Article by Sook Kim, Summer Associate and law student at University of Washington School of Law
[Learn more about Stoel Rives’ summer program here]
In BAC Home Loans Servicing, LP v. Fulbright, the Washington Supreme Court held that a lien for future payments takes effect when the lien is recorded, regardless of whether the future payments are due at the time of recording. As a result, the lien takes priority over all subsequent liens on the same property.
The previous owner of a condominium defaulted on her payments to the condominium association, resulting in its foreclosure. The Fulbrights then purchased the condominium at a sheriff’s sale. Afterwards, Bank of America sought to redeem the condominium from the respondent as the mortgage holder on the property from the previous owner. The bank also sought a declaratory judgment that it was an authorized redeemer of the condominium under Washington law as the secondary lienholder. The respondent countered that Bank of America was actually the primary lienholder and therefore could not redeem it.
In a unanimous decision, the Washington Supreme Court held that Bank of America was authorized to redeem the condominium as the secondary lienholder on the property. Therefore, the unlucky Fulbrights lost their condo because of a debt the prior owner racked up.
The Supreme Court of Washington made clear in this ruling that condominium assessments are to be treated just like any other lien on a property. If a condo association forecloses a unit because the owner failed to pay dues, the bank that provided the mortgage has the same statutory redemption as if the home was foreclosed due to failure to pay an older loan.
When there is more than one lienholder on a foreclosed condominium, three Washington statutes determine which party may or may not redeem the property: the recording act (RCW 65.08.070), the redemption statute (RCW 6.23.010), and the condominium act (RCW 64.34.364). The recording act and condominium act determine the prioritization of liens, which then determines who may redeem the foreclosed property under the redemption statute.
Under the recording act, the lien that is recorded first takes priority over all unrecorded liens on the same property. One exception to this rule is if the subsequent lienholder had actual knowledge of the prior unrecorded interest. Another exception is provided by the condominium act. In Fulbright, the lower courts and the Supreme Court disagreed on the interpretation of the condominium act. The lower courts held that when an association records its lien to secure future payments, it does not automatically take priority over subsequent liens until the payments are due. In other words, the recording of a condominium association’s lien for future payments takes effect only after the condominium owner has defaulted on her payments, which at that point is when the lien takes priority over any subsequent liens on the property. In the case at hand, the lower courts held that Bank of America’s mortgage was the priority lien, because Bank of America recorded its mortgage on the property before the condominium association’s lien took effect.
However, in a unanimous decision, the Washington Supreme Court disagreed with the lower courts’ interpretation of the condominium act. The Court held that when a condominium association records its lien for future payments, the lien automatically takes effect and has priority over all subsequent liens on the same property, regardless of whether the future payments are due at the time of recording. As a result, in the case at hand, the condominium association’s lien took priority over Bank of America’s.
The prioritization of the liens is important because the redemption statute allows only for the “subsequent in priority” lienholder to redeem the property by purchasing it at its sale price (plus interest and taxes) from the purchaser under certain situations. In Fulbright, because the Supreme Court held that Bank of America was the secondary lienholder, the bank is now able to redeem the condominium from the respondent under the redemption statute.
Comment: Homeowners, Be aware of the ghost of previous owner’s past!
Purchasing a condominium in a short sale can be a steal. But be careful, because lienholders from the previous owner may be able to take the property right back from you. When purchasing a foreclosed unit, make sure to ask the right questions: How many liens are on the property? Which lienholder foreclosed the property and do the other lienholders have any rights to redeem it? Simple questions like these may make the difference between keeping your home and losing it.