Foreclosure sign in front on modern houseThe Supreme Court of Nevada stirred a great deal of controversy in its 2014 opinion SFR Investments Pool 1, LLC v. U.S. Bank, N.A.,[1] holding that a 1991 statute granting superpriority status to certain homeowner’s association (HOA) liens[2] created a true priority lien such that its foreclosure extinguishes all other liens, including a first deed of trust on the property.[3]

Prior to the SFR Investments decision, most lenders assumed the statute merely provided for a payment priority, so that upon a lender’s foreclosure of its deed of trust, the HOA would recover a portion of its overdue assessments—they certainly did not anticipate that an HOA would have the ability to wipe out a “first position” deed of trust.  As one can imagine, the SFR Investments decision did not sit well with lenders and prompted a flurry of additional lawsuits, including a constitutional challenge claiming that the statute violates the Due Process and Takings Clauses of both the United States and Nevada Constitutions.

On January 26, 2017, the Supreme Court of Nevada issued its decision in Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortgage,[4] finding that the superpriority statute does not violate either the Due Process Clause or the Takings Clause of either the United States or Nevada Constitution.

With respect to the due process challenge, the Court relied upon a two-part test set forth by the United States Supreme Court to determine whether or not due process is implicated: (1) was the bank’s loss of its security interest a result of the exercise of some right or privilege created by the state, and (2) could the foreclosing party fairly be said to be a state actor? The Court found that because the state created the superpriority lien and the right to foreclose the lien, the first prong of the test was satisfied.  However, the Court explained that an HOA acting pursuant to the statute cannot be deemed a state actor and therefore due process is not implicated.

With respect to the takings challenge, the Court explained there are two ways in which the state may effectuate a “taking”: (1) an actual taking, through a “direct government appropriation or physical invasion of private property,” or (2) a regulatory taking, through enacting a regulation that is “so onerous that its effect is tantamount to a direct appropriation or ouster.”[5]  The Court determined that the state did not directly appropriate the bank’s lien or the property securing the lien and therefore there was no actual taking.

In considering whether the statute amounted to a regulatory taking, the Court considered three factors: (1) the statute’s economic impact on the bank, (2) the statute’s interference with investment-backed expectations, and (3) the character of the government action. First, the Court determined that the statute does not necessarily have an economic impact on any given first security interest holder because, while an HOA may foreclose on its lien, the statute does not require such a foreclosure, and in the event of a foreclosure, the sale proceeds may satisfy the amount owed to the bank.  Second, even if the statute did have substantial economic impact on the bank’s property interests, the statute did not interfere with any legitimate investment-backed expectation because the statute was enacted, and the CC&Rs were recorded, prior to the bank’s lien, and therefore the bank was on notice of the potential for the superpriority lien.  Lastly, the Court characterizes the state action as merely altering the priority of certain liens.  The state did not physically invade any property interest or participate in the foreclosure, and the Court was unable to find a single case holding that a statute may not alter lien priority without compensation of affected lienholders.  Consequently, the Court held that the extinguishment of a subordinate deed of trust through an HOA’s nonjudicial foreclosure does not constitute a governmental taking.

Not only does this decision mean the statute lives on, but it further muddies the HOA superpriority waters, standing contrary to a recent Ninth Circuit decision holding that the statute does implicate due process.[6]  It is clear that the battles surrounding this statute are far from over—lenders would be well advised to ensure their borrowers keep current on their HOA dues, and pay close attention to the receipt of any default notices.

[1] 130 Nev. Adv. Op. 75, 334 P.3d 408 (2014).

[2] Nev. Rev. Stat. § 116.3116.

[3] It should be noted that in 2015, the Nevada legislature passed Senate Bill 306, significantly revising the statute to provide for, among other things, (i) more stringent notice requirements, and (ii) a 60-day right of redemption for any interested party.

[4] 133 Nev. Adv. Op. 5 (2017).

[5] Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537 (2005).

[6] The Court expressly acknowledged and declined to follow the Ninth Circuit Court of Appeals in its recent decision holding that the enactment of the statute did constitute state action and therefore required due process. See Bourne Valley Court Tr. v. Wells Fargo Bank, N.A., 832 F.3d 1154, 1159-60 (9th Cir. 2016).

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Photo of Christopher Humphrey Christopher Humphrey

Christopher Humphrey focuses his practice on real estate and corporate matters. He frequently assists developers and investors in connection with the disposition, acquisition and financing of commercial properties that range in size from small shopping centers to large mixed-use developments. Landlords and tenants…

Christopher Humphrey focuses his practice on real estate and corporate matters. He frequently assists developers and investors in connection with the disposition, acquisition and financing of commercial properties that range in size from small shopping centers to large mixed-use developments. Landlords and tenants rely on Christopher to prepare and negotiate commercial lease documents for conventional lease, triple-net and sale-leaseback transactions. Clients value his attention to detail but appreciate his practical approach to address the issues that matter most. He regularly evaluates, and advises clients with respect to, surveys, title commitments, zoning and environmental reports, and works with title companies, lenders and sellers to resolve outstanding title defects.