This piece originally appeared in the August 2024 edition of MortgagePoint magazine, online now.
Across the country, numerous states have passed uniform community housing statutes that create liens for homeowner’s associations against units in their communities for unpaid assessments. These liens are typically automatically enforceable upon failure to pay an assessment. Once enforceable, the liens can obtain “super priority” status over other lien holders. The super priority lien of an association has been the source of much litigation, across multiple jurisdictions, between associations and mortgage holders.
Recently, the North Dakota Supreme Court provided an interesting clarification and analysis on these competing interests when an association attempted to circumvent the recording requirements necessary for perfection in Indus. Comm’n v. Gould, 2024 ND 32 (2024).
In Gould, the North Dakota Supreme Court was confronted with an appeal regarding a trial court’s order granting summary judgment to the North Dakota Housing Finance Agency (NDHFA) on the issue of priority over the association’s lien and NDHFA’s right to foreclose.
Factually, a group of entities known as “Fendee” built a housing development that included a homeowner’s association. The governing documents for the association were recorded in 2013. Of importance in this matter, pursuant to the governing documents, monthly assessment payments were due on the tenth of each month. Carrine Gould purchased the home in question through a loan and mortgage with Guaranteed Rate Inc., on or about August 30, 2019. Said mortgage was recorded on or about September 5, 2019. On September 6, 2019, Guaranteed Rate Inc. assigned the mortgage to NDIC, which was acting on behalf of NDFHA.
During the purchase financing process, Fendee charged Gould a monthly assessment on August 31, 2019, but as previously stated, that assessment did not become due until September 10, 2019.
In January 2021, Gould failed to make payments on the property and subsequently defaulted on the note. In September 2021, Fendee recorded its lien against Gould for unpaid association assessments, fines, penalties, interest, and legal fees.
NDFHA initiated foreclosure on the property in January 2022 due to the 2021 default. Gould then passed away in January 2023, causing Fendee to amend its lien for additional costs in February 2023.
Both parties moved for summary judgment at the trial level, and the court determined NDFHA had the right to foreclose due to Fendee’s liens being subordinate to NDFHA’s mortgage. Fendee appealed on the premise that the association’s lien was superior due to its super priority status without debt owed, as provided in the association’s governing documents.
In its analysis, the court relied upon the language in Fendee’s recorded governing documents to render a decision. Specifically, a provision of the governing documents stated that the recording of the declaration constitutes record notice and immediate perfection of the association’s lien. The provision further waived any further recording requirements for individual lien claims for unpaid assessments, meaning the association’s lien was immediately and automatically perfected against all units and unit owners. Another section of Fendee’s declaration went on to say that “[t]hese Restrictive Covenants shall be superior and senior to any lien hereafter placed upon any portion of the Subject Property, including the lien of any mortgage or deed of trust.”
In reviewing this language, the court held that despite the terms of the declaration, Fendee’s claim of a “super lien” fails. Interestingly, the court’s reasoning was an association lien, perfected or not, could not have existed until September 10, 2019, at the earliest because that is when the first assessment payment was due. Therefore, since the mortgage was recorded and assigned prior to September 10, 2019, the mortgage had priority over the association lien under the first in time, first in right priority standard. Following this reasoning, the court inserted a short paragraph, hinting that NDHFA’s lien was superior because Fendee’s lien was not perfected until 2021 and 2023 when it recorded its notice of lien, but there was minimal analysis on this concept. Seemingly holding that despite language in the recorded governing documents attempting to automatically create a perfected lien for ongoing assessments, the association’s lien was not perfected until the individual claim was properly recorded. Thus, since the mortgage was recorded and perfected in 2019, prior to the 2021 and 2023 perfection date of the association’s lien against Gould, the lien of NDFHA was superior and NDFHA had the right to foreclose as the senior lien.
While this is a singular North Dakota case analyzing specific language from an individual community association, it highlights a continuing issue and the arguments being made by community associations nationwide to try and obtain senior priority status over mortgage holders.
As shown in Gould, the battle for lien priority between community associations and mortgage companies is ongoing as associations continue to employ creative ways to achieve a super lien priority status.
The Gould decision illustrates the importance of immediately recording the mortgage and perfecting the lien when lending for the purchase of a property in a community association development. Had the association in Gould been able to record and perfect its lien when it became eligible on September 10, 2019, prior to NDFHA’s perfection of its mortgage lien, NDFHA could have potentially lost its senior priority status, having huge ramifications on its foreclosure. It will be interesting to monitor what actions community associations take in response to this decision, as there is ambiguity in what an association can preemptively do to achieve super priority status. As community association law continues to progress and evolve, it is important to keep an eye on its impact with mortgages and the intricacies of this powerful “super priority” status given to an association’s lien.
