The mortgage lending community was dealt a serious blow in September 2014, when the Nevada Supreme Court held that an HOA’s foreclosure of its nominal super-priority lien could extinguish a first lien interest in SFR Investments Pool 1, LLC v. U.S. Bank, N.A. This decision potentially rendered hundreds of millions of dollars in secured loans unsecured in the blink of an eye. Dismissive of this harsh result, the SFR Investments Court indicated that lenders could have mitigated this risk by paying off an HOA’s super-priority lien prior to the HOA’s foreclosure. For lenders that actually attempted these super-priority payoffs prior to the HOA foreclosure sale, the key issue in quiet-title litigation against foreclosure-sale purchasers is whether the attempted pre-sale super-priority payoff discharged the super-priority lien. The answer to this question depends, in large part, on whether the lender tendered payment of the correct super-priority amount.
Lenders contend that the super-priority lien is equal to nine months of delinquent monthly assessments (or six months for a GSE loan), and that tendering payment of this amount extinguished the super-priority lien before an HOA’s foreclosure sale. In this scenario, lenders contend, the foreclosure-sale purchaser took title to the property subject to the senior lien interest. Eager to preserve their windfall profits, foreclosure sale-purchasers argue that the super-priority lien included not just assessments, but also fees, interest, and collection costs, meaning a lender’s payment of nine months’ delinquent assessments was insufficient to discharge the super-priority lien. Consequently, the purchasers contend, some portion of the super-priority lien remained, and the HOA’s foreclosure of that super-priority lien extinguished the senior lien on the respective property, giving the foreclosure-sale purchaser title to the property free and clear.
The lending community won this battle yesterday. In Horizons at Seven Hills Homeowners Association v. Ikon Holdings, LLC, the Nevada Supreme Court unequivocally held that an HOA’s super-priority lien does not include interest, collection costs, or other fees, but instead is limited to nine months of delinquent monthly assessments (plus nuisance-abatement charges that arise in a very narrow subset of cases). In Ikon Holdings, the secured lender foreclosed on its deed of trust prior to the HOA’s foreclosure. Consequently, the super-priority dispute concerned the super-priority amount the HOA could recover from the lender’s foreclosure proceeds, not the effect of a lender’s pre-foreclosure payment of the super-priority amount. Because of this narrow fact pattern, the Court did not address the specific issue of whether a lender’s offer to pay the correct super-priority amount prior to the foreclosure sale is sufficient to discharge the super-priority lien, even if the HOA rejected the tender offer as insufficient. However, coupling Ikon Holdings with the Nevada Supreme Court’s indication in SFR Investments that paying off the super-priority lien prevents the senior lien’s extinguishment provides lenders with a very strong argument that offering to pay the correct super-priority amount preserves the priority of the senior lien interest.
One potential complication for lenders is the bona fide purchaser argument, which was strengthened by the Nevada Supreme Court’s recent decision in New York Community Bancorp v. Shadow Wood Homeowners Association, Inc. In Shadow Wood, the Nevada Supreme Court indicated that a foreclosure-sale purchaser without knowledge of a pre-sale dispute between a senior lienholder and an HOA could be a bona fide purchaser. It remains to be seen how the Nevada Supreme Court will rule in a case that tests the inherent tension between Shadow Wood, SFR Investments, and Ikon Holdings—a case where the lender paid the correct super-priority amount, that amount was wrongfully rejected, and the eventual foreclosure-sale purchaser was unaware of the super-priority payment dispute. From a litigation strategy standpoint, it is important that lenders litigating quiet title actions assert claims against the HOA and their collection agents in cases where the servicer tendered the super-priority amount prior to the sale. If the foreclosure-sale purchaser is held to be a bona fide purchaser, the claims for monetary damages against the HOAs and their collection agents will likely be the lender’s only remedy.
Ikon Holdings is another important win for the mortgage industry in Nevada. Several key issues in these cases have yet to clarified at the appellate level, including:
- whether NRS 116’s “opt in” notice provisions are unconstitutional;
- whether NRS 116 is preempted as-applied to FHA-insured deeds of trust;
- whether HERA provides a basis for any GSE-owned loan to survive an HOA foreclosure sale and
- whether the SFR Investments decision should be applied retroactively.
Hopefully, the appellate decisions on these issues will be as favorable to the lending community as Ikon Holdings. Stay tuned.