Case: Supreme Court affirms Loblolly; foreclosure of deed of trust does not extinguish HOA covenants

Loblolly Properties LLC v. Le Papillon Homeowner’s Association Inc., Miss. Supreme Ct. No. 2021-CT-00767-SCT, 2023 WL 5311529 (August 17, 2023)(en banc). This case affirms the Mississippi Court of Appeals’ decision that the foreclosure of a deed of trust did not extinguish restrictive covenants filed after the deed of trust. Here is the sequence of relevant events:

2/28/08: Chattel Group executes deed of trust to First State Bank.

12/19/08: Chattel Group files restrictive covenants on lots for benefit of the homeowners’ association (“HOA”).

2/06/09: Bank forecloses on deed of trust.

2013: Bank litigates with the HOA over whether restrictive covenants encumber land. Agreed judgment states that covenants are valid and enforceable.

1/31/18: Bank sells land to Loblolly. Deed from bank to Loblolly states that conveyance and warranty are subject to “any and all Covenants and Restrictions of record.”

2019-20: Loblolly and the HOA litigate over whether 2008 restrictive covenants encumber lots. 2021: The Chancery Court holds that even though covenants may have been extinguished by the foreclosure, the covenants applied to the lots through the deed from the bank to Loblolly.

8/27/22: The Mississippi Court of Appeals affirms the Chancery Court. Miss. Supreme Ct. No. 2021-CA-00767-COA, 2022 WL 4478395 (Miss. Ct. App., Sept. 27, 2022). As described by the Supreme Court, the Court of Appeals “held that the covenants applied to the subject lots because

(1) ‘First State agreed in post-foreclosure litigation that the covenants applied’ and (2) ‘Loblolly accepted the property by a special warranty deed that specifically stated the property was bound by any covenants on record.’” Moreover, the Court of Appeals, relying on cases holding that tax sales did not extinguish the HOA’s covenants because the covenants increased the value of the property and “ran with the land”, held that the foreclosure did not extinguish the covenants. Justice Wilson argued in dissent that under Section 89-5-5 of the Mississippi Code the deed of trust priority had priority over the covenants because the deed of trust was filed before the covenant and therefore had priority over the covenants, and the foreclosure of the deed of trust therefore extinguished the covenants.

8/17/23: The Mississippi Supreme Court, in a 7-2 decision written by Justice Ishee, affirms the Court of Appeals. The Supreme Court fully embraced the reasoning of the Court of Appeals and added discussion about the unique characteristics of homeowners’ associations.

Note 1: This case represents an important change in the law regarding priorities of liens. The editor wrote at length in the March 2023 Newsletter about why he thought that the Court of Appeals’ decision was an incorrect reading of the relevant law and the dissent was correct, and will not repeat all of those arguments.

Note 2: Much of the discussions in the first parts of the majority opinions of the Court of Appeals and the Supreme Court address what First Bank agreed to in its post-foreclosure litigation with the HOA, and what Loblolly agreed to take subject to in its deed from First Bank. But at the end of the day none of this ink is necessary to the resolution of this case. In the second parts of their opinions, both the Court of Appeals and the Supreme Court hold that as a general matter, foreclosure of a prior deed of trust does not extinguish HOA covenants because the covenants benefit the property and run with the land. In other words, even if no post-foreclosure litigation had occurred between the Bank and the HOA, and even if the deed from the Bank to Loblolly had not contained the boilerplate exception for covenants and restrictions of record, the HOA still would have prevailed because the foreclosure never cut off its covenants. This reasoning is a surprise to the editor. Section 89-5-5 of the Mississippi Code establishes that the priority of liens is determined by order of filing absent actual notice. This statute contains no exceptions for restrictive covenants imposed by HOAs. Neither the Court of Appeals nor the Mississippi Supreme Court addressed or even cited Section 89-5-5; in fact, in describing Judge Wilson’s dissent in the Court of Appeals, the Supreme Court stated that the dissent relied on the Restatement of Servitudes and cases from other states and did not mention that the dissent relied primarily on Section 89-5-5. Nevertheless, as a result of this case and prior cases holding that tax sales do not extinguish HOA covenants, it appears that HOA covenants now enjoy a bulletproof, super-priority status under Mississippi real estate law and cannot be extinguished by foreclosure or tax sale.

Note 3: The Supreme Court wrote that HOAs have “unique characteristics” that justify special treatment of their covenants. The editor’s reading of this case is that the reasoning applies to covenants imposed on commercial properties as well as residential subdivisions.

Note 4: Both the Court of Appeals and the Supreme Court found it significant to their holdings that the HOA covenants “run with the land.” The editor fails to understand the significance of whether the covenants “run with the land.” The editor’s understanding is that whether servitudes (easements as well as covenants) “run with the land” is relevant in determining whether subsequent owners take subject to the servitudes, but the doctrine has nothing to do with priority of the servitudes over other interests in the land. An easement that “runs with the land” can be terminated by foreclosure of a prior deed of trust as well as an easement that does not run with the land.

Note 5: The winners from this case are homeowners’ associations and the developers who control them. Developer control is significant in Mississippi because the developer can draft the covenants so that the developer controls the association as long as the developer owns one lot in the subdivision. The developer can even extend its control beyond the date of its ownership by committing the HOA to long-term contracts with the developer or its affiliates for maintenance or other services on terms favorable to the developer. In other states the developer is required to turn over control of the HOA to the other owners of lots in the subdivision after the developer has sold a certain percentage of the lots, and the HOA board has the right to terminate contracts entered into by the developer with itself or its affiliates on above-market terms.

Note 6: Losers from this case include lenders who make loans secured by lots subject to subdivision covenants. Some covenants provide that holders of first-priority deeds of trust who foreclose do not have to pay assessments imposed by the covenants, but some, including apparently the covenants in the Loblolly case, do not. If the covenants do not contain an exception for lenders, then if the lender forecloses on its deed of trust and purchases the property at the foreclosure sale, the lender will have to pay the subdivision assessments, regardless of whether its deed of trust was recorded before or after the covenants. A construction lender may be able to make its advances subject to approval of the covenants, but if the owner subsequently changes the covenants without the lender’s consent, the lender’s foreclosure will be subject to the revised covenants, though the lender may have an action for breach of covenant.

Note 7: Does this case change the priority of an HOA’s lien for assessments? Mississippi law on HOA liens, how an HOA can enforce its liens, and the priority of the lien, is scant. If, under Loblolly, the foreclosure of a prior deed of trust does not extinguish HOA covenants, does that same immunity from foreclosure extend to one who purchases land when an HOA forecloses on its lien? To put it another way, does the purchaser at an HOA lien foreclosure sale essentially take free of the prior deed of trust?