Client Alerts
July 29, 2021

Secured Lenders Fail to Manage the Risk of “Springing Liens” at Their Peril

Stites & Harbison Client Alert, July 29, 2021

by Stites & Harbison, PLLC

“Springing liens” are first priority statutory liens on property that spring into existence when certain obligations remain unpaid. Springing liens can attach to real estate, for example, when the following obligations are not paid: taxes1, condominium association dues2, or claims for construction labor or materials3. In recent years, a busy market has developed for purchasing and foreclosing on priority real estate tax liens. These liens bear a high rate of interest and are also seen as a mechanism for acquiring title to real estate at steeply discounted values.

Likewise springing liens can attach to equipment or vehicles. For example, unpaid debts for motor vehicle repairs, storage, or accessories may result in mechanics’ liens on these4.

A recent bankruptcy decision demonstrates just how dangerous ignoring the risk of springing liens can be5. Doris and William Barrett filed Chapter 7 bankruptcy cases, after which time their HOA sold its priority lien for two years of assessments. Thereafter, the purchaser of the HOA fees filed a foreclosure action, foreclosed on the HOA lien, and sold the real estate for $17,285 free and clear of all liens in satisfaction of the HOA fees. The problem – The Bank of New York Mellon (the “BoNY”) had a first mortgage in the amount of $1.89 million, failed to participate in the foreclosure action, and its lien was wiped out.

BoNYM’s appeal of this result was denied by the Bankruptcy Appellate Panel for the Ninth Circuit and then by the Ninth Circuit Court of Appeals.

A lender may prevent an HOA foreclosure by paying the HOA fees before the foreclosure sale is held. However, if no payment is made, the HOA foreclosure sale extinguishes the lower priority mortgage. Due to BoNYM’s inaction, the foreclosure sale purchaser was able to buy property valued at $1.5 million for $1,500, free and clear of BoNYM’s mortgage. Ouch!

Stites & Harbison’s attorneys are ready to help you resolve any questions or issues you may have regarding springing liens in Kentucky, Indiana, Tennessee, Georgia, Virginia, Ohio and Alabama.

1KRS 382.480
2KRS 381.9113
3KRS 376.010
4KRS 376.270
5The Bank of New York Mellon v. 2298 Driftwood Tide Trust (In re Barrett), 833 Fed. App’x 668 (9th Cir 2020).

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