As the primary foreclosure attorney at Altitude Community Law, I am often asked to explain judicial foreclosures. There are a lot of moving parts in a foreclosure, and your average citizen is often unfamiliar with the process. And, because it is human nature to shy away from the unfamiliar, board members and community association managers sometimes do not consider foreclosure as a viable collection tool. The information below outlines some of the basics and provides an idea of how judicial foreclosures move through the system from lawsuit to sale.

A foreclosure has three basic parts: (1) pre-litigation – gathering of the information necessary to prepare a lawsuit; (2) litigation – the lawsuit is filed and judgment obtained; and (3) the sale of the property.

Pre-Litigation

In the pre-litigation phase, we verify that the owner received compliant delinquent notices, is not actively in bankruptcy, is not active military, has not transferred or sold the property, and that the lender has not begun foreclosure proceedings. We also order a litigation guarantee (i.e., title report) to determine who has a recorded interest in the property. Generally, but not always, title reports will reference a Deed of Trust and the Association’s lien. There may also be a second mortgage, judgments, or tax liens. We refer to the entities and individuals with liens as “lienholders.” Each lienholder has a claim on the property and is prioritized according to the date the lien was recorded. There are exceptions for real estate tax liens and other governmental charges, which move to first priority position regardless of the recording date.

Liens have priority in the following order: (1) real estate taxes and other governmental assessments; (2) lien for assessments, but only for six months of assessments (i.e., the superlien); (3) the first deed of trust; (4) lien for assessments owed in excess of the six month amount; (5) other lienholders chronologically by the date of recording. If there is a master or sub association with a lien, the associations’ liens have equal priority per statute, regardless of the amount owed, unless the declaration states otherwise.

This information, along with appropriate addresses for service of process, is entered into our software to generate the documents filed with the court.

Litigation

In the litigation phase, the lawsuit documents prepared in the pre litigation phase are filed with the court. A Lis Pendens (notice of pending action) is also recorded in the county where the property is located. The documents are sent to a private process server or the sheriff to serve on the lienholders and owners (“Defendants”.)

Personal service on a defendant is required. However, if a defendant is not able to be served, if there have been sufficient attempts and if it can be shown that either the defendant is avoiding service, has moved to an unknown location, or resides out of state, the court will usually grant a request to serve the defendant by publication. Service by publication requires that the summons be published in a newspaper with general circulation in the county where the property is located for a period of five consecutive weeks. The defendant is considered “served” as of the last date of publication.

Defendants, whether served personally or by publication, must file a response to the complaint within a set number of days as prescribed in the Colorado Rules of Civil Procedure or risk a default being entered against them.

Lienholders with deeds of trust (usually banks) will typically agree to stipulate to lien priority and be dismissed from the lawsuit. We may also stipulate with parties other than banks who hold liens. The stipulation will state that the lienholder agrees that they are senior, junior, or equal to the lien being foreclosed. The holder of the first deed of trust normally agrees to pay the amount of the priority lien (or super lien), which is six months’ worth of assessments.

In the majority of cases, the owner does not respond to the lawsuit. If they do respond, it is usually an attempt to make arrangements to pay the balance owed. Only in a small percentage of cases, less than 10%, does the owner actually contest the foreclosure. These cases may take a year or more to resolve. In the uncontested cases, we file the appropriate affidavits and motions with the court to obtain a judgment of foreclosure against the owner. Once judgment is entered, we can proceed with the sale of the property.

Sale/Redemption*

The sale involves sending the judgment to the sheriff, along with a package of documents that the sheriff needs to either have published in the newspaper, mailed to lienholders, or have issued to the purchaser at the sale. The sheriff will process our request and assign a sale date. A notice of the sale is published for five weeks. The owner can pay the balance due at any time up to the date of sale and keep the property. If the owner does not pay, the sheriff will hold a sale and the property is sold to the highest bidder.

We submit a bid to the sheriff in advance of the sale that states how much is owed to the association. This bid establishes a minimum bid for the sale. If another party’s bid exceeds the association’s bid, and they are the highest bid at the sale, they are considered the “winning” bid. A Certificate of Purchase is issued by the sheriff to the winning bidder. If a third party purchases the property, the Association is paid in full. If there is not a third party buyer, the association will become the owner. There is a redemption period following the sale in which junior lienholders may redeem the property (take ownership) and/or claim overbid funds. However, if no junior lienholders redeem, the winning bidder or the association, remains the owner and the owner may claim the overbid funds.

As the owner, the association may sell or lease the property. If the association sells the property, it is subject to any liens that were not extinguished by the association’s foreclosure, which would include the first mortgage and any liens which are determined to have equal or greater priority. A lease of the property could continue until the first mortgage forecloses on the property.

Now that you know the mechanics of foreclosure, I hope that you consider it a powerful tool to compel payment. Of course, this overview does not address every issue or situation, so please contact me or anyone in our foreclosure department with additional questions at any time.

*In cases where there is a stipulation to lien priority with the first lienholder, the sale of the property is subject to the first deed of trust. The association is not obligated to pay the first lienholder, although the ultimate purchaser will need to resolve this debt to obtain or convey clear title to the property.