On September 30, 2014, we posted “Lenders Beware: the Nevada Supreme Court Holds that Foreclosures of Homeowner’s Association Liens May Extinguish First Priority Deeds of Trust” which discussed the recent decision of SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 130 Nev. Adv. Op. 75 (Sept. 18, 2014) (“SFR”).   At the risk of oversimplification, the SFR Court held that:

1. NRS 116.3116 (the “Statute”) splits the lien of a homeowner’s association (“HOA”) into a “superpriority piece” and a “subpriority piece.”
2. The superpriority piece of the HOA’s lien consists of the “last nine months of unpaid HOA dues and maintenance and nuisance-abatement charges” and is prior to the first priority lien.
3. The subpriority piece of the HOA’s lien consists of “all other HOA fees or assessments” and is subordinate to the first priority lien.
4. The superpriority piece of the lien could be foreclosed upon non-judicially and such a foreclosure sale will extinguish the first priority lien.

In response to the respondent’s allegations that the HOA was demanding it pay more than the last nine months of unpaid HOA dues, the SFR Court stated:

And from what little the record contains, nothing appears to have stopped U.S. Bank from determining the precise superpriority amount in advance of the sale or paying the entire amount and requesting a refund of the balance.” (emphasis added).

In Nevada Association Services, Inc., v. The Eighth Judicial District Court, 130 Nev. Adv. Op. 94 (Dec. 4, 2014) (“NAS”), the purchaser of several properties at foreclosure sales did exactly what the Nevada Supreme Court suggested in SFR: it determined the amount of the superprioirty owed the HOA, it paid the full amount demanded by the HOA’s collection agency under protest in order to avoid foreclosure of its property and then sued for a refund of the overpayments.

The Nevada Supreme Court held that the “voluntary payment doctrine” barred the plaintiff from recovering amounts it paid to the HOAs in order to prevent its property from being foreclosed upon. The NAS Court described the voluntary payment doctrine “an affirmative defense that “provides that one who made a payment voluntarily cannot recover it on the ground that he was under no legal obligation to make the payment.”” Since the voluntary payment doctrine is an affirmative defense, the defendant bears the burden of proving its applicability. The Court then held since the defendant demonstrated a voluntary payment was made, the burden shifted to the plaintiff to prove that an exception to the doctrine was present.

The plaintiff alleged that two exceptions were present: (1) it made the payments under coercion or duress caused by a business necessity; and (2) it made the payments in defense of property in order to avoid losing the properties at the various HOAs’ foreclosure sales – something the lower court agreed with.   The Nevada Supreme Court rejected these arguments, without referring to the SFR decision. It reasoned that Elsinore had other alternatives available to it at the time it made the payment such as seeking arbitration or mediation by the Nevada Real Estate Division (“NRED”) before paying the lien and Elsinore failed to show that it risked losing its property at a foreclosure sale.

In practice, it costs as much if not more to mediate or arbitrate these disputes before NRED than it does to pay what the HOA demands because their demands typically range from about $5,000 to $10,000. Thus, payment under protest and later suing for a refund, something the Nevada Supreme Court suggested in SFR, seems like a much better approach.

Should the holder of a first priority deed of trust or the purchaser of property at a foreclosure sale conducted by the holder of a first priority deed of trust elect to follow the Nevada Supreme Court’s advice in SFR to pay the amount of the lien in order to avoid a foreclosure sale by an HOA, it should be prepared to demonstrate that the voluntary payment doctrine does not apply in order to avoid being left without a remedy.