August 21, 2017

Colorado Supreme Court: Membership Interest of Non-Colorado LLC Member Located in Colorado for Charging Order Purposes

The Colorado Supreme Court issued its opinion in JP Morgan Chase Bank, N.A. v. McClure on Monday, April 10, 2017.

Limited Liability Companies—Membership Interests—Charging Orders—Priority.

This case concerns the relative priority of competing charging orders filed by multiple judgment creditors against a foreign judgment debtor’s membership interests in several Colorado limited liability companies (LLCs). The Colorado Supreme Court concluded that for purposes of determining the enforceability of a charging order, a membership interest of a non-Colorado citizen in a Colorado LLC is located in Colorado, where the LLC was formed. The court further concluded that when, as here, a judgment creditor obtains a foreign charging order that compels certain action by a Colorado LLC, the charging order is ineffective as against the LLC until the creditor has taken sufficient steps to obligate the company to comply with that order. Although the authorities are not uniform as to the steps to be taken, under any of the applicable scenarios, the charging orders obtained by the petitioner did not become effective until after the respondents had obtained and served their competing charging orders. Accordingly, the court concluded that respondents’ charging orders are entitled to priority over petitioner’s competing charging orders and therefore affirmed the judgment of the court of appeals.

Summary provided courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Partial Subordination Approach to Lien Priority Best Reflects Colorado Law

The Colorado Court of Appeals issued its opinion in Tomar Development, Inc. v. Friend on Thursday, June 4, 2015.

Lien—Subordination Agreement—Partial Subordination Approach.

The Friend family sold its ranch to Friend Ranch Investors Group (FRIG) to develop it into a resort-style golf course community. In 2010, FRIG conveyed the property to Mulligan, LLC, and at that time, the relevant order of priority was (1) Colorado Capital Bank’s (CCB) senior lien; (2) Tomar Development (Tomar); (3) the Damyanoviches; (4) the Friends; and (5) CCB’s junior lien. Bent Tree, Mulligan, and CCB then entered into a subordination agreement whereby CCB’s senior lien became subordinate to CCB’s junior lien. Neither Tomar, the Damyanoviches, nor the Friends was involved in or an intended beneficiary of the subordination agreement. CCB’s senior lien was never released. Bent Tree then foreclosed on CCB’s senior lien and, in November 2010, Bent Tree bought the property at a public trustee’s foreclosure sale for approximately $11,800. Tomar, the Friends, and the Damyanoviches filed claims, each of which sought declaratory judgments as to the priority of their interests, which were dismissed by the trial court under CRCP 12(b)(5).

On appeal, Tomar, the Friends, and the Damyanoviches argued that the trial court erred in applying the partial subordination approach to the subordination of liens. The partial subordination approach applies when the most senior lienholder (A) agrees to subordinate his interest to the most junior lienholder (C) without consulting the intermediary lienholders (B). Under this approach, when A subordinates to C, C becomes the most senior lienholder, but only to the extent of A’s original lien. Under this partial subordination approach, B is not affected by the agreement between A and C, to which it was not privy. Colorado adopts the partial subordination approach, and it was properly applied in this case. Accordingly, the trial court did not err in dismissing Tomar’s, the Damyanoviches’, and the Friends’ claims seeking a declaratory judgment that each of their interests was senior to all other interests.

Summary and full case available here, courtesy of The Colorado Lawyer.

Colorado Court of Appeals: Funds Received in Arbitration Award Determined to be “General Intangibles”; Prevailing Party Entitled to Attorney Fees

The Colorado Court of Appeals issued its opinion in Millenium Bank v. UPS Capital Business Credit on Thursday, March 13, 2014.

Summary Judgment—Creditors’ Rights— Uniform Commercial Code.

UPS Capital Business Credit (UPS) loaned Superior Plaster and Drywall, Inc. (Superior) $1,027,000, secured by Superior’s assets. Millennium Bank (Millennium) loaned Superior $1.5 million, also secured by Superior’s assets. Millennium and UPS entered into an Intercreditor Agreement to establish the respective priority of their secured interests in Superior’s assets. Under the Intercreditor Agreement, (1) Millennium had first priority, and UPS second priority, in Superior’s accounts receivable; and (2) UPS had first priority, and Millennium second priority, in Superior’s general intangibles.

This case arose when Millennium and UPS disputed their rights to funds awarded to Superior in an arbitration proceeding. Superior had subcontracted with Beck Development, LLC (Beck) to perform drywall and paint work as part of the construction of two condominium towers. Superior claimed Akzo Nobel Paints, LLC (Akzo) had supplied defective paint; Akzo countered that Superior’s application techniques were to blame. Superior repainted the project four times at Beck’s insistence. The problem was not fixed, and Beck terminated Superior, without paying Superior for the costs incurred in repainting.

Superior sued Beck and Akzo, claiming (1) breach of contract by Beck and Akzo; (2) breach of warranty by Akzo; and (3) the right to receive payment on a mechanic’s lien it had filed on the condominium towers for work performed on the subcontract. The three entities agreed to arbitrate the claims against Akzo.

The arbitration panel determined that Akzo’s paint was the cause of the paint problems. The panel awarded consequential damages to Beck and Superior. To Superior, the damages encompassed (1) the amount due on Superior’s lien for work performed under the subcontract on the towers; (2) Superior’s costs for excess labor and excess materials in repainting the towers; and (3) punitive damages. Two weeks later, Superior filed for bankruptcy. Approximately one year later, Beck successfully moved, without objection, for dismissal of Superior’s claims against it.

The funds awarded in the arbitration became part of Superior’s bankruptcy estate. Millennium and UPS asserted their rights in those funds as secured creditors under Colorado’s version of the Uniform Commercial Code (UCC). They disputed only the priority rights with respect to the part of the funds representing the excess costs in labor and materials ($638,226.83) incurred by Superior in repainting the towers (challenged funds).

Millennium asserted the challenged funds were the proceeds of an account, on which it had first priority; UPS asserted they were the proceeds of an intangible right, on which it had first priority. The bankruptcy court determined it lacked jurisdiction to adjudicate the priority dispute and ordered the trustee to deliver the challenged funds to Millennium and UPS jointly for state law determination of their interests in the funds.

After the parties filed a statement of undisputed facts and cross-motions for summary judgment, the district court entered summary judgment for UPS, concluding that the challenged funds were general intangibles, rather than accounts. Millennium appealed and the Court of Appeals affirmed.

The parties agreed the resolution of the case depended on whether, as a matter of law, the challenged funds were, under the UCC, proceeds of an “account” or the proceeds of a “general intangible.” The “general intangible” category of assets traditionally encompassed proceeds from the right to pursue many types of lawsuits between a debtor and a party other than the interested creditor. However, this category, under the UCC, does not include “accounts.”

Here, the challenged funds were from an arbitration award Superior recovered from Akzo on a breach of warranty claim, not the right to payment of a monetary obligation for services rendered or to be rendered. Thus, the funds recovered from Akzo were not proceeds from an “account,” but rather proceeds of a “general intangible.” The district court’s classification of the funds was affirmed.

UPS requested its attorney fees incurred on appeal pursuant to a prevailing party fee provision in the Intercreditor Agreement. The Court agreed that UPS was entitled to those fees and remanded the case to the district court to award a reasonable amount of attorney fees incurred on appeal.

Summary and full case available here.

Colorado Court of Appeals: Contractual Covenants in Deed of Trust Not Extinguished in Foreclosure

The Colorado Court of Appeals issued its opinion in Top Rail Ranch Estates, LLC v. Walker and Walker Development Co. v. Top Rail Ranch Estates, LLC on Thursday, January 30, 2014.

Issue of First Impression—Motions for Directed Verdict—Doctrine of Claim Preclusion—Pursuit of Same Claim in Two Actions—Fraud—Economic Loss Rule—CRCP 59(a)(4)—Attorney Fees.

Top Rail Real Estates, LLC (Top Rail) entered into a contract with Walker Development Company to purchase a subdivision of platted residential lots. Top Rail paid $200,000 of the purchase price in cash, and executed a promissory note payable for the balance of $1 million. After Walker Development’s failed attempt to change the zoning to sell a portion of the property to a mining company, Top Rail was unable to sell lots in the subdivision, and it halted construction activities. Top Rail stopped making payments on its loan from the bank, and the bank foreclosed on its deed of trust. The parties sued each other in separate actions, and this appeal followed.

Walker Development argued in the first action that the court erred in granting the motion for directed verdict and dismissing its counterclaim. Regardless of whether the lien imposed by the deed of trust was extinguished by foreclosure of the bank’s senior lien, the contractual covenants in the deed of trust were not extinguished by the foreclosure. Therefore, the trial court erred in directing a verdict against Walker Development on its counterclaim.

Ronald Walker and Walker Development also argued that the trial court erred in denying their motion for directed verdict on the fraud claims asserted by Top Rail and Christopher Jenkins. The economic loss rule applied to bar the fraud claims asserted by Top Rail and Jenkins because the relief sought was the same as that sought for breach of contract and breach of the covenant of good faith and fair dealing.

The Court of Appeals agreed that the trial court erred in its calculation of prejudgment interest. The award should have been based on the $500,000 damages award in the final judgment entered by the trial court, and not on the $567,000 damages awarded by the jury.

Walker Development also contended that the trial court improperly granted summary judgment for Top Rail and Jenkins in the second action, based on its ruling that claim preclusion barred Walker Development’s claims. The doctrine of claim preclusion does not bar claims that were permissive counterclaims in a prior action, where the adjudication of those claims would not result in inconsistent judgments or a deprivation of rights established by the first judgment. Here, allowing Walker Development’s claims to be adjudicated in the second action did not nullify the judgment in the first action or impair any rights established by it, nor did inconsistent judgments result. Accordingly, the trial court erred in granting summary judgment against Walker Development based on claim preclusion.

On cross-appeal from the second action, Top Rail and Jenkins argued that the trial court erred in denying their CRCP 59(a)(4) motion for cancellation of the promissory notes, release of the deed of trust, and release of the notice of lis pendens. The Court disagreed. The trial court did not abuse its discretion in determining that it would be inequitable to require Walker Development to file an additional bond on top of the $1.3 million bond that it had already posted in the first action. The judgment was affirmed in part and reversed in part, and the case was remanded with directions.

Summary and full case available here.

Tenth Circuit: Filing Lis Pendens Does not Create a Transfer of Interest in Property Under Bankruptcy Code

The Tenth Circuit Court of Appeals published its opinion in Ute Mesa Lot 1, LLC v. First-Citizens Bank & Trust on Monday, November 25, 2013.

Ute Mesa is a real estate developer in Colorado. In October 2007, it received a $12 million loan from Defendant-Appellee United Western Bank (“Bank”) to finance the construction of a single family home. First-Citizens Bank & Trust acquired United’s interest in the loan and state court claims. To secure the loan, the Bank prepared a deed of trust incorrectly identifying Ute Mesa’s sole member as the owner rather than Ute Mesa. Because the grantor under the deed of trust was not the owner of the property, the deed of trust was ineffective in giving the Bank a lien on the property.

In May 2010, the Bank filed suit in Colorado state court seeking reformation of the deed of trust and a declaration that it had a first priority lien on the property. Two days later, the Bank filed a notice of lis pendens in the Pitkin County real property records. In August 2010, Ute Mesa petitioned for Chapter 11 bankruptcy relief. Ute Mesa continued as debtor in possession of the property. In April 2011, Ute Mesa filed an adversary proceeding against the Bank seeking to avoid the lis pendens as a preferential transfer. The bankruptcy court granted the Bank’s motion to dismiss, and the federal district court affirmed.

Ute Mesa argued that under 11 U.S.C. § 547(e)(1)(A), a “transfer of an interest in property” occurs when a bona fide purchaser cannot acquire an interest superior to that of a creditor. According to Ute Mesa, because the lis pendens prevents a bona fide purchaser from acquiring an interest in the property superior to the Bank’s interest, the lis pendens qualifies as a transfer of an interest in the property. The Bank argued that the first and only step of the analysis is to determine whether an underlying property interest exists under state law. Because a lis pendens is merely a notice and does not constitute a lien, no transfer occurred. The Tenth Circuit agreed with the Bank and affirmed.

Colorado Court of Appeals: Insurance Company Owed Duty to Third-Party so Trial Court’s Grant of Motion to Dismiss in Error

The Colorado Court of Appeals issued its opinion in Medical Lien Management v. Allstate Insurance Company on Thursday, June 6, 2013.

Breach—Assignment—Personal Injury—Settlement—Notice.

In this breach of assignment action, plaintiff Medical Lien Management, Inc. (MLM) appealed the judgment dismissing its complaint against defendant Allstate Insurance Co. (Allstate). The judgment was reversed and the case was remanded.

In October 2005, Fred Martinez was injured in an automobile accident caused by a tortfeasor insured by Allstate. In March 2007, in consideration for payment by MLM of his medical bills, Martinez executed a written agreement granting MLM a lien on, and assigning his rights to, any and all proceeds derived from his personal injury claim in an amount equal to the fees and costs of the medical treatment paid by MLM. MLM eventually paid $9,938 for such treatment. In October 2008, Martinez settled his personal injury claim against the tortfeasor insured by Allstate. Allstate issued payment to Martinez without paying MLM.

MLM asserted that the court erred in granting Allstate’s CRCP 12(b)(5) dismissal motion for failure to state a claim. First, an individual can validly assign the sums to be recovered from his or her personal injury claim before settlement. Here, the language of the agreement was sufficient to withstand a pleadings challenge as to whether the parties intended to affect a present transfer of the proceeds of Martinez’s personal injury recovery. Additionally, the complaint adequately alleged a valid assignment to MLM of Martinez’s rights to proceeds resulting from his injury and notice of the assignment. Once a debtor receives notice of a valid assignment, it is required to pay the assignee. Allstate failed in this regard. Therefore, the trial court erred in granting Allstate’s motion to dismiss for failure to state a claim.

Summary and full case available here.

Colorado Court of Appeals: Dismissal for Failure to Prosecute Inappropriate Where Party Awaited Judgment

The Colorado Court of Appeals issued its opinion in Hudak v. Medical Lien Management, Inc. on Thursday, May 23, 2013.

Failure to Prosecute.

Defendant Medical Lien Management (MLM) appealed the district court’s judgment dismissing with prejudice its counterclaims against plaintiff Tammy Hudak for failure to prosecute. The Court of Appeals reversed the judgment and the case was remanded with directions.

In 2006, Hudak was injured in an automobile accident. Because she was unable to pay for her medical treatment, she entered into “lien” agreements with various medical providers to obtain that treatment. Pursuant to those agreements, she received medical care in exchange for the providers’ right to place liens on any settlement or judgment funds she might obtain in a personal injury action against the alleged tortfeasor, and collect from her any amounts owed above that recovered in a settlement or judgment.

After obtaining a $47,000 settlement in her personal injury action, Hudak filed a motion for declaratory and interpleador relief, naming MLM as an interpleader defendant. MLM, which had accumulated or been assigned a lien balance of $40,430.70, filed a breach of contract, unjust enrichment, and account-stated counterclaims against Hudak for any amount owed after distribution of the interpleaded funds.

MLM filed a motion for summary judgment, claiming priority over other interpleador defendants to the interpleaded funds, and a right to judgment on its counterclaims. The trial court determined that because MLM had second priority, it was entitled to recover only $20,353.75 of the interpleaded funds. The district court never ruled on the part of MLM’s summary judgment motion relating to its counterclaims and, without notice to MLM, entered an order closing the case.

Thirteen months later, MLM filed a renewed motion for summary judgment with respect to its counterclaims. The district court, acting through a different judge, dismissed the counterclaims for failure to prosecute. On appeal, MLM argued this was error, and the Court agreed.

To reverse a decision to dismiss for failure to prosecute, the Court must find that the trial court’s decision was manifestly arbitrary, unreasonable, or unfair. Here, the case was inactive for thirteen months. MLM argued that it was awaiting a ruling by the district court on its pending motion for summary judgment and this was a mitigating circumstance or reasonable excuse for delay. The Court agreed that the burden of following up on motions generally is on the party filing them. However, MLM had done all that was necessary to put its dispositive summary judgment before the court and was not obliged to renew the motion or remind the court that it needed to be ruled on. Under these circumstances, it was error for the trial court to exercise its discretion to dismiss MLM’s case. The judgment was reversed and the case was remanded for reinstatement and further proceedings.

Summary and full case available here.

Colorado Court of Appeals: Agent’s Error in Proceeding with Closing Despite Lack of Proof of Compliance with Underwriter’s Terms Constituted Violation of Contract

The Colorado Court of Appeals issued its opinion in Fidelity National Title Co. v. First American Title Insurance Co. on Thursday, May 23, 2013.

Contractual Duties of a Real Estate Closer.

Defendant Fidelity National Title Company (Agent) appealed the trial court’s judgment in favor of third-party defendant First American Title Insurance Company (Underwriter). The Court of Appeals affirmed the judgment.

Agent issued title insurance policies underwritten by Underwriter pursuant to an underwriting agreement (contract). Under the contract, Agent was to perform title and closing services. Toward the end of 2007, Agent wrote two title insurance commitments underwritten by Underwriter, each of which committed to insure a different bank as the first-position lienholder for the same parcels of real estate. The policies were issued in 2008.

The first commitment was issued with respect to Brown Financial, LLC (Brown), which loaned money to the developer of the parcels (Developer). Brown assigned its deed of trust to Academy Bank (Academy), and Brown serviced the loan by collecting money from Developer and forwarding it to Academy. The policy insured Academy as the first-position lienholder.

Two months after Agent had issued the commitment for the Brown title policy, it issued a commitment to insure the interest of Colorado East Bank & Trust (CEB&T) as first position lienholder on the same parcels in connection with a new loan from CEB&T to Developer. The CEB&T commitment had a requirement that the previous deed of trust be released, and noted it had been assigned to Academy.

Agent closed both loans within two months. Agent failed to pay Academy from the closing proceeds of the CEB&T loan and failed to obtain a release of Academy’s deed of trust on the parcels. Both Academy and CEB&T were insured in their respective policies as first position lienholders for the same parcels. Agent did not notify Underwriter of this fact.

After Academy began foreclosure proceedings on the parcels in 2009, CEB&T sought to enjoin the foreclosure. Because the Academy lien had not been paid or released, Academy asserted a claim against Underwriter under the Brown title policy, and CEB&T asserted a claim against Underwriter under CEB&T’s policy. Underwriter paid CEB&T $986,000 to resolve the latter’s claims in foreclosure and $55,000 to reimburse CEB&T for its attorney fees.

The claims in this appeal are by Underwriter against Agent under the terms of the contract. The trial court found in favor of Underwriter.

On appeal, Agent argued the trial court misconstrued section 7.3 of the contract and erroneously found Agent liable for committing “[an] error, fault, or negligence in handling funds in connection with [an] escrow.” Requirement G of the title commitment required that the deed of trust on the property be released. It indicated that Academy would need to release the deed of trust. A letter from Brown was received before closing, stating it would provide a release of the deed of trust and the original promissory note marked “paid in full” within fourteen days of the closing. No mention was made of Academy. The closer was not happy with this, but her branch manager authorized her to proceed. The trial court found this was negligent handling of funds in connection with an escrow by Agent, in violation of section 7.3 of the contract.

Agent argued it was not “handling funds,” but simply performing a title search and completing a closing. Also, Agent contended that any errors occurred in the context of a real estate closing and that those services do not fall within the meaning of “escrow.” The Court held that the record and the plain meaning of those terms supported the trial court’s finding that Agent’s error was a breach of section 7.3 of the contract.

Agent also argued that under CRS § 38-35-124.5, the letter it received from Brown was a “payoff statement” on which Agent was entitled to rely. The Court found the letter was not a payoff statement within the meaning of the statute. The testimony of the expert witnesses and the plain language of the statute support the finding that a payoff statement is a statement that a certain sum of money would need to be paid at closing in exchange for release of a deed of trust. The Brown letter was simply a statement that no money was due to Brown; it did not specify how much was due to Academy, which was the holder of the indebtedness.

Agent argued that the trial court misconstrued section 7.4 of the contract by ruling that Agent had knowledge of a claim or loss stemming from a title report, and its failure to give notice of such a claim or loss caused Underwriter to sustain “actual prejudice.” The Court disagreed. Agent contended that it didn’t know about the claim or loss because parts of the knowledge were held by various employees. The Court found that Agent must be held accountable for the knowledge of its employees. Agent knew and therefore had a duty to report to Underwriter that it was ensuring two different entities as the first priority lien holders with respect to the same parcels of property. Clearly, Underwriter suffered “actual prejudice” as a result of the lack of this knowledge. Had it known of the potential claim in advance, it could have taken proactive steps to mitigate the damages it ultimately had to pay. The judgment was affirmed.

Summary and full case available here.

Tenth Circuit: In Case of First Impression, 2005 Amendments to Bankruptcy Code Do Not Exempt Individual Chapter 11 Debtors from the Absolute Priority Rule

The Tenth Circuit issued its opinion in Dill Oil Company, Inc. v. Stephens on Tuesday, January 15, 2013.

Arvin E. Stephens and Karen J. Stephens, f/d/b/a/ Ninnekah Quick Mart, LLC (“Debtors”) owned a chain of convenience stores for which Dill Oil Company, LLC, and Danny and Nancy Dill (“the Dills”) were the primary supplier of gasoline and gas station products. Due to the rising price of gas and a diminishing customer base, Debtors’ stores began operating at a loss. Debtors became liable to the Dills for approximately $1.8 million.

In 2010, Debtors filed for relief under Chapter 11 of the Bankruptcy Code. Pursuant to the plan, the Dills would be paid approximately $15,000 as a secured creditor, but their remaining claim would be considered unsecured. The Debtors would retain possession and control of their property; the Dills would receive a monthly payment for five years, totaling about 1% of their unsecured claim. The Dills objected to confirmation on the ground that the proposed plan violated the absolute priority rule (“APR”), which bars junior claimants, including debtors, from retaining any interest in property when a dissenting class of senior creditors has not been paid in full.  The bankruptcy court entered an order confirming the plan and the Dills appealed.

This appeal presents an issue of first impression for the Tenth Circuit: whether the 2005 amendments to the Bankruptcy Code exempt individual Chapter 11 debtors from the absolute priority rule.

After examining the divergent interpretations among the Circuits of the statutory language and endeavoring to ascertain Congress’s intent, the Tenth Circuit refused to read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure. Here, the statutory language and legislative history lacked any clear indication that Congress intended to erode the absolute priority rule, a pillar of creditor bankruptcy protection.

Accordingly, the Court REVERSED the bankruptcy court’s order confirming the plan and REMANDED for further proceedings.

Tenth Circuit: In Bankruptcy Case, Debtor Permitted to Grant Security Interest to Creditor in Economic Value of Broadcasting License, Regardless of When Sale of License is Contemplated

The Tenth Circuit Court of Appeals issued its opinion in In re Tracy Broadcasting Corporation on Monday, October 16, 2012.

Tracy Broadcasting filed for bankruptcy under Chapter 11. Its primary creditors were Valley Bank and Spectrum Scan, which was unsecured. The most valuable asset was Tracy’s broadcasting license. The schedules stated that the “proceeds” of the license were secured to Valley Bank. Spectrum Scan brought an action to determine the extent of Valley Bank’s security interest. The bankruptcy court ruled that Valley Bank had no priority in the proceeds of the sale of the license. According to the bankruptcy court, Tracy Broadcasting lacked a sufficient prepetition property interest in the license because the Federal Communications Act (FCA) barred its transfer without FCC permission. The United States District Court for the District of Colorado affirmed.

The Tenth Circuit’s analysis on appeal involved two steps. First, it determined what, if any, interest Tracy Broadcasting could convey in its license before it filed its bankruptcy petition. The Tenth Circuit concluded that Tracy Broadcasting could grant a security interest in its right to the proceeds of the sale of the license. Under the FCA, a licensee has no ownership rights in a radio channel or frequency; the use of the channel is within the regulatory power of the FCC. But the FCA does not prohibit a licensee from making money from its license—say, when a licensee sells a license (albeit only with FCC approval) and realizes a profit because of the value of listener loyalty to the frequency. Accordingly, the Court held that federal law permitted Tracy Broadcasting to grant a security interest in the economic value of its license to Valley Bank.

Second, The Tenth Circuit determined whether such a security interest is a property interest that can attach before a sale of the license is contemplated.  Under the Bankruptcy Code, property-rights issues of this sort are a matter of state law. The Tenth Circuit held that Nebraska law recognizes that a security interest in the proceeds of a license sale attaches when the licensee enters into the security agreement, regardless of whether a sale is contemplated at that time. REVERSED.

Foreclosures and Liens — Some Basics

I recently worked with a client who had purchased a property at the sheriff’s sale on a homeowners association lien. We frequently take properties through this kind of judicial foreclosure, and so from my perspective, everything was pretty cut and dry. The client had a lot of questions, and I found myself discussing some basic rules of real property law. Today, I found this article about a purchaser of a property foreclosed on by an HOA, and decided it might be appropriate to set out some general information about liens and the effect of foreclosure.

  • In an HOA foreclosure, what happens to the first mortgage?
    If the HOA lien foreclosed was the six month “superlien,” the first mortgage itself may be wiped out. This is not common. Most of the time, the HOA lien being foreclosed is for amounts owed beyond six months worth of assessments. The superlien is senior to the first mortgage. The amounts owed beyond the superlien are junior to the first mortgage. Foreclosure of a senior lien wipes out junior liens. In all likelihood, if you have purchased a property at the foreclosure of an HOA lien, you are going to have to pay the first mortgage. The holder of the first mortgage may be in the process of foreclosing its lien, as well, so do your research.
  • What happens to the second mortgage, or other liens such as judgments?
    The second mortgage and other liens are wiped out by the foreclosure of the senior lien. An exception to this is when the second mortgage or other liens are not given proper notice of the foreclosure. Make sure to obtain title information to verify that all parties received proper notice.
  • Why is the HOA lien senior to the second mortgage? It was recorded after the date of the second mortgage.
    Colorado requires that any party claiming an interest in real property record evidence of that interest in the real property records of the county in which the property is located. When the Declaration creating the homeowners association is recorded, it automatically creates a lien for assessments. The association doesn’t even have to record a lien later, when an owner fails to pay assessments, but it’s a good idea to do so to protect the association’s rights.
    Because the Declaration was recorded long before any owner took out a first or second mortgage, it is technically “senior” to those interests. The Declaration, however, as well as Colorado law, subordinates the association’s lien (beyond the superlien) to the first mortgage. This is to ensure banks are willing to finance properties within associations. Second mortgages are not treated with the same deference and are junior to the association’s lien.
  • I won my auction! I’m going to sell the property immediately!
    Not so fast, my friend. While you may win an auction, the second mortgage holder and other junior lien holders have at least eight business days after the sale to file a notice of intent to redeem. If they do this, you will receive payment for your bid, but they will end up with the property.
  • How do I get rid of the tenants?
    If the parties residing in the property were the owners who were subject to foreclosure, they can be removed with a simple eviction. Keep in mind that evictions are often not simple. If the parties in the property were bona fide tenants, paying fair market value rent, and not related to the prior owners, you may have to allow the tenant to reside in the property for the longer period of 90 days, or the end of the lease. Contact an attorney to learn the proper procedures in these cases.

Each individual foreclosure has its own idiosyncrasies, and this information is extremely general. If you’re looking into investing in a foreclosure, make sure you do your due diligence and don’t get surprised with an unexpected mortgage payment, or worse, an unexpected foreclosure!

Lindsay S. Smith is an attorney at Winzenburg, Leff, Purvis and Payne, LLP where she practices in general community association and real estate law. She provides legal representation in covenant enforcement, eviction, bankruptcy, and general association litigation; contract and document drafting and review; and general business and governance advice for association clients. She regularly contributes to the firm’s blog on topics such as governance and litigation. This article originally appeared on the firm’s blog on September 21, 2012.
A Colorado native, she received her undergraduate degree from the University of Oklahoma in 2001, magna cum laude. She was a member of Phi Beta Kappa, Phi Sigma Pi, and Alpha Gamma Delta. She received her Juris Doctorate from the University of Oklahoma in 2004, with distinction. She was Articles Development Editor of the American Indian Law Review, which also published her article on American Indian water rights issues. She is a member of the Colorado and American Bar Associations and is admitted to practice in Colorado state and federal courts. To contact Lindsay directly, you may e-mail her at lsmith@wlpplaw.com.