DS News

76 Legal Industry Update State Focus NEVADA THE CURRENT STATE OF NEVADA'S HOA FORECLOSURE CONTROVERSY By David Cowles, Olivia Todd and Mark Bosco, Tiffany & Bosco, P.A. To put it mildly, the Nevada Supreme Court's opinion in SFR Investments Pool 1, LLC v. U.S. Bank, N.A, caused a bit of a stir. In that case, the court held in a 4-3 split decision that under sec- tion 116.3116 of the Nevada State Code, an HOA lien consists in part of a "super-priority" portion that is superior to all other liens and encumbranc- es, including a first deed of trust and that, as a re- sult, an HOA foreclosure extinguishes a first deed of trust. Before SFR was issued, Nevada's state and federal courts were split over how to interpret NRS 116.3116, but SFR appeared to settle the split: unless a lender paid off the super-priority portion of an HOA lien prior to the HOA's foreclosure of its lien, the foreclosure would extinguish the lender's first deed of trust. About a week later, the United States District Court for the District of Nevada issued Wash- ington & Sandhill Homeowners Association v. Bank of America, N.A. e HOA foreclosed its lien, including the super-priority portion, and, later, Bank of America foreclosed its first deed of trust. Under SFR, it would appear that the HOA's foreclosure extinguished Bank of America's interest, but the facts in Washington & Sandhill were more complicated than those in SFR. Bank of America's interest was insured by the FHA and Bank of America was accord- ingly required, if at its own foreclosure it acquired title, to transfer title to HUD. e court held that these additional facts distinguished the case from SFR (where no federal interest existed) and implicated the Supremacy and Property clauses of the United States Constitution, which trump NRS 116.3116. Accordingly, the court held that the HOA's earlier foreclosure did not extinguish Bank of America's first deed of trust, and granted Bank of America's motion to dismiss the HOA's quiet title action. What of loans in which Fannie Mae or Freddie Mac hold an interest? e federal court provided part of the answer in Skylights LLC v. Byron. In Skylights, the HOA foreclosed its lien (including the super-priority portion) after the lender had assigned the deed of trust to Fannie Mae. Recognizing that the Housing and Eco- nomic Recovery Act of 2008 (HERA) created FHFA, which placed Fannie Mae (and Freddie Mac and others) into conservatorships, FHFA stood in the shoes of Fannie Mae. But federal law protects from foreclosure any property of FHFA without its consent. FHFA having not consented to the HOA's foreclosure, the court held that "a homeowner's association's foreclosure of its super- priority lien cannot extinguish a property interest of Fannie Mae or Freddie Mac while those enti- ties are under FHFA's conservatorship." Later federal cases established that even if Fannie Mae or Freddie Mac are not the record beneficiaries of the first deed of trust, but merely own the loans, the result is the same: an HOA's foreclosure of its super-priority lien does not extinguish a first deed of trust securing a loan owned by Fannie Mae or Freddie Mac. e Nevada Legislature stepped in as well, enacting S.B. 306, which took effect on October 1, 2015. S.B. 306 requires that the HOA send each lien holder, by certified mail, the Notice of Default and Election to Sell as well as the Notice of Sale. e amount of the HOA's lien that has super-priority status must be set forth in the Notice of Default and Election to Sell, and is further capped – for example, attorneys' fees may not be included. e holder of a first deed of trust has until 5 days prior to the HOA's scheduled sale to pay the super-priority portion, and must within 2 days prior record proof of payment of the super- priority portion. e auctioneer must announce whether or not the first lien holder has paid the super-priority portion. And both the first lien holder and the former owner have a 60-day right of redemption. Finally, following the Skylights ruling, FHFA in September amended its class action complaint in FHFA v. SFR Investments, and has moved to certify a class. e class action would cover all HOA lien sales where Fannie or Freddie had an interest. SFR, not surprisingly, is opposing class certification. We do not expect a ruling on class certification until sometime in the spring of 2016. e effect of the Nevada Supreme Court's SFR decision has thus been significantly cabined. Lenders need to pay close attention, of course, but at least now their first deeds of trust are in far less danger of being extinguished by an HOA foreclosure sale, and they have remedies that were previously unavailable, including redemption within 60 days within of the HOA sale.

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