In a recent case, the Colorado Court of Appeals strengthened the lien rights of community associations to collect delinquent assessments when the first mortgage holder has foreclosed its lien on an association member’s unit.  Although the defeated first mortgage company in this case will certainly appeal the court’s decision to the Colorado Supreme Court, at this point, as one commentator has written, this ruling has created a class of “meanor lienor” associations.

What Are An Association’s Lien Rights Anyway?
 
By way of background, most association covenants and the Colorado Common Interest Ownership Act (CCIOA) bolster the association’s ability to collect its assessments by creating a perfected lien in favor to the association against each association unit for unpaid assessments, late charges, fines, interest, and collection attorney fees.  This perfected lien is subordinate (“junior”) only to taxes and the first mortgage.  This subordination to the first mortgage means that if the first mortgage closes on its lien, the association’s “junior” lien is extinguished on the date the first mortgage acquires title.  Unfortunately, during the average six month period after foreclosure begins and before the first mortgage assumes ownership of the unit, associations are highly likely to lose assessment payments.

To protect against the loss of assessments during this six month window, CCIOA has granted associations limited protection by providing that a portion of association liens statutorily survive, continuing to encumber the property foreclosed by the first mortgage.  Since this part of lien survives even against the first mortgage, this super-priority lien is known as the “superlien.”  CCIOA limits the superlien to an amount equal to “common expense assessments … which would have become due … in six months immediately preceding institution” of a first mortgage foreclosure.  Unfortunately, this time limitation renders the superlien not so super as superlien amounts are tiny compared to the typical first mortgage amount.  Rarely do superliens make associations whole for the debts run up against a foreclosed unit.

First Atlantic v. Sunstone

In November 2002, the Georgia-based First Atlantic Mortgage foreclosed its lien on a home in Sunstone North, an Arapahoe County common interest community.  When First Atlantic completed its foreclosure in the spring of 2003, Sunstone was owed at least $1,455.  Despite the amount owed, Sunstone made a statutory demand for only the amount of the “super,” or surviving, part of its lien, which totaled $804.  This amount was measured by the amount of assessments that would have become due during the six months immediately prior to First Atlantic’s November 2002 foreclosure initiation.

Not happy with this figure, First Atlantic filed suit in Arapahoe County District Court, challenging Sunstone’s calculation.  First Atlantic argued that the “super” surviving lien was capped by the amount owed to Sunstone on the date the foreclosure started, which was $687, not the full “measuring stick” of six months assessments, which was $804.  After the district court found in favor of Sunstone, First Atlantic appealed its case to the Colorado Court of Appeals.  At this level, Sunstone again won its argument with the Court of Appeals stating that the “first step” in deciding what a statute means is “the plain language of the statute.”  Here, the Court found that the statute plainly mandated the amount of assessments that would have become due during the six months prior to the initiation of a first mortgage foreclosure.

The Impact

First mortgage lenders have been enduring record levels of foreclosures in Colorado.  With an estimated 9,000 community associations located in Colorado, these lenders are aware that the possibility of foreclosures within these associations is quite high.  Therefore, First Atlantic v. Sunstone’s impact will spill far beyond the $117 at stake between the two parties.  In the larger picture, this case has pitted lender profits against the maintaining the financial stability of Colorado’s community associations.

For this reason, First Atlantic is expected to appeal to the Colorado Supreme Court.  If the Court decides to review the case, it will take several months before the final resolution to the question is known.  But for now, community associations may continue lawfully to claim higher superlien amounts by using the same method of calculation as Sunstone.  Fortunately, as associations deal with a challenging economy, First Atlantic v. Sunstone has indeed made Colorado community associations “meaner lienors.”

Associations should be aware that superliens are only part of successful assessment collection.  Click here to read a more general Orten & Hindman assessment collection article.