The United States Court of Appeals for the Ninth Circuit recently reversed a district court’s decision and found a Nevada statute requiring lenders to “opt in” to receive notice if a homeowners’ association is going to foreclose and extinguish the lender’s lien is unconstitutional.  See Bourne Valley Court Trust v. Wells Fargo Bank, NA, 2016 WL 4254983 (9th Cir. Aug. 12, 2016).  In 2012, a homeowners’ association foreclosed on a property based on the owner’s nonpayment of $1,298.57 in association dues.  The property was sold for $4,145 at the foreclosure sale, and the purchaser filed a quiet title action to extinguish the first mortgage on the property, which had secured a $174,000 loan.  The district court held that the homeowners’ association lien had “super priority” over all other liens under Nevada Revised Statutes section 116.3116,  including the first mortgage that had been recorded ten years before the homeowners’ association lien.  The court further held that the foreclosure extinguished all liens under this statute, including the mortgage.  On appeal, the lender argued that the statute under which the association foreclosed was facially unconstitutional because it violated the due process rights of lenders.  Specifically, the statute at the time of the foreclosure—it was amended in 2015 to correct this issue—required a homeowners’ association to send notice of its lien and foreclosure to other lienholders only if the other lienholders had previously notified the homeowners’ association of their lien.  Thus, “the burden was on the mortgage lender to ask the homeowners’ association to please keep it in the loop regarding the homeowners’ association's foreclosure plans.”  The Ninth Circuit found that this provision unconstitutionally deprived lenders of their right to notice that an action had been taken to affect their property.  Although the homeowners’ association argued that it could not have violated the lender’s due process rights because it is not a state actor, the court found that the due process violation occurred when the statute was enacted. 

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.