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Counsel’s Corner: HOA Super-Priority Lien Issue Not as Clear After Court Opinion

Jon Patterson

Jon Patterson

Aaron Chastain

Aaron Chastain

Jon Patterson is a member of Bradley Arant Boult Cummings Financial Services Litigation & Compliance team and is based in the firm's Birmingham, Alabama, office. He focuses his financial services litigation practice on mortgage litigation. Practicing since 2003, he has handled cases through all stages of the litigation process, including arbitration hearings, mediation, jury trials, bench trials, and injunctive relief hearings. He has substantial experience in the mortgage litigation arena, managing the litigation of more than 1,000 cases across the country for various mortgage servicers.

Aaron Chastain is a member of Bradley Arant Boult Cummings’ litigation practice group and appellate practice team. His practice focuses on analyzing problems to determine the most effective and cost-efficient resolution and pursuing that result in trial and appellate courts, as well as in alternative dispute resolution forums. He has significant experience defending clients in the financial services industry against claims such as violations of the Fair Debt Collection Practices Act (FDCPA), wrongful foreclosure, violations of the Truth in Lending Act (TILA), and violations of the Real Estate Settlement Procedures Act (RESPA).

Patterson and Chastain are currently managing hundreds of files arising from the Nevada Supreme Court’s September 2014 decision in the case of SFR Investments Pool 1 v. U.S. Bank which gave homeowners associations the legal power to non-judicially extinguish a first lien. Last week, the Nevada Supreme Court issued another opinion in an attempt to clarify some of the pending litigation.

In a nutshell, what clarity did the most recent opinion by the Nevada Supreme Court provide for the pending litigation around HOA super priority liens?

Patterson: It didn’t provide as much clarity as I think the entire community wanted, including lenders and servicers as well as others involved, such as the investor purchasers and HOAs. There are thousands of these lawsuits now pending in Nevada and everybody is looking for some type of answer to a lot of global questions to possibly put this issue to rest one way or the other. So there was some hope that this opinion would go a long way toward clearing up some global issues. It didn’t do that, and in fact, kind of did the opposite, which at least suggests that these cases may be taking on more of an individualized track with every single case having to be litigated on its own facts to answer certain questions that the court left out there.

The one good thing is that they did go out of their way to signal that state courts in Nevada at least have equitable authority to set aside these HOA foreclosure sales if the court find the sales were not commercially reasonable, which in the Supreme Court’s mind, is less than 20 percent of the market value. They also held that a trial court could set aside a foreclosure sale upon finding that the party affected by the sale attempted to pay the HOA’s lien.

The ultimate effect is that the court decided to remand the case for further factual development on all of these issues, which tends to suggest our overarching point—that we’re looking at significant individualized factual development in every single one of these cases in certain issues. The state courts must decide on a one-off basis whether each particular sale was commercially unreasonable, or whether each particular sale has facts that warrant unwinding the sale or vacating the sale because the lender or servicer did enough to try to pay the HOA lien. But the big question that’s left out there that I think most people thought may get answered in this opinion was on the issue of what the nine-month super priority amount was, and whether that amount is just the homeowner’s monthly dues or whether that amount also constituted fees and costs and expenses, which is a really big issue right now that the court left unaddressed. We have to wait on another opinion to get further clarity on what that means, and that’s a really big issue right now.

What effect does this opinion have on the lending community? It sounds like it made it more murky instead of clearer.

Chastain: I think that’s right. The one caveat to that is by getting an opinion, even though it didn’t address all the issues that we were hoping, it still gave us a sign of which issues the Supreme Court thinks are still live and which issues may not be. The court didn’t strike any arguments and say “That’s no-go territory. . .” It suggested that the arguments about commercial reasonableness and trying to tender payment for super-priority liens are alive and well. One of the big takeaways from this is not only that the cases are going to require a lot of individual factual development, but also all the cases are going to require that. Not many of them are going to be able to be restricted to legal issues that the court has suggested are dead in the water.

What extensive factual development will these cases require before they are ready for adjudication?

Patterson: There’s no doubt that the upshot of the court’s ruling is that the lending community is really going to have to dig into the facts of each case to answer certain specific questions, such as:

  • How much were the monthly assessments?
  • Did the HOA have costs outside of just the monthly dues that fell within the super priority amount of its lien?
  • How were those assessments calculated? Were those assessments calculated according to a valid budget adopted by the HOA?
  • What do the covenants and conditions and restrictions for each HOA speak to about what’s constituted as an assessment?
  • What is the market value of the property at the time of the sale to determine whether or not the sale amount is within the 20 percent “commercially unreasonable” frame?

Those are some of the questions that you’re going to be left to answer, which in litigation dictate that you’re going to have substantial discovery going on. You’re going to have discovery of the HOA itself; you’re going to have discovery involving the HOA trustee, sometimes referred to as the collection agent; you’re going to have discovery of the HOA purchaser, who purchased at the sale, and what they knew about the sale. If the property has been sold multiple times, what do the various folks who purchased it since then know about this? You’ve really taken a case that in most instances was an HOA sale for less than $10,000 and are turning it into a really expensive piece of litigation in order for these lenders to fight to secure their first liens. You look across the board and there are literally thousands of these cases out there right now. Lenders, investor purchasers, and the HOAs themselves are going to continue to spend extraordinary amounts of litigation costs to hopefully bring this situation to an end eventually.

Chastain: There are still arguments that would be dispositive of a large percentage of these cases that technically are still alive, and in some cases alive and well. This court opinion doesn’t necessarily change that, although it certainly suggests in the Nevada Supreme Court’s mind that each case is going to take a lot of factual development. The argument that the old statute we’re litigating under is unconstitutional hasn’t been adjudicated. It’s been briefed in the Nevada State Supreme Court. We don’t have an opinion yet telling us whether it’s constitutional or not. In this case, it didn’t address that issue.

Similarly, there are cases pending mainly in federal court having to do with whether or not the Housing and Economic Recovery Act (HERA) of 2008 provides a quasi-preemption dissent and GSEs have been involved in that litigation and have for the most part been successful in getting judgments from the federal courts. That provides more or less an absolute dissent to the HOA foreclosures. There are also arguments about preemption under the FHA loan program. Those are examples of issues that are outside the realm of what this case could have possibly decided and what it did decide. They still could come out in a way that resolves a large percentage of the litigation in Nevada notwithstanding the Nevada Supreme Court’s opinion that it’s going to take a lot of factual development.

Editor’s note: Click here to view the Nevada Supreme Court’s opinion issued last week.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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