In an effort to keep you informed of recent developments in state laws and cases, we write to inform you of two matters in the State of Arkansas:

Survival of Condo Association Liens Post-Foreclosure and Lender Liability

While the issue is older, recent developments with some of our clients have led us to believe we should send a reminder about condo association liens in Arkansas. When the Arkansas legislature wrote Arkansas’s Horizontal Property Act, (A.C.A. §18-13-101, et seq.), they tried to protect mortgage lenders by ensuring that payments toward recorded mortgages had priority over condo association assessments. A.C.A §18-13-116(c). However, the legislature also enacted a section that made the purchaser of a condo jointly and severally liable with the seller for the past due association assessments. A.C.A. §18-13-116(d). In 2014, the Arkansas Supreme Court held that section (d), which imposes the joint and several liability for past due assessments, did not include a carve out for purchasers at foreclosure sales, despite the language of section (c) granting mortgage lenders lien priority. First State Bank v. Metro Dist. Condos. Prop. Owners’ Ass’n, 2014 Ark. 48, 432 S.W.3d 1 (2014). So in Arkansas, while a mortgagee or trustee may foreclose the lien of a condo association, the lien immediately becomes enforceable against the purchaser at the foreclosure sale – be it a third party or a lender. So while the “super-lien” issues that have arisen out of Nevada and other states that allow for the foreclosure of a mortgagee’s entire interest do not exist in Arkansas, risk abounds for lenders with properties secured by condos. Importantly, note that this is not just a payment priority for condo liens, but instead the purchaser of the property becomes personally liable for past due assessments jointly and severally with the seller (borrower). If you have any questions about this, please reach out to our office to discuss.

Bankruptcy Court Rules Foreclosure Sale is not a Preferential Transfer under 11 USC § 547

Recently in Arkansas, bankruptcy trustees and debtors alike have started positing the theory that foreclosure sales that take place within the 90 day “claw back” window prior to the filing of the bankruptcy petition are preferential transfers of ownership under 11 U.S.C §547(b), and may be unwound by the bankruptcy estate. There is a sizeable split in authority across the country on this issue, and in Arkansas, it is an issue of first impression. On October 3, Judge Taylor in the Western District of Arkansas granted a Motion to Dismiss to Embrace Home Loans in an adversary complaint filed by the debtor alleging preference in the foreclosure sale. The motion was granted on the basis that a foreclosure sale is not a preferential transfer and thus not subject to unwinding by the estate. While this is a trial court decision, the tightknit structure and relative deference of judges in Arkansas to one another makes this case great for the mortgage industry. SettlePou of Dallas represented Embrace in WDAR Case 4:16-ap-07082.

While this may seem to be an innocuous issue at first blush, the idea that a trustee may seek to unwind a foreclosure sale many months after it is held is quite troubling. In fact, if the trustee can show that the transfer is preferential, and the lender has already dispositioned the REO asset to a bona-fide purchaser, the lender may be required to reimburse the trustee for the difference between the value of the property and the amount of the lien held by the lender. In today’s marketplace of rising property values, this poses a substantial unseen risk for lenders, and is something to be weary of in all jurisdictions.

At ALAW we appreciate the opportunity to serve our clients day in and day out. We seek to be your partners from the moment a loan comes in your doors to the eventual payoff or other disposition of the asset. If ever you have any questions about the topics addressed in this advisory, or any other issues in your business, our knowledgeable team of partners, managing attorneys, and experienced staff are here to help.

Please refer to the attachment for the entire Supreme Court of Arkansas decision.

For more information on this legal update please contact:
James McPherson
[email protected]