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Surplus Funds

Written by Peter Wilburn, Attorney

One sign of a stronger housing market reaching condominium and homeowner associations is showing up in foreclosure sales. Far more often than has happened in the previous seven to eight years, condos and homes are being sold for more than what's owed on the mortgage, which makes the mortgage lender whole, and leaves a surplus for other potential creditors. Associations who record liens early in a delinquency are more likely to have priority over those surplus funds than other creditors, or the foreclosed owner.

The law establishing the surplus funds is sparse (RCW 61.24.080); the trustee, who sells the property, must deposit the surplus funds in the Superior Court for the county where the property was located. A case number is created, and notice is sent to all parties who also received notice of the trustee's sale. The funds first go to any Court costs, such as the filing fee.

Any creditor with a claim to the surplus funds must simply file a claim with the court, in the form of a motion to disburse the surplus funds. If multiple creditors make a claim on the surplus funds, the money goes to the creditor with the earliest claim against the property, as determined by the Court. For example, if an owner is delinquent in paying assessments, the Association records a lien against the property. Later, the owner has a judgment filed against him or her, which is recorded in the same county as the property. If this owner is foreclosed by his or her mortgage lender, any surplus funds would go to the Association first, then to the judgment creditor.

I have competed for surplus funds from many different creditors, and succeeded in securing those funds, for the most part because the Association in question recorded its lien early enough to be first in line. In one case my client prevailed over the estate of the deceased because the Association recorded its lien one month before the owner died, and because the estate did not give proper notice to the Association to make a creditor's claim in the probate case. The Association's lien of $11,258.56 was paid in full.

In another case, the Association succeeded in securing surplus funds of $22,296.66 over the objections of the owner, who was in bankruptcy at the time, and who argued the funds should be secured by the bankruptcy court for the benefit of the other creditors. The Court ruled in favor of the Association because of its promptness in filing the lien against the owner's property, which predated the owner's bankruptcy by eight months. There were also interesting questions of Federal Jurisdiction (Bankruptcy Court) versus State Jurisdiction (State Superior Court), but the Court ruled the statute governing surplus funds is entirely on a state level, and thus the state court should determine the disposition of the funds.

The lesson to be learned by Condominium and Homeowner Associations is to keep good track of delinquencies and to record a lien at the earliest possible opportunity, as governed by the relevant statute for your type Association (RCW 64.38 for HOAs, RCW 64.34 for Condominiums, and in some case RCW 64.32 for "Old Act" Condominiums), and in accordance with your specific governing documents. There can be other advantages to this as well: if the owner tries to sell the property, the Association lien will be one of the first to be paid; it is also essential in order to pursue a lawsuit to foreclose that lien.

Though drafting and recording a lien can be an expense, and though an Association may not take such action against owners for other reasons, it not only protects Associations from losing their rights to collect against nonpaying owners, it presents an incredible opportunity to recover funds in the case of a lender's foreclosure with surplus funds.

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