The Nevada Supreme Court held in SFR Investments Pool 1, LLC. v. U.S. Bank, N.A. that a non-judicial foreclosure by an HOA generally extinguishes a first mortgage interest, however, it left several unresolved issues. For example, it did not address whether an HOA foreclosure is invalid if the first lienholder attempts to pay off the HOA lien, but the HOA refuses either to provide the amount of the lien or to allow the lender to tender payment. SFR also did not address whether an HOA foreclosure is invalid if the sale is not properly noticed by the HOA. Additionally, SFR did not address whether an HOA foreclosure is void if the sale price is grossly inadequate. Substantial litigation has ensued since the 2014 ruling over these and other unanswered questions.

The Court recently issued an opinion impacting HOA foreclosure litigation in Nevada by addressing some of the unresolved issues in SFR.

In Shadow Wood Homeowners Association, Inc.; and Gogo Way Trust v. New York Community Bancorp, Inc., the lender foreclosed on its first deed of trust but did not tender the nine months of superpriority assessments to the HOA. The Lender also failed to pay ongoing HOA assessments after it became the owner of the property. The HOA later foreclosed upon its HOA lien, ostensibly extinguishing the Lender’s rights to the property. The Court addressed four primary issues:

• Whether the HOA was entitled only to nine months of assessments and whether it acted unfairly and oppressively by insisting on more than that amount to cancel the sale
• Whether the “conclusive” presumptions provided by statute prevented the Lender from invalidating the HOA sale
• Whether the sale price was grossly inadequate, and
• Whether the purchaser of the property via the HOA’s foreclosure qualified for bona fide purchaser status.

Addressing these issues, the Court found each issue to be fact driven and could not resolve them as a matter of law—at least at the procedural stage from which appeal was taken in Shadow Wood.

Regarding whether an HOA is entitled only to a nine-month “super-priority” of assessments, the Court found the HOA was entitled to the nine-month super-priority lien as well as HOA dues from the time the lender foreclosed on the property (and became the property owner) to the date of the HOA foreclosure sale. The Court declined to address what fees and costs an HOA can recover because of an undeveloped factual record, but the Court alluded that some fees and costs may be recouped.

In a related argument and finding on whether the HOA acted unfairly and oppressively by providing inconsistent demands to the lender, the Court stressed that if the conduct rose to the level of misrepresentations and nondisclosures that prevented the lender from curing the default it might support setting aside the sale. However, such conduct must be weighed against a lender’s inaction (i.e. failure to attend the sale, failure to request arbitration to determine the amount owed, or failure to take action to enjoin the sale).

On the “conclusive” presumption issue, the Court held that district courts have power to grant equitable relief from a defective foreclosure sale when appropriate despite NRS 116.31166's "conclusive" recital language.

Addressing gross inadequacy of price, the Court found that it was not established as a matter of law in this case, and the Court did not hold that the argument was unavailable to lenders. In particular, the Court found that the property sold at the HOA foreclosure sale for 23 percent of the price paid at the lender's foreclosure sale. The Court cited the Restatement (Third) of Prop.: Mortgages § 8.3 cmt. b (1997) noting that a court is warranted in setting aside the sale when the price is less than 20 percent of fair market value and absent other defects is usually not warranted in invalidating a sale that yields in excess of that amount.

Finally, addressing whether a third party who buys property out of an HOA foreclosure sale can be a bona fide purchaser, the Court recited general legal principles governing bona fide purchaser status and emphasized that bona fide purchaser status can be crucial in determining whether to set aside a sale. Thus, factors such as the purchaser’s knowledge of the pre-sale dispute between the lender and the HOA and the potential harm to the purchaser must be taken into account when deciding whether to set aside the sale. The Court stated that a low sale price alone is not sufficient to put the purchaser on notice that something is amiss with the sale.

Given the procedural context of, and the issues addressed in Shadow Wood, it appears that litigants to these disputes must more fully develop factual records, perhaps even by way of trial, before being able to resolve HOA foreclosure related litigation.