Condo super priority lien decision obliterates mortgages

A week ago the D.C. Court of Appeals handed down a decision that answered lingering questions about condo super priority lien foreclosures. It is a potentially a huge blow to mortgage lenders and a windfall to the investors who bought up these foreclosures by the dozen.

Chase Plaza in 2014 was a breakthrough for condos and investors.

For the last four (4) years there have been open questions about the impact of a condo lien foreclosure.  Specifically, what happens to a mortgage when a condo forecloses?

It started with the groundbreaking decision in the Chase Plaza case in August 2014. In that case the Court of Appeals recognized that where a Condominium foreclosed on only six (6) months worth of condo fees, the super priority foreclosure extinguished any first trust mortgage on the property. See Chase Plaza Condominium Association, Inc. v. J.P. Morgan Chase Bank, 98 A.3d 166 (D.C. 2014) Exciting new law for condos (if there is such a thing).

However, many of the condo liens being foreclosed were for greater than the six month super priority period, and Chase Plaza didn’t apply.

Still, an insular group of investors whose milieu is condo foreclosures continued to push the boundaries of the condo foreclosure law.

Creative foreclosure investors exploited the new legal landscape.

In a post-Chase Plaza world, when everyone learned that a 6 month condo foreclosure wiped-out a mortgage of several hundred thousand dollars, it drove the prices of these things way up. 6 months of fees amounting to a couple of grand, were routinely selling for $80 – 150 k after Chase Plaza.

Undaunted, the investor cabal and/or their attorneys quietly found another arbitrage opportunity (or maybe it’s better described as a hedge, I don’t know, I’ll ask my brother, he is in finance ***update: I just asked him, he says it’s neither, and said it in such a way to suggest I am an idiot***). Anyway, instead of purchasing the now premium priced 6 month liens, they started buying up “junior lien”(more than 6 mos.) condo foreclosures.

But, why would they do such a thing if those liens were “subject to” a first trust?

Two reasons:

(1) because it would take banks literally years to get off their butts and foreclose so the investor could rent out the units at a substantial profit; and

(2) for the opportunity to expand the scope of the Chase Plaza decision by additional litigation. A collateral benefit of litigation was further delay of the bank’s foreclosure, allowing the investor to collect additional rental income while the case went on.

A second ‘fish to the face’ from the D.C. Cout of Appeals.

In April 2018, the Court of Appeals came down with Liu v. U.S. Bank, N.A.179 A.3d 871 (D.C. 2018). In that case the Court of Appeals marginally expanded Chase Plaza. In Liu the Court found that a six (6) month foreclosure where, the terms of sale expressly stated that it was “subject to” the first mortgage still wiped out the mortgage. Like Chase Plaza, Liu is also limited in scope. It only applies to foreclosures of 6 months or less where the advertisement and sale terms expressly contained “subject to” language.

And now…the super priority kick in the nuts.

The Court of Appeals dropped the remainder of its payload on lenders in 4700  Conn 305 Trust v. Capital One, N.A. In this newest case, the Court decided the open question of whether a condo foreclosure of more than 6months also extinguishes a first trust mortgage. Using a legal theory called a “split lien” the Court found that it defeats the mortgage.

So the condo lien investors who have been holding units for rental at a decent profit, instantly realize enormous gain with the wipe out of the mortgage. It amounts to hundreds of thousands of dollars per unit!

Now, it’s not exactly that simple. First, it is important to remember that the decision only applies to sales that took place before the D.C. Council changed the foreclosure law in 2017.

Also, the Court of Appeals reiterated that a sale can be undone if the sale price is “unconscionable.” That means a price so low that it “shocks the conscience.” (Well that clears that right up). So there will be another round of litigation to decide the question of “how low is too low?”

Complications aside, small investors made millions, overnight, at the expense of institutional lenders. Even if those gains cannot be realized without another round of litigation, it’s huge. If nothing else it puts investors in the drivers seat in settlement discussions with the bank over a reduced payout of the mortgage.

If you have questions about how the 4700 decision impacts a unit you own or if you are on a condo board, contact me or use my online scheduling tool to book an appointment for a free case evaluation call.

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