The U.S. District Court for the District of Nevada recently confirmed that a homeowner association’s foreclosure of its superpriority lien cannot extinguish a property interest of Fannie Mae or Freddie Mac while those entities are under the Federal Housing Finance Agency’s (FHFA) conservatorship.

In so ruling, the Court also denied class certification, holding that the issue of whether Fannie Mae or Freddie Mac held an interest in the property at issue at the time of a homeowner association foreclosure sale presents an impermissible individualized factual inquiry that would require “mini-trials” as to each affected property.

A copy of the opinion is available at:  Link to Opinion.

As you may recall, in July 2008 the Federal Housing Finance Agency was tasked by Congress to regulate Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks.  In so doing, Congress granted the FHFA among other things a statutory “exemption” providing that when the FHFA acts as conservator of Fannie Mae or Freddie Mac, “[n]o property of [FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of [FHFA], nor shall any involuntary lien attach to the property of [FHFA].” 12 U.S.C. § 4617(j)(3).

In September 2008, FHFA placed Fannie Mae and Freddie Mac into conservatorships for the purpose of reorganizing or rehabilitating them. FHFA succeeded to all rights, titles, powers and privileges of Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac acquired separate ownership interests in each of the five properties in the instant case, prior to a homeowner association (HOA) foreclosure sale through which the HOAs purchased the properties.

The FHFA, Fannie Mae, and Freddie Mac filed this putative class action seeking to have their interests in certain properties subject to HOA foreclosures adjudicated as against three HOA defendants.  Four motions were before the Court:  the HOA defendants’ Motion to Dismiss, the FHFA plaintiffs’ Motion for Summary Judgment, the FHFA plaintiffs’ Motion to Certify Class, and the HOA defendants’ Motion to Sever.

HOA Defendants’ Motion to Dismiss

As noted above, 12 U.S.C. § 4617(j)(3) provides that while FHFA acts as conservator of Fannie Mae and Freddie Mac, “[n]o property of the Agency shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Agency, nor shall any involuntary lien attach to the property of the Agency.”

Nevada Revised Statutes §116.3116 states “the association has a lien on a unit for any construction penalty that is imposed against the unit’s owner pursuant to NRS 116.310305, any assessment levied against that unit or any fines imposed against the unit’s owner from the time the construction penalty, assessment or fine becomes due…”

The District Court previously held in Skylights LLC v. Byron, 112 F. Supp. 3d 1145 (D. Nev. 2015), that 12 U.S.C. §4617(j)(3) prohibits property of FHFA from being subject to a foreclosure without its consent, even if such foreclosure sale is held by an HOA pursuant to Nevada Revised Statutes § 116.3116.

The Court upheld its prior ruling in Skylights LLC and denied the HOA’s Motion to Dismiss.  The Court reached its holding on different grounds in this case, but found no reason to overturn its prior holding in Skylights.

FHFA Plaintiffs’ Motion for Summary Judgment

The FHFA plaintiffs requested that the Court declare that (1) 12 U.S.C. § 4617(j)(3) preempts any Nevada law that would permit a foreclosure on a superpriority lien to extinguish a property interest of Fannie Mae or Freddie Mac while they are under FHFA’s conservatorship, (2) the HOA Sale did not extinguish the plaintiffs’ interest in the properties and thus did not convey the properties free and clear to any defendants, and (3) title to the properties is quieted in either Fannie Mae’s or Freddie Mac’s favor insofar as the defendants’ interest, if any, is subject to the interest of the plaintiffs or, if applicable, the interest of the plaintiffs’  successors.

Returning to its holding in Skylights LLC, the Court held that the plain language of 12 U.S.C. §4617(j)(3) prohibits property of FHFA from being subject to a foreclosure without its consent.

The Court found that the FHFA had an interest in each of the properties prior to the HOA foreclosure sales.  The Court then held that §4617(j)(3) prevents the HOA’s foreclosure on the properties from extinguishing the deeds of trust of the properties as FHFA held an interest in the deeds as conservator for Freddie Mac and Fannie Mae prior to the HOA foreclosures.

Accordingly, the FHFA plaintiffs’ motion for summary judgment was granted.

FHFA Plaintiffs’ Motion to Certify Class

The Court recited that a party seeking class certification must prove that the class is “ascertainable,” meaning that membership in the class can be determined by reference to objective criteria.

Here, the FHFA plaintiffs defined the proposed class as a defendant class of “current record owners—other than Fannie Mae, Freddie Mac, or the Conservator—of Units as to which: (1) HOA Foreclosure Sales have been or will be completed on or after September 18, 2009, (2) an Enterprise Lien had attached and had not been satisfied at the time of the applicable HOA Foreclosure Sale, and (3) the Court may assume and exercise in rem jurisdiction.”

The HOA defendants argued that the merits of the FHFA plaintiffs’ action hinges on the extent to which the FHFA plaintiffs owned an “Enterprise Lien,” and therefore that the merits of the case are impermissibly implicated by class definition.

The District Court agreed with the HOA defendants and held that the issue was impermissibly dependent on a highly individualized fact inquiry. Thus, the Court held, the proposed class is not reasonably ascertainable. Accordingly, the Court denied the plaintiffs’ Motion to Certify Class.

HOA Defendants’ Motion to Sever

As you may recall, Rule 20(a)(2) of the Federal Rules of Civil Procedure “provides that, in order for more than one defendant to be joined together in an action, the defendants must meet two specific requirements: (1) the right to relief asserted against each defendant must arise out of or relate to the same transaction or occurrence or series of transactions or occurrences; and (2) a question of law or fact common to all defendants must arise in the action. ‘If the test for permissive joinder is not satisfied, a court, in its discretion, may sever the misjoined parties, so long as no substantial right will be prejudiced by the severance.'”

Here, the Court noted that although each of the HOA defendants purchased the properties at HOA foreclosure sales, those separate, but similar, events did not constitute a series of transactions or occurrences. Thus, the Court held that severance of the misjoined HOA defendants was proper. Under the Court’s ruling, the first named HOA defendant remained while the subsequent HOA defendants were dismissed without prejudice.