Raising the Bar: The Ninth Circuit's Troubling Interpretation of the Federal Foreclosure Bar.

• Author: Rowan, Sarah
• Position: NOTE

Berezovsky v. Moniz, 869 F.3d 923, 925 (9th Cir. 2017)

1. INTRODUCTION

   With sixty-nine million residents in community associations (1) and eighty-nine million dollars in assessments, associations have a prominent role in today's society. (2) In 2017, the Ninth Circuit, in Berezovsky v. Moniz, restricted an association's ability to collect delinquent assessments when it held that the association cannot foreclose on its priority position lien without the Federal Housing Finance Agency's ("Agency") consent. (3) In so holding, the court sided with the big banks and lenders at the expense of local associations and state priority lien laws that have been in effect for twenty to thirty years. Not only does this decision burden associations, but it burdens the millions of homeowners living in those associations as well. This Note argues that the Ninth Circuit erred in holding that the Federal Foreclosure Bar requires the Agency's consent and that, even if it does require Agency consent, the Agency has not already impliedly consented. This Note also discusses the policy implications of the Berezovsky decision and of requiring the Agency's consent before associations can foreclose. The Federal Foreclosure Bar completely undercuts the balance that priority lien laws created between lenders and associations, and it effectively prevents associations from enforcing their rights.

   Part II of this Note discusses the facts surrounding the Ninth Circuit's decision in Berezovsky v. Moniz. (4) Part III then describes the role of associations and analyzes cases interpreting superpriority liens, the Federal Foreclosure Bar, and the FDIC Exemption. Part IV explains the Ninth Circuit's rationale for holding that an association cannot foreclose on its priority position lien without the Agency's consent. Finally, Part V discusses why the Ninth Circuit should not have held that the Agency's consent in association priority lien foreclosures is required and the implications of requiring the Agency's consent before associations can foreclose.

2. FACTS AND HOLDING

   In 2007, Gregory and Idell Moniz took out a $220,000 loan to purchase a home in Las Vegas, Nevada. (5) The loan was secured by a deed of trust with Bank of America, N.A. ("BANA") as its beneficiary. (6) A few years later, the Monizes missed payments owed to the homeowners' association ("HOA"), which governed their home's community. (7) Accordingly, an HOA lien arose against the Monizes' home. (8) For the first nine months of unpaid assessments, the HOA lien was further entitled under Nevada's superpriority lien statute to priority over BANA's lien. (9) After recording a lien against the home and providing a formal notice of default, (10) the HOA foreclosed on the Monizes' home. (11) Alex Berezovsky purchased the home at the HOA's foreclosure sale. (12) After purchasing the home, he sued the Monizes and BANA to quiet title in Nevada state court. (13) Unknown to Berezovsky--and not shown on the record - Freddie Mac had purchased the Monizes' loan in 2007. (14) Freddie Mac then intervened and filed a counterclaim for title to the property. (15) Armed with 12 U.S.C. [section] 4617(j)(3) ("Federal Foreclosure Bar"), Freddie Mac removed the case to federal court and filed a motion for summary judgment. (16) Additionally, as Freddie Mac's conservator, the Agency intervened and joined the motion for summary judgment. (17)

   Freddie Mac and the Agency claimed that [section] 4617(j)(3) precluded the HOA from extinguishing Freddie Mac's lien, unless the Agency consented to the HOA foreclosure of the priority portion of its lien. (18) They argued that the Agency did not consent to the HOA's foreclosure of the priority portion of its lien; thus, the HOA foreclosure did not extinguish Freddie Mac's lien. (19)

   The district court granted Freddie Mac and the Agency's motion for summary judgment, determining that the Agency did not consent to the HOA's extinguishment of Freddie Mac's lien on the property. (20) Berezovsky appealed, arguing that the Federal Foreclosure Bar does not apply to private association foreclosures and that because Freddie Mac and the Agency did not take any action to stop the sale, they implicitly consented to the foreclosure. (21) In the alternative, Berezovsky argued that Freddie Mac did not have a property interest that was enforceable. (22) The Ninth Circuit affirmed the district court and held that Freddie Mac possessed an enforceable property interest, Freddie Mac was under Agency conservatorship at the time of the foreclosure sale, and ultimately, the Federal Foreclosure Bar protected the deed of trust from being extinguished without the Agency's consent. (23)

3. LEGAL BACKGROUND

   This Part discusses the role of associations, superpriority liens, and FDIC receiverships. It also analyzes court decisions that have interpreted superpriority liens and the FDIC exemption.

   1. Community Associations

      Associations oversee common areas and property interests, offer services for owners, and help cultivate a feeling of community through social activities and/or amenities. (24) In 2016, there were 342,000 associations in the United States, which housed sixty-nine million residents or 21.3% of the U.S. population. (25) The number of associations varies widely by state. (26) For example, Florida had 47,900 associations, while Alaska had fewer than 1000 associations in 2016. (27) Missouri had 5400 associations with an estimated 1,089,000 residents in 2016. (28) The number of associations in the United States is estimated to have increased to 345,000-347,000 in 2017. (29)

      Moreover, with $88 billion in assessments collected from homeowners across the country, associations have a role in both the national economy and in people's lives. (30) Assessments may go towards costs such as landscape, maintenance of common areas, snow removal, garbage collection, street lighting, amenities (pool, golf, exercise room, etc.), police patrol, and even insurance. (31) Condominium communities are slightly different because common areas are owned by all community members. (32) Accordingly, condo assessments typically go towards building exteriors, roofs, roads, common areas, sewage, and parking lots. (33) Moreover, associations will also maintain a reserve fund for future and/or unanticipated expenses and to cover unpaid assessments potentially. (34)

      Associations are also susceptible to economic downturn. During the mortgage crisis of 2007-2010, many homeowners defaulted on their mortgages, foreclosure rates went up, and home values crashed. (35) As a result, many borrowers went underwater on their mortgages. (36) Unsurprisingly, in tough economic times, association assessments were not being paid either. (37) Moreover, when lenders foreclosed on a property, there was not enough equity in the property to satisfy both the mortgage lien and the association lien. (38) Therefore, unpaid assessments were not being satisfied by the foreclosure, and the associations were left with a strained operating budget and potentially increased assessments for other homeowners in the association. (39) A limited priority position for an association's lien would provide some protection from adverse market forces and help soften the blow during economic downturns. (40)

   2. The Superpriority Lien

      Generally, "first in time, first in right" governs the priority of liens. (41) In other words, the first lien to attach to a property has a priority position over liens that attach afterwards. (42) However, statutes that regulate lien priorities can change the general first in time, first in right rule. (43) For example, the Nevada statute at issue in Berezovsky created a superpriority lien for association assessments. (44)

      A superpriority lien elevates an association's lien for the first six months (45) of assessments to a position above other creditors, such as a mortgage lender. (46) In effect, a superpriority lien splits an association's entire lien into two portions, with six months of delinquent assessments getting priority over a first mortgage and the remaining unpaid assessments receiving a junior position to the mortgage. (47) The goal is to "strik[e] an equitable balance between the need to enforce collection of unpaid assessments and the need to protect the priority of the security interests of lenders." (48)

      Superpriority liens for associations stem from section 3-116 of the Uniform Common Interest Ownership Act of 1982 ("UCIOA"). (49) The UCIOA attempts to make uniform law among the states regarding common interest communities. (50) Comments to the UCIOA compare an association lien to other liens--such as liens for real estate taxes--because an association gets its revenue primarily, if not only, from common assessments. (51) Moreover, associations, rather than the public government, may be responsible for collecting trash and maintaining roads and parks. (52) Thus, association assessments are comparable to property taxes, and property tax liens typically have priority over all other liens. (53)

      As of the time of this Note, eleven states have adopted a version of the UCIOA, which applies to condominiums, planned communities, and real estate cooperatives. (54) Fourteen states have enacted the Uniform Condominium Act ("UCA"), which only applies to condominium associations. (55) In some states, such as Nevada, the statute applies to an HOA's unpaid assessments for up to nine months. (56) In other states, like Missouri, the statute only applies to condominium associations for six months of unpaid assessments. (57) All other unpaid assessments, after the six or nine months, remain in a junior position to the lender's mortgage or to a first deed of trust. (58) Regardless of which statute a state enacts, the goal is still to "strik[e] an equitable balance between the need to enforce collection of unpaid assessments and the need to protect the priority of the security interests of lenders." (59)

      Nevada's superpriority...