Nevada Banks Take a Gamble when it Comes to HOA Liens

Posted by NCBRC - November 4, 2014

In a 4-3 decision, the Nevada Supreme Court decided that Nev. Rev. St. 116.3116 gives a homeowners’ association (HOA) a superpriority lien based on certain unpaid dues and assessments so as to extinguish the first deed of trust upon foreclosure. SFR Investments Pool v. U.S. Bank, No. 63078 (Nev. S. Ct. Sept. 18, 2014). The court also held that, under the statute, an HOA may use a non-judicial foreclosure.

After the homeowners became delinquent on both their HOA fees and their loan with US Bank, SFR purchased the property at an HOA non-judicial foreclosure sale and sought to quiet title and enjoin US Bank’s pending trustee sale. US Bank’s motion to dismiss was granted by the district court upon a finding that judicial foreclosure is a required to eliminate the first deed of trust.

The Nevada Supreme Court looked to the statute. In a “significant departure from existing practice,” NRS 116.3116(2) gives a homeowners’ association (HOA) a superpriority lien based on up to nine months of unpaid HOA dues and specified assessments, and subpriority lien on any remaining unpaid fees and assessments. The former lien enjoys true superpriority status under NRS 116.3116(2) and is superior to the first deed of trust.

In so holding, the court rejected US Bank’s argument that the impact of the legislation is to create a structure under which, upon foreclosure by the first deed of trust holder, the HOA lien must be paid off before the foreclosure purchaser obtains clear title. The court found that, although courts are divided on the issue, the plain language of the statute supports the interpretation that priority refers to the lien rather than the order of payments. The court pointed to legislative comments indicating that the legislature contemplated that the holder of the first deed of trust would avoid losing its rights by paying off the HOA debts, thereby eliminating the superpriority lien, before foreclosing.

The court found that the language and historical purpose of NRS 116.3116, supported its finding. The statute, enacted in 1991, grew out of the Uniform Common Interest Ownership Act of 1982, §3-116, 7 U.L.A., part II 121-24 (2009) (amended 1994, 2008)(“UCIOA”) but its use was not prevalent until the recent recession when large numbers of Nevada homeowners began to fall delinquent on their home mortgages and HOA payments. The prioritizing statute was intended to prevent the situation in which a homeowner abandons his property and the first deed of trust holder fails to foreclose, thereby requiring the HOA to place the burden of paying the assessments on the other homeowners in the association, or reducing services.

Having found that the HOA lien is a true superpriority lien, the court turned to whether it was properly foreclosed in a non-judicial procedure. Turning again to the language of the statute, the court found the answer. NRS 116.075 provides that “the association may foreclose its lien by sale,” and the mechanics of foreclosure, as spelled out in NRS 116, make clear that the required steps are nonjudicial. The court rejected the dissent’s interpretation of NRS 116.3116(2) as requiring judicial foreclosure. That section defines the superpriority piece of the lien as comprising “assessments for common expenses . .. which would have become due in the absence of acceleration during the 9 months immediately preceding institution of an action to enforce the lien.” The dissent argued that “action” refers to judicial action, but the majority disagreed, finding that the term could just as easily apply to non-judicial action.

The court also rejected as a “nonstarter” US Bank’s argument that elevating the HOA lien over the deed of trust denies its due process rights. Because the posture of the case was a motion to dismiss, the court found that there were sufficient allegations that the bank received all appropriate notice under the statute. The mere fact of the prioritization structure, is not, in and of itself, violative of due process.

Finally, the court found that the superpriority status was not effectively contracted away by a “mortgage protection clause,” in the Conditions, Covenants & Restrictions of the HOA agreement. NRS 116.1104 provides that: “except as expressly provided in this chapter, its provisions may not be varied by agreement, and rights conferred by it may not be waived” and there is no expressed provision allowing for this waiver or separate agreement in NRS 116.3116.

The dissent agreed with the majority that the HOA lien was a superpriority lien, but it disagreed that judicial foreclosure was not required.

What does this mean in practical terms? In a report published on the NACTT website considerchapter13.org Chapter 13 Trustee Staff Attorney, Danielle N. Gueck-Townsend, said of the decision: “It is suspected that we may see banks adding HOA payments to escrow accounts, that NRS 116 will be added to the top of the agenda for the next Nevada legislative session, and banks will begin paying much closer attention to HOA liens, requesting payoffs and satisfying the HOA delinquencies in order to avoid HOA lien foreclosures.”

SFR Nev SCt opinion

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One Comment

  • Posted August 8, 2015 at 2:27 am | Permalink

    If there is no redemption period for secondary lien holders against a trustee’s deed then why are these hoa lien foreclosures continuing to sell for so low at trustee sales? If investors were confident of clear title it seems reasonable that bidding would increase substantially on the majority of lien foreclosures.

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