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9th Cir. Holds Nevada HOA ‘Superpriority Lien’ Statute Does Not Violate Takings or Due Process Clauses

HOAThe U.S. Court of Appeals for the Ninth Circuit recently held that the application of Nevada’s “superpriority lien” statute was not an uncompensated taking under the Takings Clause nor did it violate the Due Process Clause of the U.S. Constitution.

A copy of the opinion in Wells Fargo Bank, N.A. v. Mahogany Meadows is available at:  Link to Opinion.

In 2008 a couple purchased a house in Las Vegas, Nevada, with a loan from a bank secured by a deed of trust. Three years later the couple fell behind on their Homeowners’ Association (HOA) dues and the HOA recorded a lien for the delinquent assessments.

As you may recall, Nevada Revised Statutes Section 116.3116 grants an HOA a superpriority lien for certain unpaid assessments and charges which “is superior to all other liens on the property, including the first deed of trust held by the mortgage lender.” Arlington W., 920 F.3d at 622; accord SFR Invs. Pool 1, LLC v. U.S. Bank, N.A., 334 P.3d 408, 410 (Nev. 2014). “This means that an HOA can extinguish the first deed of trust by foreclosing on its superpriority lien.” Arlington W., 920 F.3d at 622.

The HOA ultimately foreclosed on the home to satisfy its lien, and in 2013, a Trust purchased the property at a public auction for $5,332, extinguishing the bank’s deed of trust.

The bank then filed a quiet title action against the Trust, the HOA, and the HOA’s agent. The bank sought a declaration that the foreclosure sale was invalid and that its deed of trust “continues as a valid encumbrance against the Property,” which was then worth approximately $200,000.

The trial court dismissed the bank’s complaint for failure to state a claim, and this appeal followed.

The questions presented on appeal were whether Nevada Revised Statutes Section 116.3116 violated the Takings Clause or the Due Process Clause of the U.S. Constitution.

The Ninth Circuit first examined the bank’s takings claim, noting the Takings Clause of the Fifth Amendment, made applicable to the States through the Fourteenth Amendment, provides: “[N]or shall private property be taken for public use, without just compensation.” U.S. Const. amend. V; see Chicago, B. & Q.R. Co. v. Chicago, 166 U.S. 226, 247 (1897).

The bank’s argument was that the enactment of Section 116.3116 was the action which constituted a government taking.

However, the Ninth Circuit was quick to point out that both Section 116.3116 and the HOA covenants were enacted years before the bank acquired the lien. Therefore, the bank’s right to maintain its lien unimpaired by a later HOA lien was not part of its title to begin with.

Moreover, the Ninth Circuit held, when “‘background principles’ of state law already serve to deprive the property owner” of the interest it claims to have been taken, it cannot assert a claim under the Takings Clause. Esplanade Props., LLC v. Seattle, 307 F.3d 978, 985 (9th Cir. 2002) (quoting Lucas, 505 U.S. at 1029). Quite simply, “[t]he State cannot take what the owner never had.”

The Ninth Circuit explained the Supreme Court of the United States applied this principle in United States v. Security Industrial Bank which “strongly suggests if not implicitly holds” that prospective application of a statute would not impermissibly tread on the Takings Clause.

The bank argued that applying those principles here produces a harsh result because it allows a small HOA lien to wipe out the value of the bank’s much larger deed of trust.

The Ninth Circuit was unpersuaded, finding “that result is no harsher than the result produced by foreclosures to satisfy property-tax liens, which, though sometimes small, can take priority over other interests in the property.”

The bank asserted that it could not have known about the potential impairment of its lien because even though section 116.3116 was enacted before it acquired its lien, only in the SFR Investments decision “did the Nevada Supreme Court radically reinvent [the statute] and hold that it not only granted a homeowner’s association first-payment priority during foreclosure, but that foreclosure of such a lien also destroyed every other lien on the property.”

However, the Nevada Supreme Court explained that SFR Investments did not change the law but “did no more than interpret the will of the enacting legislature.” K&P Homes v. Christiana Tr., 398 P.3d 292, 294 (Nev. 2017).

Ultimately, the Ninth Circuit found that “[b]ecause the enactment of section 116.3116 predated the creation of [the bank’s] lien on the property, [the bank] cannot establish that it suffered an uncompensated taking.”

The bank next argued the foreclosure sale violated the Due Process Clause and was invalid because it was not preceded by constitutionally adequate notice.

The Due Process Clause “requires the government to provide ‘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.’” Jones v. Flowers, 547 U.S. 220, 226 (2006) (quoting Mullane v. Central Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950)).

The Ninth Circuit acknowledged this is not the Court’s first due process challenge to this statute and had previously held that the statute “is not facially unconstitutional.” Arlington W., 920 F.3d at 624.

The bank argued that the Court’s holding in Arlington West is not controlling here because that case involved only a facial challenge, while this one involves an as-applied challenge.

A facial challenge requires a plaintiff to “establish that no set of circumstances exists under which [a statute] would be valid.” United States v. Salerno, 481 U.S. 739, 745 (1987).

An as-applied challenge, by contrast, focuses on the statute’s application to the plaintiff. Holder v. Humanitarian Law Project, 561 U.S. 1, 18–19 (2010).

The Ninth Circuit discussed that here, the bank conceded “it received actual notice of the foreclosure sale.” Therefore, by acknowledging it received actual notice, the bank was in essence arguing that the notice contemplated by the statute is insufficient and therefore all applications of the statute are invalid. Accordingly, although the bank characterized its argument as an as-applied challenge, it amounts to an argument that the statute is invalid on its face.

The Ninth Circuit explained it held the opposite in Arlington West which still controls and foreclosures the bank’s due-process challenge.

Finally, the Ninth Circuit quickly disposed of its review of the trial court’s denial of the bank’s motion for reconsideration.

The Appellate Court held the bank conceded that the evidence on which it relied “was theoretically available” when it filed its response to the motion to dismiss. Therefore, the trial court did not abuse its discretion in denying reconsideration.

Accordingly, the judgment of the trial court was affirmed.

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Ryan Grotz practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in all phases of commercial litigation, including motion practice, written discovery, depositions, mediations, and bench and jury trials. Ryan received his Juris Doctor from the Chicago-Kent College of Law, where he was an associate editor on the Access to Justice Student Editorial Board. He was awarded his Bachelor of Business Administration degree from the University of Iowa. Ryan is licensed to practice law in Illinois and the U.S. District Court for the Northern District of Illinois. For more information, see https://mauricewutscher.com/attorneys/ryan-grotz/

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