New Decision from the D.C. Court of Appeals Recognizes Additional Defenses to HOA Super-Priority Lien StatuteAs we noted in last week’s blog post, the District of Columbia Court of Appeals issued a decision on March 1, 2018, that created a new wave of uncertainty for lenders with loans secured by deeds of trust on condominium units in the District of Columbia. In the Liu decision, the court held that a condominium association’s foreclosure on its statutory lien could wipe out a first priority security interest on the same property even when the association expressly purported to foreclose subject to the first deed of trust. But a new decision in U.S. Bank, N.A. v. Green Parks, LLC, issued on March 13, 2018, offers insight into what secured lenders can do to avoid the outcome in Liu.

Green Parks involved a similar fact pattern. In 2013, a condominium association foreclosed on its statutory lien but advertised its sale and described it in the memorandum of purchase and deed as having taken place “subject to” U.S. Bank’s deed of trust.

After the D.C. Court of Appeals issued its decision in Chase Plaza Cond. Ass’n v. JPMorgan Chase Bank (which indicated that a condominium’s foreclosure on its statutory lien could extinguish a first deed of trust), U.S. Bank brought an action to establish the validity of its security interest in relation to Green Parks, which bought the property at the foreclosure sale. Green Parks filed a counterclaim, seeking a judgment that under Chase Plaza, it had acquired title to the property free and clear of U.S. Bank’s interest. U.S. Bank responded to the counterclaim with an answer that raised affirmative defenses – including unconscionability and unclean hands – and moved to dismiss, citing the extensive evidence that the association intended to foreclose on a lien that was subordinate to U.S. Bank’s interest.

In considering U.S. Bank’s motion, the trial court flipped the script. It first converted the motion to dismiss to a motion for summary judgment and denied it. It then went even further by dismissing U.S. Bank’s counterclaim and granting summary judgment against U.S. Bank, even though Green Parks had not requested that relief.

On appeal, the D.C. Court of Appeals quickly reasoned that the trial court’s order was incorrect because it failed to provide the parties with proper notice that it was considering granting summary judgment and because it failed to view the evidence in the light most favorable to U.S. Bank in granting summary judgment for Green Parks. But especially noteworthy is how the court framed the prejudice U.S. Bank suffered as a result of these actions. In the court’s words, “The surprise entry of judgment was not harmless for it deprived the Bank of an adequate opportunity to dodge the bullet.”

The Court of Appeals also noted that Liu left an important question unsettled: What happens if an association forecloses on a lien greater than the six months of unpaid assessments given super-priority status under D.C. law? The Green Parks court described it as an open question as to whether such a lien is “entirely lower in priority than a first deed of trust or whether a portion of the lien enjoys super-priority status.”

Furthermore, the Green Parks decision instructed that, on remand, the trial court had to consider the merits of U.S. Bank’s arguments that the association’s foreclosure sale should be set aside based on equitable doctrines such as unclean hands or unconscionability. While Liu may have established the legal priority of the association’s lien, U.S. Bank’s arguments that the sale was invalid based on equitable defenses were still to be decided.

Going forward, lenders now have a road map as to how to protect their deeds of trust on condominiums in the District of Columbia that have been placed in jeopardy as a result of an association’s foreclosure. The first step is determining whether the association included more than six months of unpaid assessments in its advertised lien amount. According to the Green Parks court, such a foreclosure may mean that the entire association lien is subordinate to the deed of trust. Second, and independently, lenders can raise equitable defenses to the association’s foreclosure sale and seek to have it invalidated on those grounds.