Freedom Mortg. Corp. v. Las Vegas Dev. Grp., LLC

Decision Date19 May 2015
Docket NumberCase No. 2:14–cv–01928–JAD–NJK.
Parties FREEDOM MORTGAGE CORPORATION, Plaintiff, v. LAS VEGAS DEVELOPMENT GROUP, LLC, Maria Teresa Castro, Tierra de las Palmas Owners Association, Defendants.
CourtU.S. District Court — District of Nevada

Kevin Hahn, Malcolm & Cisneros, Irvine, CA, for Plaintiff.

Roger P. Croteau, Roger P. Croteau & Associates, Ltd., Carolyn M. Broussard, Upson Smith, Las Vegas, NV, for Defendants.

Order Granting Motion to Dismiss

JENNIFER A. DORSEY, District Judge.

In the years following Las Vegas's real estate crash, lenders and investors were at loggerheads over the legal effect of a homeowners association's (HOA's) nonjudicial foreclosure of a superpriority lien on a lender's first trust deed. The Nevada Supreme Court settled the debate last September in SFR Investments Pool 1, LLC v. U.S. Bank, holding that " NRS 116.3116(2) gives an HOA a true superpriority lien, proper foreclosure of which will extinguish a first deed of trust."1 The SFR decision made winners out of the investors who purchased foreclosure properties in HOA sales and losers of the lenders who gambled on the opposite result, elected not to satisfy the HOA liens to prevent foreclosure, and thus saw their interests wiped out by sales that often yielded a small fraction of the loan balance.

Freedom Mortgage Corporation is one of these lenders. Its first-trust-deed interest in Maria Castro's Tierra de las Palmas Village home was extinguished when the HOA foreclosed on its liens after Castro defaulted on her HOA assessments.2 Freedom Mortgage brings this action to challenge the extinguishment of its interest in the Castro property. It alleges that, because its loan to Castro was insured by the Department of Housing and Urban Development (HUD), the federal government has an interest in the property, and permitting the lender's security interest to be extinguished under NRS 116.3116(2) as clarified in SFR violates the Property and Supremacy Clauses of the United States Constitution. The investors who bought the Castro property from the HOA move to dismiss Freedom Mortgage's claims as legally unsound.

I find that Freedom Mortgage lacks standing to assert HUD's rights under the Property Clause and, regardless, HUD has no property interest in the Castro property. I also conclude that the Supremacy Clause does not preempt NRS 116.3116(2)'s application to HUD-insured mortgaged properties because Nevada's HOA superpriority lien law is consistent with HUD's single-family mortgage-insurance program.

A. The Castro Property

Castro purchased her home at 2119 Spanish Town Avenue in North Las Vegas, Nevada in 2009 with a $98,188 loan from Freedom Mortgage, secured by a note and first deed of trust.3 The loan was insured through the Federal Housing Administration (FHA) by HUD.4 The property is subject to a 1997 Declaration of Covenants, Conditions, and Restrictions of the Tierra de las Palmas Owners Association (CC & Rs) that obligates homeowners in the Tierra de las Palmas neighborhood to pay certain dues and assessments for the HOA's operation and its common-area maintenance.5

B. The HOA Foreclosure on the Castro Property

Castro defaulted on her HOA assessment payments, and the HOA conducted a proper, nonjudicial foreclosure sale in August 2011 at which it bought the property on a credit bid.6 The HOA then sold the property to Las Vegas Development Group (LVDG) for $3,000 by quitclaim deed.7

C. HOA Liens under Nevada's Chapter 116

" NRS 116.3116(1) gives an HOA a lien on its homeowners' residences" for unpaid assessments and fines, and NRS 116.3116(2) gives that lien priority over all other liens and encumbrances with limited exceptions.8 NRS Chapter 116 permits HOAs to enforce those liens through nonjudicial foreclosure.9

As the Nevada Supreme Court explained in SFR, Nevada's HOA statutory-lien scheme, codified as NRS Chapter 116, "is a creature of Uniform Common Interest Ownership Act of 1982 ... (UCIOA), which Nevada adopted in 1991."10 After an extensive discussion of UCIOA history and Nevada's adoption in Chapter 116 of many of the UCIOA's provisions, the Nevada Supreme Court concluded in SFR that " NRS 116.3116(2) establishes a true superpriority lien" that is "senior to" a lender's first deed of trust.11 The SFR court explained the importance of this enforcement tool for property owners in common-interest communities:

[T]he recent foreclosure crisis ... created [incentives] for first security holders to strategically delay foreclosure.... An HOA's sources of revenues are usually limited to common assessments. This makes an HOA's ability to foreclose on the unpaid dues portion of its lien essential for common-interest communities. Otherwise, when a homeowner walks away from the property and the first deed of trust holder delays foreclosure, the HOA has to either increase the assessment burden on the remaining unit/parcel owners or reduce the services the association provides (e.g. by deferring maintenance on common amenities). To avoid having the community subsidize first security holders who delay foreclosure, whether strategically or for some other reason, [the UCIOA provision on which NRS 116.3116 is based] creates a true superpriority lien....12

Thus, the court concluded, an HOA lien is much like "other inchoate liens such as real estate taxes and mechanics liens": proper foreclosure on these liens extinguishes the lien of the otherwise first mortgagee.13

D. This Lawsuit and the Defendants' Motions to Dismiss

On November 19, 2014, two months after the SFR decision was handed down and more than three years after the foreclosure on the Castro property, Freedom Mortgage filed this complaint. It sues Castro, the HOA, and LVDG for declaratory and injunctive relief, quiet title, and an equitable lien. All claims hinge on the theory that its first trust deed on Castro's property could not have been extinguished by the HOA's foreclosure because the loan was insured by HUD, HUD thus "holds a mortgage interest in the Property," and the Constitution's Supremacy and Property Clauses preempt NRS 116.3116 from being "applied to loans insured by HUD."14

LVDG and the HOA now move to dismiss all claims.15 LVDG argues that SFR is squarely dispositive because it supplies the rule that the lender's mortgage interest was extinguished by the HOA's foreclosure sale, and Freedom's claims fail because it no longer has any interest in the property as a matter of law. The HOA joins in LVDG's motion and additionally contends that Freedom Mortgage's claims against it are unripe because the lender failed to first bring them before the Nevada Real Estate Division (NRED) under NRS 38.310 and also failed to provide the affidavit required by NRS 116.760.16 Because I grant LVDG's motion and dismiss Freedom Mortgage's claims as legally unsound, I decline to reach the HOA's additional arguments.

A. The Property Clause

The Property Clause provides that "Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belong[ing] to the United States."17 In simple terms, it precludes states and private individuals from divesting the federal government—through state laws or otherwise—of title to property without congressional consent. As the Supreme Court explained in Wilcox v. Jackson, a "state has an undoubted right to legislate as she may please in regard to the remedies to be prosecuted in her Courts, and to regulate the disposition of the property of her citizens by descent, devise, or alienation. But [when the property is] part of the public domain of the United States: Congress is invested by the Constitution with the power of disposing of, and making needful rules and regulations respecting it."18 "If a state were able to pass laws that could dispose of federal lands ... the practical result ... would be, by force of state legislation to take from the United States their own land, against their own will, and against their own laws."19

Freedom Mortgage contends that NRS 116.3116(2) is precisely that type of law and that allowing it to extinguish first trust deeds securing federally insured lender loans violates the Property Clause.20 Freedom Mortgage's argument fails for two reasons: (1) it lacks standing to assert the federal government's Property Clause challenge and (2) the foreclosure on the Castro property deprived the federal government of no property interest.

1. Freedom Mortgage lacks standing to raise a Property Clause challenge.

For this court to have jurisdiction over any case, "the party bringing the suit must establish standing."21 There are two aspects to standing: Article III standing, which requires a case or controversy, and prudential standing, which "encompasses ‘the general prohibition on a litigant's raising another person's legal rights, the rule barring adjudication of generalized grievances more appropriately addressed in representative branches, and the requirement that a plaintiff's complaint fall within the zone of interests protected by the law invoked.’ "22 "The question of prudential standing is often resolved by the nature and source of the claim. ‘Essentially,the standing question in such cases is whether the constitutional ... provision on which the claim rests properly can be understood as granting persons in the plaintiff's position a right to judicial relief.’ "23

"The Supreme Court's reasons for the general rule against third-party standing counsel against" granting Freedom Mortgage standing "to enforce the federal government's property rights" in the Castro property. As the Tenth Circuit expressed en banc in The Wilderness Society v. Kane County, Utah:

We "must hesitate before resolving a controversy on the basis of the rights of third persons not parties to the litigation" for two reasons. "First, the courts should not adjudicate such rights unnecessarily, and it may be that in fact the holders of those rights do not wish to assert

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