9th Circuit Holds Nevada HOA Super Lien Statute is Constitutional and Not Preempted by FHA Mortgage Insurance Program
The U.S. Court of Appeals for the Ninth Circuit recently held that Nevada’s homeowner’s association (HOA) super lien statute is constitutional, overruling its previous decision given new Nevada Supreme Court precedent rejecting the Ninth Circuit’s interpretation of the statute. Further, the Ninth Circuit held that this statue was not preempted by FHA Mortgage Insurance Program.
The Nevada statute provides a homeowners association a lien with superpriority status on property governed by the association for the last nine months of unpaid HOA dues and any unpaid maintenance and nuisance-abatement charges. With a few exceptions, the superpriorty portion of the lien is superior to all other liens on the property, including the first deed of trust held by the mortgage lender.
In this case, the relevant home was in a neighborhood governed by the defendant HOA. The original owners of the home purchased the property using a mortgage insured by FHA. The deed of trust securing the loan was later assigned to the plaintiff, a national bank. The owners fell behind on their monthly HOA dues and the HOA initiated foreclosure proceedings and recorded a notice of delinquent assessment lien and a notice of default and election to sell. The bank received the notice of default and asked the HOA to identify the superpriorty portion of the lien so that it could pay the amount and protect its lien fist deed of trust. The HOA provided the bank with a ledger showing the total amount due to the HOA, but this ledger did not specify the superpriority amount. After reviewing the ledger, the bank determined the superpriority amount and tendered it to the HOA. However, the HOA rejected the payment as insufficient and went forward with the foreclosure sale. The bank sued the HOA asserting claims, among others, for quiet title and declaratory judgment and wrongful foreclosure.
The Ninth Circuit explained that in order for the bank to prevail on its quiet title claim, the bank had to prove that its interest in the property was superior. Relying on Nevada Supreme Court precedent, the Ninth Circuit held that because the bank had tendered what it calculated to be nine months of HOA dues, and because the ledger did not indicate that the property had incurred any charges for maintenance or nuisance abatement, the tender was sufficient and the HOA had no basis for refusing it. Therefore, the bank had established its interest was superior to that of the HOA.
With regards to the wrongful foreclosure claim, the bank relied on a Ninth Circuit decision to argue that the Nevada HOA lien statute violates the Due Process Clause because the statute contains an impermissible opt-in notice scheme where a junior interest holder would only receive notice of the HOA’s intent to foreclose if the interest holder requested that notice. However, the Ninth Circuit overthrew the decision being relied on by the bank because the Nevada Supreme Court in a later case rejected the Ninth Circuit’s interpretation of the HOA lien statute and clarified that the statute incorporates mandatory notice requirements, and therefore, does not violate the Due Process Clause. Lastly, the bank argued that the Nevada statute was preempted by the FHA mortgage insurance program. However, the Ninth Circuit rejected this argument because it found that the FHA program allows HUD to insure home loans made by private lenders and that two of the program’s goals are to help homeowners avoid foreclosure when possible and to protect the lender’s interest in the property in the event of a foreclosure, purposes with which the Nevada statute does not conflict. The court stated that under Nevada law, a private lender may keep its first deed of trust on a property and help homeowners find alternatives to foreclosure by paying the superpriority portion the HOA’s lien.
