Last week, the Ninth Circuit held, in Bourne Valley Court Trust v. Wells Fargo Bank, NA that Nevada’s super-lien priority statute, NRS § 116.310, prior to certain amendments enacted in 2015, was facially unconstitutional.

Nev. Rev. Stat. 116.3116 establishes that liens resulting from non-payment of homeowners’ association (HOA) have priority over other secured liens for up to nine (9) months of unpaid HOA dues. In September 2014, the Nevada Supreme Court held, in SFR Invest. Pool I, LLC v. U.S. Bank, N.A., 334 P.3d 408 (Nev. Sept. 18, 2014), that NRS 116.3116 does not establish merely payment priority, but provides a homeowners’ association with a true super-priority lien, which upon proper foreclosure may extinguish an otherwise valid first deed of trust. The impact of this ruling on secured lenders was compounded by the fact that the statute did not require HOAs to provide notice of their lien to other security holders unless the lien-holder had expressly “opted-in” to receiving HOA notices when it recorded its lien. See N.R.S. section 116.31163(2) (requiring notice of default and election to sell be mailed to “any holder of a security interest encumbering the unit’s owner’s interest who has notified the association, 30 days before the recordation of the notice of default, of the security interest”). In the wake of the SFR Investments ruling, HOAs foreclosed their interests, often without notice to other lien holders, and in some cases accepting bids equal to a fraction of the amount owed to the secured lender. The purchasers at the foreclosure sales were often professional investors. To ensure that they took title to a property free and clear of any liens, investors frequently filed quiet title actions against all of the junior lien holders. Lenders raised a variety of legal defenses in these suits, including that NRS 116.3116 was unconstitutional. These cases have been making their way through state and federal courts since then with widely diverging results.

In response to SFR Investments, the Nevada Legislature amended the statute to provide certain protections to lenders. Among them was the elimination of the “opt-in” notice feature. The amended statute requires that the HOA mail to the first deed of trust holder the default and sale notices within 10 days of recording, and that the HOA record an affidavit indicating those notices were sent to the first lien holder. The amendments applied only to HOA foreclosures that occur on or after Oct. 1, 2015. Completed and pending foreclosures were not benefitted by the amendments and litigation involving those properties continued to comprise a substantial portion of court dockets.

In Bourne Valley Court Trust v. Wells Fargo Bank, NA, the Ninth Circuit addressed one of the defenses lenders asserted in post-foreclosure quiet title actions – that the super-lien statute was unconstitutional on its face because it results in the taking of bank property without due process. The plaintiff, Bourne Valley Court Trust, had purchased the subject property at an HOA foreclosure sale and then commenced a quiet title action. The district court granted the HOA’s motion for judgment, agreeing that NRS § 116.3116(2) had extinguished all junior interests. The Ninth Circuit reversed, concluding that the foreclosure violated the due process rights of the senior lien holder because it impermissibly shifted the burden to mortgage lenders to request notice of an HOA’s foreclosure proceedings, without any regard for: (1) whether 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 a title search, or (3) whether the homeowners’ association had made any effort whatsoever to contact the mortgage lender.

The Court found the requisite “state action” in the enactment of the statute itself. Although the HOA’s foreclosure sale was a private transaction, the statute itself “unconstitutionally degraded [Wells Fargo’s] interest in the Property. Absent operation of the statute, Wells Fargo would have had a fully secured interest in the Property.” Accordingly, the Court concluded, NRS § 116.3116’s “opt-in” notice scheme facially violated mortgage lenders’ constitutional due process rights. The Court vacated the district court’s judgment and remanded the case for further proceedings. Although the decision is silent regarding any retroactive application, arguably all foreclosures conducted under NRS § 116 prior to the 2015 amendments are unconstitutional.

To view a copy of Bourne Valley Court Trust v. Wells Fargo Bank, please click here.