Are Non-Judicial Sales Unconstitutional? the Super-Priority Lien and Its Influence on State Foreclosure Statutes

By Prsha, Ryan | Missouri Law Review, Summer 2016 | Go to article overview

Are Non-Judicial Sales Unconstitutional? the Super-Priority Lien and Its Influence on State Foreclosure Statutes


Prsha, Ryan, Missouri Law Review


I. INTRODUCTION

As part of an ongoing balancing act between the interests of mortgage creditors and homeowners' associations, twenty states have implemented a "super-priority" lien that allows homeowners' association dues and assessments to take precedent over the property's mortgage in the event of a foreclosure. (1) Although originally intended to give mortgage creditors an incentive to pay off the association dues themselves, this lien has led to several unintended consequences. (2) Courts have accepted the concept of non-judicial foreclosure. (3) However, due to a federal district court decision interpreting the super-priority lien, the constitutionality of these sales could soon be put into question. (4)

In 2015, the U.S. District Court for the District of Nevada cited a landmark civil rights case from Missouri, Shelley v. Kraemer, (5) and ruled that a private, non-judicial foreclosure sale was a state action. (6) This, in turn, subjected the sale to the Due Process Clause of the U.S. Constitution (7) and subsequently put in jeopardy the concept of non-judicial foreclosure. (8) Although this decision's effect is currently confined to the State of Nevada, there are nineteen other states, including Missouri, that have yet to make a decision on how to handle the super-priority lien. (9) If Nevada's Shelley justification is invoked in the remaining district courts, there could be widespread implications for all non-judicial foreclosure statutes across the country.

Part II of this Note discusses the background necessary to understand the super-priority lien and its constitutional implications in regards to non-judicial foreclosure. Part III reviews the recent developments that have given rise to this issue. Part IV discusses the ramifications of the manner in which the super-priority lien is being handled and how the court's methodology could potentially affect the constitutionality of non-judicial foreclosure.

II. LEGAL BACKGROUND

In order to fully understand the implications that the super-priority lien has created for non-judicial foreclosure, it is necessary to discuss the predicates on which the issue stands. This Part will first examine the foreclosure process and how it relates to the super-priority lien. Next, it will explore the constitutional grounds that the district courts have relied on, including the concepts of state action and non-judicial foreclosure.

A. The Basics: What Is a Lien and How Does It Work?

A lien is a notice attached to a property informing others that the property titleholder owes a creditor money, and the property has been put up as collateral for the debt. (10) If the owner fails to pay back what is owed, the creditor (11) may foreclose on the property and use the proceeds of the sale to pay off what is left of the balance. (12) If more than one lien is put on the property, each lien is given a priority order in which the debt will be paid off. (13) The debt with the higher priority is the senior lien, and those with lower priority are considered its junior. (14) As soon as a senior creditor forecloses, all subordinate junior liens on that property are effectively extinguished. (15) However, when a junior creditor forecloses, all senior liens remain intact. (16) Therefore, while a junior creditor can still foreclose, the new buyer receives the property already burdened by the senior liens. (17) Consequently, any property foreclosed by a junior creditor is worth less than market value because the new buyer must pay off all senior liens to clear title. (18)

The priority order of liens is well established under a combination of equitable jurisdiction and statutory law. (19) Real estate taxes owed on the property always take first priority. (20) Historically, any mortgage on the property will take first priority after the taxes have been paid off. (21) Inevitably, all other liens fall somewhere further down the priority pecking order. …

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