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July 22, 2015

HOA Super Priority Legal Battles Continue in the Silver State: What Senate Bill 306 Means for Nevada HOAs, Lenders and Homeowners

by Aaron D. Ford and Karl O. Riley

In 1991, the Nevada Legislature enacted the Uniform Common-Interest Ownership Act (UCIOA) which had been promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL) (the Statute).[1] This law provides that a homeowners association (HOA) may record a lien on each home in the community it governs and in enacting this law, the Legislature authorized an HOA to foreclose its lien through a nonjudicial foreclosure process.[2] When the lien attaches or comes into existence continues to be a dispute issue in the ongoing litigation. Under this law, the HOA’s lien is prior to the first mortgage lien to the extent of certain maintenance and abatement charges and either six or nine months of assessments for common expenses, depending on the circumstances.[3] This portion of the HOA’s lien is commonly referred to as the “super-priority lien.” In SFR Investments Pool 1, LLC v. U.S. Bank, the Nevada Supreme Court held that the foreclosure of the “super-priority lien” by an HOA extinguishes the first mortgage lien on the unit.[4]

According to the drafters of the UCIOA, the “super-priority lien” is intended to balance the need for an HOA to collect its assessments with the need to encourage lending for the purchase of homes in HOA’s by protecting the priority of first mortgage liens.[5]

In Senate Bill No. 306 of the 2015 Session of the Nevada Legislature (S.B. 306), the Legislature sought to revise the statute to improve the fairness of the HOA foreclosure process for lenders who face the extinguishment of their liens by an HOA foreclosure. Unlike the prior version of this law, S.B. 306 makes clear that lenders are required to receive actual notice of an HOA foreclosure sale.[6] Also for the first time, S.B. 306 provides lenders and homeowners an opportunity to redeem a home from an HOA foreclosure process by paying the assessments owed to the HOA.[7] Finally, S.B. 306 improves the procedures for selling a home at an HOA foreclosure sale so that the sale may bring a higher price, leaving proceeds above the HOA’s lien that can be distributed to satisfy the liens of lenders.[8] However, because of the newly added right of redemption, in practice there exists a possibility that the sales prices may decrease as a purchaser is buying a property subject to redemption.

Because the Nevada Supreme Court has held that a foreclosure of an HOA’s “super-priority lien” extinguishes the first mortgage lien on the home and all other subordinate liens, it is important that the lienholders receive notice of the HOA’s foreclosure that is sufficient to enable those lienholders to protect their interest.[9] The goal of S.B. 306 is to ensure that lienholders receive adequate notice of an HOA foreclosure. Under S.B. 306, an HOA is required to mail a copy of a notice of default and election to sell and a copy of the notice of sale to each holder of a recorded lien on the home being foreclosed by the HOA.[10] S.B. 306 also requires additional information to be included in the notice of default and election to sell so that a lienholder receiving the notice will know exactly what the lienholder needs to do to protect its interest.[11] 

S.B. 306 provides a lender the opportunity to protect its interest by paying the amount of the “super-priority lien.” Under S.B. 306, if a lender satisfies the amount of the “super-priority lien” not later than five days before the date of the HOA’s foreclosure sale, the sale cannot extinguish the first mortgage lien.[12] Even if the sale occurs before the lender satisfies the amount of the “super-priority lien,” a lender has an opportunity to redeem the home from the foreclosure sale by paying to the purchaser the purchase price of the home within 60 days after the foreclosure sale.[13]

The fact that a lienholder pays off a homeowner’s delinquent HOA assessments in order to protect its own interests does not mean that a homeowner is off the hook for that debt. A lienholder who makes such a payment is entitled to collect that amount from the homeowner.[14] Thus, a homeowner still has a strong incentive to remain current on his or her HOA assessments.

Additionally, S.B. 306 adds procedural requirements to the statute, the intent of which is to assist in increasing the HOA foreclosure sale price, which is designed to aid a lender in satisfying its interest in the home.[15] When an HOA forecloses on a home, the proceeds of the sale are distributed to satisfy the HOA’s lien before any proceeds are distributed to satisfy the liens of lenders.[16] Thus, a higher sale price increases the likelihood that there will be proceeds remaining after an HOA foreclosure sale that can be distributed to lenders.

One of the purposes of S.B. 306 was to establish an HOA foreclosure process that ensures that a reasonable price is obtained at an HOA foreclosure sale. Under S.B. 306, if the amount of the “super-priority lien” is paid not later than five days before the date of the sale, the sale cannot occur sooner than two days after the recording of a record of that satisfaction, ensuring that interested purchasers at the sale have had an opportunity to review the public record to learn about the status of the “super-priority lien” before the sale.[17] S.B. 306 also enacts sale procedures that are similar to the procedures for a nonjudicial bank foreclosure and requires the person conducting the sale to announce at the sale whether the “super-priority lien” has been satisfied, again ensuring that persons interested in the home know what they would be buying.[18] S.B. 306 intended that by providing more open and transparent procedures for HOA foreclosure sales, the sales price would likely increase. A potential increase in the sales price will protect lenders by increasing the likelihood that an HOA foreclosure sale will bring in enough proceeds to satisfy the liens of lenders.

In conclusion, S.B. 306 improves the prior law and should assist in resolving the conflict between the interests of HOAs and their homeowners as well as lenders. Under S.B. 306, HOAs will continue to be able to conduct a foreclosure that extinguishes the first mortgage lien on a home, while lenders will receive enhanced protections to ensure the security of their recorded interest. S.B. 306 requires meaningful notice to be given to lenders and provides time for a lender to take action to protect its interest. Furthermore, the process of an HOA foreclosure sale will be improved to ensure that the sale is conducted in a reasonable manner. Notably however, S.B. 306 does not impact or alter the ongoing litigation, or the constitutional and other challenges to the original version of the Statute.

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Notes:

[1] Chapter 245, Statutes of Nevada 1991, at pp. 535-87. [back]
[2] NRS 116.3116 to 116.31168, inclusive. [back]
[3] NRS 116.3116(2). [back]
[4] 130 Nev. Adv. Op. 75, 334 P.3d 408 (2014). In spite of this decision, the United States District Court for the District of Nevada has issued several opinions finding that the lender’s deed of trust is not extinguished by an HOA foreclosure sale where the property is insured by the federal government or owned by Fannie Mae or Freddie Mac (currently under federal conservatorship). The government’s interest in the property is subject to the Supremacy Clause because the Statute interferes with important federal policies and programs. Washington & Sandhill Homeowners Ass’n v. Bank of Am., N.A., No. 2:13-CV-01845-GMN-GWF, 2014 WL 4798565, at *6-7 (D. Nev. Sept. 25, 2014) (appeal docketed, No. 14-17032); Saticoy Bay LLC v. SRMOF II 2012-1 Trust, No. 2:13-CV-1199-JCM-VCF, 2015 WL 1990076, at *4 (D. Nev. Apr. 30, 2015) (appeal docketed, No. 15-16092). Likewise, Fannie Mae and Freddie Mac’s interest is subject to 12 U.S.C. § 4617(j)(3) which prohibits extinguishment of the deed of trust. See e.g. Skylights LLC v. Byron, No. 2:15-CV-00043-GMN-VCF , 2015 WL 3887061, -- F. Supp. 3d -- (D. Nev. June 24, 2015); Elmer v. JP Morgan Chase Bank N.A., No. 2:14-CV-01999-GMN-NJK (D. Nev. July 13, 2015). [back]
[5] Uniform Common-Interest Ownership Act (2008) § 3-116 cmt. 2. [back]
[6] Sections 2 and 4 of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[7] Section 6 of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[8] Section 5 of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[9] Indeed, several Nevada state courts have recently ruled that the Statute violates due process and is unconstitutional because it fails to ensure adequate notice to the lenders. Cano-Martinez v. HSBC Bank, USA, et al, Case No. A-13-692027, (reh’g filed); Saticoy Bay LLC Series 350 Durango v. Wells Fargo Home Mortgage, et al, Case No. A-13-688410); LN Management LLC Series 855 Rhinegold v. Chase, et al, Case No. A-14-694748); Zaisan Enterprises, LLC v. Green Tree Servicing, et al, Case No. A-13-690281). [back]
[10] Sections 2 and 4 of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[11] Section 2 of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[12] Section 6 of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[13] Id. [back]
[14] Section 1(16) of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[15] See section 5 of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[16] NRS 116.31164, as amended by section 5 of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[17] Section 5 of Senate Bill No. 306, 2015 Session of the Nevada Legislature. [back]
[18] Id. [back]

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