Some Banks Employing a Legal Strategy during Foreclosure Action that Negatively Impacts Community Associations
We wanted to share with our client boards news of the legal strategy that some banks have been pursuing in court foreclosure actions that would have a significant negative impact on community associations if it were to continue.
Historically, when banks/mortgage companies brought action to foreclose on a unit, Connecticut state law ensured that a portion of the association's lien is not foreclosed out by the mortgage foreclosure. This has been an important protection for associations because it ensured that if a bank obtained foreclosure judgment, the bank would become the new owner of the unit and still be subject to the priority portion of the association's lien. This protection provided under a "priority lien" guaranteed that the bank, as the new owner, would be required to pay a minimum of six months worth of common fees plus reasonable court costs and attorney fees (as determined by the court) and then pay the monthly common charges to the association from the date it took title to the unit going forward.
In at least two cases, the Connecticut courts have agreed with the bank's legal arguments to eliminate its additional financial responsibility to the association. In these instances everyone else in the community needed to make up the difference for the lost income resulting from the bank's delay in finalizing the foreclosure effort. Apparently, the legal strategy for the bank has been to pay the six-month priority lien without taking title to the unit and then seek the court's interpretation that the six-month priority lien applies only once during the lawsuit or even the lifetime of the mortgage. The bank then just sits back and lets the foreclosure sit uncompleted, often for many years. In the meantime, the association is obligated to provide services to the unit as it does to all other units. In addition to the landscaping, snow removal and other maintenance services, some associations are also obligated to provide heat, water and other services to the unit if provided to other units as part of its responsibility.
It is suspected that the delays could be a result of the sheer size of the banks, the disorganization that has resulted as the banks attempted to adjust to the many mergers and acquisitions that took place at the height of the mortgage meltdown, improper practices of the people who made the loans and the way in which the loans were administered. Another possibility is that some of the banks have simply determined that there is no point in taking title to condominium units and paying their share of the cost of maintaining the condominiums, unless the bank can dispose of the condominium unit almost immediately.
Even if the defaulting unit owner eventually works out a deal with the bank to reinstate the mortgage, some of these banks have asserted that the mortgage continues to trump the priority lien going forward if the owner becomes delinquent again with the payment of fees to the association. The association could start its own foreclosure, but under the bank's theory, it would have to take title to the unit and also repay the mortgage on it, which would often cost more than the unit is worth.
If recent court decisions against association are not reversed on appeal or if the Connecticut General Assembly does not make it clear that the priority lien is meant to protect associations and their unit owners, Connecticut associations will be severely impacted. Every time a unit owner abandons a unit, or just stops paying their mortgage and common charges, Connecticut associations and their homeowners will be obligated to carry the defaulting unit and will in effect be subsidizing the bank's asset and what has been historically their responsibility.
An effort is underway, spearheaded by CAI-CT, to fight this and to restore the decades-old understanding of the association's six-month priority lien under Connecticut law. This safeguard to associations exists before each foreclosure to discourage foreclosure action from being prolonged and to avoid other owners in the community from having to assume the financial burden.
Imagineers serves on CAI-CT on the Legislative Action Committee (LAC) where action on this matter is being discussed. CAI-CT is following this issue through its Legislative Action Committee and Attorneys Council and will be posting additional information to help coordinate corrective action for those interested in helping. CAI-CT's website is www.caict.org. We will also keep you apprised of this matter.
Thank you for reading the Imagineers Board Newsletter. If you have any question or need any additional information on any articles provided in this newsletter, please contact us at 1-800-560-7268.
Imagineers LLCEmail: Gpassacantando@imagineersllc.com
Phone: 1-800-560-7268
Fax: 860-236-3951
Web: http://www.imagineersllc.com
