Appellate Decision Underscores Title Review as Critical to Lien Priority

In a decision recently certified for publication, Bear Creek Master Ass'n v. S. Cal. Inv'rs, Inc., the California Court of Appeal found that an assessment lien recorded against a golf course property in 2014 had priority over a deed of trust recorded against the same property a year earlier, in 2013. On its face, the decision would seem to be at odds with California's well-established "first in time, first in right" lien priority rules. The unique twist in Bear Creek was that the holder of the 2014 lien, the Bear Creek Mountain Association (Association), claimed priority over the 2013 deed of trust on the basis of a "claim of lien" created in its favor nearly 30 years before, in 1984, in connection with a recorded set of covenants, conditions, and restrictions (CC&Rs) governing the property. In essence, the Association argued that the CC&Rs created a lien right in 1984, to which any associated and subsequently recorded lien would relate back. While the Court of Appeal did not accept the Association's argument regarding the "relation back" doctrine, it agreed that the Association's "inchoate" lien rights, created in 1984, established a procedure whereby affiliated, but later-recorded, assessment liens would be recognized as priority interests.

As a result of this decision, secured lenders, and holders of any critical instruments affecting title to real property, should carefully review all documents recorded against a property.

Facts and Procedural Background

In 1984, the developer of the golf course property in question recorded the CC&Rs, which granted the Association the right to maintain the property if its owner failed to do so. To that end, the CC&Rs granted the Association a "claim of lien, with power of sale, on the [property] to secure payment to [the Association] of any and all Assessments levied against any and all owners of the [property]," and further provided that such lien would "have priority over all liens or claims created subsequent to the recordation of" the CC&Rs. The only exceptions to this priority were for tax liens and the lien of a first deed of trust or first mortgage.

On August 29, 2014, the Association recorded an assessment lien against the property. However, almost a year prior to this recordation, on September 12, 2013, another party, Southern California Investors, Inc. (SCI), had recorded a third deed of trust against the property. SCI later instituted non-judicial foreclosure proceedings on the deed of trust and advised the Association that its assessment lien had been extinguished in the foreclosure. The Association disputed that claim, but the trial court ruled in favor of SCI, determining that its deed of trust had priority over the Association's later-recorded assessment lien. The Association appealed and the Court of Appeal reversed.

Rationale Underlying the Decision

Notably, the Court of Appeal did not accept the Association’s argument that its 2014 lien was created and perfected by the 1984 CC&Rs. It also rejected the Association’s argument that its lien was entitled to priority treatment because it “related back” to the CC&Rs. Instead, the Court of Appeal determined that the CC&Rs created an inchoate or contingent "claim of lien" in favor of the Association, but that the assessment lien was not created or perfected until 2014. However, because the CC&Rs explicitly modified the otherwise-applicable "first in time, first in right" rule on lien priorities in order to prioritize later-recorded Association liens, the Association's lien was entitled to priority over the SCI deed of trust, which was recorded earlier.

Potential Lessons

The Bear Creek decision stands as a cautionary tale to lien holders, and particularly to secured lenders who expect their liens to enjoy priority status. Secured lenders, and holders of any critical instruments affecting title to real property, should carefully review all documents recorded against a property, because California's default "first in time, first in right" rule can be modified, potentially to the significant detriment of subsequent lien holders.