Date: 06-09-2003

Case Style: Board of Directors of the Colchester Towne Condominium Council of Owners v. Wachovia Bank, N.A., et al.

Case Number: 021741

Judge: Lawrence L. Koontz, Jr.

Court: Supreme Court of Virginia

Plaintiff's Attorney: Unknown

Defendant's Attorney: Unknown

Description:

In March 2002, the Board of Directors of the Colchester Towne Condominium Council of Co-Owners (the Association) recorded a lien, pursuant to Code  55-79.84, against a condominium unit owned by Juanita C. James for unpaid condominium assessments. The Association initiated the process for a public sale of the unit, as permitted by Code  55-79.84(I), and notified Wachovia Bank, N.A. (the Bank), the holder of the first deed of trust on the unit. The first deed of trust had been recorded in 1996. The Association's advertisement of the intended sale of the unit at public auction to the highest bidder reflected that title to the unit would be conveyed to the purchaser by special warranty deed. The notice included a statement that the unit was "subject to a deed of trust" in favor of the Bank and that the sale would be "subject to all existing liens." The Association intended to disburse the sale proceeds pursuant to the provisions of Code  55-79.84(I)(5)(c). This subsection makes no express provision for disbursement of any of the proceeds of the sale to satisfy a first deed of trust.

The Bank filed a bill of complaint and a motion for temporary injunction against the impending public sale in the trial court, seeking a declaratory judgment that the proceeds of the sale must first be applied to satisfy the lien of the Bank's first deed of trust. The Association responded that, under Code  55-79.84(I), it was entitled to sell the unit "subject to" the Bank's lien without satisfying that lien, and that the proceeds of the sale were to be applied to the Association's lien and other specified encumbrances on the property. The trial court entered an injunction in favor of the Bank, concluding that under the provisions of Code  55- 79.84 the Bank's lien had priority over the Association's assessment lien and that the Association was required to apply any proceeds from the sale first to satisfy the bank's lien.

We granted the Association an appeal.

DISCUSSION

It is a matter of common knowledge and experience that, as with other forms of land development, purchase money financing by institutional lenders is the primary fuel that drives the development engine of a condominium complex. In turn, the realities of the marketplace require that such lenders be encouraged to provide the desired financing for individual condominium units by granting priority to the lien of their first mortgages or first deeds of trust. It is the priority of the lender's lien on a particular unit as well as the market value of the unit that establishes the lender's security for the loan.? Similarly, there is no dispute that condominium assessments are the recognized and necessary means by which all owners of a particular condominium development benefit from the use of such assessments for general maintenance, security, and other matters.

With this in mind, the General Assembly by its enactment of Code  55-79.84 has preserved the desired priority of the lien of the instrument securing institutional lenders while providing for an inferior lien in favor of the unit owners' association for unpaid assessments on a particular condominium unit. Code  55-79.84 addresses the circumstances under which a condominium association may acquire a lien on a condominium for unpaid assessments. It also addresses the methods of enforcing such a lien. When perfected in accordance with the statute, an assessment lien is prior to all other liens and encumbrances except real estate tax liens on the unit, liens and encumbrances recorded prior to the condominium lien, and "sums unpaid on any first mortgages or first deeds of trust recorded prior to the perfection of said lien for assessments and securing institutional lenders." Code  55-79.84(A).

Once an assessment lien is perfected against a condominium unit, Code  55-79.84(I) authorizes "the unit owners' association [to] sell the unit at public sale, subject to prior liens." (Emphasis added.) Code  55-79.84 (I)(5)(c) recites the order in which the proceeds of the sale are to be applied:

The unit owners' association shall receive and receipt for the proceeds of sale, . . . and apply the same in the following order: first, to the reasonable expenses of the sale; second, to the satisfaction of all taxes, levies, and assessments, with costs and interest; third, to the satisfaction of the lien for the unit owners' assessments; fourth, to the satisfaction in the order of priority of any remaining inferior claims of record; and fifth, to pay the residue of the proceeds to the unit owner or his assigns . . . .

The focus of the present dispute is on the proper construction of the phrase "subject to prior liens" in Code  55-79.84(I). The Bank contends that because the priority of its lien is established in Code  55-79.84(A), the proceeds of the sale must be used to satisfy its lien before being applied to the lien of the unit owners' association and the other encumbrances on the unit in the order prescribed by Code  55- 79.84(I)(5)(c) because the sale is "subject to prior liens."

The Association contends that the phrase "subject to prior liens" as used in Code  55-79.84(I) should be read to permit a unit owners' association to sell a unit at public sale with the understanding that the unit remains encumbered by any prior superior liens. Thus, the Association contends that from the proceeds of the sale it may satisfy its assessment lien, satisfy the other encumbrances on the unit specifically enumerated in Code  55-79.84(I)(5)(c), and pay any residue of the sale proceeds to the former owner of the unit, without applying the proceeds to the prior liens. In sum, the Association contends that a forced sale of an individual unit pursuant to Code  55-79.84(I) preserves the priority of the lien of the first deed of trust in favor of the institutional lender established in subsection (A), by permitting the sale to be made "subject to prior liens" through the continued encumbrances of the property after the sale.

The Association's interpretation of the phrase "subject to prior liens" in Code  55-79.84(I) creates a conflict between that subsection and subsection (A) of the statute. In effect, the Association's interpretation would render the priority of liens established in subsection (A) meaningless with respect to the remainder of the statute. This conflict is avoided, however, by the application of basic principles of statutory construction.

Under basic rules of statutory construction, we examine the language of a statute in its entirety and determine the intent of the General Assembly from the words contained in the statute. Cummings v. Fulghum, 261 Va. 73, 77, 540 S.E.2d 494, 496 (2001); Earley v. Landsidle, 257 Va. 365, 369, 514 S.E.2d 153, 155 (1999). In doing so, the various parts of the statute should be harmonized so that, if practicable, each is given a sensible and intelligent effect. VEPCO v. Prince William Co., 226 Va. 382, 387-88, 309 S.E.2d 308, 311 (1983).

Applying these principles of statutory construction, the priority of the liens in favor of institutional lenders in Code  55-79.84(A) is properly viewed as creating a condition precedent to the disbursement order of the sale proceeds under subsection (I). Thus, the "subject to prior liens" language of the latter subsection may be fairly interpreted as requiring the satisfaction of those liens from the proceeds of a forced sale of an individual condominium unit by the unit owners' association. In short, we conclude that the General Assembly intended to balance the interests of the holder of a first deed of trust and those of a unit owners' association by providing in these subsections that the satisfaction of the institutional lender's first mortgage or first deed of trust be a term of the public sale of an individual condominium unit by the unit owners' association when seeking to satisfy its inferior lien for unpaid assessments.

A contrary result permitting the sale proceeds to be used to satisfy the lien of the unit owners' association, other lesser encumbrances, and potentially disbursing the residue of the sale proceeds to the defaulting former owner, without applying those proceeds to satisfy the first deed of trust, would put the institutional lender holding the first deed of trust at a serious disadvantage with respect to its ability to protect its security interest in the condominium unit. The purchaser and new owner of the condominium unit would have no obligation to pay the lender the sums unpaid on the lender's first deed of trust. The lender would be placed at risk that the new owner might permit damage to the unit before the lender could foreclose. The other detrimental possibilities are numerous and of great potential consequence, such as the prospect of inadequate fire insurance coverage in the event of unexpected fire damage to the unit. Additionally, the original owner would no longer own the unit and, thus, would have less incentive to satisfy the debt secured by the lender's deed of trust. We have no doubt that the General Assembly intended to avoid such possibilities to the detriment of the institutional lender's security interest.

Accordingly, we hold that the proceeds of a public sale of a condominium unit by a unit owners' association under Code  55-79.84(I) must be applied first to satisfy the prior superior liens established under Code  55-79.84(A) before the unit owners' association may apply the proceeds of that sale in satisfaction of its own lien as well as other encumbrances on the property, and then it is to pay any residue to the former unit owner as prescribed by Code  55-79.84(I)(5)(c).

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Click the case caption above for the full text of the Court's opinion.

Outcome: For these reasons, we will affirm the judgment of the trial court directing that the proceeds of the sale of the condominium unit by the Association pursuant to Code  55- 79.84(I) must be used first to satisfy the Bank's first deed of trust.

Affirmed.

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: Digested by Kent Morlan