The Super-Priority Saga Continues – Nevada Supreme Court Holds That NRS 116’s Notice Provisions Are Constitutional

by Bradley Arant Boult Cummings LLP
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The Ninth Circuit sent shockwaves through the mortgage industry when it held that NRS 116—the statute allowing an HOA to impose a nominal super-priority lien that can extinguish a senior deed of trust when foreclosed—was facially unconstitutional under the Due Process Clause in Bourne Valley  Court Trust v. Wells Fargo Bank, N.A. In Bourne Valley (see our previous blog posts on this decision here and here), the Ninth Circuit held that NRS 116’s notice scheme did not mandate that mortgagees receive actual notice of these HOA super-priority lien foreclosures, but instead required that mortgagees request such notice from the HOA in advance of the HOA’s foreclosure sale. The Ninth Circuit determined this “opt-in” notice scheme violated the Due Process Clause’s requirement that statutes authorizing the extinguishment of junior liens mandate that junior lienholders receive actual notice of the foreclosure sales that can extinguish their liens.

Importantly, the Ninth Circuit held that an HOA’s foreclosure under NRS 116 constituted state action, a threshold determination in Due Process Clause challenges, as the Due Process Clause only applies to state actions. Specifically, the Ninth Circuit held that NRS 116 foreclosures constitute state action because HOA liens are purely statutory, rather than contractual, like deeds of trust. Because an HOA could not impose and foreclose on its super-priority lien absent the statutory authority granted to it through NRS 116, an HOA’s super-priority lien foreclosure constitutes state action under Bourne Valley.

Today, the Nevada Supreme Court disagreed with the Ninth Circuit’s interpretation of the United States Constitution’s state-action requirement. In Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortgage, the Nevada Supreme Court held the Due Process Clause does not apply to NRS 116 foreclosures because such foreclosures are not state action. The Nevada Supreme Court analogized NRS 116 foreclosures to deed of trust foreclosures, citing to a Ninth Circuit decision holding that deed of trust foreclosures do not constitute state action, Charmicor, Inc. v. Deaner. The Nevada Supreme Court did not address the distinguishing characteristic between deed of trust and NRS 116 foreclosures—that the former is authorized by private contract, while the latter is authorized solely by a state statute. Bluntly, the Nevada Supreme Court determined the Ninth Circuit misinterpreted Ninth Circuit precedent when it held that NRS 116 foreclosures met the federal constitution’s state-action requirement.

Significantly, the Nevada Supreme Court’s holding in Saticoy Bay is based on federal law. The Ninth Circuit owes no deference to the Nevada Supreme Court on questions of federal law, meaning Bourne Valley will presumably remain binding in Nevada’s federal courts. In state courts bound by Saticoy Bay, however, the quiet-title actions pitting HOA-sale purchasers against senior mortgagees over title to properties purchased at HOA foreclosure sales will likely turn on factual issues like the HOA’s compliance with NRS 116, whether the mortgagee tendered the super-priority amount before the HOA’s foreclosure, and the commercial reasonableness of the foreclosure sale itself.

So, practically speaking, the Saticoy Bay decision indicates there will be an ongoing split between federal and state courts on whether NRS 116.3116 is constitutional. State and federal trial courts will be bound by their respective superior courts. Thus, the forum for each quiet-title action regarding a NRS 116 foreclosure may be outcome determinative—unless the United States Supreme Court resolves the conflict.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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