By Kate M. Leason, Altitude Community Law, P.C.
As the primary foreclosure attorney at Altitude Community Law, I am often asked to explain the judicial foreclosure process. There are a lot of moving parts in a foreclosure and your average citizen is often unfamiliar with the process. And because it is human nature to shy away from the unfamiliar, Board Members and Property Managers sometimes do not consider foreclosure as a viable collection tool. The information below provides an overview of the basics and an idea of how judicial foreclosures move through the court system from lawsuit to sale.
A foreclosure has three basic parts: (1) pre-litigation – gathering of the information necessary to prepare a lawsuit; (2) litigation - the lawsuit is filed and judgment obtained; and (3) the sale of the property.
In the pre-litigation phase, it is a good idea to verify that statutorily compliant delinquent notices were sent to the owner, than no owner has filed bankruptcy, is not active military, has not transferred or sold the property, and that the lender has not begun foreclosure proceedings. The lender commonly forecloses via the Public Trustee, which follows a similar, but different process than a judicial foreclosure. You will also want to obtain a title report or “litigation guarantee” (a title report that provides recourse if there is an error in the title report) to determine who has a recorded interest in the property. Generally, but not always, title reports will reference, at a minimum, a Deed of Trust and the Association’s lien. There may also be a second mortgage, judgments, or tax liens. The entities and individuals with liens are known as “lienholders”. The liens may be junior or senior to the Association’s lien. Each lienholder has a claim on the property and is prioritized according to the date the lien was recorded. There are exceptions for property tax liens, federal and state tax liens (e.g. IRS, etc.) and other governmental charges, which move to first priority position regardless of the recording date.
Liens have priority in the following order: (1) real estate taxes; (2) lien for assessments, but only for six months of assessments; (3) the first Deed of Trust; (4) lien for assessments owed in excess of the six month amount; (5) other lienholders chronologically by the date of recording. If there is a master or sub association with a lien, under Colorado Common Interest Ownership Act the liens have equal priority unless the Declaration states otherwise.
Once all of the above information is obtained, the complaint for foreclosure can be drafted. The complaint is the document that starts the foreclosure action. The complaint states facts about each of the listed lienholders (i.e., Defendants) identifying their interest in the property (e.g., deed of trust, transcript of judgment, etc.) and will allege that the owner has breached the covenants by failing to pay assessments and that the Association is allowed to foreclose pursuant to the Declaration and statute.
In the litigation phase, the lawsuit documents prepared in the pre litigation phase are filed with the District Court in the county where the property is located. A Lis Pendens (notice of pending action) is also recorded in the county where the property is located. The Lis Pendens is recorded to place parties on notice of the lawsuit. The complaint and summons are served on the Defendants by the sheriff or private process server. Once served, the Defendant must file a response to the complaint within a set number of days as prescribed in the Colorado Rules of Civil Procedure or risk a default being entered against them.
To maintain its senior lien position, the holder of the first deed of trust (usually banks) will typically stipulate to lien priority and agree to pay the superlien (i.e., six months of assessments) to be dismissed from the lawsuit. Stipulations can be entered into with other lienholders to establish lien priority.
In the majority of cases, the owner does not respond to the lawsuit and the judgment and order and decree of foreclosure is entered by default. If an owner does respond, it is usually to request time to pay the debt. Foreclosure is disputed in only a small percentage of cases and the majority of those cases are resolved through mediation. Once an order and decree of foreclosure is obtained, the property can be sold at a sheriff’s sale.
The sale involves sending the court order to the sheriff, along with a package of documents that the sheriff needs to either have published in the newspaper, mailed to interested parties, or have issued to the purchaser at the sale. The sheriff will assign a sale date. The sheriff publishes a notice of the sale in a local newspaper for five weeks. With some limitations, the owner can obtain a “cure statement” from the sheriff and pay the balance due to keep the property. If the owner does not pay, the sheriff will hold a sale and the property is sold to the highest bidder. A bid for the total amount due to the Association is submitted to the sheriff prior to the sale on behalf of the Association. This bid establishes the minimum bid for the sale. If another party’s bid exceeds the Association’s bid, and they are the highest bid at the sale, they are considered the “winning” bid. If a third party purchases the property, the Association is paid in full. If there is not a third party buyer, the Association will become the owner following the redemption period. The redemption period allows junior lienholders to “redeem’ (take ownership) of the property by paying the winning bidder the sums he/she expended at the sale. However, if no junior lienholders redeem, the winning bidder or the Association, will be issued a sheriff’s deed for the property.
If the Association becomes the owner, the Association may sell or lease the property. If the Association sells the property, the sale is subject to any liens that were not extinguished by the Association’s foreclosure, which would include the first mortgage and any liens which had equal or greater priority.
Although the foreclosure process has many steps and is best handled by an attorney, it is a collection option that Association Boards should consider for chronically delinquent owners and owners with high balances that might otherwise take years to collect.
Kate Leason has been a member of the Colorado Bar Association since 2009 and with Altitude Community Law P.C. since 2017. Altitude Community Law specializes in HOA law and has been elevating community associations since 1988. Please visit www.altitude.law for more information.