If an association does not create a new lien after a judicial foreclosure or money judgment, it can lose its priority over other creditors. An assessment, special or regular, becomes a debt of the unit owner when the association levies it. Civ. Code § 1367.1(a). However, the association does not have a security interest in the unit until the association records a Notice of Delinquent Assessment with the County Recorder’s office, after first providing the statutorily required notice to the owner. Recording the Notice of Delinquent Assessment creates a lien on the unit, enabling the association to foreclose on the unit if the unit owner’s account is not brought current. Civ. Code § 1367.1(d) & (g). The assessment lien is effective when the Notice of Delinquent Assessment is recorded and is senior to (i.e., has priority over) all other creditors’ liens that are recorded after the Notice of Delinquent Assessment, unless the CC&Rs contain a clause subordinating the association’s lien to any others (e.g., lenders/mortgagees). Civ. Code § 1367.1(f). The inverse is that the association’s lien is junior to any liens recorded before the Notice of Delinquent Assessment. In other words, any previously recorded liens have priority over the association’s lien.
An assessment lien may be enforced in any manner permitted by law (Civ. Code § 1367.1(g)), which includes non-judicial foreclosure, judicial foreclosure, and lawsuits for a money judgment. Non-judicial foreclosure, the most commonly utilized, is a sale of the unit by a trustee to satisfy payment of the assessment, without any legal proceedings in court. Judicial foreclosure is a legal proceeding by which a court renders a judgment for the amount owed and for sale of the unit to satisfy payment of that amount. (An association might choose judicial foreclosure to preclude the owner’s right to demand binding arbitration to determine any dispute over the assessment (Civ. Code §§ 1367.1(c)(1)(B) & 1367.4(c)(1)) or to obtain the money judgment if the value of the unit is not sufficient to cover the previously recorded liens and the association’s lien.) If the unit’s value is insufficient to cover the previously recorded liens, the association can forego foreclosure, sue the owner for a money judgment only, and collect from the owner’s other assets.
In a recent case, the California Court of Appeal considered the effect of a judicial foreclosure judgment on the priority of the association’s lien over a later recorded lien of another creditor. In Diamond Heights Village Association, Inc. v. Financial Freedom Senior Funding Corp. (June 7, 2011) 11 Cal. Daily Op. Serv. 6930, 2011 Daily Journal D.A.R. 8297, the court ruled that when an assessment lien is enforced through judicial action, the resulting judgment supersedes the assessment lien, and collection requires enforcement of the judgment. According to the Court, when a final judgment is entered, the lien itself is no longer enforceable because the judgment creates a new debt or liability, distinct from the lien and the assessment. In other words, the judgment extinguishes the association’s previous rights and remedies, substituting in their place only the rights granted by the judgment.
To have a security interest in the unit after obtaining the judgment, the association must create a new judgment or execution lien on the unit. A judgment lien is created by recording an Abstract of Judgment. Code Civ. Proc. §§ 674 & 697.310. An execution lien is created by levying execution of the judgment to have the property sold and having the levying officer record a Notice of Levy. Code Civ. Proc. §§ 697.710 & 700.015(a).
In Diamond Heights Village Association, Inc. v. Financial Freedom Senior Funding Corp., the association did neither, relying on its previously recorded Notice of Delinquent Assessment to establish the priority of its security interest in the unit. After the association recorded its Notice of Delinquent Assessment and won its judicial foreclosure judgment, the unit owner obtained a reverse mortgage, giving a deed of trust (i.e., lien) to the lender. The court held that the deed of trust had priority over the association’s rights because the judicial foreclosure judgment replaced the previously recorded assessment lien and, hence, does not relate back to the date of the assessment lien. The court intimated, but did not expressly state, that had the association created a judgment or execution lien, the new lien would have related back to the date of the assessment lien, giving it priority over the deed of trust.
Whenever an association obtains a judgment to collect an assessment, whether a judicial foreclosure judgment or a straight money judgment (even a small claims court judgment), it should immediately have recorded the documents necessary to create a new lien on the unit (Abstract of Judgment and/or Notice of Levy) to protect the priority of the association’s lien over the liens of other creditors.
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