Superlien law heads to state Supreme Court

Editor’s note: Barbara Holland takes a break from her Q&A format for the next two weeks to discuss the U.S. District Court ruling on HOA nine-month superlien law.

As many of my readers know, a number of disputed legal issues that pertain to the nine-month superlien law are slowly heading toward the Nevada Supreme Court. Questions such as, does the law exclude late fees, interest and collection costs? Are the associations entitled to receive the nine months of back assessments and late fees, interest and collections costs? Does a foreclosure sale conducted by a homeowner association to collect unpaid assessments extinguish all junior liens, including a first deed of trust (the mortgage)?

The U.S. District Court for Nevada, case number 2:13-CV-00506-PMP-GWF, heard a case between 7912 Limbwood Court Trust, plaintiff v. Wells Fargo Bank, MTC Financial Inc. and Federal Home Loan Mortgage Corp. that pertained to these issues. The court sided with the HOAs and announced its ruling Oct. 28.

A little background is needed. The property involved was at 7912 Limbwood Court in Las Vegas. The property was subject to a first deed of trust that was recorded in 2004 (the homeowners had a mortgage on this home). The property also was subject to the 1995 recorded covenants, conditions and restrictions of the homeowner association, Elkhorn Community Association.

The association initiated foreclosure action upon the homeowners per state law to recover unpaid association assessments. The foreclosure sale was in compliance with all statutory notice requirements. The foreclosure sale by the association was conducted March 6, 2012. The association purchased the property and a foreclosure deed was recorded with the Clark County recorder on March 16, 2012.

On Oct. 5, 2012, the lender on the home recorded a notice of default and election to sell the home based on the homeowners’ deed of trust. The sale was set for March 8. The association sued in state court March 5 to quit title on the property and to move for a temporary restraining order and preliminary injunction to prevent the sale of the property by the lender. The court had set a hearing date for March 12. However, the lender sold the property on March 8 to the Federal Home Loan Mortgage Corp.

Without taking the readers through the legal hoops, this case was moved out of the state District Court to U.S. District Court. The defendants filed motions to dismiss the case and stated the lender’s lien was superior to the association’s lien, and that the association’s lien did not extinguish the first deed of trust. The defendants’ position was that the first deed of trust continues to encumber the property after the foreclosure of the association lien.

Again, reducing the legal arguments, the association contended that the defendants received the statutory required notice of the possibility of a superpriority lien, extinguishing the first deed of trust and that the association cannot waive its superpriority lien through the CC&Rs. The association contended the lender could have preserved its interest by paying off the association’s superpriority lien but “they sat on their rights and cannot be heard to complain now.”

The court rejected arguments presented by the defendants and found in favor of the association, stating, “Under the unambiguous statutory language, the HOA superpriority lien is prior to the first deed of trust and consequently foreclosure on the HOA superpriority lien extinguishes all junior security interests, including the first deed of trust. Wells Fargo easily could have avoided this purportedly inequitable consequence by paying off the HOA superpriority lien amount to obtain the priority position thereby avoiding extinguishment of its junior interest. Additionally, Wells Fargo could have required an escrow for the HOA assessments so that in the event of default, Wells Fargo could have satisfied the superlien amount. ...”

The bottom line: If an association follows all of the statutory requirement notices, and if the lenders do not step up to pay the association’s nine-month superlien, the association’s foreclosure action would extinguish the lender’s trust deeds on the property.

Now, this issue was decided by U.S. District Court (and by the way its decision is comparable to a decision made by the Washington state Supreme Court) and has not been heard or decided by the Nevada Supreme Court. The legal arguments discussed and decided by the federal court will lend heavily upon the state Supreme Court’s decision.

As I have mentioned numerous times, the Legislature needs to pass a law that would require the lenders to escrow association assessments. If such a law was passed, so much wasted time and money would be eliminated in the collection process and would greatly improve the financial position of so many associations that have been hit hard because of the recessionary economy that has continued to linger in Nevada.

For a full copy of the federal court’s decision, visit www.hlrealty.com.

Barbara Holland, certified property manager, broker and supervisory certified association manager, is president and owner of H&L Realty and Management Co. Questions may be sent to the Association Q&A, P.O. Box 7440, Las Vegas, Nev., 89125. Fax is 702-385-3759, email is support@hlrealty.com.