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Another Nevada Federal District Court Decision Confirms HOAs are Necessary Parties to Quiet Title Claims

While Nevada waits for the United States Supreme Court to decide if it will hear the conflict of law issue between its state courts and the Ninth Circuit regarding Nevada’s previous version of its HOA lien statute (NRS 116.3116), the Nevada Federal District Court recently issued another decision limiting the application of the Ninth Circuit Court of Appeals holding in Bourne Valley, finding the statute unconstitutional. In Deutsche Bank National Trust Company v. Talaser and Vicanto Homeowners Assocation, 2017 WL 736879, the Nevada Federal District Court considered the parties motions for summary judgment and motion to dismiss.

The quiet title case arose from Defendant Talasar and Vicanto Homeowner Association’s (HOA) non-judicial foreclosure sale of residential property in its community to Defendant SFR Investments (SFR). Deutsche Bank obtained an assignment of the first deed of trust. Deutsche Bank’s Complaint asserted claims for quiet title, declaratory/injunctive relief, wrongful foreclosure, and violation of NRS 116.3116. SFR filed Counterclaims against Deutsche Bank and its processor lender parties, including Bank of America (BANA), for quiet title and slander of title.

SFR filed a motion for summary judgment on its counterclaims and Deutsche Bank filed a counter motion for summary judgment, seeking a ruling that the HOA’s foreclosure sale did not extinguish its alleged interest in the property. The HOA filed a motion to dismiss on the grounds it did not claim an ownership interest in the property and therefore was not a proper party to the quiet title claims.

Motion To Dismiss

The Court first analyzed the HOA’s motion to dismiss. The Court explained for a party to prevail on a quiet title claim, it only needs to prove its claim to title is superior to all other parties. The Court analyzed Federal Rule of Civil Procedure 19(a)’s requirement that a party must be joined as a “required” party in two circumstances: (1) when “the court cannot accord complete relief among existing parties” in that party’s absence or (2) when the absent party “claims an interest relating to the subject of the action” and resolving the action in the person’s absence may, as a practical matter, “impair or impede the person’s ability to protect the interest,” or may “leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.”

The Court concluded the HOA was a necessary party in the case.

The Court explained this conclusion:

The HOA has a present interest in the property because Deutsche Bank challenges the validity of the foreclosure sale and/or to equitably set aside the sale. [citations omitted]. If the foreclosure sale is invalidated or set aside, the HOA’s superpriority lien might be reinstated as an encumbrance against the property.
Further, the existence and priority of that lien might still be in doubt where Deutsche Bank alleges it tendered payment of that lien. “The disposition of this action in the HOA’s absence may impair or impede its ability to protect its interests.”

The Court also reasoned if Deutsche Bank obtained a ruling invalidating the foreclosure sale without the HOA being a party to this suit, “separate litigation to further settle the priority of the parties’ respective liens and rights may be necessary.” Therefore, it explained if the HOA was dismissed as a party, Deutsche Bank “would not be able to secure the complete relief it seeks.” The Court found the HOA to be a proper party to Deutsche Bank’s quiet title claim.

This portion of the Court’s ruling further increases the likelihood HOAs will be named in every bank/lender initiated quiet title case arising from an HOA foreclosure sale.

Regarding the HOA’s motion to dismiss Deutsche Bank’s claims for breach of NRS 116.1113 and wrongful foreclosure, the HOA claimed the Court lacked subject matter jurisdiction to consider these claims because Deutsche Bank had not satisfied NRS 38.310’s requirement that these claims be first submitted to the Real Estate Division of the Nevada Department of Business and Industry’s (NRED) for arbitration or mediation. Deutsche Bank argued it had exhausted its administrative remedies or “was excused from doing so” because it submitted the dispute to NRED and NRED failed to timely complete mediation in the allotted 60 days required under the statute.

Because NRED ADR is inundated with thousands of similar claims, it cannot process the claims to comply with this requirement and parties often wait six to nine months before NRED appoints a mediator or arbitrator, who then schedules and conduct the mediation or arbitration.

The Court instructed that NRS 38.310 is an exhaustion statute which creates prerequisites for filing certain state-law claims, not a jurisdictional statute.
Therefore, it declared NRS 38.310 cannot affect the court’s subject matter jurisdiction.

The Court next examined the language of NRS 38.310. Subsection (1) of the statute provides,

No civil action based upon a claim relating to [t]he interpretation, application or enforcement of any covenants, conditions or restrictions applicable to residential property . . . or [t]he procedures used for increasing, decreasing or imposing additional assessments upon residential property, may be commenced in any court in this State unless the action has been submitted to mediation.

Subsection (2) of NRS 38.310 provides a “court shall dismiss any civil action which is commenced in violation of the provisions of subsection 1.” Regarding Deutsche Bank’s assertion the mere submission of its claim to NRED was sufficient to comply with the statute, the Court noted the statute did not contain any language providing that NRED’s failure to appoint a mediator within 60 days constitutes exhaustion nor did it find any legislative intent to impose a burden on NRED to complete mediation within a specified period of time.

The Court declared that because the parties had not participated in mediation nor had Deutsche Bank asserted/alleged it included the HOA as a party in its request for mediation, Deutsche Bank had not exhausted its administrative remedies. It held Deutsche Bank must mediate the claims for violation of NRS 116.3116 and wrongful foreclosure before initiating an action in court. It also found Deutsche Bank Bank’s claims were not prejudiced by the statute’s requirement the parties participate in mediation prior to initiating an action in court because the statute tolls the applicable statute of limitations to said claims.

In reaching its holding, the Court instructed,

“A wrongful foreclosure claim challenges the authority behind the foreclosure, not the foreclosure act itself.” McKnight Family, L.L.P. v. Adept Mgmt., 310 P.3d 555, 559 (Nev. 2013) (citing Collins v. Union Fed. Sav. & Loan, 662 P.2d 610, 623 (Nev. 1983)). “The material issue in a wrongful foreclosure claim is whether ‘the trustor was in default when the power of sale was exercised.'” Turbay v. Bank of Am., N.A., No. 2:12-CV-1367-JCM-PAL; 2013 WL 1145212, at *4 (quoting Collins, 662 P.2d at 623). “Deciding a wrongful foreclosure claim against a homeowners’ association involves interpreting covenants, conditions or restrictions applicable to residential property.” McKnight Family, L.L.P., 310 P.3d at 559. “This type of interpretation falls under NRS 38.310.” Id. Additionally, NRS 38.310 applies to laws “contain[ing] conditions and restrictions applicable to residential property.” Id. at 558.

Because Deutsche Bank failed to submit the wrongful foreclosure and violation of NRS 116.3116 claims to NRED ADR mediation before proceeding with its lawsuit, the Court dismissed these claims without prejudice. It also dismissed, without prejudice, Deutsche Bank’s final claim against the HOA for Injunctive Relief, following the rule that injunctive relief standing alone is not a cause of action.

This portion of the Court’s ruling will cause banks to submit all such claims against HOAs to NRED ADR before they file in federal court. Because of the conflict in state and federal law, NRED mediation never results in resolution unless the HOA acquired the property at its own foreclosure sale. When a third party purchases the property at an HOA foreclosure sale, the bank’s quiet title claim against the record owner is not subject to NRS 38.310. Unless the record owner voluntarily participates in the mediation, settlement is impossible.

Motion For Summary Judgment

Interestingly, in deciding the competing motions for summary judgment regarding the quiet title claims brought by Deutsche Bank and SFR, the Court elaborated regarding what a lender must do to preserve its interest in a property and after it receives the recorded lien notice from the HOA. Deutsche Bank requested a pay off balance from the HOA’s collection agent and after the agent failed to respond, it tendered what it considered to be the super-priority portion of the HOA’s lien. The Court explained this was insufficient.

The Banks created the problem by failing to pay the amount set forth in the notice of default, which was $1,942.90. Had the Banks paid the amount set forth in the notice of default ($1,942.90), the HOA’s interest would have been subordinate to the first deed of trust. [citation omitted]. Rather than tendering the $1,942.90 and then later seeking a refund of any difference, BANA decided to tender an insufficient amount ($765.00), the amount BANA calculated to be nine months of assessments. See SFR Investments, 334 P.3d at 418 (noting that the deed of trust holder can pay the entire lien amount and then sue for a refund). After failing to use the legal remedies available to them to prevent the property from being sold to a third party-for example, seeking a temporary restraining order and preliminary injunction and filling a lis pendens on the property, the Banks now seek to profit from their own failure to follow the rules set forth in the statutes. [citations omitted]

The Court granted SFR’s motion for summary judgment and denied Deutsche Bank’s counter motion, ruling the HOA foreclosure sale extinguished Deutsche Bank’s first deed of trust. In reaching this holding, the Court held that because Deutsche Bank and/or its predecessors received actual notice of the HOA’s lien recordings and the notice of the sale, it did not have standing to assert the constitutional due process violations that Bourne Valley held were violated by NRS 116.3116 statutory scheme. The Court reached this conclusion despite the fact the lender in Bourne Valley also admitted receiving notice of the disputed foreclosure sale.

Takeaway

The importance for HOAs regarding the Court’s ruling in favor of SFR is that it confirms the banks have the burden of proof regarding any claim that the HOA foreclosure sale is invalid. It also shows Bourne Valley does not guarantee the banks will prevail on the quiet title claims against the buyer who purchased at the HOA foreclosure sale as the Bourne Valley decision seemed to portend. And to the extent the Bourne Valley decision appear to eliminate the need for banks to name HOAs as parties in these quiet title cases, the subsequent Nevada Federal District Court decisions such as this one, guarantee that HOAs will be enmeshed in these disputes until and unless the U.S. Supreme Court considers the pending writ regarding Bourne Valley and clarifies the law regarding Nevada’s disputed HOA foreclosure statute and the Constitutional due process implications.

ABOUT THE AUTHOR: Tom McGrath is the managing partner of Tyson & Mendes’ Las Vegas, NV office. Mr. McGrath specializes in insurance defense, personal injury, professional liability, and general civil litigation. Contact him at (702)724-2648 or tmcgrath@tysonmendes.com.