Owner Responsibility During Foreclosure Proceedings

This is the second part of a three part series discussing when an owner’s liability for assessments terminates when going through a divorce, foreclosure and/or bankruptcy proceeding. The first part of the series dealt with divorce proceedings. This part addresses public trustee foreclosure of a lender’s lien created by a recorded deed of trust (for purposes of this discussion, a deed of trust is the same as a mortgage).

A public trustee foreclosure is instituted when an owner fails to make one or more payments on his/her mortgage. Upon default, the lender has the option of foreclosing the mortgage as a means of collecting the monies due from the owner. If the lender chooses to pursue foreclosure, it will file a Notice of Election and Demand for sale of the property with the public trustee. The public trustee will then schedule a sale date within the allowable time period provided by statute (not less than 110 days and not more than 125 days after filing the Notice of Election and Demand) and will send notices of the foreclosure to all parties who have a recorded interest in the property, such as the owner, the holder of a judgment lien, the holder of a mechanic’s lien, the homeowners association (if it has provided the statutorily required notice of address), etc.

In order to conduct the public sale of the property, the lender must obtain a court order authorizing the sale. This is done by way of a Rule 120 Motion in court. Without going into detail, a Rule 120 Hearing is scheduled to determine if,in fact, there is a default in a payment under the mortgage and whether the proper notice is served under the Service Member Civil Relief Act. The procedure can be stopped by the owner of the property or another person who has personal liability for payment of the mortgage by filing an injunctive proceeding in a separate court action. If a separate injunctive proceeding is filed, the public trustee sale process is stopped.

If the necessary court order is obtained, and the public trustee sale occurs, at the sale the lender or a successful bidder receives a certificate of purchase, but not title to the property. Following the sale, if statutory notices are timely filed, lien holders who were junior to the mortgage (which may include the homeowners association) have the right to redeem from the sale by paying the amount bid at the sale plus any additional amounts that have come due since the sale. The junior lien holder having the most senior recorded lien can redeem the property no earlier than 15 business daysnor more than 19 business days after the sale. Each subsequent lien holder has an additional 5 business daysto redeem.

At the expiration of all redemption periods, if there has been no redemption, title transfers to the lender. If there is a redemption by a junior lien holder, then title transfers to the redeeming party. The original owner is no longer responsible for payment of assessments that come due once title vests in the foreclosing lender or redeeming party. The lender or the redeeming party, whether or not they apply for an actual deed, becomes liable, however, for all assessments that come due commencing with the date they take title.

Unless the association elects to redeem from the foreclosure, the foreclosure eliminates the association’s lien for unpaid assessments with the exception of six months’ worth of budgeted assessments which are entitled to “superlien” status; that is, they have a priority superior to the lender’s mortgage, and therefore, cannot be eliminated as part of the foreclosure. In addition to regular assessments that become due commencing with the transfer of title through foreclosure, upon the future resale of the property the superlien amounts must be paid to convey clear title.

The amount of assessments coming due through the date the lender or redeeming party takes title to the property remains the personal obligation of the foreclosed owner. The association will need to evaluate whether it should pursue that owner for the amounts owed.

If your association would like to update its collection policy to address foreclosure issues, or other matters relating to delinquent accounts, please contact one of our attorneys, or our Client Relations Representative, Kate Ellis, at kellis@wlpplaw.com for assistance.