US Bankruptcy Court – Eastern District of Virginia (June 10, 2014).

Bankruptcy debtor (homeowner) filed action in bankruptcy court to determine the validity, priority or extent of liens asserted by her HOA against her property. In the action, the homeowner/debtor sought the release of the HOA’s judgment and assessment liens against her property.

Prior to the HOA liens, the homeowner’s property was encumbered by a first and a second deed of trust in favor of third-party lenders. Those two mortgage liens totaled approximately $153,000. The parties agreed that the value of the property was $139,300.00 — accordingly, the debtor had no equity in the property. Between 2009 and 2011, the HOA recorded 5 judgment liens against the subject property which totaled $14,401.00 plus interest. Prior to the homeowner’s bankruptcy filing, the HOA filed additional liens against the property totaling $8,083.90, plus $33,076.53 in legal fees. The homeowner contended that because there was no equity in the property, the HOA liens are unsecured and should be removed from the Property. Prior court decisions have held that a completely valueless lien should be classified as an unsecured claim in a bankruptcy proceeding as a claimant’s secured status is determined by the value of its collateral.

The Virginia Property Owners’ Act (“Act”) provides the mechanism for HOAs to obtain liens on owners’ properties for unpaid assessments. The Act states that an assessment lien “shall be prior to all other subsequent liens and encumbrances.” Furthermore, there can be no lien for an assessment until it is “perfected.” The Act details the requirements for perfecting a lien as requiring the HOA to file a memorandum of the lien within 12 months of when the assessment because due and payable.

In reviewing the facts of this case, the court found that the HOA never properly perfected the claimed lien by filing the required memorandum of lien. Accordingly, the lien claimed by the HOA did not constitute a valid encumbrance on the homeowner’s property. The court further found that, even if the HOA had perfected the lien, it would have been subordinate to the liens of the two lenders, and because the value of the property was agreed to be less that the total of the two lenders’ liens, the HOA’s claimed lien would be wholly unsecured. As such, even if the liens had been properly perfected, they would have been subject to removal by the bankruptcy court because they had no value.

See case decision: Cruickshanks_v._Permberton_Oaks_Townhouse_Ass’n_Inc.