Nevada Supreme Court: HOA Failed to Provide Notice of Default to Foreclose Superpriority Lien

The Supreme Court of the State of Nevada recently vacated and remanded a judgment of a district court holding that a lien foreclosure sale extinguished the first deed of trust, thereby quieting title in favor of the foreclosure sale buyer.  The court held that a remand was required to decide whether, given the defect in the notice default, the first deed of trust holder deserves relief from the sale.

The Appellant, a national bank, held a note on the home.  The borrower defaulted on his HOA dues, whereupon the HOA initiated lien foreclosure proceedings, but the HOA misread the bank’s deed of trust and sent the notice of default to an unaffiliated entity.  As a result, the bank did not receive the notice of default, and did not attend the lien foreclosure proceedings.  The respondent acquired the property at the lien foreclosure sale for $5,331. After the borrower passed away, his estate defaulted on the loan, and the bank commenced judicial foreclosure proceedings against the homeowner’s estate on its deed of trust, and later added the respondent as a defendant.  Ruling for the respondent, the district court held that the HOA lien foreclosure sale extinguished the bank’s deed of trust, leaving the bank nothing to judicially foreclose.  The district court reasoned that the bank was not entitled to notice of default because it had not requested it from the HOA and that, alternatively, the HOA gave adequate notice, even though the notice did not reach the bank.

The bank argued that the HOA foreclosure sale was invalid because the HOA failed to mail it the notice of default at the address specified for it in its deed of trust.  Further, the bank argued that the notice defect rendered the sale void or voidable. The court agreed with the bank that an HOA seeking to foreclose a superpriority lien must “send the holder of a recorded first deed of trust notices of default and of sale, even though the deed of trust holder has not formally requested them.”  On the question of a void sale, the court reasoned that if on remand the district court finds that the HOA’s agent failed to mail it the notice of default at the address specified for it in its deed of trust, that the bank did not receive timely notice by alternative means, and that the bank suffered prejudice as a result, the district court should determine whether it should declare the sale void to the extent it purports to extinguish the bank’s deed of trust. 

Finally, the court determined that the district court erred in finding that the foreclosure sale buyer was a bona fide purchaser for value based on the grossly inadequate foreclosure sales price, combined with the problems with the notice of default, and sophistication of the foreclosure sale buyer.  Thus, the court determined that “whether diligent inquiry by [the foreclosure sale buyer] would have revealed the notice defect, or the other deficiencies alleged, are questions of fact for the district court to resolve.”