R.I. Supreme Court Says HOA Lien Foreclosure Sale Extinguished Lender’s First Mortgage

Supreme Court of Rhode Island decision (December 4, 2015).

In August of 2011, the plaintiff in this action purchased a condominium at a foreclosure sale conducted by a condominium association as a result of the non-payment of association assessments by the former owner of the condominium and/or the former owner’s mortgage holder. The foreclosure sale did not generate sufficient proceeds to satisfy the first mortgage on the condominium. Subsequent to the foreclosure sale, the former owner’s mortgage holder commenced foreclosure proceedings against the unit for non-payment of the mortgage debt that was secured by a first mortgage on the condominium. Thereafter, the plaintiff filed this action against the lender, PNC Bank, seeking to quiet title in plaintiff’s name and declaratory / injunctive relief in order to prevent the lender from continuing with its foreclosure sale. The trial court ruled that the lender’s first mortgage survived the association’s lien foreclosure sale and dismissed the plaintiff’s action. The plaintiff filed an appeal of that decision.

In its appeal, the plaintiff contended that the earlier condominium foreclosure sale conducted by the homeowners association extinguished the prior-recorded first mortgage on the subject condominium unit after the lender failed to exercise its statutory right to redeem the property following the foreclosure sale. The appellate court , considering the principles of law and equity as a supplement to the applicable statutory provisions, found that as a general principle of foreclosure law, liens with lower priority are extinguished when a valid foreclosure sale yields proceeds that are insufficient to satisfy a higher-priority lien. The appellate court further commented that the state statutes provide a lender with several practical solutions to avoid the extinguishment of their security interest such as: (i) the ability to pay the association the assessments that have super-priority and then add the amount paid to the principal balance of the mortgage; (ii) the ability to require the borrower to pay assessments into an escrow account as is frequently done with insurance and property taxes; and, most importantly (iii) the ability to redeem the foreclosed property within the 30 days following the foreclosure sale by payment of the assessments and attorney fees/costs incurred by the lender in foreclosing.

The reviewing court concluded that that the foreclosure of a homeowners association’s super-priority lien extinguishes the first mortgage and therefore, reversed the decision of the trial court. In commenting on the potential harshness of the consequences of extinguishing the lender’s first lien, the court cited the ancient maxim “dura lex sed lex,” which means, “although the law may be harsh, it is still the law.” The court further stated that the lender could have avoided the harsh results of the extinguishment of its lien had it chose to avail itself of any one of the available alternative options. Thus, the harsh results were due to the lender’s own decision making.

See case decision: Twenty_Eleven,_LLC_v._Botelh