Maryland Bankruptcy Court Determines Priority of Homeowner Association Fees versus Mortgage Lender’s Deed of Trust

In 2017, the Maryland Court of Appeals in the case of Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, 455 Md. 313 (2017) (“Saddlebrook”) held that a provision in a recorded declaration by a utility that purported to create a lien to secure payment of an annual assessment to cover the construction of water and sewer facilities was ineffective to create a lien because the utility company failed to comply with the Maryland Contract Lien Act (“MCLA”).[1]   This ruling was somewhat surprising in that it was widely believed that a properly drafted and recorded declaration imposing assessments which was filed prior to a deed of trust created a lien with priority over the deed of trust.  The Saddlebrook trial court and Court of Special Appeals (whose affirmance of the trial court’s decision was reversed) also believed such to be the case.  Parties other than utilities, such as homeowner associations, which stand to benefit from recorded declarations imposing assessments which if unpaid may result in liens, have been hoping that this decision may be limited to declarations covering utility company assessments.  However, although there are no reported Maryland state court decisions applying Saddlebrook in other cases, a Maryland bankruptcy judge has recently issued a decision in In re Stein Properties, Inc., 2019 WL 335454, expanding the Saddlebrook ruling to unpaid homeowner association assessments.

            In Stein Properties, the Maryland bankruptcy court was asked to determine the priority between a deed of trust recorded in favor of First National Bank of Pennsylvania (“FNB”) and an alleged lien for unpaid assessments against the debtor asserted by the Columbia Association (“CA”) under a declaration recorded long before FNB recorded its deed of trust. The CA argued that Saddlebrook was not controlling, in large part due to Md. Code Ann., Real Prop. § 11B-117 (the “HOA Act”), which it argued expressly recognized the validity of its lien.  FNB argued that the CA’s claim was unsecured because either: (a) the HOA Act still required a homeowners association’s compliance with the MCLA to obtain a lien; or (b) even if it did not, Saddlebrook required compliance with the MCLA.                        

            To resolve the dispute, the bankruptcy court looked at the express language of the HOA Act, particularly § 11B-117(b) which states as follows:

In addition to any other remedies available at law, a homeowners association may enforce the payment of the assessments and charges provided in the declaration by the imposition of a lien on a lot in accordance with the Maryland Contract Lien Act. (emphasis added)

The CA argued that the foregoing highlighted language should be interpreted to mean that, to establish a lien, a homeowners association had the option of either relying on the declaration or complying with the MCLA.   More specifically, the CA argued that another “remedy available at law” was found in Chapter 200 of Title 14 of the Maryland Rules, which was foreclosing under a “lien instrument”,  the definition  of which includes a declaration.  It supported its argument by pointing out that section 14-203(d)(3) of the MCLA expressly states that the MCLA is not intended to preclude a “governing body” [which includes a homeowners association] from “using any other means to enforce a lien”.  Nevertheless, the court, siding with FNB, found that the “other remedies” language in the HOA Act could not include a remedy solely based on the declaration because the Saddlebrook court had held thatsole reliance on a declaration to create a lien was not a remedy available at law.  This analysis is however flawed in that Saddlebrook had not considered the impact of the HOA Act. 

            Next, the CA argued that sub-section (c)(1)(i) of the HOA Act supported its position that sub-section (b) [cited above] does not limit its lien enforcement rights to those under the MCLA. That subsection states:

(c) Foreclosure; priority of liens – (1) This subsection does not limit or affect the priority of:

(i) A lien for the annual charge provided first priority over a deed of trust or mortgage by the deed, agreement, and declaration of covenants, easements, charges, and liens dated December 13, 1966, and recorded in the land records of Howard County[2]; or…

(ii) [liens in favor of a governmental entity]


(2) In the case of a foreclosure of a mortgage or deed of trust on a lot in a homeowners association, a portion of the homeowners association’s liens on the lot, as prescribed in paragraph (3) of this subsection [4 months of unpaid assessments], shall have priority over a claim of the holder of a first mortgage or a first deed of trust that is recorded against the lot on or after October 1, 2011…

However, the court correctly interpreted the above provision to mean that, in the event of a foreclosure, the limitation on the priority of a homeowners association lien to four (4) months assessments would not apply to CA liens or liens in favor of a governmental entity.

            Finally, the CA argued that the invalidation of its lien based on the MCLA would violate the U.S. Constitution’s Contract Clause, which states that “[n]o State shall … pass any … law impairing the obligation of contracts[.]”  However, the court found that, because of the MCLA, the HOA Act and Saddlebrook, the CA never had a valid lien, and thus that there was no impairment of any right.  This finding leaves open two important questions. Did the CA declaration create a valid lien to collect delinquent assessments prior to enactment of the MCLA?  If so, is the retroactive application of the MCLA constitutional?

            It is clear that the bankruptcy court’s decision was heavily influenced by the Saddlebrook  court’s concern for due process protections being afforded to the property owner, which is the lynchpin of the MCLA.  However, the CA pointed out in its filings with the court all of the due process protections which were included within the provisions of its declaration.  Furthermore, while due process protection is no less important to the property owner when the assessing party is a homeowners association rather than a utility, the HOA Act was not a consideration in Saddlebrook.  The bankruptcy court stated that the analysis in Saddlebrook is even more compelling in a case where the HOA Act is applicable because the latter makes explicit reference to compliance with the MCLA.  But this is an overly simplistic analysis which fails to afford proper meaning to the HOA Act, as noted above.

            Although the ruling in In re Stein is not binding on Maryland state courts, it likely will be very persuasive at least to trial courts unless and until the issues are examined by a state appellate court.


[1] The MCLA requires that: (i)  the recorded document provide for the creation of a lien, and identify the party asserting the lien and the real property affected; (ii) notice  be given to the party being assessed; and (iii)  the lien be recorded in the land records.  Once this takes place, a lien for these charges will be created on the real property in question, but will not relate back to the date on which the declaration was recorded, and thus will be subordinate to intervening liens or mortgages despite express language in the declaration to the contrary.

[2] The December 13, 1966 declaration referred to in this sub-section is the declaration being relied upon by the CA.