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Association Dues have "Super Priority" over Bank Mortgages

he Rhode Island Supreme Court ruled that a condo association's lien extinguishes a bank mortgage lien.

Michael J. Botelho purchased a condo in Rhode Island in 2004. Some time after the purchase, Botelho defaulted on his condominium dues and his mortgage. The condominium association placed a lien on the property and sold it at an auction for $21,000 to the plaintiff, Twenty Eleven.

Botelho had a mortgage with PNC; two years after Twenty Eleven purchased the property, PNC sent a letter stating the bank would proceed with a foreclosure sale.

In an effort to stop the sale, Twenty Eleven filed suit to quiet title to the condo and permanently prevent the bank having any interest in the property.

HOA Lien Takes Priority

Twenty Eleven relied on the Rhode Island Condominium Act § 34-36.1-3.21 (c) which states an association's lien takes priority over first mortgages, and that when the association foreclosed on the lien and sold the property at auction the mortgage was extinguished.

Twenty Eleven also argued that the bank failed to exercise its right to redeem within 30 days of the sale and that the plaintiff received the property free and clear of the mortgage.

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No Payment Priority

PNC argued the act only created payment priority and that the mortgage obligation would remain. PNC believed that if the bank instituted a foreclosure proceeding, as a secured creditor the association would receive money to satisfy the lien.

During a bench trial, the judge decided against the plaintiff, stating there was no language in the statute supporting the argument and granted the defendant's motion to dismiss.

The specific provision at issue is officially called the “lien assessment” or unofficially the “super priority lien.” The act allows a homeowner association to institute two liens--one that takes higher priority over the mortgage or other encumbrances, and the other that is of lower priority to mortgages and the deed of trust.

The state supreme court concluded that "prior to" has a special meaning in the mortgage and lien context.  Additionally, the foreclosure principles provide that a “lien with lower priority are extinguished if a valid foreclosure sale yields proceeds to satisfy the higher priority lien.”

Missed Opportunities to Preserve Interest

A review of other statutory provisions including the split-lien concept and the court’s interpretation of this statute also concluded that an association lien took true priority over a mortgage.

The judge believed the defendant had several options at its disposal to retain their interest in the property but failed to do either. The bank could have paid the outstanding dues and added increased the mortgage amount or required association dues to be paid into an escrow account.

The bank ultimately stated the defendant could have avoided losing its interest, if it had availed itself to one of those options.

The court agreed that the conclusion was “draconian in nature” but says “we are also reminded of the ancient maxim “dura lex sed lex,” meaning the law may be harsh, it is still the law.

This case is Twenty Eleven, LLC v. Michael J. Botelho et al., Case No 2014-10-Appeal, Rhode Island Supreme Court.

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