June 06, 2012
“Covenants and Restrictions” Maintenance/Assessment Lien Held To Be Subordinate To Mortgage Lien

PNC v. IRC, 2011 U.S. Dist. LEXIS 12389 (S.D. Ind. 2011) (.pdf)  involved a priority dispute between a junior mortgagee and a property management company, both of which possessed recorded liens on commercial real estate subject to a foreclosure case.  The issue was whether the junior mortgagee’s lien recorded in 2003 had priority over the management company’s lien recorded in 2009. 

The covenants and restrictions.  The subject real estate was an office park overseen by a property management company that I’ll call the “Association”.  The Association recorded certain covenants and restrictions against the real estate in 1991 pertaining to property maintenance and tenant behavior.  The covenants and restrictions provided that the Association could assess fees to cover administration of common areas and further provided that, if an owner failed to pay an assessment, the Association could file a lien against the owner’s parcel within the park.  The covenants and restrictions also stated that such lien “shall be subordinate only to the first mortgage, if any, which was on the Parcel at the time the assessments became due and payable.” 

The liens.  The borrower/mortgagor/owner in PNC failed to pay an assessment by the Association, resulting in the Association’s execution of a Notice of Association Lien that the Association recorded in 2009.  The competing lien holder, the United States Small Business Administration (“SBA”), in connection with a loan to the owner, recorded a junior/second mortgage on the subject property in 2003.  (There was no dispute that PNC, the first mortgagee, had the senior lien.)

The Association’s contention.  Even though its lien did not attach until 2009, the Association claimed that its lien should be senior to the SBA’s lien based upon the 1991 recordation of the covenants and restrictions.  The Association reasoned that “any party who might take an interest in the [property] after that date did so subject to the provisions of the [covenants and restrictions].”  The Association went on to claim that all parties with an interest in the case were on notice of the Association’s lien for any outstanding balance in a priority afforded to it by virtue of the 1991 recording.  The 2009 filing, according to the Association, simply was “a notice to the world of the balance existing under the [covenants and restrictions] at that moment in time.”  In short, 1991, not 2009, was the operative recording date.

The Court’s finding.  The Association and the SBA had competing summary judgment motions on the matter of priority.  Judge Lawrence of the United States District Court for the Southern District of Indiana noted that there was no Indiana case law directly on point.  He relied upon an Oregon decision, which essentially held, in the context of residential homeowner’s association fees, that there could be no debt and thus no lien until the Association exercised its power to make an assessment.  Applying the Oregon precedent to the facts of PNC, Judge Lawrence concluded:

Although the [covenants and restrictions] give [the Association] the authority to file a lien against a property owner who fails to pay his or her assessments, the [covenants and restrictions] themselves are not a lien.  No lien existed on the [property] until 2009.  Thus, [the Association’s] priority is based on the 2009 attachment.  This renders its lien junior to that of the SBA.

The Court granted summary judgment in favor of the SBA accordingly.  2009, not 1991, was the date of the recording that ultimately mattered.

First in time.  At its core, the Court basically applied Indiana’s “first to file” rule based upon Ind. Code § 32-21-4-1(b), which provides that mortgages take priority according to the date of their filing.  Since the filing (recording) of the SBA’s mortgage lien predated the filing (recording) of the Association’s assessment lien, the SBA prevailed.  The prior, 1991 recordation of the covenants and restrictions was of no moment.  Generally, therefore, a maintenance-related lien like that in PNC will be junior to a mortgage, assuming the mortgage gets recorded first. 

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Posted at 03:15 PM in Mortgages , Other Liens  |  Permalink