Since the Nevada Supreme Court’s infamous decision in SFR Investments Pool 1, LLC v. U.S. Bank, N.A. in September 2014, the mortgage community has continued to fight to save senior deeds of trust from extinguishment due to an HOA’s foreclosure of its super-priority lien. Numerous arguments are currently being raised by the mortgage community, such as whether the HOA sale was commercially reasonable (as most fetched only pennies on the dollar), or whether the sale was valid where an HOA rejected a lender’s pre-foreclosure attempts to pay off the super-priority lien. While these arguments work around the effect of the SFR Investments decision on a case-by-case basis, other arguments—such as the attack on the constitutionality of the super-priority lien statute itself—could upend the SFR Investments decision and render thousands of HOA sales in Nevada void.
The Global Implications of the Park v. Wells Fargo Bank Case
The validity of several of these constitutional arguments may be revealed when the Nevada Supreme Court decides the Park v. Wells Fargo Bank case, which is scheduled for oral argument in front of the en banc Court on October 6. In Park, Wells Fargo argued that NRS 116 is facially unconstitutional under the Due Process Clause, as it does not mandate that a lien holder receive notice of the HOA foreclosure sale that purportedly extinguishes its security interest. Next, Wells Fargo argued that NRS 116 is unconstitutional under the Takings Clause, because it eliminates the first lienholder’s security interest, and effectively transfers the value of that interest to the HOA-sale purchaser, all without the “just compensation” required by the Takings Clause. While the Takings Clause argument has not gained much traction among Nevada District Court judges, the due process argument has fared much better, as several lower-court judges have held that the statute’s “opt-in” notice provisions—which do not require that notice be provided to a first lien holder unless that lien holder requests notice of the HOA sale—do not meet the actual-notice standard required by the Due Process Clause.
In addition, Wells Fargo argued that the HOA foreclosure sale should be set aside because the HOA’s sale of the property for 11% of its fair market value was commercially unreasonable. While the HOA super-priority statute seems to require that HOA sales be commercially reasonable, Nevada courts have held that a diminutive sales price alone is not sufficient to void a foreclosure sale as commercially reasonable under the Uniform Commercial Code. However, the commercial reasonableness argument in the HOA-sale context is an issue of first impression, and the policy considerations attendant to home foreclosures—namely, the propriety of allowing an HOA’s foreclosure of its minimal-value lien to eliminate a homeowner’s equity in his or her home—could lead the Nevada Supreme Court to hold that low price alone is sufficient to invalidate an HOA foreclosure sale as commercially unreasonable.
What Happens Next?
The Nevada Supreme Court’s decision in Park could provide some much-needed clarity for all involved in the Nevada mortgage industry. Stay tuned for an update discussing the Park decision once the Nevada Supreme Court issues its opinion.