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Nevada Supreme Court Confirms The Super-Priority Portion of an HOA Assessment Lien is Limited

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The Nevada Supreme Court’s recent decision in Horizons at Seven Hills Homeowners Association v Ikon Holdings, LLC 132 Nevada Advance Opinion (April 28, 2016) confirmed the “super-priority portion” of a homeowners’ association lien under NRS 116.3116, is limited to the total of nine months of common assessments.  The Court explained the super-priority portion may include fees and cost related to collection but the total amount of the super-priority portion of the HOA lien cannot exceed the equivalent of nine months of assessments.

When homeowners fail to pay their assessments, Nevada Revised Statute 116.3116 provides HOAs with a lien for delinquent assessments and/or fines. This HOA lien is senior to all other liens with the exception of the following liens:

  1. Liens recorded before the applicable CC&Rs;
  2. A first security interest recorded before the date of the assessments sought to be enforced; or
  3. Government/real estate tax liens.

NRS 116.3116 contains significant additional language that provides the HOA lien is senior to all first security interests described in section (b) above for the portion of the lien that is equal to the total of nine months of assessments.  This is the “super-priority” portion of the HOA lien.

Declaratory Relief Claim

Ikon Holdings involved a declaratory relief claim concerning a dispute between a property owner, Ikon Holdings, and its HOA related to the HOA’s lien for only delinquent assessments that arose before a lender had foreclosed on the property.  In 2011, Ikon Holdings acquired a property from Scott Ludwig that Mr. Ludwig had purchased at a lender foreclosure sale in 2010.  The property was within Horizons at Seven Hills Homeowners Association’s (“Horizon”) community.  The property’s former owner had defaulted on his mortgage and failed to pay his month HOA assessments.  Horizon recorded against the property a Notice of Delinquent Assessment Lien and a Notice of Default but before it could foreclose on the property, the owner’s mortgage lender foreclosed.

After Ikon acquired the property, Horizons contacted Ikon and declared Ikon had acquired the property subject to Horizon’s unextinguished super priority lien.  Horizons demanded roughly $6,000.00 to extinguish the lien, which in addition to unpaid assessments, included roughly $2,700 in collection fees and foreclosure costs.  Ikon disputed Horizons’ claim and took the position the lien only included six months of assessments.  It also claimed the HOA could not include fees and collection costs in the super-priority portion.

Ikon filed the underlying declaratory relief action seeking a ruling Horizon’s super-priority lien was limited to nine months of assessments based on NRS 116.3116(2) and alternatively, six months based on Horizon’s CC&Rs.  The District Court granted Ikon partial declaratory relief, determining Horizon’s lien was limited to six months, based on the language in Horizon’s CC&Rs.  Horizon appealed.

Supreme Court Appeal

The Nevada Supreme Court first addressed Horizon’s appeal based on its claim that Nevada law implied that collection costs and fees could be included, in additional to the nine months of assessments.  The Court explained that while costs and fees may be included in an HOA lien, the Nevada Legislature intended to place a cap on the total amount of the HOA lien that would be senior to a lender/first security interest deed of trust holder as provided in section b of NRS 116.3116.  Therefore, if a lender forecloses on a property before the HOA, the lender’s foreclosure extinguishes the non-super-priority portion of an HOA lien (any amount exceeding nine months of common assessments).

The Nevada Supreme Court also rejected Horizon’s claim the language in its CC&Rs created a separate contractual lien (in addition to the statutory lien created by NRS 116.3116).  Horizon argued that it could include collection fees and foreclosure cost as part of the super-priority portion of its contractual lien.  But the Nevada Supreme Court declared NRS 116.3116(2)’s limitation regarding the super-priority portion of an HOA lien supersedes and/or invalidates any language in an HOA’s CC&Rs providing for a greater super priority amount.

Takeaways

Ikon Holdings is a significant decision as it applies to at least two general types of “excessive HOA lien” cases inundating the Nevada courts.  First, HOAs are defendants in numerous cases in Nevada brought by parties that purchased properties at lender foreclosure sales.  These properties often were encumbered by HOA liens for delinquent assessments.  Soon after they acquired the properties, the investors paid the HOAs to satisfy/extinguish the liens, to enable them to sell or “flip” the properties for a substantial return.  Years after selling the properties, the investor parties sued the HOAs claiming the HOA coerced them into overpaying the liens.

But in Ikon Holdings, Ikon was still the owner of the property and it had never paid what it considered to be the HOA’s excessive lien demand.  It instead filed a declaratory relief action while it still owned the property.   Hence, Ikon, unlike other similar investor parties, still had standing to assert its declaratory relief claim and it had not waived its claims by voluntarily paying the lien demand.

Ikon Holdings also will impact HOAs’ potential defenses in the numerous wrongful foreclosure/quiet title claims lenders and lenders are prosecuting against HOAs in Nevada.  The lenders will rely on Ikon Holdings to support their position a lender’s attempted tender to an HOA, to pay only the super-priority portion of an HOA lien before a disputed HOA foreclosure sale, is sufficient to render the sale invalid.  The HOAs will counter as long as its lien notices, including the notice scheduling the foreclosure sale, complied with Nevada law and provided the lender with actual notice of the scheduled HOA foreclosure sale, the lender’s failure to appear for the sale to protect its interest is sufficient to uphold the validity of the sale.

The ruling in Ikon Holdings also raises questions about the scope and application of the Court’s decision in Shadow Wood HOA v New York Community Bankcorp, (2016) 2016 WL 347979.  Shadow Wood establishes the party challenging the validity of an HOA foreclosure sale bears the burden of proof.  The Court in Shadow Wood noted that where the first deed of trust holder received actual notice of the sale and failed to either 1) pay the entire delinquent amount before the sale or 2) appear at the foreclosure sale, the equities favor a finding that the sale is valid.

The Nevada Supreme Court explained,

The question of whether and, if so, to what extent costs and fees are recoverable in the context of an HOA super-priority lien is open, particularly as to foreclosures that pre-date the 2015 amendments to NRS Chapter 116.

Ikon Holdings appears to answer this question definitely.  It also suggests a lender does need to offer to pay the entire delinquent amount before the sale but instead needs only to tender payment of the super-priority portion of the lien.  Of course, if the lender forecloses first and the lender or the party that purchases the property at the lender’s foreclosure sale, fails to pay the HOA monthly assessments after said party acquires ownership, the HOA in essence has a second lien for the newly delinquent assessments that arise after the lender’s foreclosure sale.

But in cases where the HOA foreclosed before the lender and the lender attempted to tender the super-priority portion of the HOA lien before the sale, Ikon Holdings greatly enhances the lender’s equitable arguments to invalidate the sale.  In cases where the HOA purchased the property at its own foreclosure sale, the lack of a presumed third party buyer, who under Shadow Wood is presumed to be a bona fide purchaser of the property, probably will be sufficient to persuade Courts the lender has met its burden of proving the equities support its request to set aside the HOA’s foreclosure sale.

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.

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