Residential real estate lenders are still reeling from the August 2014 ruling of the D.C. Court of Appeals in Chase Plaza Condominium Association v. JPMorgan Chase Bank, 98 A.3d 166 (D.C. 2014), in which D.C.'s highest municipal court held that foreclosure of a condo association’s “super-lien” (a super-priority lien for 6 months of unpaid assessments) extinguishes all junior liens, including a bank's lien for a first mortgage (or first deed of trust).
JPMorgan Chase had argued that the condo association’s “super-lien” (which was enacted by statute in 1991 as an amendment to the D.C. Condominium Act) was entitled only to priority of payment. But a three-judge panel of the D.C. Court of Appeals held that the “super-lien” was a true senior lien, which, under common-law principles of lien priority, extinguishes all junior liens in a foreclosure sale.
Reversal of the ruling is unlikely, despite the unease of banks regarding (1) the statute's lack of a notice requirement, until the 2017 amendment,* and (2) the assertion that the “super-lien” might be considered an unconscionably low purchase price for a condominium unit (the unit at issue was mortgaged for $340,000, while the purchase price was a mere $10,000; the amount of the super-lien was $9,415).
JPMorgan Chase had argued that extinguishment of the bank’s lien under such circumstances would cripple mortgage lending in D.C., while the condo association had argued that it must be permitted to enforce its super-lien to prevent the condo community from falling into disrepair due to unpaid assessments. As to such competing policy considerations, the Court of Appeals indicated it would take no position, deferring to the D.C. Council on matters of policy.
While Chase Plaza Condo Association did send notice of the scheduled foreclosure sale to the record beneficiary of the first deed of trust (Washington Mutual, a.k.a. WAMU), that interest was subsequently acquired by JPMorgan Chase. The evidence is unclear as to whether the condo association knew that JPMorgan Chase had subsequently acquired the first deed of trust after WAMU filed for bankruptcy (apparently the issue of who succeeded WAMU as the beneficiary had been litigated extensively in the bankruptcy courts, and so JPMorgan Chase’s claim was on the public record).
The condominium association would have faced practical difficulties attempting to send notice to a lienholder whose interest was unrecorded, in any event. Constitutional Due Process does not require a party to do the impossible, that is, send notice to an unknown entity whose name and address are not "reasonably ascertainable through the exercise of reasonably diligent efforts." Small Engine Shop, Inc. v. Cascio, 878 F.2d 883 (5th Cir. 1989) (citing Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983)). Furthermore, "state action" would have to be established for Due Process protections to attach. A footnote in the Court of Appeals’ opinion questions whether the lack of a notice requirement in the Condominium Act might render that portion of the statute unconstitutional, either facially or as applied to JPMorgan Chase, but the Court declined to consider the issue since the parties had made no constitutional arguments in the trial court.*
The Court of Appeals opinion also expresses doubt that an association could waive its statutory right of priority by contract. As the Court of Appeals observed, the Condominium Act, D.C. Code § 42-1901.07, states that “[e]xcept as expressly provided by this chapter, a provision of this chapter may not be varied by agreement and any right conferred by this chapter may not be waived.” See Chase Plaza, supra, at 178.
* UPDATE: On February 9, 2017, the D.C. Mayor signed into law an amendment to the D.C. Condominium Act requiring among other things notice to a first mortgage holder before an association forecloses its lien for unpaid assessments.