The Supreme Court of Rhode Island, in a 4-1 decision, recently joined a growing list of states that allow a homeowners or condominium association lien for delinquent assessments to take priority over, and potentially wipe out, a first mortgage lien. 

The Court interpreted the Rhode Island Condominium Act to grant a condominium association a "super-priority" lien for up to six months of delinquent assessments. This super-priority, the Court held, is superior to the lien of a first mortgage holder. As a consequence, a condominium association foreclosure sale pursuant to the Act extinguishes a first mortgage holder's lien on that same property. The Court reached this conclusion even though a purchaser at the condominium association foreclosure sale may pay just a fraction of the amount of the first mortgage lien.

The Court acknowledged the harsh effects of its holding on first mortgage holders, but concluded that first mortgage holders are in a position to avoid extinguishment of their liens. For example, the Court noted that a first mortgage holder could either pay off the super-priority portion of the condominium association lien and add such amounts to the borrower's principal, or require the borrower to pay association assessments into escrow.

One justice vigorously dissented from the majority holding, arguing that the Act did not contain clear enough language to conclude that the legislature intended such a radical change in venerable principles in the law governing secured transactions.

The Rhode Island decision comes on the heels of state supreme courts in Nevada, Texas, and Washington reading similar statutes as having the same effect. The result of these statutory interpretations has been a wave of mortgage lenders being left with large unsecured loans as a result of homeowner and condominium association foreclosure sales. This decision will likely have the same effect on lenders conducting business in Rhode Island.