Wednesday, July 21, 2021

FYI: 9th Cir Holds Mortgagee May Challenge HOA Foreclosure Sale That Violates BK Automatic Stay

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court's order granting summary judgment in favor of the buyer at a homeowners association's non-judicial foreclosure sale that was conducted in violation of the automatic stay in the borrower's bankruptcy, and against a mortgagee whose interest in the foreclosed property would have been extinguished. 


In so ruling, the Ninth Circuit held that a first deed of trust lienholder may set aside a completed super-priority lien foreclosure sale if the sale violates the bankruptcy automatic stay.


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


A borrower ("Borrower") obtained a loan ("Loan") secured by a deed of trust recorded against real property located in Nevada ("Property").  Borrower fell behind on his homeowners' association ("HOA") monthly dues causing the HOA to record a "Notice of Default and Election to Sell".


Borrower filed for Chapter 13 bankruptcy and stated his intention to surrender the Property to the appellant mortgagee ("Mortgagee") and the HOA in his bankruptcy plan. While Borrower's bankruptcy was pending, the HOA sold the Property via non-judicial foreclosure sale to ("Foreclosure Sale").


Mortgagee subsequently initiated litigation in which it: (1) sued the HOA and the buyer at the HOA's Foreclosure Sale to quiet title and for declaratory relief alleging the Foreclosure Sale was void and did not extinguish Mortgagee's lien on the Property; (2) sought a preliminary injunction preventing the buyer from selling and/or transferring the Property; and (3) requested an order declaring the Mortgagee could foreclose on its deed of trust.  The Mortgagee separately sued the HOA for breach of Nevada Revised Statute 116.1113 and wrongful foreclosure.


The buyer moved for summary judgment arguing it had superior title to the Property because the Foreclosure Sale extinguished the Mortgagee's interest in the Property.  The Mortgagee also moved for summary judgment, arguing the Foreclosure Sale did not extinguish its interest in the Property because the Foreclosure Sale violated the automatic bankruptcy stay, and thus is void.


The trial court granted the buyer's motion for summary judgment concluding that pursuant to Tilley v. Vucurevich (In re Pecan Groves), 951 F.2d 242, 245 (9th Cir. 1991), the Mortgagee lacked standing to assert a violation of the bankruptcy's automatic stay because the Mortgagee "was neither a party, a debtor, or a trustee in [the underlying] bankruptcy matter."


The trial court entered judgment in favor of the buyer and dismissed the Mortgagee's remaining claims against the HOA because "the foreclosure sale extinguished the [Mortgagee]'s deed of trust on the Property and [because] the [buyer] purchased the property free and clear of the [Mortgagee's] deed of trust." 


The Mortgagee timely appealed. 


On appeal, the Mortgagee argued the trial court erroneously applied the holding of In re Pecan Groves.  The parties did not dispute that the Mortgagee had Article III standing due to the extinguishment of the Mortgagee's interest in the Property being "fairly traced to the HOA's violation of the bankruptcy stay."  Rather, the buyer argued the Mortgagee lacked "prudential standing" because the Mortgagee's grievance did not "fall within the zone of interests protected or regulated by the statutory provision...invoked in the suit." Bennett v. Spear, 520 U.S. 154, 162 (1997).


The Ninth Circuit disagreed, holding the Mortgagee had standing to bring a quiet title action pursuant to Nevada Revised Statute 40.100, which permits suit "by any person against another who claims an estate or interest in real property, adverse to the person bringing the action, for the purpose of determining such adverse claim."  Thus, the Mortgagee satisfied the "zone-of-interests test" for prudential standing purposes.  See e.g., Bank of Am. Corp. v. City of Miami, 137 S. Ct. 1296, 1302 (2017). 


The Court separately distinguished the In re Pecan Groves holding explaining that it "did not consider whether a creditor was precluded from advancing a quiet title action premised on violation of the automatic stay, particularly in a diversity case where state law recognizes such a claim as a basis for voiding a foreclosure sale."  The Court explained that in contrast to the facts and procedural posture of In re Pecan Groves, the Mortgagee brought its quiet title claim in accordance with Nevada precedent "invalidating HOA foreclosure sales when the HOA has violated the automatic stay."


Next, the Court examined whether the Foreclosure Sale violated the bankruptcy's automatic stay and whether the Foreclosure Sale was void under Nevada state law, which holds than an HOA foreclosure sale "conducted during an automatic stay in bankruptcy proceedings is invalid."  See e.g., LN Mgmt. LLC Series 5105 Portraits Place v. Green Tree Loan Servicing, LLC (Portraits Place), 399 P.3d 359, 359–60 (Nev. 2017). 


The Ninth Circuit held the Mortgagee's interest in the Property to be superior to the buyer's interest as the Mortgagee provided evidence demonstrating that: (1) Borrower listed the Property in his bankruptcy schedules; (2) the automatic bankruptcy stay was active through 2017; and (3) the Foreclosure Sale was conducted on September 19, 2014 while the bankruptcy stay was still in place.  Therefore, the Court concluded the Foreclosure sale was void meaning the Mortgagee was entitled to "quiet title to the Property" pursuant to Nevada Revised Statute 40.010.


Thus, the Court held that: (1) the Mortgagee had standing to pursue its claims against the buyer and the HOA; (2) the Mortgagee's interest as a creditor is protected by Nevada law; and (3) the Foreclosure Sale was void as a matter of law because it violated 11 U.S.C. § 362(a)'s automatic stay provisions. 


Accordingly, the Ninth Circuit reversed the trial court's summary judgment order in favor of the buyer, its denial of the Mortgagee's motion for summary judgment, and its dismissal of the Mortgagee's causes of action against the HOA and remanded this matter to the trial court for proceedings consistent with the instant opinion.




Ralph T. Wutscher
Maurice Wutscher LLP
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