January 29, 2016
by Laurel I. Handley
Aldridge Pite, LLP
USFN Member (California, Georgia)
In response to the flood of quiet title actions filed by entities/individuals that purchased homes at HOA super-priority foreclosure sales in Nevada, the Federal Housing Finance Agency (FHFA) has intervened, in appropriate cases, and asserted federal preemption to challenge an HOA’s ability to extinguish a first priority deed of trust owned by Fannie Mae or Freddie Mac (collectively the “GSEs”).
As most readers already know, the Housing and Economic Recovery Act of 2008 (HERA), codified at 12 U.S.C. §§ 4511, et seq., established FHFA for the purpose of regulating the GSEs, which were placed into conservatorship. See 12 U.S.C. § 4617(a)(2). The applicable provision of HERA, section 4617(j), provides in relevant part: “No property of the Agency [i.e., FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Agency, nor shall any involuntary lien attach to property of the agency.” Id. at 4617(j). Based on this provision, in March 2015 FHFA and the GSEs began filing motions for summary judgment in certain cases, asserting that section 4617(j) provides broad protection to the GSEs while under FHFA conservatorship, and that an HOA foreclosure conducted pursuant to Nevada Revised Statute Chapter 116 could not extinguish the GSEs’ deeds of trust on the relevant property.
On June 24, 2015 the first federal decision was issued addressing the application of HERA in the context of a Nevada HOA foreclosure. In Skylights LLC v. Byron, __ F. Supp. 3d __, 2015 WL 3887061 (2015), the relevant deed of trust was assigned of record to Fannie Mae as of March 7, 2014. The HOA had previously commenced foreclosure of its super-priority lien, and on September 17, 2014 a foreclosure sale was held; Skylights was the winning bidder. Skylights then filed an action seeking to quiet title. The case was removed to federal court, which granted a stipulation to allow FHFA to intervene. Two months after FHFA intervened, and prior to any party conducting discovery, Fannie Mae and FHFA filed a Joint Motion for Summary Judgment, asserting that HERA preempts the Nevada HOA foreclosure statute — such that any foreclosure conducted pursuant thereto could not extinguish Fannie Mae’s lien on the property, absent FHFA consent (and that since FHFA had not consented, the lien remained as an encumbrance after the HOA foreclosure).
Chief Judge Navarro (U.S. District Court for the District of Nevada) agreed, holding that “the HOA’s foreclosure sale of its super-priority interest on the Property did not extinguish Fannie Mae’s interest in the Property secured by the Deed of Trust or convey the Property free and [clear] to Skylights.” Id. at *11. This decision is currently on appeal to the Ninth Circuit Court of Appeals under case number 15-16904; Skylights’ opening brief was due January 4, 2016.
Shortly after the Skylights decision was entered, Chief Judge Navarro issued similar decisions in three additional cases: Elmer v. JPMorgan Chase Bank, N.A., 2015 WL 4393051 (July 13, 2015); Premier One Holdings, Inc. v. Federal National Mortgage Ass’n, 2015 WL 4276169 (July 13, 2015); and Williston Investments Group, LLC v. JPMorgan Chase Bank, N.A., 2015 WL 4276144 (July 13, 2015). The Elmer and Williston cases involved Freddie Mac loans and were factually distinct from Skylights in that after the HOA sales, foreclosures were completed as to Freddie Mac’s deeds of trust, and assignments of the deeds of trust to Freddie Mac were not recorded until after the HOAs’ foreclosures. See Elmer, supra at *1; Williston, supra at *1.
Chief Judge Navarro did not find the factual distinction relevant and instead found that Freddie Mac “held an interest” in the properties since the date it purchased the loans — not the date on which the deeds of trust had been assigned to it. See Elmer, supra at *3; Williston, supra at *3. Similarly, in the Premier One case, the chief judge determined that Fannie Mae held an interest in the property since the time it purchased the loan, which was years before the HOA foreclosure. Premier One, supra at *3. In all three cases, Chief Judge Navarro granted FHFA/GSEs’ motions for summary judgment and held that “12 U.S.C. § 4617(j) preempts Nevada Revised Statutes § 116.3116 to the extent that a homeowner association’s foreclosure of its super-priority lien cannot extinguish a property interest of Fannie Mae or Freddie Mac while those entities are under FHFA’s conservatorship.”
On July 27, 2015 Judge Jones adopted Chief Judge Navarro’s analysis in Skylights and granted FHFA and Fannie Mae’s motion for summary judgment in a “factually and legally indistinguishable case.” My Global Village, LLC v. Federal National Mortgage Ass’n, 2015 WL 4523501 at *4 (2015). Judge Jones thereafter issued a second decision on the issue in LN Management LLC Series 5664 Divot v. Dansker, 2015 WL 570799 (Sept. 29, 2015), wherein he denied FHFA and Fannie Mae’s motion based on a finding that there was a genuine issue of material fact as to whether Fannie Mae owned the note and deed of trust at the time of the HOA foreclosure. Id. at *3. Thus, although Judge Jones acknowledges that HERA preempts the state HOA foreclosure statute, in order to prevail in the Dansker litigation, Fannie Mae will need to prove its ownership interest in the note and deed of trust to establish a property interest within the scope of HERA.
Three other federal judges have issued rulings on the HERA federal preemption argument. Judge Dawson adopted the reasoning of Chief Judge Navarro in the Skylights matter and held that section 4617(j) preempts the state HOA foreclosure statute. Saticoy Bay, LLC v. Federal National Mortgage Ass’n., 2015 WL 5709484 (Sept. 29, 2015). Similarly, Judge Mahan granted FHFA’s motion for summary judgment in 1597 Ashfield Valley Trust v. Federal National Mortgage Ass’n., 2015 WL 4581220 (July 28, 2015). However, Judge Mahan’s decision indicates that Fannie Mae’s property interest did not arise when it obtained an ownership interest in the note, but instead when the deed of trust was assigned to it. Id. at *8.
This is because the deed of trust was originally in favor of MERS. In Nevada, “listing different entities as the note holder and beneficiary under the deed of trust ‘split[s]’ the note and deed of trust at inception.” Id. (citing Edelstein v. Bank of N.Y. Mellon, 286 P.3d 249, 260 (Nev. 2012). It was only when the note and deed of trust were reunited that Fannie Mae’s property interest arose. Since the assignment was executed, and Fannie Mae’s interest arose prior to the date of the HOA foreclosure sale, Judge Mahan held that Fannie Mae’s deed of trust could not have been extinguished by the HOA sale as a matter of law. Id.
Finally, Judge Dorsey has issued decisions on the federal preemption question in three cases: Federal National Mortgage Ass’n v. SFR Investments Pool 1, LLC, 2015 WL 5723647 (Sept. 28, 2015) (“adopt[ing] Chief Judge Navarro’s conclusions and the analysis she articulated in Skylights”); Nationstar Mortgage, LLC v. Eldorado Neighborhood Second Homeowners Ass’n, 2015 WL 5692081 (Sept. 28, 2015) (finding that section 4617(j) preempts the HOA foreclosure statute, but granting leave to amend after holding that the GSE and FHFA had not pled they were the beneficiary of the deed of trust, which had been assigned to Nationstar); and LN Management LLC Series 5271 Lindell v. Estate of Piacentini, 2015 WL 6445799 (Oct. 8, 2015) (finding that section 4317(j) preempts the state HOA foreclosure statute, but denying summary judgment as the GSE and FHFA had not demonstrated they were the beneficiary of the deed of trust, which had been assigned to CitiMortgage).
Notably, Judge Dorsey does not adopt Chief Judge Navarro’s conclusion that a property interest arises when a GSE obtains an ownership interest in a loan. Instead, Judge Dorsey held that a ‘split’ note and deed of trust must be reunited or that the requisite agency relationship must exist between the beneficiary of record and the owner of the note, such that the owner can require the beneficiary/agent to assign the deed of trust to it.
In summation — Each of the federal judges addressing the issue has found that 12 U.S.C. § 4617(j) preempts Nevada Revised Statute § 116.3116 to the extent that a homeowners association’s foreclosure of its super-priority lien cannot extinguish a property interest of a GSE while those entities are under FHFA’s conservatorship. The difference in the cases to date has been the requirements to establish the GSEs’ “property interest” at the time of the foreclosure, either through an assignment of the deed of trust or an agency relationship.
Because of the high number of affected properties (and to avoid inundating the Nevada courts with hundreds of individual lawsuits), the FHFA and GSEs filed a class action complaint in a case pending before Chief Judge Navarro under case number 2:15-cv-01338-GMN-CWH. The FHFA and GSEs filed a motion for certification of a defendant class which, as of this printing, has been fully briefed but not yet ruled upon.
It should be noted that section 12 U.S.C. § 4617(j) only applies when a GSE owns the loan at issue. Therefore, in state or federal cases involving a different investor, the recent federal decisions will have no application. Nevertheless, there are state law arguments being presented challenging HOA foreclosure sales and recent legislation (which took effect on October 1, 2015) that will alleviate some of the concerns over how future HOA sales are conducted in the state of Nevada.
Special Note: As this USFN Report went to press, an update was received from the author. On January 14, 2016 the Nevada Supreme Court issued a decision in Southern Highlands Community Ass’n v. San Florentine Avenue Trust, 132 Nev., Adv. Op. 3. The issue in that case: When multiple HOA liens (e.g., a master HOA and a sub-association) have equal priority and one is foreclosed, does the foreclosure extinguish the second equal-priority lien? Southern Highlands holds that an HOA sale extinguishes any other HOA lien of equal priority and that both equal-priority lienholders share the foreclosure sale proceeds. If those proceeds are insufficient to satisfy the equal-priority HOA liens, the sharing is on a pro-rata basis.
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