Flagstar Bank's mortgage lien was extinguished by a 2014 condo foreclosure in Washington, DC—even though the sale notice said the lien would survive
In a decision with significant consequences for mortgage servicers and lenders operating in jurisdictions with super-priority lien statutes, the District of Columbia Court of Appeals ruled on April 10 that Flagstar Bank’s mortgage lien on a condominium unit was extinguished by a 2014 foreclosure sale carried out by the building’s condominium association—even though the sale notice stated the property would be sold subject to the mortgage.
The case, Flagstar Bank, FSB v. Advanced Financial Investments, LLC, involved a foreclosure initiated by the New Hampshire House Condominium Unit Owners Association after the unit’s owner, Salvador Rivas, failed to pay condominium dues. Rivas had purchased the unit in 2009 using a mortgage loan from Flagstar Bank, which was secured by a first deed of trust.
In December 2014, the association foreclosed and sold the property to Advanced Financial Investments, LLC (AFI) for $26,000. The condo’s tax-assessed value at the time was $237,930, and the notice of foreclosure had stated that the property would be sold “subject to [Flagstar’s] first deed of trust” in the amount of approximately $256,632.
More than two years later, in January 2017, Flagstar filed a judicial foreclosure suit. It later amended its complaint to argue that the 2014 foreclosure was unconscionable and legally invalid, and added new claims for declaratory relief, breach of fiduciary duty, and unjust enrichment. The trial court dismissed all claims, holding that the prior foreclosure had extinguished Flagstar’s lien and that the amended claims were time-barred.
On appeal, the Court of Appeals affirmed most of the trial court’s findings. However, it found the trial court had erred in one respect: the lower court incorrectly held that Flagstar’s argument challenging the foreclosure sale as unconscionable was time-barred. The appellate court clarified that such an argument, when raised in response to an affirmative defense, is not subject to a statute of limitations.
Still, the win for Flagstar was limited. The appellate panel, led by Associate Judge Deahl, ultimately concluded that the foreclosure sale was not unconscionable as a matter of law. The court relied heavily on its 2024 ruling in New Penn Financial, LLC v. Daniels, where it had upheld a 2014 foreclosure sale of a property for $5,000 despite a tax-assessed value of $131,380. In that case, as in this one, the sale occurred at a time when the law surrounding the extinguishment of mortgage liens by condominium association foreclosures was unsettled.
The court determined that the low sale price in Flagstar’s case—just over 10% of the assessed value—was not unconscionable given the legal uncertainty that existed at the time. That uncertainty, the court said, impacted the fair market value of the property and explained the discounted price. It further found that the specific reference to Flagstar’s lien in the foreclosure notice did not change the legal analysis, emphasizing that under DC law, a condominium association cannot waive the statutory effect of a super-priority lien simply by stating that the sale is subject to a mortgage.
The court also rejected Flagstar’s attempt to toll the statute of limitations on its remaining claims by invoking the discovery rule or principles of equitable tolling. It held that the clock began running at the time of the 2014 sale, not when the court clarified the law in Liu v. U.S. Bank National Association in 2018. The opinion noted that Flagstar, as a federally chartered bank, was in a position to be aware of the developing case law and should have acted earlier to protect its interests.
However, the court did revive one portion of Flagstar’s case. It reversed the dismissal of the bank’s unjust enrichment claim against AFI. In its amended complaint, Flagstar alleged that it had continued paying property taxes on the unit after the 2014 sale, based on the belief that its mortgage lien remained in place. The court found that this claim, as framed, was not time-barred and raised a plausible theory that AFI may have benefitted at Flagstar’s expense. That single claim was remanded for trial.
The rest of Flagstar’s case was dismissed in full. The court upheld the dismissal of its claims for declaratory relief, breach of fiduciary duty, and unjust enrichment against the condominium association.
The case reinforces the binding effect of super-priority lien foreclosures in the District of Columbia. The court emphasized that even where a foreclosure notice explicitly states a property is being sold subject to a mortgage, such language cannot override the statutory framework that gives six months’ worth of unpaid condominium dues priority over all other liens—including first deeds of trust.
While Flagstar will have the opportunity to pursue limited recovery through its unjust enrichment claim related to post-sale tax payments, its attempt to reinstate the mortgage lien—valued at more than $256,000—was definitively rejected. The property remains with AFI, which paid just $26,000 at auction, and the bank’s interest, the court confirmed, was extinguished over a decade ago.
