Monday, October 13, 2014

FYI: NV Sup Ct Holds HOA Has Super-Priority Lien For Up to 9 Months of Unpaid HOA Dues, Non-Judicial Foreclosure Extinguishes Previously Recorded First-Lien DOT

The Supreme Court of Nevada recently held that a homeowners’ association’s assessment lien maintained super-priority status for nine months of unpaid dues against a first position deed of trust, and that the nonjudicial foreclosure of the HOA lien extinguished a previously recorded first deed of trust. 


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


At issue was a property located in a common-interest community subject to Covenants, Conditions, and Restrictions (CC&Rs) recorded in 2000. In 2007, the borrowers executed a promissory note and deed of trust on the property in favor of appellee lender (“Lender”).  By 2010, the borrowers were delinquent on their homeowners’ association (“HOA”) dues, and also defaulted on their obligations to Lender.  The HOA and Lender each commenced nonjudicial foreclosure actions.


At the HOA’s foreclosure sale, Appellant (“Foreclosure Purchaser”) purchased the property, and thereafter, received and recorded a trustee’s deed.  During that time, the Lender’s trustee’s sale had been postponed.


Following the HOA’s foreclosure sale, Foreclosure Purchaser brought an action to quiet title and enjoin the Lender’s trustee’s sale, arguing that the HOA trustee’s deed extinguished Lender’s first deed of trust, and therefore the Lender had no interest in the property.


The district court denied Foreclosure Purchaser’s motion for a preliminary injunction and granted Lender’s countermotion to dismiss. The lower court reasoned that to validly foreclose its super-priority lien, an HOA must initiate a judicial foreclosure action.  As a consequence of proceeding nonjudicially, the court held that the Lender’s deed of trust survived the HOA’s trustee’s sale.  Foreclosure Purchaser appealed.


As you may recall, Nev. Rev. Stat. Ann. (“NRS”) § 116.3116(1) permits an HOA to impose a lien against a unit for unpaid dues. The statute affords such a lien higher priority than a previously recorded first deed of trust for nine months of unpaid dues, but affords the lien lower priority for any additional unpaid dues. NRS § 116.3116(2).


The Nevada HOA lien is therefore effectively split into two pieces, a super-priority piece “consisting of the last nine months of unpaid HOA dues…,” which is “prior to a first deed of trust, and a sub-priority piece “consisting of all other HOA fees or assessments,” which is “subordinate to a first deed of trust.” Op. at *6.


On appeal, Lender argued that NRS §116.3116(2) creates merely a payment priority between the HOA and the beneficiary of a first deed of trust and not a true priority lien.  According to Lender, the super-priority portion of the HOA lien does not acquire super-priority status until the beneficiary of a first deed of trust forecloses, at which point, a foreclosure purchaser is required to pay off the super-priority portion of the HOA lien to obtain clear title. In contrast, if NRS §116.3116(2) creates in an HOA lien true priority status, then an HOA lien is senior to a first deed of trust, and foreclosure on that lien will extinguish a first deed of trust.


The Nevada Supreme Court rejected Lender’s payment priority argument, and held that NRS 116.3116(2) gives an HOA a true super-priority lien, complete with the ability to extinguish a first deed of trust upon foreclosure sale.  Specifically, the Court determined that the statutory language providing for a HOA lien “prior to” other liens and encumbrances (to the extent of nine months of unpaid dues), relates to lien priorities and “does not speak in terms of payment priorities.” Op. at *10.


In response to Lender’s argument that it is inequitable to allow a nominal lien to extinguish a first deed of trust securing hundreds of thousands of dollars in debt, the Court observed, “[a]s a junior lienholder, [Lender] could have paid off the [HOA] lien to avert loss of its security; it could have also established an escrow for [HOA] assessments to avoid having to use its own funds to pay delinquent dues.” Op. at *16-17.


The Court also determined that the official comments to §3-116 of the Uniform Common Interest Ownership Act of 1982 (UCIOA), the provisions of which Nevada adopted and codified as NRS Chapter 116, supported the Court’s reading of §116.3116(2). The comments acknowledge that the split-lien approach is a “significant departure from existing practice,” and explain that “[a]s a practical matter, secured lenders will most likely pay the 6 [in Nevada, nine] months assessments demanded by the association rather than having the association foreclose on the unit.” Op. at *11-12.


The Nevada Supreme Court further referenced the Joint Editorial Board for Uniform Property Acts’ (JEB) 2013 report canvassing case law construing the UCIOA’s super-priority lien provisions. The report endorsed the position that foreclosure on the super-priority portion of an HOA lien extinguishes a lower priority first deed of trust, and explicitly criticized prior Nevada federal district court decisions holding a contrary view.


Lender next argued that the HOA was required to commence its foreclosure action through the judicial process, and because it failed to do so, the non-judicial foreclosure sale was subject to Lender’s first deed of trust. For support, Lender relied on the language in NRS 116.3116(2) that defines the super-priority piece of an HOA’s lien as consisting of “assessments for common expenses…which would have become due in the absence of acceleration during the 9 months immediately preceding institution of an action to enforce the lien.”  Lender claimed that the phrase “institution of an action to enforce a lien” suggests a civil action brought in a court of law and that it required the HOA to foreclose its lien by way of the judicial process. 


Disagreeing, the Nevada Supreme Court observed that the provisions in NRS 116.31162 “speak[] to the statutory notices of delinquency, default and election to sell required of a nonjudicial foreclosure sale.” Op. at 18. The Court noted that NRS §§116.31163-116.31168 concern and explain the mechanics and requirements of nonjudicial foreclosure sales of HOA liens. The Court utilized the same reasoning to dispel the dissenting opinion’s position that NRS Chapter 116 requires judicial foreclosure of the super-priority piece of an HOA lien but authorizes nonjudicial foreclosure of any sub-priority lien.


Accordingly, the Nevada Supreme Court reversed the lower court’s order of dismissal, vacated the order denying preliminary injunctive relief, and remanded for further proceedings consistent with its opinion.






Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


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          McGinnis Wutscher Beiramee LLP





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