Property Associations Lose Battle of the Liens in Two Florida Cases.

Posted by NCBRC - February 19, 2013

In two cases out of the Middle District of Florida, property associations fought for priority over mortgage lenders in order to prevent their liens from being stripped as wholly unsecured. In re Plummer, No. 12-3870 (Bankr. M.D. Fla. Jan. 14, 2013); In re Buckner, No. 12-4962 (Bankr. M.D. Fla. Jan. 17, 2013). The Associations failed to convince the court, however, and, in Plummer, the court permitted the lien stripping under section 1322(b)(1), while in Buckner, the lien was stripped under section 506(d).

In both cases, the mortgage liens exceeded the value of the residential properties and language in the underlying contract between the debtor and the property association specified that institutional liens had priority over Association liens.

In Plummer the condominium association argued that its lien was only partially junior to the Credit Union’s lien because Florida law imposes liability for the lesser of the total assessments accrued during the previous 12 month period, or 1% of the mortgage debt, on a person who acquires title by virtue of a foreclosure sale. Therefore, unlike the typical wholly unsecured junior lien, a portion of the assessments would still be owed to the Association even if the property were sold in foreclosure.

The court agreed that if any portion of the Association lien was superior to the mortgage lien, it could not be stripped, but it went on to find that the contract language giving institutional mortgages priority, and the operation of Florida law which gives priority to the first mortgage recorded, established that the Credit Union had the primary lien. It rejected the Association’s argument that Florida law elevated its lien above the Credit Union’s by preserving a portion of that lien. Rather, the court found that the “provision does not give the Association any lien rights. It merely gives it the right to assert liability for past-due assessments against the mortgage holder if the mortgage holder acquires title through foreclosure.”

The Association went on to argue that even if its lien is junior it cannot be stripped because a condo assessment lien is a unique construct under state law. It is not secured by the value of the property but is a contractual covenant running with the land. Therefore, such liens are not covered by the Bankruptcy Code’s provisions relating to lien valuation and stripping. The court disagreed. It found that the Bankruptcy Code encompasses such liens either as statutory liens, section 101(53), or charges against interest in property, section 101(37). It further found that there was no reason to believe that Congress intended to give Condominium Association liens special treatment. The court turned to the issue of whether a debtor could strip an unsecured junior lien in chapter 13 and found that under Eleventh Circuit precedent he could. Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357, 1358 (11th Cir. 2000) (interpreting Nobelman v. Am. Sav. Credit Union, 508 U.S. 324, 329–30 (1993) to allow strip-off of wholly unsecured lien).

In Buckner, the Magnolia PD Property Association took a different approach when it sought to elevate its lien for past condominium fees and assessments over the mortgage held by the assignee of the original debt, America’s Servicing Company (ASC). There, as in Plummer, the HOA Declaration expressly subordinated HOA liens to “institutional” liens but Magnolia argued that the mortgage did not qualify under this provision because MERS, rather than the original lender (Freemont) or ASC, was listed as the “mortgagee.” The court rejected this argument finding that Freemont and ASC were unquestionably “institutional” lenders, and because MERS’ rights were limited to “acting solely as a nominee for Lender and Lender’s successors and assigns,” its status was irrelevant to the inquiry. Examining MERS’s extensive role in the mortgage industry, the court found that there were important public policy reasons for refusing to subordinate liens held by MERS as third party tracking agent and servicer to HOA liens.

The Buckner court ostensibly allowed the lien stripping under section 506(d) rather than section 1322(b). Although it apparently was not an area of contention in Buckner, some courts have found that section 506(d) does not provide a basis for lien stripping even where the lien is wholly unsecured under section 506(a). Most notably, the Tenth Circuit in Woolsey v. Citibank, No 11-4014 (10th Cir. Sept. 4, 2012), rejected the application of section 506(d) to strip off an unsecured lien in chapter 13. The Woolsey court found that the decision in Dewsnup v. Timm, 502 U.S. 410 (1992) precluded that approach.

Buckner opinion

Plummer opinion


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