Nevada HOA Foreclosure Law In 2016 After Ikon
Considering that our law firm represents a number of clients in regard to HOA Foreclosure, we are watching this area of law carefully. Specifically, our law firm represents investors who purchased properties at HOA Foreclosure sales.
For those not familiar with this area of law, a foreclosure by an HOA happens as a result of non-payment of HOA dues. The critical issue is that it wipes out any first deed of trust [a bank’s interest in the property as a result of a mortgage]. Prior to the case law discussed below, the banks often took the position that the HOA Foreclosures were invalid, or that it did not extinguish the bank’s interest via their first deed of trust.
SFR Invs. Pool 1, LLC v. U.S. Bank, N.A.
The first major HOA Foreclosure case was SFR. In SFR, on September 18, 2014, the Nevada Supreme Court held:
The superpriority lien of a homeowners’ association under Nev. Rev. Stat. § 116.3116 is a true priority lien such that its foreclosure extinguishes a first deed of trust on the property;
A superpriority lien can be foreclosed nonjudicially;
A nonjudicial foreclosure did not violate the due process rights of the lender that held the first deed of trust, given that the requirement to comply with statutory notice provisions;
The lien was not subordinated by a mortgage savings clause in the covenants, conditions, and restrictions.
SFR Invs. Pool 1, LLC v. U.S. Bank, N.A., 334 P.3d 408, 130 Nev. Adv. Rep. 75 (Nev. 2014).
This case laid it out clearly: the HOA can foreclose, and it extinguishes the bank’s first deed of trust.
Our Clients: Being a law firm that represents a number of investors who purchased properties at these foreclosure sales, this was a win for our clients. SFR is the turning point that legitimized investing in HOA Foreclosure properties.
Shadow Wood HOA v. N.Y. Cmty. Bancorp
Next, the Shadow Wood case was heard. On January 28, 2016, the Nevada Supreme Court considered the following issue:
This is an appeal from a district court order setting aside a trustee’s deed following a homeowners’ association (110A) assessment lien foreclosure sale. The district court held that NRS 116.3116(2) (2013) limited the HOA lien to nine months of common expense assessments and that the BOA acted unfairly and oppressively in insisting on more than that sum to cancel the sale; that the bid price was grossly inadequate; and that the foreclosure sale buyer did not qualify as a bona fide purchaser for value.
The appellants are the HOA and the lien foreclosure sale buyer whose trustee’s deed the district court set aside. They argue that NRS 116.31166 (2013), which says that certain recitals in an HOA trustee’s sale deed are ‘conclusive proof of the matters recited,’ renders such deeds unassailable.
Regarding the above, the court held:
“We disagree and reaffirm that, in an appropriate case, a court can grant equitable relief from a defective HOA lien foreclosure sale. E.g., Long v. Towne, 98 Nev. 11, 639 P.2d 528 (1982).
We conclude, though, 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 this case. We therefore vacate and remand.”
Shadow Wood Homeowners Ass’n v. New York Cmty. Bancorp. Inc., 366 P.3d 1105, 2016 Nev. LEXIS 5, 132 Nev. Adv. Rep. 5 (Nev. 2016)
In short, the potential for equitable relief allows for a foreclosure to be set aside in certain instances; and questions of fact surrounding an HOA Foreclosure may prevent summary judgement from being granted, thereby requiring these cases to go to trial.
The court’s citation to Long identifies the factors needed to set aside an HOA Foreclosure. The court states that to set it aside, the bank must show both:
A grossly inadequate sale price at the HOA Foreclosure; AND
fraud, unfairness, or oppression.
Without both factors, the foreclosure should not be set aside. The court also states that while a grossly inadequate price cannot be precisely defined, a threshold of 20% of the fair market value is a good starting point for the analysis. In this case, the sale price was approximately 23% of the fair market value, which tends to indicate a sale price based on fair market value.
The bank goes on to argue that the fraud, unfairness, or oppression was the fact that the HOA tried to include improper fees as part of the superpriority lien, essentially overcharging the bank. The court did not rule on this issue, stating:
The question of whether and, if so, to what extent costs and fees are recoverable in the context of an HOA superpriority lien is open, particularly as to foreclosures that pre-date the 2015 amendments to NRS Chapter 116. But here, because the parties did not develop in district court what the fees and costs represent, when they were incurred, their (un)reasonableness, and the impact, if any, of Shadow Wood’s covenants, conditions and restrictions (CC&Rs) on their allowance, we leave this issue to further development in the district court on remand.
The above issue, which was not ruled on in Shadow Wood, is exactly what the court just ruled on in Ikon.
Our Clients: Being a law firm that represents a number of investors who purchased properties at HOA foreclosure sales, this leaves our clients with more questions than answers. For example, if our client is a bona fide purchaser but the HOA Foreclosure is found to be invalid, what happens? Maybe the investor keeps the property and the HOA pays the bank? Maybe the bank gets the property back, and the investor has to go after the HOA? While this case recognizes the injury to the investor, it does not tell us what happens next.
Horizons at Seven Hills v. Ikon Holding
In 2015, the HOA Foreclosure laws were amended. In the Ikon case, the Nevada Supreme Court considered two issues regarding the pre-2015 laws:
“In this appeal, we determine whether a superpriority lien for common expense assessments pursuant to NRS 116.3116(2) includes collection fees and foreclosure costs incurred by a homeowners’ association (HOA).”
Brief Answer #1:
“We conclude that it does not.”
“Additionally, we consider whether an HOA’s covenants, conditions, and restrictions (CC&Rs) that purport to create a superpriority lien covering certain fees and costs over six months preceding foreclosure are superseded by the terms of the superpriority lien created by NRS 116.3116(2).”
Brief Answer #2:
“We conclude that the superpriority lien in the CC&Rs is superseded by NRS 116.3116(2), thus affirming in part and reversing in part the district court’s decision.”
Horizons at Seven Hills v. Ikon Holding, 132 Nev. Adv. Op. No. 35, April 28, 2016
This case fills the void in Shadow Wood wherin the calculation of superpriority v. subpriority liens was not addressed. Our expectation is that banks will try to use this decision to attempt to prove that a foreclosure based in part on a subpriority was based on fraud, unfairness, or oppression pursuant to SFR.
Our Clients: The Las Vegas Review Journal published an article about this case. The articles calls this a victory for investors and banks, which we do not feel is accurate. The case does limit the amount an HOA can recover. However, we do not consider this a victory for investors.
This is a victory for banks against HOAs, and it is a victory for Ikon. The issue is that banks will likely try to use this decision to prove that a foreclosure based in part on a subpriority was invalid. Considering that investors want the foreclosure to be upheld, this is at best a neutral outcome for our clients.