of” in § 34-36.1-3.16(b)(2) only limits the value of the super-priority lien (up to six months of delinquent assessment fees, plus up to $7,500 in attorney’s fees and costs). “There is no indication that the words [‘to the extent of’] were intended to impose any other limit, much less to create a novel lien with higher priority and the right to foreclose, but without the ability to extinguish a lower priority lien.” Chase Plaza, 98 A.3d at 176. Furthermore, “[i]f the super[-]priority piece of the [association’s] lien just established a payment priority, the reference to a first security holder paying off the super[-]priority piece of the lien to stave off foreclosure would make no sense.” SFR Investments, 334 P.3d at 413. The defendant also argues that extinguishing a first mortgage would render the language in § 34-36.1-3.21(b) meaningless. Section 34-36.1-3.21(b) provides that “[a]ny foreclosure sale held by the association pursuant to [this section], and the title conveyed to any purchaser or purchasers pursuant to such sale, shall be subject to any lien or encumbrance entitled to priority over the [association’s lien]   .” However, in light of the split-lien concept, this section is not -11- rendered entirely nugatory. For example, had the association foreclosed on the sub-priority portion of its lien (if there was one), defendant’s first mortgage would have priority over that portion of the association’s lien. Consequently, any purchaser at the foreclosure sale would take the property subject to the defendant’s mortgage. See, e.g., Armand's Engineering, Inc. v. Town & Country Club, Inc., 113 R.I. 515, 520, 324 A.2d 334, 338 (1974) (noting that foreclosure on a junior mortgage does not extinguish a senior mortgage, and a buyer at a junior foreclosure sale takes the property subject to the senior mortgage). Here, the association foreclosed on its priority portion of the lien, so § 34-36.1-3.21(b) offers defendant no reprieve. 8