Thursday, May 26, 2016

FYI: Nevada Sup Ct Holds HOA Superpriority Lien Does Not Include Atty Fees and Collection Costs

The Supreme Court of Nevada recently held that a superpriority lien for common expense assessments pursuant to Nevada Revised Statutes ("NRS") 116.3116(2) does not include collection fees and foreclosure costs incurred by a homeowners' association ("HOA").


In so ruling, the Court also held that an HOA's covenants, conditions, and restrictions ("CC&Rs") that purport to create a superpriority lien covering a different period of time than allowed by NRS 116.3116(2) is superseded and negated by the statute.


A copy of the opinion is available at:  Link to Opinion


The HOA recorded its Declaration of CC&Rs in July 2005. Later that year, a homeowner purchased the property.  The HOA had the ability to collect and charge assessments, and administer and enforce the CC&Rs upon unit owners, for the purpose of benefitting the community.


In June 2009, the homeowner became delinquent on his mortgage loan and subsequently, and the mortgagee recorded a notice of default. In August 2009, the HOA also recorded a notice of default against the homeowner for nonpayment of association assessments and other costs.


The mortgagee foreclosed on the property before the HOA could do so. A foreclosure auction was held the same day.  The purchaser subsequently transferred the property by quitclaim deed to the respondent, a holding company.


The HOA demanded around $6,000 to extinguish its lien, as the holding company acquired the property subject to the HOA's unextinguished superpriority lien.  The HOA lien included roughly $2,700 in collection fees and foreclosure costs. The holding company acknowledged the property was subject to the superpriority lien but denied that the HOA lien included nine months -- rather than only six months -- of unpaid assessments, or the collection fees and foreclosure costs.


The holding company ultimately filed the underlying action, seeking a declaratory ruling that under NRS 116.3116(2), the superpriority portion of an HOA's lien consists of nine months' (or alternatively six months' based on the CC&R's) worth of assessments, and does not include collection fees and foreclosure costs.


The trial court granted partial declaratory relief holding that the HOA's CC&Rs limited it's superpriority lien to an amount equal to six months of assessments, which did not offend NRS 116.3116(2)'s superpriority provision providing for nine months' assessments. The HOA then appealed.


As you may recall, NRS 116.3116(1) confers to an HOA a lien on a homeowner's unit for unpaid assessments, construction penalties, and fines levied against the unit. NRS 116.3116(2) establishes the priority of that lien, splitting the lien into two pieces—"a superpriority piece and a subpriority piece." SFR Invs. Pool 1 v. U.S. Bank, N.A., 130 Nev., Adv. Op. 75, 334 P.3d 408, 411 (2014). 


Under NRS 116.3116(2), the superpriority lien is "prior to all security interests . . . to the extent of any charges incurred by the association on a unit pursuant to NRS 116.310312 and to the extent of the assessments for common expenses based on the periodic budget adopted by the association pursuant to NRS 116.3115 which would have become due in the absence of acceleration during the 9 months immediately preceding institution of an action to enforce the lien." 


The HOA argued that the Supreme Court of Nevada should adopt the holding in Hudson House Condominium Ass'n Inc. v. Brooks, 611 A.2d 862 (Conn. 1992). The Connecticut court in Hudson House concluded that the superpriority lien included interest, collection costs, and attorney fees. The court relied on a Connecticut statute which authorized costs and attorney's fees. The court in Hudson House believed including such costs and fees with the superpriority lien was the only reasonable and rational result as common expense assessments are often small, and the prioritized portion of the lien is typically the only collectable portion for an HOA, that the legislature would not have authorized such proceedings without including the costs of collection.


The Supreme Court of Nevada first disagreed with Hudson House because the Connecticut court did not conduct a statutory analysis of the superpriority lien language under the Nevada statute.  The Court also noted that neither the Connecticut statute creating the lien nor NRS 116.3116(2) mention collection fees and costs, and both states' statues provide that the lien is limited to the extent of the assessment for common expenses.


Second, the Supreme Court of Nevada held that the Nevada legislature has the authority to determine the definition of a superpriority lien and may provide for additional recovery of collection fees and costs under other provisions. Lastly, the Supreme Court of Nevada disagreed with Hudson House because the Connecticut court, in effect, found the HOA as the prevailing party, making it entitled to costs and fees under the Connecticut statute. Accordingly, the Supreme Court declined to apply the holding in Hudson House to the instant case.


The HOA also argued that Nevada Administrative Code ("NAC") 116.470 must also be applied in conjunction with NRS 116.3116(2).  The administrative code provision -- NAC 116.470 -- sets a cap of $1,950 on foreclosure fees and costs that applies in most foreclosure sales. The HOA argued that if the statutory provision -- NRS 116.3116(2) -- is read to not include collection fees and foreclosure costs, it would contradict the NAC provision by removing the need for a cap. The Supreme Court of Nevada disagreed, holding that interpreting the superpriority lien to include such fees and costs does not preclude them from being incurred up to the cap.


The Supreme Court also looked to the legislative history of the statutory provision and found that the Nevada Legislature did not intend for collection fees and foreclosure costs to be included in a superpriority lien. The Court noted that the NRS cultivated from the Uniform Common Interests Ownership Act ("UCIOA") of 1982, and that section 3-116 of the UCIOA is substantially similar to NRS 116.3116.  The Court observed that UCIOA 3-116 amended the section to include reasonable attorney fees and foreclosure costs. However, the Court noted, although a similar amendment was considered for NRS 116.3116, the Nevada Legislature never adopted such an amendment. 


Moreover, because the costs of collecting as set forth in the later amended NRS 116.310313 was omitted from NRS 116.3116(2), the Supreme Court of Nevada presumed the Nevada Legislature did not intend for such costs to be included as part of an HOA's superpriority lien.


The HOA also urged the Supreme Court of Nevada to give deference to an advisory opinion from the Commission for Common Interest Communities and Condominium Hotels ("CCICCH"). The CCICCH determined that Nevada law authorized the collection of charges for late payment of assessments as a portion of the super lien amount.


Alternatively, the holding company suggested the Supreme Court give deference to the Nevada Real Estate Division ("NRED"), as they are charged with administering Chapter 116 of the NRS. Additionally, the holding company argued that the CCICCH had no authority to publish administrative opinions because such authority is reserved by statute to the NRED. The NRED concluded that the HOA's lien does not include costs of collecting as defined by NRS 116.310313.


The Supreme Court of Nevada was persuaded by the NRED interpretation.  The Court concluded that the superpriority lien granted by NRS 116.3116(2) did not include an amount for collection of fees and foreclosure costs incurred, but instead it is limited to an amount equal to the common expense assessments due during the nine months before foreclosure.


The Court then addressed the question of if the HOA's CC&R's liens were superseded by NRS 116.3116. The HOA argues there were two superpriority liens, a statutory lien and a contractual lien under their CC&R's. The holding company argued NRS 116.3116 superseded the CC&R's, but the time frame in the CC&R's (six months) shortened NRS 116.3116(2)'s allowance of nine months of common expense assessments.


The trial court had held there to be only one superpriority lien, which included interest, costs, and other fees, as long as the prioritized portion of the lien does not exceed the amount equal to six months of assessments, as noted in the CC&R's.  On appeal, the Supreme Court noted that the language in the CC&R's indicated that a lien was created covering certain fees and costs over six months preceding foreclosure. However, the Court also noted that NRS 116.1206(1) provided that any provision contained in a declaration is superseded by the provisions of chapter 116.


Accordingly, the Supreme Court of Nevada held that NRS 116.1206(1) negated the effect of the CC&R's provisions relating to the six-month priority lien because they violate the plain language of NRS 116.3116(2) by limiting the prioritized portion to six months when the statute allows for nine months, and including certain fees and costs. Thus, the Court held that the trial court's limitation of the superpriority lien to six months was in error.


In sum, the Supreme Court of Nevada concluded that a superpriority lien pursuant to NRS 116.3116(2) does not include additional amounts for collection fees and foreclosure costs that an HOA incurs preceding a foreclosure sale.  Instead, the HOA's superpriority lien is limited to an amount equal to nine months of common expense assessments.  In addition, to the extent that CC&R provisions can be read as creating a superpriority lien covering a different time frame than provided by NRS 116.3116(2), the CC&R provisions are superseded by statute and thus negated.


Accordingly, the Court affirmed in part and reversed in part the trial court's ruling.




Ralph T. Wutscher
Maurice Wutscher LLP
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