Lenders and servicers have been addressing the issue of some Nevada courts ruling that a foreclosure sale by a homeowners association (HOA) "wipes out" a senior deed of trust. Since the date of our last legal alert on this issue in March 2013, litigation on that issue has exploded, with various courts, lenders, and servicers all taking different approaches.

There is another, related issue that is beginning to arise, of which lenders, servicers, and any parties with lien interests in Nevada properties should be aware. That issue is what happens when there are excess proceeds garnered through a foreclosure sale: are the foreclosing trustees fulfilling their statutory duties in disbursing funds?

In the context of an HOA foreclosure sale, the open-ended question (currently unanswered by the Nevada Supreme Court) is whether an HOA foreclosure sale extinguishes a senior deed of trust. If the senior deed of trust is extinguished, it is entitled to the excess proceeds. If it is not extinguished, and it remains senior and intact, then it is not entitled to such proceeds, because only "junior" interests that were extinguished are entitled to make a claim to funds.

Some foreclosing trustees are taking advantage of the judicial uncertainty of HOA "super lien" priority to pursue additional fees and costs from excess proceeds that would otherwise be unavailable to them if they simply follow the applicable statute. For example, in the HOA foreclosure context, the HOA's foreclosing trustees are using the interpleader device to protect themselves from liability because they do not know whether the senior deed has or has not been extinguished by the foreclosure.

Foreclosing trustees in other contexts, however, are simply not following procedural devices in clear instances with no disputed claims over excess funds and are instead opting to file interpleader lawsuits. They do this even though, by statute, they can make written demands upon claimants to prove their claim, and if claimants do not respond, their claims are considered waived. Filing suit to interplead under the auspices that conflicting demands to proceeds exist—even without checking to see if there actually are competing claims—offers such trustees an incentive to interplead rather than follow statute, and to gain a potential windfall at the cost of rightful claimants to funds. The reason? By bringing an interpleader, there is a general presumption that the trustee and its lawyers are entitled to additional fees and costs directly out of the funds they have on hand to interplead.

Lenders, servicers, and lienholders should be aware of this trap for the unwary by knowing the statutes governing distribution of funds, the current status of their deed of trust, or other real estate liens. They should also be aware of any correspondence they receive from a trustee inquiring about lien or claim status, because a failure to timely respond may operate as a waiver of an otherwise enforceable right to funds.