February 5, 2015
by David W. Cowles
Tiffany & Bosco P.A.
USFN Member (Arizona, Nevada)
by: Laurel I. Handley
Pite Duncan, LLP
USFN Member (California, Nevada)
The priority and amount of a homeowners association (HOA) lien has been heavily contested in Nevada for the past several years. The current statute governing HOA lien priority and foreclosure was enacted in Nevada in 1991. The statute provides that an HOA lien has priority over a prior recorded first deed of trust, only “to the extent of the assessments for common expenses based on the periodic budget adopted by the association … which would have become due in the absence of acceleration during the 9 months immediately preceding institution of an action to enforce the lien.” NRS § 116.3116(2).
Until recently, HOAs, lenders, title companies, and most courts interpreted the statute to mean that an HOA lien foreclosure did not extinguish a first priority deed of trust. As the value of homes in foreclosure declined and was no longer sufficient to pay all outstanding liens, HOAs, their collection agents, and investors began to assert that an HOA foreclosure sale extinguishes a first priority deed of trust.
SFR Investments Pool 1, LLC v. U.S. Bank
On September 18, 2014, the Nevada Supreme Court issued a significant decision interpreting the statute. In SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 130 Nev. __, Advance Opinion 75 (Nev. 2014), the court held that a properly noticed nonjudicial (or judicial) foreclosure under an HOA’s super-priority lien under N.R.S.§ 116.3116(2) can extinguish a first priority deed of trust. Prior to this decision, the Nevada Supreme Court had not ruled on the issue, and the majority of Nevada courts had held that an HOA foreclosure did not extinguish a first deed of trust. Some courts had also held that an HOA must pursue judicial foreclosure in order to assert a super-priority lien.
The dispute in SFR Investments began when the homeowners became delinquent in their HOA assessment dues. Due to the delinquency, the HOA obtained a lien against the property and subsequently foreclosed, selling the property to SFR Investments Pool 1, LLC. Later, the beneficiary under a first priority deed of trust encumbering the property (U.S. Bank) attempted to foreclose on its deed of trust. Seeking to enjoin the sale, and contending that U.S. Bank’s deed of trust was extinguished by the HOA foreclosure sale, SFR filed a complaint seeking to quiet title. U.S. Bank filed a motion to dismiss, which the court granted, holding that an HOA’s super-priority lien must be foreclosed judicially. SFR appealed this decision to the Nevada Supreme Court. (Nevada does not have an intermediate appellate court.)
The Nevada Supreme Court ruled in favor of SFR, holding that an HOA lien has a “superpriority piece” that has true priority over other liens, including first priority deeds of trust recorded prior to the HOA lien. The Nevada Supreme Court also held that either nonjudicial or judicial foreclosure of the super-priority lien is sufficient to extinguish a first deed of trust and all other subordinate liens. In other words, judicial foreclosure by an HOA is not required to extinguish a first deed of trust.
The Nevada Supreme Court did not, however, reach issues as to the due process rights of a first deed of trust holder. At the “motion to dismiss” stage, the Nevada Supreme Court was constrained by the allegations in the complaint, which included allegations that U.S. Bank received sufficient notice of the HOA foreclosure. Similarly, the court could not consider the question as to whether U.S. Bank had attempted to tender funds to pay off the super-priority piece of the lien. Instead, the court merely commented that U.S. Bank could have determined the precise super-priority amount, or paid the entire lien and then sought a refund from the HOA.
Unfortunately, the court provided no specific instruction as to whether the super-priority piece of the lien is limited to nine months of monthly assessments, or whether it includes all charges associated with lien enforcement (as asserted by many HOAs). Thus, despite ruling that foreclosure of the super-priority lien terminates all other liens, calculation of the super-priority lien amount remains unclear. Moreover, the Nevada Supreme Court did not address whether the HOA foreclosure sale was conducted in a commercially reasonable manner, or whether U.S. Bank may have other defenses to challenge the validity of the foreclosure. These issues will need to be addressed by the parties on remand to the trial court.
Washington & Sandhill Homeowners Association v. Bank of America, N.A.
One week after SFR Investments was issued, the U.S. District Court for the District of Nevada issued an order in Washington & Sandhill Homeowners Association v. Bank of America, N.A.; 2:13-cv-01845-GMN-GWF, Doc. No. 24. The district court held that the HOA foreclosure sale at issue did not extinguish the first deed of trust because it was insured by the FHA insurance program — and, thus, was protected by the U.S. Constitution’s Property and Supremacy Clauses. To date, this argument has not been extended to loans other than those insured by the FHA. It has, however, opened the door for other potential claims to challenge the authority of an HOA to extinguish a first priority deed of trust.
Since SFR Investments and Washington & Sandhill were issued, disputes have continued as to the amount of the super-priority piece of an HOA lien. Lenders, seeking to protect their secured interest in a property, have attempted to pay off the super-priority piece. However, obtaining a payoff amount is often difficult. For example, some HOAs have taken the position that only the total lien payoff can be provided because “the mechanism for [an HOA] foreclosure does not provide for a distinction in the amount of the lien which is recorded.” Moreover, when a super-priority payoff is provided, it invariably includes amounts for attorneys’ fees and collection costs, which lenders contend are not authorized by statute. Thus, while everyone has been instructed that an HOA super-priority lien can extinguish a first deed of trust, no one agrees as to how that super-priority lien is calculated (or how it can be paid off), so that an HOA foreclosure sale does not extinguish a first deed of trust.
Fortunately, the Nevada Supreme Court is likely to provide guidance on these issues in the near future. On October 6, 2014, the court heard oral argument in a case involving a dispute over the amount of the super-priority piece of the lien. Shadow Wood Homeowner’s Association, Inc. v. New York Community Bancorp, Inc., Nev. Supreme Court Docket No. 63180. In addition, on November 13, 2014, the court accepted the following certified question from the U.S. District Court for the District of Nevada:
What effect, if any, is there upon a foreclosure sale conducted pursuant to Nev. Rev. Stat. § 116.3116(2) when the association refuses to provide the holder of a first security interest under a deed of trust secured by the unit with the specific amount due under the portion of the association’s delinquent assessments lien that has been made prior to the deed of trust by Nev. Rev. Stat. § 116.3116(2)(c)?
GMAC Mortgage, LLC v. Nevada Association Services, Inc. Nev. Supreme Court Docket No. 65260.
Briefing with regard to this certified question has not yet been completed. However, the ultimate decision in these two cases, and in many others that are also pending, should assist both lenders and HOAs in determining not only the amount of the super-priority lien, but also the HOAs’ duties in advising lenders of the amount required to pay off the super-priority piece of the lien. This guidance is needed to ensure that everyone has a clear direction on the rules of law.
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