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Ninth Circuit Court of Appeals Rules Nevada HOA Foreclosure Notice Provision Unconstitutional

The U.S. Court of Appeals for the Ninth Circuit, in Bourne Valley Court Trust v. Wells Fargo, recently handed down a significant decision providing that a Nevada foreclosure law was unconstitutional because the law did not require homeowners’ associations (HOA) to give mortgage holders prior notice of foreclosure actions. Over the last several years, numerous quiet title actions have been filed by purchasers of real property at HOA foreclosure auctions, as well as by mortgage holders, to determine the priority of HOA liens and mortgage holders’ first deeds of trust. An action to quiet title is a lawsuit filed to establish ownership of real property. 

In Bourne Valley, a quiet title action was filed relating to the purchase of real property at an HOA foreclosure auction. The original homeowner of the property fell behind on HOA assessments, and the HOA filed a notice to foreclose on the property. The property was subsequently sold at auction, and the purchaser filed an action to quiet title to strip off the mortgage holder’s deed of trust. The purchaser argued that the HOA foreclosure extinguished all junior interests in the property, including over the mortgage holder’s first deed of trust. The purchaser’s argument was based on a recent ruling by the Nevada Supreme Court that interpreted a state statute to give HOAs a “super priority” lien on unpaid assessments, which allowed HOAs to foreclose on their liens and extinguish mortgage liens. 

The Ninth Circuit agreed with the mortgage holder’s argument that Nevada’s HOA statutory notice scheme for foreclosures was unconstitutional. It found that the statutory scheme, which required an HOA to alert a mortgage holder that it intended to foreclose only if the mortgage holder had “opted-in” to receive such notice, violated a lender’s right to due process under the 14th Amendment to the U.S. Constitution. The 14th Amendment requires a state to give reasonable notice before taking an action that could affect a person’s interest in life, liberty, or property. According to the Court, an opt-in scheme does not satisfy the reasonable notice requirement. 

Prior to the Court’s ruling, the Nevada state legislature amended the notice statute to require that HOAs notify all lenders of plans to foreclose and removed the "opt-in" provision from the statute. In short, this amendment requires all mortgage creditors be notified before foreclosures. However, despite the amendment to the statute, the Court’s decision will still have a major impact as most of the HOA foreclosures occurred under the pre-amendment version of the notice statute. 

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About this Author

Brandon Johanssen, Litigator, Real Estate, Armstrong teasdale
Associate

Brandon Johansson is a member of Armstrong Teasdale’s Financial and Real Estate Services practice group, whose practice focuses on complex commercial litigation and creditor’s rights. Brandon has a wide array of litigation experience in state and federal courts, including representing commercial lenders and receivers, defending directors and officers of failed institutions, and advising clients on real estate matters.

Brandon represents lenders and other creditors in all aspects of litigation relating to the debtor-creditor relationship. He assists secured lenders with enforcement...

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Tracy O'Steen, Real Estate Attorney, Armstrong Teasdale Law Firm
Of Counsel

A member of Armstrong Teasdale’s Financial Services and Real Estate practice group, Tracy O’Steen guides clients through bankruptcy matters, distressed loans, commercial loan transactions, receiverships, landlord tenant disputes and other related commercial litigation.

Navigating the complications of business insolvencies, Tracy also represents creditors seeking to maximize their return through bankruptcy, preference litigation and other litigation relating to the debtor-creditor relationship.  

In bankruptcy settings, she represents clients’ interests with respect to Chapter 11 reorganizations, Chapter 7 liquidations and preference litigation. Tracy also assists secured lenders with enforcement of their state law collection rights, including suing and collecting on distressed loans, real estate foreclosures, Uniform Commercial Code (UCC) foreclosures of personal property and all aspects of post-judgment collection efforts.

 

702.473.7084
James Patrick Shea, Financial Institutions, Lawyer, Armstrong Teasdale Law Firm
Partner

James Patrick Shea has more than 30 years of experience advising financial institutions, landlords, vendors and other creditors in business bankruptcy proceedings.

Nationally recognized in the field of commercial insolvency and reorganization, he is the former president of the American Bankruptcy Institute (ABI). An ABI member since 1988, Jim has also served as ABI’s vice president-communications and information technology and the founding chair of ABI’s former subcommittee on gaming insolvencies and reorganizations. He is also a chair of ABI's Civility Task Force and a former...

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