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9th Cir. Holds Mortgage-Savings Clause Not Enough to Undo HOA’s Foreclosure Sale

nevada foreclosureThe U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court’s grant of summary judgment in favor of the defendant homeowners association in an action brought by the plaintiff mortgagee seeking to set aside the foreclosure sale of real property in Nevada.

In so ruling, the Ninth Circuit predicted that the Nevada Supreme Court would adhere to its own unpublished decisions and hold that a mortgage-savings clause, by itself, does not constitute unfairness that affects a sale, and held that the clause was void because it conflicted with Nev. Rev. Stat. 116.3116(2) and Nev. Rev. Stat. 116.1104.

A copy of the opinion in U.S. Bank v. White Horse Estates HOA is available at:  Link to Opinion.

Prior to 2015, Nevada law permitted a homeowners association to place a lien on real property for any delinquent payments. See generally Bank of America, N.A. v. Arlington W. Twilight Homeowners Ass’n, 920 F.3d 620, 621–22 (9th Cir. 2019) (per curiam).

Any portion of the lien that consisted of the last nine months of unpaid monthly assessments, or any unpaid maintenance or nuisance-abatement charges, had “superpriority” status over all other liens, including the first deed of trust. Id. at 622. If the homeowners association conducted a foreclosure sale on the lien and complied with statutory procedural requirements, the sale extinguished the first deed of trust. Id.

In 2013, a limited liability company owning a home fell behind on payments to the first defendant, the original homeowners association (“first HOA”). The defendant first HOA recorded a lien and then a notice of default and election to sell. The plaintiff, the mortgagee holding the first deed of trust, took no action at the time to preserve its deed of trust.

At the foreclosure sale, the second defendant, the new homeowners association (“second HOA”), bid the highest amount. The foreclosure sale complied with all statutory requirements, and a portion of the lien had superpriority status. Pursuant to Nevada law, the sale thus extinguished the first deed of trust.

The plaintiff mortgagee then brought an action in federal court, asking the trial court to set aside the sale as a matter of equity. The second HOA filed counterclaims against the plaintiff and other entities, seeking to quiet title in its favor. The trial court granted summary judgment to the defendant HOAs, quieting title in the second HOA’s favor and declining to set aside the sale. The plaintiff timely appealed.

In this case, a mortgage-savings clause in the applicable covenants, conditions, and restrictions (“CC&Rs”) provided, contrary to Nevada law, that any lien for unpaid assessments would be subordinate to the first deed of trust. The plaintiff argued that the clause, by itself, constituted unfairness that affected the sale.

The primary question in this case was thus one of state law: whether the mortgage-savings clause in the CC&Rs constituted unfairness that affected the sale such that the trial court had equitable discretion to set aside the foreclosure sale.

In a diversity case, the published decisions of the Nevada Supreme Court bind federal courts as to the substance of Nevada law. Albano v. Shea Homes Ltd. P’ship, 634 F.3d 524, 530 (9th Cir. 2011). Here, though, the Nevada Supreme Court had not addressed directly, in any published decision, the effect of a mortgage-savings clause by itself.

Therefore, the Ninth Circuit determined that its role was to predict how the Nevada Supreme Court would resolve the question in a published opinion. To do this, the Court looked to the Nevada Supreme Court’s unpublished decisions, which held that a mortgage-savings clause, by itself, does not constitute unfairness that affects a sale.

Under Nevada law, courts retain discretion to set aside a foreclosure sale if two circumstances are present: (1) an unreasonably low sales price, and (2) fraud, unfairness, or oppression that affected the sale. Nationstar Mortg., LLC v. Saticoy Bay LLC Series 2227 Shadow Canyon, 405 P.3d 641, 648 (Nev. 2017). However, if the record contains “no evidence that the sale was affected by fraud, unfairness, or oppression, then the sale cannot be set aside regardless of the inadequacy of price.” Shadow Canyon, 405 P.3d at 648– 49.

Here, the purchase price was approximately 8% of the market value of the property. Because of that low purchase price, the Ninth Circuit reasoned that the plaintiff must produce only slight evidence of fraud, unfairness, or oppression that affected the sale. Id. at 648.

The plaintiff mortgagee pointed to the mortgage-savings clause in the CC&Rs as evidence of unfairness that affected the sale. The clause stated, contrary to Nevada law, that any lien for unpaid assessments would be subordinate to any lien by the first deed of trust.

The Ninth Circuit declared that the mortgage-savings clause was void as a matter of Nevada law. See SFR Invs. Pool 1, LLC v. U.S. Bank, N.A., 334 P.3d 408, 419 (Nev. 2014) (en banc) (holding that a similar mortgage-savings clause was void). The clause conflicted with Nevada Revised Statutes section 116.3116(2), which required liens for unpaid assessments to have superpriority status. Id. Additionally, section 116.1104 provided that the priorities cannot be modified by agreement. Id.

The Ninth Circuit also observed that the mortgage-savings clause was void under the terms of the CC&Rs themselves. A provision of the CC&Rs expressly stated that if any provision conflicted with chapter 116 of the Nevada Revised Statutes, then “such offending Declaration provision shall be automatically deemed modified or severed herefrom.”

However, the Ninth Circuit held that the plaintiff mortgagee had not introduced any evidence that the clause misled the plaintiff or that the mortgage-savings clause affected the sale at all.

According to the Ninth Circuit, the Nevada Supreme Court has repeatedly rejected in unpublished opinions the same argument that the plaintiff advanced here.

For instance, in U.S. Bank Nat’l Ass’n as Trustee for Benefit of HarborView 2005–08 v. Vistas Homeowners Ass’n, 432 P.3d 191, 2018 WL 6617731 (Nev. 2018) (unpublished), the Nevada Supreme Court held that a mortgage-savings clause did not constitute unfairness because the appellants in that case did not present “any evidence that potential bidders were misled by the CC&Rs’ protective covenant and that bidding was chilled. Moreover, [the Nevada Supreme Court] must presume that any such bidders also were aware of NRS 116.1104, such that they were not misled.” Id. at *1.

The Ninth Circuit distinguished this case from ZYZZX2 v. Dizon, No. 2:13-cv-1307, 2016 WL 1181666 (D. Nev. Mar. 25, 2016), which concerned a mortgage-savings clause and a letter affirmatively stating that the specific sale at issue would not extinguish the first deed of trust. Id. at *5. The mortgagee in Dizon therefore had no reason to protect its interest because, according to the letter, the mortgagee’s interest was not threatened.

The Ninth Circuit concluded that the type of individualized affirmative misrepresentation at issue in Dizon is clearly unfair. By contrast, the Court held that the mortgage-savings clause in the present case was void as a matter of law and did not, by itself, constitute unfairness that affected the sale.

The Ninth Circuit noted that the Nevada Supreme Court has repeatedly distinguished Dizon for the same reasons in unpublished opinions. For example, in HarborView, 2018 WL 6617731, after holding that no prospective buyer could have been misled by the mortgage-savings clause, the court held in a footnote that “to the extent it is persuasive, ZYZZX2 v. Dizon, 2016 WL 1181666 (D. Nev. 2016), is distinguishable because in addition to the CC&Rs’ covenant, the HOA [in Dizon] sent a letter to the deed of trust beneficiary affirmatively misrepresenting to the beneficiary that it would not need to take any action to protect its deed of trust.” HarborView, 2018 WL 6617731, at *1 n.2.

Therefore, the Ninth Circuit held that, under Nevada law, the mortgage-savings clause did not constitute fraud, unfairness, or oppression that affected the sale.

The dissenting opinion in this case stated that the Ninth Circuit should have certified the question to the Nevada Supreme Court. However, the majority concluded that its role in a diversity case is to “predict how the state high court would resolve” a question in a published decision, Albano, 634 F.3d at 530, and that the Court regularly decides issues of state law without certifying questions to the state’s highest court.

The Ninth Circuit also rejected the plaintiff mortgagee’s remaining arguments and concluded that no unfairness arose from the first defendant’s processing of payments and that the notice at issue, which complied with statutory requirements, did not violate due process.

Accordingly, the Ninth Circuit held that, because the mortgage-savings clause did not affect the foreclosure sale, the sale could not be set aside, and title vested with the second HOA, the purchaser at the sale. Thus, the Court affirmed the trial court’s grant of summary judgment in favor of the second HOA.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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