Two Other Significant Rulings Nevada Supreme Court Super Priority Liens

We previously reported that in 2014 the Nevada Supreme Court ruled that homeowners’ associations’ Super-Priority Liens are prior to first deeds of trust and the buyer of the property at a properly conducted HOA foreclosure sale acquires title free and clear of any liens or encumbrances. Since then, there have been two other significant rulings by the Supreme Court. In Southern Highlands Community Association v. San Florentine Avenue Trust, et al., 132 Nev. Advance Opinion 3 (1-14-2016), the Supreme Court ruled that if there are two homeowner’s associations that have assessment liens on the same property, they are equal in priority. However, if one of the associations forecloses on its lien, the other association’s lien will be extinguished. This is a major departure from preexisting law, wherein equal liens were not extinguished. Two weeks later, in another case, Shadow Wood Homeowners Association, Inc. v. New York Community Bancorp, Inc., 132 Nev. Advance Opinion 5 (1-28-2016), the Supreme Court stated under certain circumstances the conclusive recitals in an HOA foreclosure deed can be overcome by a party if they can show evidence of fraud, and in extreme instances the sale may be set aside. In considering the evidence, the court must weigh the harm that would be inflicted on an innocent third-party purchaser. The Supreme Court also confirmed that a purchaser at an HOA sale is a bona fide purchaser if they paid valuable consideration and had no knowledge of a conflict between the bank and the HOA. The Shadow Wood case has caused yet another volley of motions to be filed by the banks, erroneously claiming that the opinion adopted a previously rejected argument that a grossly inadequate price is alone sufficient to set aside the sale.   These cases both only deal with sales conducted pursuant to NRS 116 occurring BEFORE the changes to the statute that were made effective October of 2015. This article discusses both cases.

SOUTHERN HIGHLANDS:

In Southern Highlands the Supreme Court concluded that the plain language of NRS 116.3116(4) unambiguously gives “equal priority” to two or more HOA liens on the same property when those liens secure unpaid HOA fees or charges, including unpaid HOA dues, regardless of when the underlying assessment arose or became due. But then, the court explained that the principles of law and equity supplement NRS 116.3116(4) and just because two liens have equal priority it does not mean that one would survive the foreclosure of the other. Rather, the court relied on California’s approach to equal priority mechanic’s liens. In California, when one equal priority mechanic’s lien forecloses, the other equal priority mechanic’s lien-holders are entitled to proceeds in the same priority position as the foreclosing lienholder, and their liens are extinguished.

 

The Supreme Court supported its adoption of the California approach by stating that, even if NRS Chapter 116 does not compel this approach, it is not inconsistent with the chapter either. Second, the Supreme Court concluded that this approach better fits the term “equal priority” because it allows all equal priority lien-holders to be paid at the same time; and if the sale proceeds are insufficient to satisfy all equal priority liens, all equal priority lienholders, including the foreclosing lienholder, share that loss pro-rata. Last, the Supreme Court concluded that this approach avoids scenarios where multiple equal priority lienholders attempt to foreclose on the same property at different times even though the initial foreclosure sale produced sufficient sale proceeds to pay off all equal priority liens.

 

This decision is a major departure from prior interpretations of the law stating that liens of equal priority do not extinguish one another. This decision has the potential of creating more questions than it answers. For instance, what is the affect on those properties that were purchased at subsequent HOA foreclosure sales? There are cases where the property has been foreclosed on by the second HOA within a few months of a prior HOA foreclosure sale. In some of those instances, the parties have believed that the second  because the lien survived the first sale. In other instances where there has only been one foreclosure the foreclosing HOA has distributed the sale proceeds to junior lien holders in accordance with the statute because those liens were extinguished by the senior lien foreclosure (this is centuries old common lien law). However, no proceeds were distributed to the equal priority HOA lienholders because they were considered equal with their lien surviving the sale. Does this decision not mean that the proceeds from the sale were improperly distributed? Is the foreclosing HOA now responsible for recouping those sales proceeds and redistributing them to the equal priority lienholders whose liens are now considered extinguished? This would be a nearly impossible task to accomplish and would likely result in protracted litigation over the prospective vs. retroactive application of this decision.

SHADOW WOODS:

The banks have seriously misinterpreted the Supreme Court’s holding in this case, by claiming that the court has determined that a purchase prices of less than twenty percent of fair market value is alone grounds to set aside an HOA foreclosure sale. That is not what this case says.

In Shadow Woods, the District Court held that NRS 116.3116(2) limited the HOA super-priority lien to nine months of common expenses and that the HOA acted oppressively in insisting on more than that sum to cancel the sale, that the bid price was grossly inadequate, and that the foreclosure buyer did not qualify as a bona fide purchaser for value. The Supreme Court concluded that the district court erred in limiting the HOA lien amount to nine months of common expense assessments and in resolving on summary judgment the significant issues of fact surrounding the parties conduct, the HOA lien amount, the foreclosure sale buyer’s status and the competing equities in the case. The Court vacated the judgment and remanded the case back to the District Court.

In its opinion, the Supreme Court held that in accordance with NRS 116.31166(2) the recitals in a foreclosure deed are conclusive as to compliance with the notice provisions of the statute and that a purchaser is entitled to rely on those recitals and has met his burden of proof as to the HOA’s compliance with the statutes. However, the Court stated that a party challenging the validity of the sale can overcome the conclusiveness of the recitals if the party can present evidence sufficient to set aside the sale on equitable grounds. The burden of proof is on the party challenging the sale, not on the purchaser at the sale.

In its ruling, the Court explained that merely alleging a “low purchase price” is not sufficient to set aside a sale. The Court reaffirmed its holding in Golden v. Tomiyasu, 79 Nev. 503, 387 P.2d 989 (1963) that in order to set aside a foreclosure sale as commercially unreasonable the party must show evidence of fraud, unfairness, or oppression on the part of the purchaser.

The Court further confirmed that a purchaser at an HOA sale is a bona fide purchaser if they have paid valuable consideration and have no knowledge of any dispute between the bank and the HOA. The Court stated:

The question is not whether the consideration is adequate, but whether it is valuable… the fact that the foreclosure sale purchaser purchased the property for a “low price” did not in itself put the purchaser on notice that anything was amiss with the sale.

Thus, when considering an equitable resolution to a dispute between the bank and the HOA, the court must consider the effect setting aside the sale would have on the purchaser. If the purchaser had no knowledge of a dispute, equity leans in favor or the purchaser, because he is an innocent third party.

The Supreme Court further stated that when considering the competing equities of the parties involved the court must consider the conduct of those parties. The Court concluded that it is not sufficient for a bank to calculate what it perceived to be an amount adequate to satisfy the super-priority lien and offer to pay that amount, then do nothing more. In its ruling, the Supreme Court stated that if a bank offers to pay, or even pays, the lien and becomes aware that the foreclosure sale is still going forward, the bank must take further action.   The Supreme Court stated:

Against these inconsistencies, however, must be weighed NYCB’s (in)actions. The NOS was recorded on January 27, 2012, and the sale did not occur until February 22, 2012. NYCB knew the sale had been scheduled and that it disputed the lien amount, yet id did not attend the sale, request arbitration to determine the amount owed, or seek to enjoin the sale pending judicial determination of the amount owed.

Thus, when it is apparent that the foreclosure sale is going forward, the bank cannot simply sit back and do nothing and later claim that the deed of trust was not extinguished because purchaser should have been aware of the bank’s attempt to pay the lien or that a dispute exist and is therefore not a bona fide purchaser.

This ruling has many more important implications to HOA foreclosure sales, too many to list in this article. We have identified those areas that we believe are of importance here.

Again, these cases deal with the pre-October 2015 amendments to the statute. This office litigates the pre-change sales cases and sales made after the changes are not the same. Many changes were made, including ways to both assist banks in paying of liens and informing purchasers by way of public recording that such payments have been made, which drastically changes what the purchaser at these sales in actually purchasing. Only very well informed buyers should consider purchasing properties sold under either set of rules.

The Wright Law Group, P.C. has several years of experience litigating claims with banks and other financial institutions who claim their security interests survived an HOA foreclosure sale. If you purchased a property at an HOA foreclosure sale and a bank or other institution still claims an interest in the property, we want to hear from you. Call us now at (702) 405-0001 to arrange a consultation.