There a lot of legal pieces to this HOA puzzle

Do you like jigsaw puzzles, the ones that have more than 500 pieces?

If you do, then you will enjoy following the various federal and state court decisions pertaining to Nevada associations and their foreclosures.

“Who’s on first?” Seems like the rulings change on a daily basis. So here goes.

About a month or so ago, the Ninth U.S. Circuit Court of Appeals issued a ruling in the case of Bourne Valley Court Tr v. Wells Fargo Bank, N.A.. In a 2-1 ruling, the judges found that the Nevada foreclosure law, Nevada Revised Statute 116.3116, violates constitutional protections.

Wells Fargo had argued that this NRS statue was unconstitutional because it did not require associations to provide actual notice of the foreclosure. In addition, Wells Fargo argued it did not receive notice that the association’s foreclosure would also extinguish their interest in the subject property. Wells Fargo believed that the association’s foreclosure violated the “due process clause” of the United States and Nevada constitutions. Wells Fargo maintained the association’s foreclosure amounted to an illegal “taking” under the “takings clause” of the United States and Nevada constitutions.

The Supreme Court of the State of Nevada disagreed in its ruling of Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortgage, A Division of Wells Fargo Bank N.A.

In this case, the homeowners had failed to pay their association dues and their mortgage payments. Both the association and the lender recorded notices of default and election to sell against the homeowner. The association conducted a nonjudicial foreclosure sale wherein the property was sold to Saticoy Bay LLC for $ 6,900

This LLC filed a complaint in District Court seeking an injunction to prevent Wells Fargo from foreclosing on the property and a declaration from the court that the LLC was the rightful owner of the property, free and clear from any encumbrances or liens. Wells Fargo filed a motion to dismiss stating that NRS 116.3116 violated the due process clause and the takings clause of the two constitutions. The District Court granted Wells Fargo’s motion. The LLC appealed the decision and the case was heard at the Nevada State Supreme Court.

Without discussing all of the various legal issues, the LLC noted that NRS 116.31168 does incorporate the notice requirements of an association in its foreclosure process in NRS 107.090.

In its decision, the Nevada State Supreme Court noted the following facts: 1. NRS 116.3116 was enacted in 1991. The association’s covenants, conditions and restrictions was recorded in 1994. Wells Fargo acquired its security interest in 2003. The court concluded, “therefore, Wells Fargo was on notice that by operation of the statute, the (earlier recorded) CC&Rs might entitle the homeowners association to a superpriority lien at some future date which would take priority over a (later recorded) first deed of trust.”

As to the due process and taking clause issues, Wells Fargo argued that because the Legislature enacted this NRS statute, the deprivation of Wells Fargo’s property interest was the result of “state action” and that the association was in an essence a “state actor.” Our Supreme Court ruled the state was not compelled to initiate a foreclosure action and it was not involved in the foreclosure sale. (Attorneys, please forgive me for simplifying the various legal discussions in this decision.)

So, we now have two different pieces of a puzzle that does not quite fit, one where the Bourne Valley remains the law in federal court and the Saticay Bay decision is now the law in Nevada.

Will we see this legal debate continue with an appeal to the United State Supreme Court? Let’s hope not. We would like to finish this puzzle so that we all know the rules of the game.

Why is this Nevada State Supreme Court decision so important? If the Supreme Court had agreed with the District Court that the NRS statute was unconstitutional, we would have had a major nightmare. The decision would have been far reaching as technically no foreclosures would have been legal. What if you had purchased a home that was foreclosed upon from an association as your primary residence only to be informed that you owe the bank money or lose your home? The economic impact would have been incredible.

There are still more decisions to come that will eventually help us to complete this jigsaw puzzle.

Barbara Holland is a certified property manager, broker and supervisory certified association manager. Questions may be sent to holland744o@gmail.com.