The U.S. District Court for the District of Nevada recently held that the federal Housing Economic Recovery Act of 2008 (HERA) requires super-priority lien holders to obtain consent from the Federal Housing Finance Agency (FHFA) prior to foreclosing on any liens on properties where the FHFA is acting as conservator.

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

In 2007, two borrowers obtained a $105,700 loan on a property located in Las Vegas that was secured by a Deed of Trust on the property.  The property was also part of a homeowners association (HOA) and subject to monthly association dues.  Years later, the Deed of Trust was transferred to a regulated entity held in FHFA conservatorship.  The Corporate Assignment of the Deed of Trust was recorded in March 2014.  Six months later, after foreclosing on its super-priority lien for unpaid HOA fees, the HOA sold the property for $28,500 to a third-party purchaser and recorded a Trustee’s Deed Upon Sale in September 2014.

FHFA never consented to the HOA’s foreclosure.

Subsequently, the third-party purchaser filed a state court claim to quiet title and extinguish all other liens on the property—including the mortgage lien held by the FHFA as conservator.  FHFA and other defendants to that action removed the case to federal court in the District of Nevada and asserted counter-claims against the purchaser and HOA.

The FHFA then moved for summary judgment.  It did not dispute that under ordinary circumstances, Nevada’s super-priority lien statute would extinguish its prior first security lien interest.  Instead, the FHFA argued that HERA barred the HOA from foreclosing on the property without its consent and sought summary judgment against the HOA and third-party purchaser as to the quiet title action.  The Court agreed.

As you may recall, HERA provides protections for properties held by regulated entities while under conservatorship of FHFA.  The Court examined the interplay between provisions in Nevada’s super-priority lien statute (Nev. Rev. Statutes § 116.3116) and 12 U.S.C. § 4617 of HERA.

The Court held that the plain language of § 4617 of HERA requires consent from the FHFA as conservator of any of HERA’s “regulated entities” prior to foreclosure.

In particular, the Court considered language in § 4617(j)(1) that reads “[t]he provisions of this subsection shall apply with respect to the Agency [defined as the FHFA] in any case in which the Agency is acting as a conservator or a receiver.”  Moreover, § 4617(j)(3) provides that “[n]o property of the Agency shall be subject to levy, attachment…without consent of the Agency….”

The Court held that, to an extent a conflict exists between the state statute and HERA, the HERA provision requiring consent prior to foreclosure (12 U.S.C. § 4617) prevails under the Supremacy Clause of the United States Constitution.

Accordingly, the Court held that a “straightforward reading of the statutory language bars the HOA’s foreclosure in this case from extinguishing the Deed of Trust without FHFA’s consent, regardless of the HOA lien’s super-priority under state law.”

Moreover the Court held that its reading of the HERA § 4617(j) is further supported when compared with 12 U.S.C. 1825(b) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).  FIRREA provides property protections for the FDIC when it is acting as a receiver that are similar to those found in HERA.  The Court held that FIRREA § 1825(b)(2) “contains virtually identical language” to HERA § 4617(j)(3) and therefore decisions interpreting FIRREA § 1825(b)(2) are highly “persuasive for this Court’s interpretation of [HERA] section 4617(j)(3).”

The Court held that of the several courts that have considered the corresponding property protections under FIRREA, “all have found that the plain language of that statute prevented property held by the FDIC as receiver from being extinguished by the foreclosure of superior liens without FDIC’s consent.”

Accordingly, the Court rejected the HOA’s and third-party purchaser’s multiple arguments that HERA § 4617(j)(3) did not apply to them.  Notably, this includes their arguments that:  § 4617(j)(3) violates procedural due process; that it does not apply because it “lacks specific preemption language;” and that because one court (the Fifth Circuit) has held the operative similar language in FIRREA only protects the FDIC from “taxation and liens by state and local authorities,” and not from private entities like the HOA, HERA likewise does not apply to private entities such as the HOA.

As to this final argument, the Court held that (1) the Fifth Circuit opinion cited by the HOA and third-party purchaser was not binding precedent, (2) the opinion involved interpretation of FIRREA and not HERA, and (3) certain differences in the titling structure for HERA show that it is plainly intended to apply to both state and private entities (even if FIRREA is not).

Consequently, the Court held that the HOA’s foreclosure sale did not extinguish the private lien held in conservatorship by FHFA, and granted summary judgment in its favor and against the HOA/third-party purchaser as to the quiet title claims.