[co-author: Thomas Lynch]

The District of Columbia Court of Appeals recently sent a new set of shockwaves through the mortgage industry in the nation’s capital when it released its decision in Andrea Liu v. U.S. Bank National Association. Having held over three years ago that condominium associations have “super-priority” liens for unpaid assessments and can wipe out first mortgages by foreclosing on those liens, the Liu decision went an unexpected step farther: An association’s foreclosure would wipe out the first mortgage even if the association expressly stated that it intended for the foreclosure to be held subject to that mortgage. Secured lenders who thought they might have dodged the bullet now find themselves fighting for the validity of their security interests.

In 2014, the D.C. Court of Appeals issued its decision in Chase Plaza Condominium Ass’n v. JPMorgan Chase Bank, N.A., which addressed the effect of a condominium association’s foreclosure sale in the District of Columbia. The Chase Plaza court explained that D.C. Code § 42-1903.13 entitled a condominium association to foreclose and then apply the sale proceeds first to the six months of assessments considered a “super-priority” lien under D.C. law. Moreover, the court reasoned that because the super-priority lien had seniority over a lender’s first mortgage on the same property, the association’s foreclosure would wipe out that mortgage. If the sales proceeds were insufficient to pay the outstanding balance of the mortgage, then the secured lender would be left with a potentially hefty unsecured debt.

In light of the uncertainty regarding the interpretation of D.C. Code § 42-1903.13, condominium associations wishing to foreclose on a unit had developed a practice of expressly indicating that the property would be sold at a foreclosure sale subject to the lender’s mortgage. In Liu, for example, the advertisements of sale, the memorandum of sale to Ms. Liu, and the deed of trust all specified that the condominium association sale was made subject to the first deed of trust. Thus, the secured lender argued that it was “abundantly clear” that Ms. Liu purchased the property subject to its lien.

The Court of Appeals rejected that argument based on a somewhat surprising reading of D.C. Code § 42-1903.13. The court explained that D.C. Code § 42-1901.07 prevented parties from varying the terms of a condominium association super-priority lien sale by agreement. Based on that reasoning, the Liu court held that notwithstanding the repeated, express representations made by the association indicating that the first mortgage would survive the association’s foreclosure sale, Ms. Liu bought the property free and clear of the first mortgage (for a sales price representing a tiny fraction of the property’s market value).

The practical impact of the Liu court’s holding is that a condominium association’s sale, even if made explicitly subject to a first deed of trust, might not be actually subject to that deed of trust. Secured lenders who have reasonably relied on express representations made by an association that their lien interests would remain intact have suddenly learned that their reliance might have been misplaced.

The D.C. condominium association sale statute was amended in April 2017 to require parties to specify at the outset whether a sale would be a super-priority sale that extinguished all other liens, or a sale for more than the super-priority amount that would be subject to a first deed of trust. For sales prior to that date, however, the Liu decision adds a significant amount of uncertainty. It appears that pre-2017 condominium association sales might now be treated as extinguishing first deeds of trust, even if all parties thought otherwise.

The Liu decision creates an enormous amount of uncertainty as to the enforceability of pre-foreclosure mortgages and whether such mortgages survived condominium association foreclosure sales. It is certainly within the realm of possibility that condominium sale purchasers will now claim that they own their property outright, causing a new wave of litigation in the District of Columbia. Lenders with security interests on D.C. condominiums will be closely watching to see if the D.C. Court of Appeals accepts en banc review of the Liu decision, hopefully to prevent a new wave of uncertainty and litigation.