home-market-droppingIn September 2014, the Nevada Supreme Court, in SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 334 P.3d 408 (Nev. Sep. 18, 2014), held that a portion of a homeowners’ association lien for delinquent assessments has true super-priority status over a first deed of trust, meaning that the foreclosure of that lien could extinguish the first deed of trust. This decision understandably shocked mortgage lenders, as the foreclosure of a nominal lien, arising from a few hundred dollars of unpaid HOA dues, could nullify a mortgage securing a loan for a thousand times that amount. And the impact of the SFR Investments decision could spread beyond Nevada, as the Nevada statute at issue, NRS 116, et seq., is Nevada’s adoption of the Uniform Common Interest Ownership Act, which has been adopted by seven other states; another fifteen states have adopted the Uniform Condominium Act, which contains the same problematic language.

Recently, those who purchased property at these HOA foreclosure sales have been aggressively litigating quiet title actions against mortgage lenders, seeking to have state courts declare that they own the foreclosed property free and clear of any prior encumbrances.

This begs the question: Does the SFR Investments decision leave any room for mortgage lenders to argue that their deed of trust survived an HOA foreclosure sale?

The short answer: Yes.

While the SFR Investments holding was particularly unfavorable to mortgage lenders, the Court left many issues unresolved and gave its blessing to a key defense for mortgage lenders. For instance, the Court noted that mortgage lenders could preserve the first-priority position of their deeds of trust by tendering payment of the super-priority portion of the HOA’s lien prior to the foreclosure sale. Furthermore, based on the procedural posture of the case, the Court assumed that the HOA complied with all statutory notice requirements, leaving open the question of whether failure to comply with these notice requirements voids the sale. Finally, the Court left open the possibility of other key defenses to quiet-title cases, including whether the homeowner associations’ foreclosures (which usually recovered a tiny fraction of the market value of the property) were commercially reasonable and whether the Nevada homeowner association foreclosure scheme is unconstitutional due to its failure to ensure that lenders with first-position deeds of trust receive notice that they could lose their interest to a homeowners’ association foreclosure.

In the post-SFR Investments world, it is important that mortgage lenders and servicers in Nevada not only file and record requests for notice of HOA sale activity pursuant to NRS 116.31163(1), but also that they tender payment of the super-priority amount prior to an HOA foreclosure sale, as this is the surest way to preserve the first-priority position of the mortgage. In addition, outside counsel should investigate the circumstances of the foreclosure sale to determine whether the sale was commercially reasonable and whether the HOA provided all statutorily required notices prior to the foreclosure sale. The viability of these defenses, and perhaps the recognition of a few more, will be clarified as Nevada state and federal courts issue rulings on the litany of quiet title actions that have been filed since the SFR Investments decision came down. Stay tuned.