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HOAs vs. Mortgage Lenders 

Editor's note: This article appears in the March 2021 issue of DS News, available here.

Nevada’s Homeowner’s Associations (HOAs) have won again in their battle with mortgage lenders challenging Nevada’s super-priority lien law, this time in the United States Court of Appeals Ninth Circuit.  

What’s the Superpriority Statute?   

First enacted in 1991, Nevada’s HOA lien priority statute, formally known as NRS 116.3116 and acrimoniously referred to as the “superpriority statute,” is intended to provide HOAs with what was considered much-needed muscle as a means of collecting delinquent assessments from offending homeowners. NRS 116.3116(1) bestows upon an HOA a statutory lien against a property for unpaid HOA assessments and further provides for a portion of these assessments to be superior to a senior mortgage. Simply put, aside from a few exceptions, if the HOA assessments go unpaid, an HOA has the authority to proceed with foreclosure of its lien, even if the HOA lien itself is subordinate in value to the mortgage or lender’s lien.  

The assessments that HOAs levy are typically the hard costs incurred by the HOAs to provide requisite services to the homeowners within the private community, such as property taxes for the common areas as well as costs of maintaining the amenities held in common by owners of property within the development. When a homeowner abandons their property or neglects to pay the HOA assessments as obligated, the HOAs are left at risk to subsidize those senior mortgage holders who, like their defunct borrowers, disregard the HOA lien or delay foreclosure resulting in protracted HOA assessment delinquency. The legislative intent of NRS 116.3116 was to account for these hypothetical “bad player” homeowners and senior lien holders.   

In 2009, the Nevada Legislature amended the HOA superpriority statue by increasing the amount given priority over a senior mortgage to nine months of delinquent assessments. However, properties encumbered by Fannie Mae or Freddie Mac backed mortgages remain limited to six months of assessments. Until 2013 and 2015, the statute did not expressly require notice be given to the lender of the foreclosure nor expressly provide any right for the lender to obtain lien payoff.  

Surrounding Controversy   

In 2014, the Nevada Supreme Court, in what remains a controversial decision, affirmed the legislative intent of NRS 116.3116 specifically to preempt HOAs from continuing to subsidize first lien holders who delayed foreclosure, and pointedly endorsed the dominion of the superpriority statue, holding that the foreclosure of an HOA’s super-priority lien could lawfully extinguish a senior mortgage under the mandate of NRS 116.3116. SFR Investments Pool 1 v. U.S. Bank, 334 P.3d 408, 410 (Nev. 2014). SFR unequivocally decided:   

  1. an HOA has a true super-priority lien, not just a payment priority; and  
  2. the property foreclosure, whether judicial or non-judicial, extinguishes a first deed of trust.   

Dissatisfied with the mortgagee’s argument, the Nevada Supreme Court concluded that the lender could have either:  

  1. Easily paid-off the full lien to avert its loss of security and request the HOA reimburse the amount exceeding the super-priority lien or  
  2. paid the HOA assessments through an escrow account to avoid disbursing its own funds.    

In the wake of SFR and the derivative law of the case Nevada witnessed a surge of quiet title actions aimed to ensure title was acquired free and clear of the senior mortgage. In response, the Federal Housing Finance Agency (FHFA) categorically withheld consent for all HOA lien foreclosures, contravening the Nevada Supreme Court’s ruling in SFR.   

The FHFA contemporaneously filed a surfeit of federal district court complaints and counterclaims asserting HERA. As a result, Congress granted FHFA certain privileges and exemptions including a ‘property protection’ exemption. Under this exemption, when acting as conservator, no property of FHFA is subject to levy, foreclosure, or sale without the consent of FHFA and no involuntary lien(s) may attach to any FHFA property. 12 U.S.C. 4617 (j)(3). This congressional gesture offered the FHFA bona fide protection from the superiority statute but, left lenders vulnerable and fully exposed.    

The Superpriority Statute Today  

Six years after SFR bequeathed upon the Nevada HOAs a true super-priority lien with the capacity to extinguish a first deed of trust, lenders continue to challenge the constitutionality of the Nevada superpriority statute. In late fall 2020, in what will undoubtedly resonate beyond Nevada state lines, the United States Court of Appeals for the Ninth Circuit was asked to consider the federal constitutional question of whether the HOA superpriority ‘scheme’ (as donned by the Court) either effectuates an uncompensated taking of property in violation of the Fifth Amendment or alternatively violates the Due Process Clause of the Fourteenth Amendment. The Ninth Circuit handily affirmed the district court’s dismissal of the quiet title action commenced by first lien holder Wells Fargo Bank, N.A. against the purchaser of real property at a foreclosure sale. Effectively representing all lenders in opposition of NRS 116.3116, Wells Fargo sought a declaration that the foreclosure sale was invalid and that the bank’s deed of trust continued as a valid encumbrance against the real property located in Las Vegas, alleging brazenly on appeal that the superpriority statute and authorized HOA foreclosure violated the lender’s constitutional rights.   

Factual Background and Procedural History  

In 2008, homeowners purchased a home within the Copper Creek HOA in Las Vegas and were subject to the covenants, conditions and restrictions, including an obligation to pay dues and other assessments to the HOA. The homeowners financed the purchase with a loan from WELLS FARGO and to secure the loan, recorded a deed of trust in favor of WELLS FARGO.  In 2011, the homeowners defaulted on the loan and concurrently fell behind on their HOA dues, resulting in a lien for the delinquent assessments. Thereafter, the HOA foreclosed on the property to satisfy its lien and in 2013, the Mahogany Meadows Avenue Trust (“Mahogany Meadows”) purchased the property at public auction thereby extinguishing Wells Fargo’s deed of trust.  Notably, Mahogany Meadows purchased the property for $5,332.00, an amount substantially less than the value of the property estimated at $200,000.00.   

Following the foreclosure, Wells Fargo initiated a quiet title action seeking a declaration that the foreclosure sale was invalid and that the lender’s deed of trust survives as a valid encumbrance against the real property on the grounds that NRS 116.3116 violates the Takings Clause and the Due Process Clause of the U.S. Constitution. The district court dismissed Wells Fargo’s complaint for failure to state a claim relying heavily on the Supreme Court of Nevada’s decision in the 2017 action, Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortgage, a Division of Wells Fargo Bank, N.A., 388 P.3d 970, 975 (Nev. 2017) where the court  concluded an HOA acting pursuant to NRS 116.3116 cannot be deemed a state actor nor did the Nevada Legislature deprive the lender of its constitutional rights by enacting the superpriority statute.  

 Thereafter, Wells Fargo unsuccessfully moved for reconsideration, arguing for the first time that because the borrower was an active-duty member of the Army Reserve, the HOA foreclosure sale was a flagrant violation of the Servicemembers Civil Relief Act, 50 U.S.C. §3953.  The district court denied Wells Fargo’s motion because Wells Fargo was unable to explain why it did not reveal or know of its borrower’s status earlier.  

5th Amendment/Takings Claim  

 The Takings Clause of the Fifth Amendment, made applicable to the states under the Fourteenth Amendment to the United States Constitution, provides private property shall not be taken for public use without just compensation. In determining whether a regulation, or in this instance, a statute, constitutes a compensable ‘taking,’ courts consider three factors:     

  1. The economic impact on the property owner,  
  2. the interference with investment backed expectations, and  
  3. the character of the government action.   

Intended to bolster the HOAs enforcement authority, the superpriority statute facially appears to illicitly and unjustly strip lenders of their prerogative as first lien holders without compensation.   

Certainly, that is the argument zealously advanced by Wells Fargo in Wells Fargo v. Mahogany Meadows Ave. Trust (2020). However, the Ninth Circuit decidedly disagreed. While the Supreme Court has long recognized that liens such as Wells Fargo’s deed of trust constitute property under the Takings Clause, the Ninth Circuit concluded that one of the requisite prongs of eminent domain is simply not satisfied as there is a profound absence of government action.   

Pursuant to Nevada law, later fortified by the court’s ruling in SFR, we now understand that HOAs in the Battle State enjoy a superpriority lien on association properties for unpaid assessments that has the capacity to extinguish a first deed of trust held by a mortgage lender. The appellate panel, agreeing with both the Nevada Supreme Court in Saticoy Bay, and its predecessor district court ruling in SFR, held that Wells Fargo did not suffer an uncompensated physical nor regulatory taking under the Takings Clause of the U.S. Constitution.   

Interestingly the Court notes the potential for a philosophical conundrum in its analysis of the purported taking of Wells Fargo’s lien, which is an intangible interest.  Nonetheless, Wells Fargo under the physical or regulatory analysis is plagued with the onus of identifying what action actually constitutes the egregious taking.  

First, importantly rejecting Wells Fargo’s claim that the foreclosure proceeding initiated by the HOA, Mahogany Meadows Ave. Trust, amounted to a taking, the Ninth Circuit noted that the HOA’s foreclosure proceeding was not, nor could it liberally be construed as, a taking under any circumstance because the Takings Clause governs the conduct of the government exclusively and not that of a private actor. Here, the Copper Creek HOA, which conducted the foreclosure, is a private entity not an arm of the State of Nevada and not beholden to nor subject to the parameters of the Takings Clause.  As such, the HOA’s foreclosure could not identify as a taking and therefore Wells Fargo’s claim of foul play was moot.   

Secondly, the Ninth Circuit rejected Wells Fargo’s contention that the legislative enactment of NRS 116.3116 itself embodied a taking because:   

  1. Although the HOA’s action was authorized by Nevada law, that authorization and resultant foreclosure sale by a private actor does not metamorphose into government action and  
  2. the enactment of the superpriority statute predated origination of Wells Fargo’s lien on the property, meaning Wells Fargo could not demonstrate that it had suffered an uncompensated taking as defined by the Takings Clause.   

The Court relied on Saticoy Bay where the Nevada Supreme Court held that the extinguishment of a subordinate deed of trust through an HOA’s non-judicial foreclosure did not materialize as a violation of the Takings Clause. Moreover, the conspicuous factual timeline here challenged Wells Fargo’s position that it should maintain its lien unimpaired by a purported subordinate HOA lien. The timeline of events revealed the following:  

  • NRS 116.3116 was enacted in 1991;  
  • The HOA’s covenants, condition and restrictions, which created the obligation to pay dues, were recorded in 2003; and  
  • Both events occurred before 2008 Wells Fargo acquired its lien.  

In a nutshell, the interest Wells Fargo asserted, that being its right to maintain its lien unimpaired by the HOA lien, was in fact not even part of its title from the onset. Furthermore, though Wells Fargo argued that this interpretation yields a harsh result by allowing a small HOA lien to wipe out the value of a much larger deed of trust, the Court reminded that property-tax liens are likewise often lesser than mortgage liens but nonetheless, routinely abate the lender’s often substantial interest, and do so judiciously.   

Fourteenth Amendment—Due Process Claim  

The Due Process Clause of the Fourteenth Amendment requires the government to provide notice reasonably calculated to apprise all interested parties of the pendency of the action and to afford said parties of the opportunity to object to the same. Wells Fargo relied on the Due Process Clause in its appeal to challenge the constitutionality of the HOA foreclosure, specifically pointing to what the lender characterized as deficient notice.    

 Nevada law requires that upon foreclosure, HOAs provide all junior interest holders the following:  

  1. Notice of default and election to sell the property to satisfy the lien;  
  1. Notice of the amount of assessments and sums owed; and  
  1. Notice of time and place of foreclosure sale.     

See Nev. Rev. Stat. §§116.31162910, 311645(1), 116.31168(1)-(3).  

Well Fargo argued, while conceding receipt of actual notice, that the notice provided by the HOA was not reasonable because it did not articulate that the HOA was foreclosing to satisfy the superpriority portion of the lien, state how large the superpriority lien portion was, or warn that WF’s lien was in jeopardy.    

In its analysis, the Court first cautioned that the foreclosure sale itself was not a state or government action necessarily subject to the Due Process Clause.  Notwithstanding this fact, the Ninth Circuit nonetheless rebuffed the lender’s remonstration finding that Wells Fargo received precisely the notice prescribed by Nevada Law and therefore, constitutionally adequate notice of the foreclosure sale.  Further, the Court held that simply by conceding receipt of notice of the foreclosure sale, WELLS FARGO’s due process rights were not violated.  

A Hail Mary Pass  

Anticipating the uphill battle of its Takings and Due Process claims, in what can best be characterized as a hail may pass in further support of its appeal, Wells Fargo posited that the HOA foreclosure was unlawful under the Servicemembers Civil Relief Act and that the district court therefore abused its discretion in dismissing its complaint pursuant to Federal Rule of Civil Procedure 59(e). Though the Ninth Circuit did not contemplate Wells Fargo’s rationale in detail, but rather politely admonished Wells Fargo for failing to raise the argument based upon evidence that was theoretically available earlier, it did not altogether dismiss this belated play, suggesting perhaps this would have been the lender’s most persuasive tactic to challenge the HOA foreclosure and perhaps vacate the foreclosure sale and regain its position as a first priority lien.  

 The Take-Aways / Lessons Learned   

  1. Be proactive: The Ninth Circuit periphrastically chastised Wells Fargo for failing to anticipate the risk stating Wells Fargo could have avoided this kind of loss by refusing to lend to the borrower at origination on the grounds that it did not want a lien subject to the HOA superpriority scheme.  Alternatively, Wells Fargo could have satisfied the HOA lien to avert loss of its security interest or established an escrow for the HOA assessments to pay delinquent dues and altogether circumvent the superpriority statute.  
  2. Brainstorm all possible defenses: Carefully evaluate potential defenses, like the Servicemembers Civil Relief Act, and do so early on.  This translates to investigating your borrowers and closely examining the history of the loan. 
  3. Don’t cry wolf: Pay attention to chronology. Create a timeline to determine whether the lender’s lien predates the HOA recording before claiming foul-play.  

The National Impact   

Homeowners and lenders beware, 20 states, including the District of Columbia, have assessment priority statutes akin to NRS 116.3116, which are not random, but are based in whole or in part on the Uniform Common Interest Ownership Act. This list includes Alabama, Alaska, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and West Virginia. While each state’s threshold for designating HOA liens as true priority liens that hold a higher priority in a foreclosure than a first lien mortgage varies among this list, the message to borrowers and lenders in Nevada and D.C. rings clear—if an HOA properly conducts a foreclosure sale of its super lien, and the mortgagee does not act to redeem its interest by satisfying the HOA assessment, then the mortgagee’s interests can potentially be extinguished despite even the most valiant attempts.  

About Author: Rosemarie C. Hebner

Rosemarie C. Hebner graduated from Villanova University and obtained her Juris Doctorate from the Elisabeth Haub School of Law at Pace University. She represents corporations, financial institutions, and other institutional clients. She previously worked as in-house counsel for a prominent Fortune 500 manufacturing company, served as insurance defense counsel in the private sector, and has led CLE programs. Hebner is licensed to practice in New York and New Jersey.

About Author: Eric Houser

Eric Houser has a national litigation practice specializing in consumer and commercial finance, default servicing, title, bankruptcy, and technology litigation. Houser has successfully tried cases from Hawaii to Connecticut. He graduated from the University of California, San Diego in 1984 and the University of San Diego School of Law in 1987. Houser is licensed to practice law in California and before the United States Supreme Court.
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