I previously wrote about a case involving a bank which had lent on a condominium as collateral, and an investor who purchased the condo in a judicial foreclosure sale of the lien for the owner’s unpaid homeowner’s association dues assessments. In that case the bank, which had been notified of the foreclosure sale, inexplicably failed to participate and then filed a separate lawsuit after the sale seeking to overturn the sale. The Court of Appeals said in effect that the bank, having slept on its rights, did not have the right to overturn the purchase by an investor of a condo worth $130,000 for the small amount owed by the borrower in unpaid homeowners’ association assessments, around $10,000.

As a result of this case it was clear that a bank that had failed to participate in a foreclosure sale and pay the homeowners’ association the amount of the unpaid assessments would not have the legal right to set aside the sale of the property to an investor or other purchaser just because the price the investor paid was small in relation to the value of the property or the size of the bank’s lien. However a lawsuit to set aside a foreclosure sale is not the only method that a lien holder can try to protect its collateral when another lien on the same property is foreclosed. Another approach is redemption.

Another condo foreclosure sale case on a similar point recently came to a similar result when the bank tried to exercise redemption rights and take the property back from the investor by paying the investor what the investor had bid at the homeowners’ association lien foreclosure auction plus costs and interest. The bank’s loan to the homeowner was about $227,000 and the unpaid homeowners’ association dues were about $14,000. Redemption is a process in which the holder of a junior lien can protect its collateral in the face of a foreclosure of a lien that is prior in time to the junior lien. The junior lien holder has eight months from the foreclosure sale to exercise the redemption rights. The question before the court in this more recent case was whether the bank’s first deed of trust was a “subsequent in time” lien to the homeowners’ association lien. If so, the bank would have been entitled to redeem the property from the investor. The bank had, as in the first case, ignored the notice it had received concerning the foreclosure sale.

In this more recent case the court explained the apparent contradiction between the statute governing “superpriority” homeowners’ association liens that establishes the priority of such liens as dating from the date the declarations of the homeowners’ association are recorded, with a denial of redemption rights to a lender whose deed of trust lien was recorded after the recording of the homeowner’s association declarations. The court said that the homeowner’s association lien can foreclose the subsequent deed of trust security because it is a “superpriority” lien by statute, but that for purposes of the redemption statute, the homeowner’s association lien does not “arise” until the homeowner’s dues become delinquent. Because this date of delinquency was subsequent to the recording of the bank’s deed of trust, the deed of trust was not a lien that was “subsequent in time” to the homeowner’s association lien for unpaid dues. Therefore the bank was not entitled to redeem the property and the bank became an unsecured creditor of the former homeowner in this case.

The teaching of these cases is that investors can sometimes score substantial profits by bidding at foreclosure auctions of homeowners’ association liens. Normally of course a lender faced with a homeowners’ association lien foreclosure will pay the delinquent assessments and add the amount to its borrower’s loan. If the lender involved fails to participate in the foreclosure process, then it is possible for an investor to buy a condo for a price that is a small fraction of its value. The preceding is intended for education and should not be considered as legal advice.