Nevada Eighth Judicial District Judge Elizabeth Gonzales has voided a 2014 homeowners association (HOA) foreclosure sale and ruled that a first mortgage held by Bank of America, N.A. was unaffected by the sale. The April 20, 2016 ruling in Nevada New Builds, LLC v. Bank of America, followed a trial in which Bank of America presented evidence that it had paid any HOA dues that could potentially have priority over the first mortgage. The ruling reaffirmed an HOA’s responsibility to communicate with lenders concerning the payment amount required to preserve the first mortgage. The ruling will likely buoy lenders seeking to overturn HOA foreclosures where the association fails to cooperate with the lender’s good faith effort to safeguard its lien.

In Nevada, an HOA’s foreclosure of its lien can sometimes extinguish a first-priority mortgage, thanks to the state legislature’s grant of super-priority status to the 9 months of assessments preceding an HOA foreclosure (codified at NRS 116.3116, et. seq.). Lenders have argued that the mortgage should be preserved, however, where the lender has attempted to pay those 9 months of assessments to the HOA.

At trial, Bank of America presented evidence that it had paid $1,305.00 to the HOA and that the HOA had accepted the payment without clarifying whether it deemed the funds sufficient to discharge the super-priority portion of its lien. The HOA then proceeded to foreclose on the property, selling it for less than one tenth of its market value after informing bidders that nine months of assessments had been paid. The HOA purchaser argued that the lender’s payment was less than the amount required to pay off the total dues and charges accorded super-priority status, but Judge Gonzales held that the purchaser failed to meet its burden to prove that additional charges had priority over the mortgage. Since the court’s decision, the Nevada Supreme Court has now clarified in Horizons at Seven Hills Homeowners Association v. Ikon Holdings, LLC that super-priority status is limited to nine months of assessments for common expenses and does not include additional charges and fees: https://www.financialservicesperspectives.com/2016/04/mortgage-industry-scores-big-nevada-supreme-court-win-in-continued-battle-over-hoa-super-priority-liens/.

Judge Gonzales went further in her ruling, stating that a lack of fairness in the circumstances surrounding the sale required that it be set aside. The judge found that the HOA’s failure to communicate in the face of the lender’s inquiries was unreasonable, declaring that the HOA’s “refusal to provide adequate payment instruction to Bank of America was unfair.” The judge also noted that the HOA’s announcement of the lender’s payment at the sale depressed bids on the property by implying that the mortgage would survive the sale, rendering the sale commercially unreasonable.