Will my HOA Foreclose its Lien on my House?

For this week’s Guest Post Friday here at Musings, we welcome back John Tarley.  John is an attorney with the Williamsburg law firm of Tarley Robinson, PLC. John is the managing partner for the firm and leads the firm’s business and litigation practices. A large part of the firm’s practice involves homeowners’ associations, as the firm represents associations throughout Virginia. In his spare time, John teaches two classes a semester as an adjunct at the William & Mary Law School, serves as the 9^th Judicial Circuit’s representative on the Virginia State Bar Council where he serves as Vice-Chair of the Budget and Finance Committee and as a faculty member for the Virginia State Bar’s Professionalism Court, was appointed the Assistant Commissioner of Accounts for Williamsburg/James City County, and is the editor of the Tarley Robinson blog and the @TarleyRobinson twitter account.

Previously, Chris gave me the opportunity to write about the “The Power and Complexity of the Community Association Lien” in which I wrote about this “powerful tool for community associations to collect dues and assessments.” I mentioned in that post that once the Association’s lien is properly perfected, “the property owners’ association (or the unit owners’ association, in a condominium) may conduct a nonjudicial foreclosure sale.”

In the 2014 General Assembly session, many legislators spoke out against pending legislation, warning that HOAs were just looking for reasons to foreclose upon unaware homeowners. Conversely, attorney and Senator Tommy Norment responded to those scare tactics stating that “he’s never seen a homeowner or condominium association push a fine to foreclosure.”  Who’s right?

The HOA can file a lien. . .

Condominium associations can file a lien pursuant to Va. Code § 55-79.84, and developments governed by the Property Owners Association Act (“POAA”) can file a lien pursuant to Va. Code § 55-516. Once that lien is properly perfected, the property owners’ association (or the unit owners’ association, in a condominium) may conduct a nonjudicial foreclosure sale.

But there are unavoidable obstacles to foreclosing on an Association Lien.

So do HOAs foreclose on their liens?The short answer is “No!” Without a doubt, the real estate downturn has caused problems with community associations struggling to keep up with its financial commitments. HOA board members have a fiduciary duty to enforce the community’s governing documents, but bankruptcy filings relieve delinquent homeowners of pre-petition assessments, leaving the other compliant homeowners with a greater share of the common burden. Why don’t Virginia associations foreclose on their Association Lien?

Prior to 2003, associations could foreclose upon an Association Lien subject to prior liens, as stated clearly in the statutes cited above. Community associations included statements in the notices of foreclosure that the sale was “subject to a deed of trust” in favor of a lender and “subject to all existing liens.” Such a process is consistent with Virginia’s law of foreclosure, and is followed in many other states in which the Association Lien is “given priority over the first mortgage (or first and second if there are two mortgages), regardless of when it was recorded.” But in a 2003 decision, by a 4-3 vote, the Virginia Supreme Court flipped that process upside-down, and has all but eliminated the nonjudicial foreclosure of an Association Lien in Virginia.

In Board of Directors of The Colchester Towne Condominium Council Of Co-Owners,
v. Wachovia Bank, the condominium association advertised a foreclosure sale of a unit, subject to Wachovia’s first deed of trust. The association intended to apply the proceeds according to statute:

first, to the reasonable expenses of sale; second, to the satisfaction of all taxes, levies, and assessments, with costs and interest; third, to the satisfaction of the lien for the unit owners’ assessments; fourth, to the satisfaction in the order of priority of any remaining inferior claims of record; and fifth, to pay the residue of the proceeds to the unit owner or his assigns;

Wachovia Bank filed a complaint, asking the court to issue an injunction against the sale. Wachovia wanted a ruling that the “proceeds of the sale must first be applied to satisfy the lien of the Bank’s first deed of trust.”

To the chagrin of all Virginia community associations, the Court held that the statutes’ “‘subject to prior liens’ language . . . may be fairly interpreted as requiring the satisfaction of those liens from the proceeds of a forced sale of an individual condominium unit by the unit owners’ association.” (Emphasis added). Consequently, proceeds for a foreclosure upon an Association Lien “must be applied first to satisfy the prior superior liens . . . before the unit owners’ association may apply the proceeds of that sale in satisfaction of its own lien as well as other encumbrances on the property, and then it is to pay any residue to the former unit owner.” Not only did this decision change the existing practice for community associations, arguably the decision is contrary to Virginia’s laws regarding non-judicial foreclosures, in which a junior lienor may foreclose upon its lien, but the purchaser takes the property subject to the more senior liens.

Conclusion

So where does that leave community associations and foreclosure in Virginia? Pretty much nonexistent. The time and expense of foreclosing upon an Association Lien cannot be justified if the debt owed to the community association will not be satisfied by the foreclosure. Only if a property has sufficient equity, would it make economic sense for a community association to attempt a foreclosure of an Association Lien.

Consequently, the “warnings” that assessing a noncomplying homeowner a fine of $10 day for 90 days will lead to rampant HOA foreclosures is just plain wrong. On the other hand, it may be time to revisit the Virginia Supreme Court’s decision in Colchester Towne Condominiums in an attempt to make consistent Virginia’s foreclosure procedures.

As always, John and I welcome your comments below.  Please subscribe to keep up with this and other Guest Post Fridays at Construction Law Musings.