As the lending community is well aware, the mortgage industry in the state of Nevada remains in flux. Nevada continues to deal with the aftermath of the Nevada Supreme Court’s September 2014 decision in SFR Investments Pool 1, LLC v. U.S. Bank, N.A., where the Court held that under Nevada law, a properly noticed Home Owners Association (HOA) sale could extinguish a first lien interest. Following the decision, lenders and servicers in Nevada are heavily involved in litigation regarding the propriety of HOA foreclosure sales. One of the key issues remaining in dispute is the amount of the HOA’s superpriority lien under Nevada law—and whether a lender’s offer to pay off the superpriority portion of that lien saved the first lien interest from the ensuing HOA foreclosure sale.
On January 28, 2016, the Nevada Supreme Court issued another HOA-related opinion that could have provided much needed clarity to the pending litigation, especially with respect to the issue of what charges constitute the HOA’s “assessment lien” under Nevada law. But while the opinion in New York Community Bancorp v. Shadow Wood Homeowners Association, Inc. & Gogo Way Trust did answer certain questions that have been raised since the SFR decision, it also indicates that the lending community may have to individually litigate many or even most HOA-lien cases all the way through trial.
In Shadow Wood, New York Community Bank (NYCB)—a secured lender that had foreclosed on its first deed of trust and thus had acquired legal title to the Las Vegas property at issue—filed suit against the Shadow Wood Homeowners Association, as well as the purchaser (Gogo Way Trust) of the property at the HOA’s subsequent foreclosure sale, seeking declaratory relief and quiet title to the property. Following its own foreclosure sale, but before the HOA’s foreclosure sale, NYCB reached out to the collection agent for the HOA to attempt to pay the amount of the HOA’s superpriority lien. However, the parties could not reach an agreement as to the proper amount of the lien. NYCB sent the HOA’s collection agent a check for $6,783.16, but the HOA rejected it, claiming that it was owed $9,017.39. The monthly assessments on the property were $168.71 per month. The HOA sale went forward on February 22, 2012, and Gogo Way Trust purchased the property at the HOA sale for $11,018.39, a little more than 20 percent of the property’s estimated market value.
On competing motions for summary judgment, the trial court held in favor of NYCB, finding that under Nevada’s HOA foreclosure statute (NRS 116.3116), the HOA could only recover nine months’ worth of assessments—$1,519.29 (calculated by multiplying the monthly assessment amount by nine). The trial court further held the HOA’s actions in rejecting NYCB’s check were “unreasonable and oppressive,” and that Gogo Way Trust was not a bona-fide purchaser. The trial court set aside the HOA sale and entered a judgment declaring NYCB to be the legal owner of title to the property.
The Nevada Supreme Court reversed and remanded the decision of the trial court. In so doing, the Nevada Supreme Court held as follows:
- Despite the language in NRS 116.3116 suggesting that the deed recitals in an HOA’s trustee deed are conclusive (suggesting that a first lien holder is barred from raising any post-HOA sale challenge), courts have equitable authority to consider quiet title actions such as the one filed by NYCB to challenge the HOA sale.
- NYCB did not establish as a matter of law that the foreclosure sale price—23 percent of the amount of NYCB’s credit bid at its own foreclosure sale—was “grossly inadequate,” and thus that it should be set aside as commercially unreasonable. However, the Shadow Wood opinion suggests that a sale price less than 20 percent of the fair market value would be grossly inadequate and may be a basis for setting aside the sale.
- NYCB did not establish as a matter of law that the HOA acted unfairly and oppressively in seeking to collect more than simply the nine months’ worth of assessments, given that NYCB was the owner of the property following its own foreclosure sale and thus directly liable for all HOA assessments that came due afterwards.
- Finally, the Court addressed the trial court’s holding that Gogo Way Trust was not a bona fide purchaser, which would essentially allow Gogo Way Trust to claim title to the property through its purchase at the HOA sale regardless of any irregularity on the part of the HOA in bringing the sale. Instead, the Court held that the evidence did not support a finding that Gogo Way Trust had any notice of the pre-sale dispute between the HOA and NYCB, and as such, potential harm to Gogo Way Trust should have been taken into account. The Court did not explain the full implication of this holding, only noting that on remand and reconsideration of NYCB’s arguments for setting aside the foreclosure sale, “the potential harm to Gogo Way must be taken into account.”
Importantly, the Court failed to clarify an incredibly important issue in the HOA litigation: whether, and to what extent, costs and fees (as opposed to simply monthly dues) are recoverable in the context of an HOA superpriority lien. The Court held that further factual development was necessary on this issue to determine what the particular fees and costs represented, when the fees and costs were incurred, whether the amounts were unreasonable, and whether the HOA’s covenants, conditions and restrictions had any bearing on the inclusion of costs and fees in the assessment calculation.
The upshot of the Court’s ruling is that there is still a long road ahead for mortgagees seeking to rescue their security interests in Nevada. While the Court appeared to give some credence to some of the lenders’ main arguments—that foreclosure sales for less than 20 percent of market value were commercially unreasonable and due to be set aside, and that an effort to pay the superpriority portion of an HOA’s lien may serve as an equitable reason for setting aside a foreclosure—the opinion indicates that these issues will require extensive factual development before they are ready for adjudication. It looks like the lending and servicing community is left to fight each case on an individual basis—leading to incredibly expensive litigation for all involved.