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Nevada Federal Court Obscures Significance of Bourne Valley but Confirms a Federal Entity’s Property Interest Cannot be Extinguished by an HOA Foreclosure Sale

In Bank of America NA v. SFR Investments Pool 1 LLC, 2017 WL 598761, the Nevada Federal District Court recently declared an HOA foreclosure sale under Nevada’s previous version of NRS 116.3116 cannot extinguish a federal entity’s interest in the property sold at the HOA foreclosure sale if federal entities such as Fannie Mae, Freddie Mac or the FHA insure a loan related to the property. The Court explained,

Allowing an HOA foreclosure to wipe out a first deed of trust on a federally-insured property thus interferes with the purposes of the FHA insurance program. Specifically, it hinders HUD’s ability to recoup funds from insured properties. As this court previously stated in SaticoyBayLLC, Series 7342 Tanglewood Park v. SRMOF II 2012–1 Trust, the court reads the foregoing precedent to indicate that a homeowners’ association foreclosure sale under NRS 116.3116 may not extinguish a federally-insured loan.

But the Court explained unlike the Tanglewood Park case, because FHA was not a named party in the case before it, Bank of America (BANA) could not rely upon the fact that its loan securing its first deed of trust interest in the property was federally insured, to obtain summary judgment regarding its quiet title and declaratory relief claims against the party (SFR) that purchased the property at the HOA foreclosure sale.

More importantly, the Court also denied BANA’s Motion for Summary Judgment on its Quiet Title and Declaratory Relief claims. The court surprisingly rejected BANA’s argument the Ninth Circuit Court of Appeal’s decision in Bourne Valley, (holding the previous version of NRS 116.3116 Unconstitutional under the Due Process Clause), rendered the disputed foreclosure sale invalid. SFR opposed this portion of BANA’s Motion by arguing Bank of America lacked standing to assert a due process argument because it received actual notice of the foreclosure sale. BANA admitted receiving actual notice of both the notice of default and the notice of foreclosure sale. But BANA asserted whether it received actual notice of the sale was irrelevant after Bourne Valley. It is worth noting the lender in Bourne Valley, Wells Fargo, also received actual notice of the disputed foreclosure sale. Surprisingly, the Court disagreed with BANA’s position regarding Bourne Valley.

BANA misstates the Bourne Valley holding. The Ninth Circuit held that NRS 116.3116’s “opt-in” notice scheme, which required a[n] HOA to alert a mortgage lender that it intended to foreclose only if the lender had affirmatively requested notice, facially violated mortgage lenders’ constitutional due process rights. Bourne Valley Court Trust, 832 F.3d at 1157–58. The facially unconstitutional provision, as identified in Bourne Valley, exists in NRS 116.31163(2). See Id. at 1158. At issue is the “opt-in” provision that unconstitutionally shifts the notice burden to holders of the property interest at risk. See Id.

The Court continued,

To state a procedural due process claim, BANA must allege “(1) a deprivation of a constitutionally protected liberty or property interest, and (2) a denial of adequate procedural protections.”
The Court reasoned BANA satisfied the first element because of its deed of trust but it declared BANA did not satisfy the second prong. The Court explained Due Process requires not actual notice but notice “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.”

The Court ruled NAS, (the HOA’s collection agent that recorded the lien notices, including the notice of the disputed foreclosure sale) provided adequate notice to BANA when it recorded the HOA’s Notice of Default and Election to Sell and sent copies of this notice to all interested parties, including BANA. The Court reasoned the notice of trustee’s sale was sufficient notice to cure any constitutional defect inherent in Nevada’s previous version of its HOA lien statute because “it put BANA on notice that its interest was subject to pendency of action and offered all of the required information.”
The significance of Bank of America v SFR is if the buyer at the HOA foreclosure sale can establish that the lender received notice “reasonable calculated” to inform the lender of the foreclosure sale and provide an opportunity to object/respond, apparently Bourne Valley does not compel the Nevada Federal District Court to rule the foreclosure sale is invalid. The significance for HOAs is the clarity Bourne Valley seemed to provide regarding the outcomes of the thousands of pending HOA foreclosure cases in Nevada Federal Court, is now cast in doubt, along with HOAs’ potential exposure for lenders wrongful foreclosure claims, seeking damages from the HOAs in the event the foreclosure sale is determined to have extinguished the lenders’ interest in the properties sold at HOA foreclosure sales.

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.