In the case of Show Me State Premium Homes, LLC v. George McDonnell, the United States District Court, E.D. Missouri, Eastern Division addressed the issue of whether a non-judicial tax sale in Missouri could extinguish federal liens held by the United States Department of Housing and Urban Development (HUD). The court concluded that such non-judicial sales do not satisfy the requirement for a “judicial sale” under 28 U.S.C. § 2410(c), and therefore, HUD’s liens remained intact.
Background:
- Property and Liens: George and Doris McDonnell owned a property in Missouri and had taken out home equity loans secured by deeds of trust, including two held by HUD.
- Tax Delinquency and Sale: After the McDonnells became delinquent on their property taxes, the county tax collector conducted a non-judicial tax sale, selling the property to Missouri Bond Company, which subsequently transferred it to Show Me State Premium Homes, LLC by Quit Claim Deed.
- In Missouri, the county can set a sale for delinquent taxes without filing a judicial lawsuit. Instead, the county can set a tax sale after providing notice to the record owner of the property and publishing notice of the sale in a newspaper.
Legal Proceedings:
- Quiet Title Action: Seeking clear title, Show Me State Premium Homes filed a lawsuit in Missouri state court to extinguish all other interests in the property, including HUD’s liens.
- Federal Involvement: The United States removed the case to federal court and moved to dismiss, arguing that under 28 U.S.C. § 2410(c), a federal lien can only be extinguished through a “judicial sale,” which the non-judicial tax sale did not constitute.
The Court held that that any action to foreclose a lien in favor of the United States must seek judicial sale. In other words a party with an interest in a property superior to the United States’ interest must go through the judicial process. Although this case this takes place in Missouri, this case law will have implications across all states because HUD (a federal agency) was involved. Lenders in all states, including Arizona, may be and are now foreclosing their liens by judicial action to eliminate certain subordinate interests of the United States.
As such, when the United States has a subordinate lien (other than a federal tax lien), the holder of the senior interest, such as a first mortgage, must foreclose its lien by judicial action to eliminate the subordinate interest of the United States.
What does this mean for your HOA?
- Associations Named as Defendants in Judicial Foreclosure Lawsuits
Instead of receiving a Notice of Trustee’s Sale when an owner is behind on their mortgage payments, Association’s may be served with a lawsuit as a named defendant in lawsuit filed by lenders in Superior Court to extinguish a junior interest held by the United States. These interests include second position deeds of trust, mortgages or home equity lines of credit. The Association would be named as a defendant in these lawsuits because it also has an interest in the property.
If your Association is served with a judicial foreclosure lawsuit, we strongly recommend contacting your attorney to discuss next steps. These can typically be resolved quickly and at a minimal cost to the Association.
- Assessment Collections can Take Longer
Because the judicial foreclosure process generally takes longer than the nonjudicial process, collecting delinquent assessments from an owner who is in the process of a judicial foreclosure can extend the time an owner is delinquent and affect an Association’s ability to foreclose their assessment lien.
We recommend reviewing the Association’s collection policy to ensure timely and effective assessment collections.
Tips for Fair and Effective Debt Collection
- Be Consistent: Apply collection policies uniformly to all homeowners to avoid accusations of favoritism or discrimination.
- Maintain Professionalism: Keep all communications respectful and professional, even if the homeowner is uncooperative or hostile.
- Follow the Law: Ensure that all collection efforts comply with state laws, including notice requirements and limits on penalties or foreclosure.
This case underscores the importance of adhering to federal requirements for extinguishing government-held liens and clarifies that non-judicial tax sales are insufficient for this purpose under current law. While no HOA can entirely eliminate delinquent dues, proactive measures can minimize the likelihood of future issues. Regularly review and update the collection policy, educate homeowners on their financial responsibilities, and maintain open communication to build trust and transparency within the community. By addressing delinquencies early and consistently, HOAs can protect their financial health, maintain community harmony, and ensure that shared amenities and services continue to benefit all residents.
If you have any questions regarding these materials, please reach out to the firm for assistance. Call us toll free at (800) 743-9324 or email moc.w1774083307albdh1774083307c@ofn1774083307i1774083307.
The information contained in this article is not intended to be legal advice and is provided for educational purposes only.