Practice Pointers

Nonjudicial Foreclosure: A Weapon in Your Collections Arsenal?

     Richard Glassel stormed into a board meeting of his homeowner association. He then allegedly opened fire, killing two board members and wounding four others before his gun jammed and he was tackled and brought to the ground. Mr. Glassel was subsequently convicted of two counts of first-degree murder and sentenced to death.

     What prompted such a violent outburst? Mr. Glassel had lost his home due to a nonjudicial lien foreclosure action by his Arizona homeowner association.

     Though potentially dangerous, nonjudicial lien foreclosure can be a highly effective assessment collection tool. Though usually a collection method of last resort, the possibility of a nonjudicial lien foreclosure can encourage even the most delinquent homeowners to bring their assessment dues current

.

      The Virginia nonjudicial lien foreclosure statutes, Va. Code § 55-79.84(I) for condominiums and Va. Code § 55-516(I) for homeowner associations, prescribe the procedures associations are to follow for notice to the owner and lien holders secured by a deed of trust, along with specifications for advertisement of the sale. Additionally, the Code details how the proceeds of the sale are to be applied.

      Although the Arizona example is extreme, nonjudicial lien foreclosures do pose some legal risks. The Virginia statutes are relatively new and thus far there has been only one Virginia Supreme Court decision on the subject. A condominium association appealed a decision by a Fairfax Circuit Court judge who held that the sale proceeds must be first applied to pay the first deed of trust. The decision was upheld by the Virginia Supreme Court. (Board of Directors of the Colchester Towne Condominium Council of Co-owners. v. Wachovia Bank, N.A., et al). The association’s position was that the buyer at the foreclosure sale takes the property subject to the first deed of trust and thus takes responsibility for paying off the first deed of trust to avoid a subsequent deed of trust foreclosure. A Green County homeowner association also has appealed a decision from the circuit court there. (Winkelman v. Dogwood Valley Citziens’ Association, Inc., et al.) . The circuit court held that because Va. Code § 55-516(I) refers to a “unit,” only a unit can be sold, not the lots owned by plaintiff. The issues involved in these two cases are expected to be addressed in next year’s legislative session. Finally, a Loudoun County Circuit Court judge recently issued an order temporarily halting final settlement of a prior homeowner association lien foreclosure sale on the basis of lack of actual notice, as opposed to constructive notice. (John Shourds, et al. v. South Riding Proprietary, et al.). The matter was settled, to the benefit of the association, before a final hearing was held.

     The Virginia Housing Study Commission is currently customizing the Uniform Nonjudicial Foreclosure Act to Virginia laws. If ratified and adopted in Virginia the Act would provide, among other things, the following additions to the current statutes: (1) more stringent notice requirements (two notices instead of the current one); (2) recordation of the notice of foreclosure in the clerk’s office for the jurisdiction in which the real property is located; (3) two written notices of default and foreclosure, 30-day notice to cure period, and opportunity to meet with the foreclosing creditor. It is possible that we may see legislation in the 2003 General Assembly on this issue.

     Although questions remains with regard to nonjudicial lien foreclosure in Virginia, it is clear that particularly in the current “hot” real estate market, lien foreclosure is a highly effective tool for associations.

.