Why this Case is Important

Nevada’s version of the Uniform Common Interest Ownership Act, known as N.R.S. 116, gives broad powers to homeowners’ associations (HOAs). Under N.R.S. 116 and Nevada case law, HOAs have the power to foreclose on members’ properties to collect unpaid HOA fees and assessments and have priority over all other creditors (including the holders of mortgages). These “super-priority lien” actions by HOAs have caused a flood of litigation in Nevada state and Federal courts, as N.R.S. 116 only requires an HOA to provide pre-foreclosure notice to lenders that have “opted in” to receive such notification. This ruling renders the “opt-in” provision of N.R.S. 116 unconstitutional and will not only impact future foreclosures, but might also give rise to further litigation of previous foreclosures where the lender was not provided notice.

Facts of the Case

Homeowner, Renee Johnson ("Homeowner") purchased the subject property in 2001 and financed the same through a $174,000 loan from Plaza Home Mortgage, Inc. ("Plaza"). The subject property was a part of a development governed by the Parks Homeowners' Association ("Parks HOA"). Plaza recorded a deed of trust on the subject property and assigned all beneficial interests to Wells Fargo in February 2011. Subsequently, Homeowner ceased to make payment of her HOA fees and Parks HOA began the foreclosure process. On October 12, 2011, Parks HOA recorded a Notice of Default and Election to Sell. On April 9, 2012, Parks HOA recorded a Notice of Trustee/Foreclosure Sale. The subject property was sold to Horse Pointe Avenue Trust. On May 22, 2012, a Trustee's Deed Upon Sale was recorded by Horse Pointe Avenue Trust. Horse Pointe Avenue Trust conveyed the property to Bourne Valley Court Trust ("Bourne Valley"). Bourne Valley filed a quiet title action.

The Rulings

Generally, a first deed of trust is superior to an HOA's lien pursuant to N.R.S. 116.3116(2)(b). However, there is an exception to this in N.R.S. 116.3116(2), which grants HOA liens "super-priority status" for dues owed within the nine (9) months following an action to enforce the HOA lien. Due to the above overlay of the law at the time of the District Court decision in Bourne Valley Court Trust, the Court ruled that Parks HOA's lien foreclosure extinguished Wells Fargo's interest as the first deed of trust holder in the subject property. However, the District Court failed to consider the facial constitutionality of N.R.S. 116.3116's "opt-in" provisions, which the Court of Appeals specifically deals with herein.

N.R.S. 116.3116, as formerly written, imposed on the first deed of trust holder an affirmative duty to ask to be notified when the HOA was going to foreclose on its lien, albeit there being no relationship between the HOA and the first deed of trust holder.1 Although this was an issue of first impression for this Court, it followed precedent from the Fifth Circuit Court of Appeals, which ruled that "opt-in" notices are unconstitutional when surrounding circumstances are not considered. Small Engine Shop, Inc. v. Casico, 878 F.2d 883 (5th Circ. 1989). With Small Engine Shop as guidance, the Court ruled that "opt-in" notices are unconstitutional when they are enforced without consideration of whether "(1) the mortgage lender was aware that the homeowner had defaulted on her dues to the homeowners' association, (2) whether the mortgage lender's interest had been recorded such that it would have been easily discoverable through title search, or (3) whether the homeowners' association had made any effort whatsoever to contact the mortgage lender."

(1) Notice

Bourne Valley argued that mortgage lenders are provided notice of default proceedings regardless of whether they affirmatively requested to receive such notice, pursuant to N.R.S. 107.090, which is incorporated by reference in N.R.S. 116.31168(1). N.R.S. 107.090(3)(b) requires that notice of default be sent to each party who holds an interest in the property or whose interest is subordinate to the deed of trust. However, the Court of Appeals ruled that such an interpretation would deem Chapter 116 redundant.

(2) State Action

Bourne Valley also argued that there was no state action involved because the foreclosure at issue involved a private sale. The Court of Appeals disagreed, holding that the statute "unconstitutionally degraded" Wells Fargo's interest in the property and, but for the statute, Wells Fargo's interest would have otherwise been protected. As such, the Court ruled, this constituted state interference/action with Wells Fargo's property interest.
As a result, the Court of Appeals ruled that N.R.S. 116.3116's "opt-in" notice schemes facially violated mortgage lenders' constitutional rights and this matter was remanded.

Dissent

Justice Wallace disagreed with the majority's ruling that the enactment of N.R.S. 116.3116 unconstitutionally degraded Wells Fargo's property interest because (a) N.R.S. 116.3116 was in effect before Wells Fargo acquired its interest in the subject property; (b) no government actor was involved in the nonjudicial foreclosure that resulted in Bourne Valley holding title to the property; and (c) even if there was state action, the HOA satisfied its due process obligations through N.R.S. 107.090, because mortgage lenders are provided notice of default proceedings, regardless of whether or not they affirmatively requested to receive such notice, due to the mere fact that they hold an interest in the property.

Lesson to be Learned from This Ruling

This ruling provides further clarification and guidance into the realm of first deed of trust holder interests, HOA interests, and fairness principles as to nonjudicial foreclosures by HOAs. It must now be reconciled with the fact that a mortgage lender's constitutional rights will be deemed to have been violated if it was not provided notice of the default, regardless of whether it made an affirmative request to receive notice of the same.

As a result, HOAs should make sure to issue notice to all parties who may hold an interest in the home they are foreclosing, and mortgage lenders should make sure to maintain all documentation they receive from properties in order to stay abreast of potential foreclosure proceedings. This will likely enable mortgage lenders to either (1) have an opportunity to satisfy the HOA liens before properties are foreclosed, or (2) purchase the properties at the foreclosure sales themselves, and then seek reimbursement for any excess fees they may have paid.

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1 This statute has now been amended and has removed a deed of trust holder's affirmative duty to request notice of  default. HOAs are now required to provide first deed of trust holders with notice of default and sale even when such notice has not been requested.

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