Bourne Valley Court Trust v. Wells Fargo Bank, NA

• Decision Date: 12 August 2016
• Docket Number: No. 15-15233,15-15233
• Parties: Bourne Valley Court Trust, Plaintiff–Appellee, v. Wells Fargo Bank, NA, Defendant–Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

832 F.3d 1154

Bourne Valley Court Trust, Plaintiff–Appellee,

v.Wells Fargo Bank, NA, Defendant–Appellant.

No. 15-15233

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 13, 2016 San Francisco, California

Filed August 12, 2016

Andrew M. Jacobs (argued), Snell & Wilmer L.L.P., Tucson, Arizona; Amy F. Sorenson, Snell & Wilmer L.L.P., Salt Lake City, Utah; Kelly H. Dove, Snell & Wilmer L.L.P., Las Vegas, Nevada; for Defendant–Appellant.

Michael F. Bohn (argued), Law Offices of Michael F. Bohn, Esq., Ltd., Las Vegas, Nevada, for Plaintiff–Appellee.

Before: J. Clifford Wallace, Dorothy W. Nelson, and John B. Owens, Circuit Judges.

Dissent by Judge Wallace

OPINION

D.W. NELSON

, Circuit Judge:

Nevada Revised Statutes section 116.3116 et seq.

(the Statute)¹ strips a mortgage lender of its first deed of trust when a homeowners' association forecloses on the property based on delinquent homeowners' association (HOA) dues. Before it was amended, it did so without regard for whether the first deed of trust was recorded before the HOA dues became delinquent, and critically, without requiring actual notice to the lender that the homeowners' association intends to foreclose.

We hold that the Statute's “opt-in” notice scheme, which required a homeowners' association to alert a mortgage lender that it intended to foreclose only if the lender had affirmatively requested notice, facially violated the lender's constitutional due process rights under the Fourteenth Amendment to the Federal Constitution. We therefore vacate the district court's judgment and remand for proceedings consistent with this opinion.

BACKGROUND

This case arises out of an action to quiet title to real property located at 410 Horse Pointe Avenue (the Property) purchased at a homeowners' association foreclosure auction in North Las Vegas, Nevada.

Renee Johnson, the original homeowner, purchased the Property in 2001 with a loan for $174,000 from Plaza Home Mortgage, Inc. (Plaza). The Property is part of a planned development governed by the Parks Homeowners' Association (Parks). Plaza recorded a deed of trust securing a note on the property, and Appellant Wells Fargo was assigned all beneficial interest in the note and deed of trust in February 2011.

Johnson fell behind on payments for her HOA dues, and Parks recorded a Notice of Delinquent Assessment Lien on August 30, 2011. The total amount due was $1,298.57. On October 12, 2011, Parks recorded a Notice of Default and Election to Sell. On April 9, 2012, Parks recorded a Notice of Trustee/Foreclosure Sale against the Property.

On May 22, 2012, a Trustee's Deed Upon Sale was recorded, reflecting that Horse Pointe Avenue Trust paid $4,145 at the homeowners' association foreclosure sale. Horse Pointe Avenue Trust conveyed its interest in the Property to Appellee Bourne Valley Court Trust (Bourne Valley).

Bourne Valley filed an action to quiet title in Nevada state court. The action was removed to the federal district court for the District of Nevada pursuant to 28 U.S.C. § 1441

. The district court granted summary judgment for Bourne Valley.

The district court's ruling was based largely on the Nevada Supreme Court's decision in SFR Investments Pool 1 v. U.S. Bank , 334 P.3d 408 (Nev. 2014)

. There, the Nevada Supreme Court interpreted the Statute to give a homeowners' association a “super priority” lien on an individual homeowner's property for up to nine months of unpaid HOA dues. Id. at 419

. As the Nevada Supreme Court interpreted the Statute, the foreclosure of a homeowners' association “super priority” lien extinguished all junior interests in the property, including even a mortgage lender's first deed of trust. Thus, following the Nevada Supreme Court's interpretation of the Statute, the district court held that Parks's foreclosure extinguished Wells Fargo's interest in the Property.

Wells Fargo timely appealed.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction pursuant to 28 U.S.C. § 1332

. We have jurisdiction pursuant to 28 U.S.C. § 1291.

We review a district court's order granting summary judgment de novo . Fed. Deposit Ins. Corp. v. New Hampshire Ins. Co. , 953 F.2d 478, 485 (9th Cir. 1991)

.

ANALYSIS

I. The Statute was facially unconstitutional.

Before explaining why the Statute's notice scheme rendered the Statute unconstitutional, we first review how the Statute would have otherwise permitted a homeowners' association lien foreclosure to extinguish a mortgage lender's first deed of trust.

Section 116.3116(2)

set forth the priority of the homeowners' association lien with respect to other liens. Pursuant to that section, a homeowners' association lien took priority over all other liens except:

(a) Liens and encumbrances recorded before the recordation of the declaration and, in a cooperative, liens and encumbrances which the association creates, assumes or takes subject to;

(b) A first security interest on the unit recorded before the date on which the assessment sought to be enforced became delinquent ...; and

(c) Liens for real estate taxes and other governmental assessments or charges against the unit or cooperative.

Thus, section 116.3116(2)(b)

ordinarily made a first deed of trust superior to a homeowners' association lien. However, section 116.3116(2) gave “super priority” to the portion of a homeowners' association's lien for dues owed in the 9 months immediately proceeding an action to enforce the lien:

The lien is also prior to all security interests described in paragraph (b) 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 ... which would have become due in the absence of acceleration during the 9 months immediately preceding institution of an action to enforce the lien....

Nev. Rev. Stat. § 116.3112(2)(c)

.

In SFR Investments

, the Nevada Supreme Court held that foreclosure of a “super priority” lien under section 116.3116(2) extinguished all junior interests, including a first deed of trust. 334 P.3d at 410–14. As noted, the district court relied on SFR Investments in concluding that Parks's lien foreclosure extinguished Wells Fargo's interest in the Property. The district court explained that because Bourne Valley had shown that the required statutory notices were sent, and because Wells Fargo did not present evidence that it did not receive notice,² Wells Fargo's due process challenge failed. The district court did not address whether the Statute's notice scheme was facially unconstitutional.³ We turn to that question now.

A. The Statute impermissibly shifted the burden to mortgage lenders, requiring them to affirmatively request notice.

Before its amendment, the Statute employed a peculiar scheme for providing mortgage lenders with notice that a homeowners' association intended to foreclose on a lien. Even though such foreclosure forever extinguished the mortgage lenders' property rights, the Statute contained “opt-in” provisions requiring that notice be given only when it had already been requested. See, e.g. , Nev. Rev. Stat. § 116.31163(2)

(requiring notice of default and election to sell be mailed to “any holder of a security interest encumbering the unit's owner's interest who has notified the association, 30 days before the recordation of the notice of default, of the security interest”). Thus, despite that only the homeowners' association knew when and to what extent a homeowner had defaulted on her dues, 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. How the mortgage lender, which likely had no relationship with the homeowners' association, should have known to ask is anybody's guess, and indeed Bourne Valley offers no arguments here. But this system was not just strange; in our view, it was also unconstitutional.

Before it takes an action that will adversely “affect an interest in life, liberty, or property ..., a State must provide ‘notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.’ ” Mennonite Bd. of Missions v. Adams , 462 U.S. 791, 795, 103 S.Ct. 2706, 77 L.Ed.2d 180 (1983)

(quoting Mullane v. Central Hanover Bank & Trust Co. , 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950) ). Moreover, “[n]otice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party, whether unlettered or well versed in commercial practice, if its name and address are reasonably ascertainable.” Id. at 800, 103 S.Ct. 2706 (emphasis in original).

We have never addressed the constitutionality of an “opt-in” notice scheme like the one provided for in the Statute. Another court of appeals has, finding that “opt-in” notice does not pass muster.

In Small Engine Shop, Inc. v. Cascio

, the Fifth Circuit Court of Appeals concluded that an “opt-in” notice clause contained in Louisiana's real property foreclosure statute could not satisfy due process requirements. 878 F.2d 883 (5th Cir. 1989). The clause at issue provided that actual notice of seizure of real property was required for only those who requested it. Citing Mennonite, the court explained that it would be unconstitutional for the state by statute to “prospectively shift the entire burden of ensuring adequate notice to an interested property owner regardless of the circumstances.” Id. at 884 (citing Mennonite , 462 U.S. at 797, 103 S.Ct. 2706 ).

The Statute we address here is similar. Like the provision at issue in Small Engine Shop

, the Statute shifted the burden of ensuring adequate notice from the foreclosing homeowners' association to a mortgage lender. It did so without regard for: (1) whether the mortgage lender was aware that the homeowner had defaulted on her dues to the...