LIEN IT OR LOSE IT

Not A Surprise But A Good Reminder

 

It is always reassuring when a court decision confirms something we have been telling our North Carolina clients for years. Ever since the provisions of Section 3-116 found their way into the North Carolina Condominium Act in 1986 and into the North Carolina Planned Community Act in 1999, we have been telling our clients that in order to insure that their claim for recovery of assessments attaches to and becomes a lien on the land, they must file a Claim of Lien in the Office of the Clerk of Superior Court. Only by doing so is the Association's lien claim "perfected" and its priority established as to other competing claimants. Those competing claimants may be another creditor, a purchaser or even an owner who files bankruptcy.

THE CASE

In Kingston at Wakefield Plantation vs. Castell, Kim Castell, an owner of property in the Kingston at the Wakefield Plantation subdivision in Raleigh, filed a Chapter 13 Bankruptcy. The Association filed a Proof of Claim claiming it had a secured position for the recovery of $678.75 in delinquent homeowner assessments. Castell argued that the Association's claims were unsecured because it never filed a written Claim of Lien in the clerk's office. The Association asserted that its claim was secured by virtue of the filing of its Declaration which stated that the Association possessed a "continuing lien" to the extent assessments were not paid. The U.S. Bankruptcy Court for the Eastern District of North Carolina agreed with Castell. On appeal, the U.S. District Court for the Eastern District of North Carolina affirmed the Bankruptcy Court's decision. Incredibly, the Association decided to make a real "federal case" out of the matter, and appealed the case to the 4th Circuit Court of Appeals. After receiving briefs and hearing oral argument, the court announced what we believe has been clear in our statutes since they were adopted: File a Claim of Lien or risk losing your priority and probably all of the money you are owed!

THE LESSON

The decision to commence collection action to recover unpaid assessments is always a challenging one for Association leadership. Virtually all officers and directors would prefer that their members pay their obligations to the Association voluntarily and cooperatively. Association leaders don't like having to take enforcement action against their neighbors. Those officers and directors, however, must understand that if they do not at least take the initial step of filing a Claim of Lien to "perfect" and secure the Association's position, the Association's realistic rights of recovery may be quickly lost by the assertion of superior rights by a competing creditor, by the sale or transfer of the property to a purchaser or by the filing of a Bankruptcy proceeding. While the decision of whether or not to enforce a Claim of Lien through foreclosure warrants the thoughtful consideration of many factors, the decision of whether to file a Claim of Lien is truly a "no brainer." Associations that unreasonably delay or fail to take the relatively simply step of filing a Claim of Lien need to be prepared to explain to their members why they did not do so and why the Association's position for potential recovery was compromised as a result.

WE CAN HELP

If you have questions about liens and the steps the law requires be taken to place a Claim of Lien on record, please contact us for more information. While the filing of the Claim of Lien does not guarantee payment, it is unlikely that assessments that have remained unpaid for any significant period of time will ever be paid unless the Association is willing to take the first step and file a lien.

Please feel free to call or email Tim Sellers with any questions about this post.