The United States Bankruptcy Court for the District of Maryland recently held that the lien position of the assessments under the declaration that encumbers the land in Columbia, Maryland (the “Declaration”) was subordinate to that of a deed of trust on a particular property. Therefore, when the proceeds of a sale of that property were insufficient to pay the deed of trust holder in full, the court held that the Columbia Association, Inc., which collects the Declaration assessments, was not entitled to a portion of those funds to pay past due assessments. In re Stein Properties, Inc. United States Bankruptcy Court for the District of Maryland, Case No. 17-22680-TJC (January 23, 2019).
Stein Properties involved the sale in bankruptcy of an office building on Little Patuxent Parkway known as the Columbia Professional Center, for $5,275,000. Unfortunately, the amount secured by the deed of trust on the property exceeded $5.4 million. The Columbia Association filed a claim for the unpaid assessments under the Declaration, alleging that the assessments had priority over the deed of trust.
The Declaration, which was the basis for the assessments, was recorded in the Land Records of Howard County in 1966. It provides that the charges and assessments under it that are imposed each year are a first priority lien on all of the property described in it, superior to any and all other charge, liens or encumbrances that may later arise or be imposed on the covered property.
The Columbia Association uses the assessments for recreational, cultural, and community purposes. Private parties and governmental agencies have long regarded the lien of the assessments under the Declaration as having first priority, subordinate only to taxes and similar governmental charges.
In 2017, the Court of Appeals held in Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Co. LLC that liens under private declarations must be created and enforced under the Maryland Contract Lien Act, regardless of the language of the declarations. This means that a lien is created, and the priority is established, only when an assessment is unpaid and the declarant goes through the process required by the Contract Lien Act. This places unpaid assessments behind the liens of deeds of trust and other encumbrances that are recorded after the declarations but before the assessments became delinquent.
The bankruptcy court in Stein Properties held that the Declaration is subject to the Maryland Homeowners Association Act (“HOA Act”). Maryland Code, Real Property Article (“RP”) §11B-117(b) of the HOA Act provides that a homeowners association may enforce the payment of assessments under a declaration by the imposition of a lien under the Contract Lien Act. In its analysis, the bankruptcy court concluded that, “for the [Columbia] Association to impose and enforce the lien provided in the Declaration, it was required to comply with the [Contract Lien Act].”
The Columbia Association noted that RP §11B-117(c)(1)(i) specifically refers to the “lien for the annual charge provided first priority over a deed of trust or mortgage by the [Declaration].” The Columbia Association argued that this language recognized and preserved the first priority lien of the assessments under the Declaration. The bankruptcy court disagreed. It pointed out that this subsection is part of the law that grants homeowner associations priority for up to $1,200 or four months’ assessments over deeds of trust in foreclosure proceedings. Further, the bankruptcy court noted that the introductory language to this part of the statute states that subsection (c) does not limit or affect the priority of the lien provided in the Declaration. Importantly, it does not establish the priority of the lien. The court said that the priority of the lien is established by RP §11B-117(b) and the Select Portfolio case, and they require compliance with the Contract Lien Act – resulting in a lien for the assessments under the Declaration that is subordinate to a recorded deed of trust.
Finally, the Columbia Association contended that a decision that the assessments did not have a valid and enforceable priority lien would violate its rights under the Contracts Clause of the United States Constitution. But the bankruptcy court ruled that the Declaration itself did not create a lien, so that requiring compliance with the Contract Lien Act to create and enforce a lien did not take away any right.
The time period for filing an appeal of the Stein Properties case has expired with no appeal having been filed.
A version of this article was published by The Daily Record on April 17, 2019 (online) and April 18, 2019 (print).