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I know there has been a lot of discussion about the HOA foreclosures in NV since the 2014 ruling. I received this update on this issue from one of our hard money lenders today and thought I would share it with our readers. Please feel free to add your thoughts.
Court of Appeals rules that Nevada HOA liens do not supersede first mortgages
Older version of state's laws ruled unconstitutional
Mortgage lenders and investors needn’t worry about whether a homeowners’ association super lien will be given priority over a first mortgage in the state of Nevada, at least for now.
According to an alert published Monday by Ballard Spahr, the Ninth Circuit Court Appeals ruled last week that an older version of Nevada’s laws, which previously gave super-priority status to HOA liens, is unconstitutional.
In a 2-1 decision, the Ninth Circuit overruled a 2014 decision from the Nevada Supreme Court, which held that foreclosure of a super lien for HOA assessments can extinguish a first mortgage.
But one portion of the state’s laws that the Nevada Supreme Court did not address is whether supposed junior lienholders, including mortgagees, were required to be notified in the event of a super lien foreclosure.
Specifically, the ruling deals with an older version of Nevada law that was amended by the Nevada state legislature in 2015. Under the older Nevada law, homeowners’ associations were only required to notify lenders of a foreclosure if the lender requested to be notified.
In 2015, the Nevada state legislature changed the state’s laws to require notice of foreclosure to be given to all junior lienholders.
But the case in question deals with the pre-2015 version of the law, which did not make it mandatory to give notice to junior lienholders, which according to the Ninth Circuit is a violation of the Constitution.
And according to the attorney’s at Ballard Spahr, the impact of the ruling could be significant.
From the Court’s decision:
Nevada Revised Statutes section 116.3116 et seq. strips a mortgage lender of its first deed of trust when a homeowners’ association forecloses on the property based on delinquent HOA dues. Before it was amended, it did so without regard for whether the first deed of trust was recorded before the HOA dues became delinquent, and critically, without requiring actual notice to the lender that the homeowners’ association intends to foreclose.
We hold that the Statute’s “opt-in” notice scheme, which required a homeowners’ association to alert a mortgage lender that it intended to foreclose only if the lender had affirmatively requested notice, facially violated the lender’s constitutional due process rights under the Fourteenth Amendment to the Federal Constitution. We therefore vacate the district court’s judgment and remand for proceedings consistent with this opinion.
The decision itself stems from a case that involved an attempt to quiet the title on a home purchased at a HOA foreclosure auction.
The home in question had a mortgage loan for $174,000 from Plaza Home Mortgage. The beneficial interest in the noted and deed was subsequently assigned to Wells Fargo in 2011.
After the homeowner, Renee Johnson, fell behind on her HOA payments, the HOA in question, Parks Homeowners’ Association, recorded a notice of delinquent assessment lien for $1,298.57 in August 2011.
In October 2011, Parks recorded a notice of default and election to sell. Then, on April 9, 2012, Parks recorded a notice of trustee/foreclosure sale against the property.
The Horse Pointe Avenue Trust then paid $4,145 for the home at a homeowners’ association foreclosure sale, before conveying its interest in the property totheBourne Valley Court Trust, which then filed an action to quiet title and extinguish any other junior liens.
As the Ninth Circuit writes, the foreclosure of a homeowners’ association “super priority” lien extinguished all junior interests in the property, including even a mortgage lender’s first deed of trust.
Therefore, using the Nevada Supreme Court’s interpretation of the state’s laws, the district court held that Parks’ foreclosure extinguished Wells Fargo’s interest in the property.
Wells Fargo then appealed, leading to this decision.
According to the Ninth Circuit’s decision, Nevada state law contained a “peculiar scheme” for providing mortgage lenders with information about when an HOA intended to foreclose on a property.
“Even though such foreclosure forever extinguished the mortgage lenders’ property rights, the statute contained “opt in” provisions requiring that notice be given only when it had already been requested,” the Ninth Circuit wrote in its opinion.
“Thus, despite that only the homeowners’ association knew when and to what extent a homeowner had defaulted on her dues, the burden was on the mortgage lender to ask the homeowners’ association to please keep it in the loop regarding the homeowners’ association’s foreclosure plans,” the court continued. “How the mortgage lender, which likely had no relationship with the homeowners’ association, should have known to ask is anybody’s guess.”
The setup was not only “strange,” according to the Ninth Circuit, it was also unconstitutional.
The court continues:
But that the foreclosure sale itself is a private action is irrelevant to Wells Fargo’s due process argument. Rather than complaining about the foreclosure specifically, Wells Fargo contends—and we agree—that the enactment of the statute unconstitutionally degraded its interest in the property. Absent operation of the statute, Wells Fargo would have had a fully secured interest in the property. A foreclosure by a homeowners’ association would not have extinguished Wells Fargo’s interest. But with the statute in place, Wells Fargo’s interest was not secured. Instead, if a homeowners’ association foreclosed on a lien for unpaid dues, Wells Fargo would forfeit all of its rights in the property.
According to the court, the Nevada “opt in” rule violated mortgage lenders’ constitutional due process rights.
The attorneys at Ballard Spahr note that the investor that bought the property in question can petition for a rehearing, but state that, for now, the opinion is binding in all Nevada federal courts.
According to Ballard Spahr’s note, the vast majority of currently pending quiet title actions involve sales that occurred before 2015, which means that the sales were governed by the pre-amendment version of the notice statutes, making this decision applicable to most of those cases.
“The non-judicial foreclosure of a Nevada HOA super lien cannot constitutionally extinguish a mortgage lender's security interest, the Ninth Circuit Court of Appeals has held,” Ballard Spahr’s attorneys state. “This holding will affect many lawsuits in federal courts seated in Nevada, and may affect hundreds of lawsuits in Nevada State courts between mortgage lenders and investors who have brought HOA-foreclosed properties.”
The attorneys also write that the decision will have a “strong persuasive authority (at the very least)” in actions currently pending in Nevada state court.
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