It is hard to imagine that a lender’s first-position deed of trust on a residence worth hundreds of thousands of dollars could be extinguished by a homeowners’ association (HOA) lien for overdue neighborhood assessments, usually no more than a few thousand dollars. But this exact scenario is playing out across Nevada and has been the subject of contentious litigation that has flooded state and federal court dockets for more than a year. Currently, real-estate investors, lenders, and HOAs are anxiously awaiting a decision from the Nevada Supreme Court on the most controversial legal issue in the state: whether the foreclosure sale of an HOA’s “super-priority” lien can extinguish a lender’s first-recorded deed of trust.

The recent financial meltdown and associated real-estate collapse severely impacted Nevada and its citizens, with the state at one point experiencing the highest foreclosure rates in the country. To combat the effects of the crisis, the Nevada legislature enacted a number of provisions to protect homeowners and encourage lenders to modify loans and reach resolution short of foreclosure. These provisions reduced foreclosure rates, and as a result, opportunities also declined for real-estate investors to purchase distressed properties through lender foreclosure sales. So, with lender foreclosures decreasing, real estate investors sought to capitalize on another investment opportunity, which has proven to be very profitable, and even too good to be true.

Originally published in Corporate Counsel - Winter 2014, Vol. 28 No. 2.