Foreclosure of Nevada HOA Super Lien Cannot Extinguish Mortgage Lender’s Security Interest

Ballard Spahr LLP

Ballard Spahr LLP

The non-judicial foreclosure of a Nevada HOA super lien cannot constitutionally extinguish a mortgage lender's security interest, the Ninth Circuit Court of Appeals has held. This holding will affect many lawsuits in federal courts seated in Nevada, and may affect hundreds of lawsuits in Nevada State courts between mortgage lenders and investors who have bought HOA-foreclosed properties.

In 2014, the Nevada Supreme Court held that, as a matter of lien priority, the foreclosure of a super lien for HOA assessments can extinguish a first mortgage. However, the Supreme Court did not address whether the provisions of NRS Chapter 116 governing notice to purported junior lienholders, including mortgagees, were constitutional. The Ninth Circuit answered this question in the negative in Bourne Valley Court Trust v. Wells Fargo Bank, NA. The Ninth Circuit panel held that Chapter 116 requires a purported junior lienholder to "opt in" before receiving notice of an HOA foreclosure sale. Therefore, the Ninth Circuit held Chapter 116's notice provisions violate the Due Process Clause of the 14th Amendment.

One of the three judges on the panel dissented, arguing that a non-judicial HOA foreclosure does not involve sufficient state action to implicate due process. The dissent further argued that Chapter 116 incorporates certain provisions of NRS Chapter 107 that require notice to all junior lienholders, not just those who request notice.

The investor who bought the property in Bourne Valley may petition the Ninth Circuit for rehearing or en banc review. For now, the Bourne Valley opinion is binding on all Nevada federal courts. It will also serve as strong persuasive authority (at the very least) in actions pending in Nevada state court.

Importantly, Bourne Valley interprets a prior version of NRS Chapter 116 that was in effect until 2015. At that time, the Nevada Legislature amended Chapter 116 to make notice to junior lienholders mandatory. However, the vast majority of currently pending quiet title actions involve sales which occurred before 2015 and which were governed by the pre-amendment version of the notice statutes. Therefore, Bourne Valley will apply to most of these cases.

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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