By Michael R. Brooks, Esq., Brooks Hubley
UTA Nevada Representative
The ongoing litigation surrounding homeowners associations’ superpriority lien rights is now five years old and still going strong. The biggest news is that the resolution of the issues surrounding HOA assessment liens may rest with the United States Supreme Court and a holding regarding what constitutes state action. While a favorable ruling for lenders could end many of the superpriority claims, there are plenty of other issues and arguments concerning NRS 116.3116, et seq. that affect a lender’s lien rights.
Superpriority Analytical Framework:
In an effort to sort through all of the cases decided, unpublished, or even pending, it is helpful to follow the analytical framework laid out by the Nevada Supreme Court in the SFR Investments Pool 1, LLC v. U.S. Bank, N.A. In SFR, the Supreme Court majority described NRS 116.3116 as a three-step statute: 1) the rule of assessment lien priority; 2) the first deed of trust exception to the rule; and 3) the superpriority exception to the first deed of trust exception. Applying the longstanding Nevada legal principle that the party that seeks to invoke an exception bears the burden of proving the exception, we see that the burden of proof shifts twice in a superpriority litigation matter, and concludes with constitutional analysis, as follows:
Step 1: Purchaser bears the burden of proving a valid assessment lien sale;
Step 1a: Affected parties bear burden of proving defenses to valid HOA Lien sale;
Step 2: First security interest holder bears the burden of proving exception;
Step 3: Purchaser bears the burden of proving superpriority exception to first deed of trust;
Step 3a: First security interest holder can assert legal or equitable defenses to superpriority exception;
Step 4: Constitutional Issues.
Step 1: Validity of the underlying foreclosure sale and related defenses.
When it comes to proving a valid assessment lien sale, the question is what combination of evidence and evidence substitutes (i.e., conclusive presumptions) is needed to prove a valid assessment lien sale. The question has not been answered in an official reported decision of the Nevada Supreme Court, but a few orders have given us a clue.
Regarding the four statutory conclusive presumptions in NRS 116.31166(8), the Supreme Court has found that they do not exist when there is evidence of statutory non-compliance. Even when they might exist, the Supreme Court has not given them the weight that purchasers had hoped. In the reported Shadow Wood decision, the conclusive presumptions were not sufficient to trump equitable defenses to the foreclosure sale. In fact, a significant number of orders granting summary judgment have been reversed and remanded by the Supreme Court based on the failure of the lower court to consider evidence that may be sufficient to declare the sale commercially unreasonable. Moreover, the conclusive presumptions were given little weight or simply bypassed in two unreported decisions. As a result, an HOA lien sale purchaser must show more than the recorded foreclosure deed to succeed on its claims to the property.
Without the benefit of conclusive presumptions, purchasers are required to present evidence to establish the completion of all of the necessary steps to a foreclosure. It appears that a properly conducted HOA assessment lien sale would require more than 15 separate service actions in the form of mailing, recording, posting and publishing. The Supreme Court has seemed to indicate that only substantial compliance will be required to validate an assessment lien sale.
Regarding defenses to a valid assessment lien sale, the Court has invalidated assessment lien sales that were conducted in violation of the automatic stay in bankruptcy. Another defense that may require Supreme Court resolution is whether an assessment lien sale can be properly conducted if the assessment lien was based, in whole, or in part, on violations assessed by the association.
A defense that has been eliminated, for all practical purposes, is the stale lien defense based on the statute that a lien is unenforceable unless “proceedings are commenced” within three years of the Notice of Delinquent Assessment lien. The Supreme Court rejected the argument and held that as long as a Notice of Default is recorded within 3-years of a Notice of Delinquent Assessment Lien, the lien does not go stale.
Step 2: First Deed of Trust holder evidence
Purchasers do not generally challenge the lender’s evidence of a first deed of trust holder status. However, lenders should always be prepared to prove their status as holders of a first position security interest.
Step 3: Super-priority evidence and related defenses
The requirements for proving the existence and enforcement of superpriority lien rights has not been fully addressed by the Supreme Court. In the absence of direct, published guidance, there have generally been two outcomes: 1) some courts conclude that assessment liens possess superpriority rights because they “generally include monthly assessments”; and, 2) other courts require evidence of superpriority separate and apart from what is generally in monthly assessments.
This first conclusion which finds superpriority without more than what is generally in an assessment lien is troublesome on many levels. First, if monthly assessments have ‘two parts’, or distinct priorities, as the Supreme Court held in SFR, how does the court tell the difference between the two parts of the monthly assessments? If a court concludes that all that is needed is evidence of monthly assessments, it hasn’t answered the question of which priority was enforced. Put another way, the conclusion that monthly assessments and superpriority rights are the same cannot logically be true when SFR tells us that the two priorities are not coextensive or identical.
Secondly, equating any monthly assessments with superpriority assessments is inconsistent with the language of the statute. Principally, SFR stated that “[i]f subsection 2 ended there, a first deed of trust would have complete priority over an HOA lien.” If the Bank has “complete priority” over an assessment lien as part of the balancing of the parties’ interests, then something more than simple monthly assessments is necessary to establish superpriority. In addition, superpriority rights are subject to qualification and limitation of monthly assessments. Courts that conclude monthly assessments are superpriority are dispensing with the qualification and limitation language of the statute.
Another problem equating any monthly assessments to superpriority assessments is that it is inconsistent with the legislative intent of NRS 116.3116. By conflating superpriority with regular monthly assessments, any protections given to the lenders in the form of lien priority is essentially written out of the law because it would never be realizable by lenders.
Conversely, several lower courts have now recognized that the question of the presence and enforcement of superpriority liens is a factual question. Specifically, when determining whether the assessment lien sale was a superpriority lien sale, the court will apply traditional deed interpretation techniques and determine the intent of the parties based upon the totality of circumstances surrounding the sale. This approach allows the court to look at the entirety of the situation and ask several questions, including but not limited to:
- Are mortgagee protection clauses found in CC&Rs an expression of intent not to foreclose on superpriority?;
- Did the association or its collection agent believe that they were enforcing superpriority rights?;
- Did the foreclosure notices communicate the enforcement of superpriority rights?;
- Did the collection agent’s post-sale distribution reveal its intent to exercise only subpriority rights?
In the end, it will be the answer to these questions, and others, which will determine whether an assessment lien sale is a superpriority assessment lien sale.
Step 3a: Lender Defenses to Superpriority Lien Claims:
Even if the purchaser can prove that an assessment lien sale is a superpriority assessment lien sale, lenders have numerous defenses. These include:
- The federal foreclosure preemption law which protects any loan held by Fannie Mae or Freddie Mac;
- Limited purpose associations;
- Tender/satisfaction of superpriority lien arguments;
- Equitable defense of a commercially unreasonable sale as set forth in Shadow Wood;
- Equitable defense prohibiting the retroactive application of the law.
While the viability of some of these defenses are currently being challenged in various courts of appeal, the successful assertion of these defenses would allow the lender to maintain its first position deed of trust. Meanwhile, this outcome allows the purchaser to retain its interest in the property and either satisfy the indebtedness, or rent the property until the lender completes a foreclosure.
Step 4: Constitutional Challenges:
Finally, there is the constitutional challenges to the “opt-in” notice provisions for junior lienholders in NRS 116. Both the 9th Circuit Court of Appeals and the Nevada Supreme Court have issued rulings on the issue and have come down with competing conclusions. At least one of the litigants has reportedly sought United States Supreme Court review. As of today’s date, whether the review will be granted is unclear.
There is still reason to be hopeful that the litigation of the superpriority matters will be resolved. However, as the relative evidentiary burdens are resolved among the parties, the outcomes may become much clearer.