We have reported before on a decision last fall from Nevada’s Supreme Court holding that a homeowners association (HOA) lien is a true super-priority lien that, if foreclosed upon, extinguishes a first deed of trust. Lenders around the country have been affected by the decision, and we have continued to follow its aftermath, including passage of legislation effective October 1, 2015, that made significant changes to the statute at issue.
In another recent development, a federal district court in Nevada has ruled that the statute at issue is unconstitutional. US Bank, N.A. v. SFR Invs. Pool 1, LLC, --- F. Supp. 3d ---, 2015 U.S. Dist. LEXIS 112807 (D. Nev. Aug. 26, 2015). Investors who purchased properties at HOA foreclosures have argued that lenders cannot challenge the statute on due process grounds because an HOA foreclosure does not constitute “state action,” meaning that such a foreclosure does not involve a governmental actor. However, the US Bank court recognized that a lawsuit which seeks court enforcement of state statutes which would extinguish the property rights of another qualifies as state action because it requires the court’s involvement. In short, a non-judicial foreclosure is not state action, but the subsequent step of seeking court enforcement to gain clear title is state action.
Investors who purchased properties at HOA sales and lenders have argued over whether the statute required that the HOA provide notice to those in first position of the HOA’s intent to foreclose prior to the sale. The US Bank court ruled that the statute does not satisfy constitutional due process because it is an "opt-in" scheme that requires a beneficiary under a deed of trust has to record a request to receive notice of a potential foreclosure sale. The court confirmed this interpretation by noting that the amendments to the statute mentioned above, which went into effect on October 1, 2015, mean that the statute now requires that notice be mailed to all interest holders who have recorded their interest. It suggests that the change was necessary precisely because the older version of the statute did not require such notice.
In summary, the US Bank case includes two important rulings. First, though a non-judicial foreclosure sale does not implicate state action, when a purchaser at that non-judicial foreclosure then files a lawsuit to extinguish the rights of others with an interest in that property, then state action is implicated and constitutionality can be raised. Second, before it was amended, NRS Chapter 116 failed to satisfy due process because it did not require HOAs to provide mailed notice of foreclosure proceedings to those holding a first position deed of trust.
For now, the US Bank ruling is not binding on other courts. Time will tell whether the ruling is appealed.
