U.S. Bank, N.A. v. S. Highlands Cmty. Ass'n

• Decision Date: 03 June 2021
• Docket Number: No. 19-15918,19-15918
• Parties: U.S. BANK, N.A., TRUSTEE FOR the HOLDERS OF the J.P. MORGAN MORTGAGE TRUST 2007-S3, Plaintiff-Counter-Defendant-Appellant, v. SOUTHERN HIGHLANDS COMMUNITY ASSOCIATION, Defendant-Appellee, SFR Investments Pool 1, LLC, Defendant-Counter-Claimant-Cross-Claimant-Appellee, v. Nationstar Mortgage LLC; Bank of America, NA, Cross-Claim-Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

999 F.3d 1185

U.S. BANK, N.A., TRUSTEE FOR the HOLDERS OF the J.P. MORGAN MORTGAGE TRUST 2007-S3, Plaintiff-Counter-Defendant-Appellant,

v.SOUTHERN HIGHLANDS COMMUNITY ASSOCIATION, Defendant-Appellee,SFR Investments Pool 1, LLC, Defendant-Counter-Claimant-Cross-Claimant-Appellee,

v.Nationstar Mortgage LLC; Bank of America, NA, Cross-Claim-Defendants-Appellants.

No. 19-15918

United States Court of Appeals, Ninth Circuit.

Filed June 3, 2021

ORDER CERTIFYING QUESTION TO THE NEVADA SUPREME COURT

Sandra S. Ikuta, Circuit Judge We ask the Nevada Supreme Court to resolve an important and open question of state law: what evidence constitutes "slight evidence of fraud, unfairness, or oppression" affecting a foreclosure sale that may be "sufficient to authorize the granting" of equitable relief, Nationstar Mortg., LLC v. Saticoy Bay LLC Series 2227 Shadow Canyon , 133 Nev. 740, 741, 749, 405 P.3d 641 (2017) (quoting Golden v. Tomiyasu , 79 Nev. 503, 515, 387 P.2d 989 (1963) ), when a homeowner's association (HOA) forecloses its superpriority lien on a residence and sells the residence at a foreclosure sale for a grossly inadequate sales price. Specifically in this case, does a mortgage protection clause in the HOA's covenants, conditions, and restrictions (CC & Rs), along with misrepresentations about the HOA's superpriority lien made to the lender in a separate proceeding, constitute such evidence?

The answer to that question is determinative here, and the decisions of the Nevada Supreme Court do not provide controlling precedent. See Nev. R. App. P. 5(a).

"We invoke the certification process only after careful consideration and do not do so lightly." Kremen v. Cohen , 325 F.3d 1035, 1037 (9th Cir. 2003). In deciding whether to certify this question to the Nevada Supreme Court, we consider: "(1) whether the question presents ‘important public policy ramifications’ yet unresolved by the state court; (2) whether the issue is new, substantial, and of broad application; (3) the state court's caseload; and (4) ‘the spirit of comity and federalism.’ " Murray v. BEJ Mins., LLC , 924 F.3d 1070, 1072 (9th Cir. 2019) (en banc) (quoting Kremen , 325 F.3d at 1037–38 ).

The question in this case has "important public policy ramifications" and is "of broad application" given that Nevada HOAs continue to initiate foreclosures based on the state's superpriority lien statute. See NRS § 116.3116 ; see, e.g. , Bank of Am., N.A. v. Hernandez , No. 2:17-CV-03108 RFB CWH, 2019 WL 1442184, at *4 (D. Nev. Mar. 31, 2019) (involving an HOA foreclosure sale based on a superpriority lien in December 2016, after the Nevada Legislature amended the HOA superpriority statute in 2015); see also Eli Segall, Despite Foreclosure Freeze, HOAs Sending Default Notices , Las Vegas Review-Journal, June 11, 2020.¹ In the spirit of comity and federalism accorded to state courts to decide important issues of state law, see Murray , 924 F.3d at 1071–72, we therefore respectfully certify this question of law to the Nevada Supreme Court under Rule 5 of the Nevada Rules of Appellate Procedure. Per Rule 5(c)(1)–(6) of the Nevada Rules of Appellate Procedure, we provide the following information for the consideration of the Nevada Supreme Court.

I

This case is one of a number of cases from Nevada involving HOAs’ foreclosures of their superpriority liens on properties in common interest communities. We begin by describing the Nevada Supreme Court's rulings on (1) whether these superpriority liens extinguish first deeds of trust and (2) whether the foreclosure of these liens can be set aside under equitable principles.

A

Since 1991, the Nevada legislature has allowed HOAs in Nevada to impose liens for past-due assessments on units subject to their CC & Rs. See NRS § 116.3116.² Subsection 1 of NRS § 116.3116 allows the HOA to place a lien on its homeowners’ residences for any delinquent HOA assessment. See NRS § 116.3116(1) (2012). Subsection 2 gives that HOA lien priority over most other liens. See NRS § 116.3116(2) (2012). The lien has two portions. The portion of the lien securing nine months of HOA dues, maintenance, and nuisance-abatement charges has priority over a first deed of trust. See NRS § 116.3116(2)(b) (2012). This portion is referred to as the "superpriority" lien, while the remainder of the lien is referred to as the "subpriority" lien. See SFR Invs. Pool 1 v. U.S. Bank , 130 Nev. 742, 754, 334 P.3d 408 (2014), superseded by statute on other grounds as stated in Saticoy Bay LLC Series 9050 W Warm Springs 2079 v. Nev. Ass'n Servs. , 135 Nev. 180, 180, 444 P.3d 428 (2019). In order to encourage lenders to finance the sale of a residence within a common interest community, HOAs frequently included mortgage protection clauses in their CC & Rs. As with the mortgage protection clause in this case, such clauses typically state that the HOA would subordinate its superpriority lien to the bank's first deed of trust. See, e.g. , U.S. Bank, N.A., Tr. for Banc of Am. Funding Corp. Mortg. Pass-Through Certificates, Series 2005-F v. White Horse Ests. Homeowners Ass'n , 987 F.3d 858, 864 (9th Cir. 2021) ( White Horse ).

After the 2008 economic downturn, when HOAs began initiating foreclosures of their superpriority liens to recover unpaid assessments, it was an open question whether a superpriority lien extinguished the first deed of trust on a property. See SFR , 130 Nev. at 749, 334 P.3d 408. Before 2014, some courts held that a superpriority lien only established a payment priority over the first deed of trust. See id. at 747–48, 334 P.3d 408 (citing cases). In other words, the superpriority portion of the lien had to be paid when the first deed of trust was foreclosed, but it did not extinguish the first deed of trust. See Bayview Loan Servicing, LLC v. Alessi & Koenig, LLC , 962 F. Supp. 2d 1222, 1225 (D. Nev. 2013). Because of the uncertainty regarding whether HOA foreclosures extinguished first deeds of trust, investors bought residences at HOA foreclosure sales for roughly the amount of the HOA's liens. See id. at 1226. As one federal district court explained, "[i]f investors believed that HOA foreclosures extinguished first mortgages, homes sold at HOA foreclosure sales would sell for significant fractions of their fair market value, not for the tiny fractions of their fair market value approximating the HOA lien at which HOA-foreclosed homes invariably sell." Id. This behavior indicated that "the real estate community in Nevada clearly underst[ood] the statutes" as establishing only a payment priority. Id. It was not until 2014, two years after the foreclosure in this case, that the Nevada Supreme Court authoritatively ruled that an HOA's foreclosure of the superpriority component of the lien would extinguish a first deed of trust. See SFR , 130 Nev. at 743, 334 P.3d 408.

After this ruling, lenders began arguing that HOA foreclosure sales should be set aside under equitable principles. See, e.g. , U.S. Bank, N.A. v. Queen Victoria #1720-104 NV W. Servicing LLC , No. 2:13-CV-01679-GMN, 2015 WL 419836, at *1 (D. Nev. Jan. 5, 2015). They argued that under longstanding Nevada Supreme Court precedent, courts have "the power, in an appropriate case, to set aside a defective foreclosure sale on equitable grounds." See Shadow Wood Homeowners Ass'n v. N.Y. Cmty. Bancorp., Inc. , 132 Nev. 49, 58, 366 P.3d 1105 (2016) (citing Golden , 79 Nev. at 514, 387 P.2d 989 ). Golden first set forth the two-prong test for analyzing this issue: a foreclosure sale may be set aside where there is "inadequacy of price" along with "proof of some element of fraud, unfairness or oppression as accounts for and brings about the inadequacy of price." 79 Nev. at 504, 387 P.2d 989 ; see also Long v. Towne , 98 Nev. 11, 13, 639 P.2d 528 (1982) ("Mere inadequacy of price is not sufficient to justify setting aside a foreclosure sale, absent a showing of fraud, unfairness or oppression.").

Shadow Wood confirmed that Golden applied in the HOA foreclosure sale context. See Shadow Wood , 132 Nev. at 58, 366 P.3d 1105. In Shadow Wood , the HOAs argued that Golden did not apply because, in their view, all post-sale challenges to foreclosure sales were barred under NRS § 116.31166. Id. at 51, 366 P.3d 1105. Shadow Wood held that this statute did not disrupt a court's equitable power to consider quiet title actions. Id. at 57, 366 P.3d 1105. Shadow Wood then reiterated the two-part test from Golden : to set aside an HOA foreclosure sale on equitable grounds, the lender must show that "an association sold a property at its foreclosure sale for an inadequate price" and "there must also be a showing of fraud, unfairness, or oppression." Id. at 60, 366 P.3d 1105. Considering the second prong of this test, Shadow Wood indicated that if communications from the HOA and its agents "rose to the level of misrepresentations and nondisclosure" which prevented the lender's ability to cure the default, they "might support setting aside the sale." Id. at 62, 366 P.3d 1105.

Soon after Shadow Wood affirmed that Golden applied to HOA foreclosures, the Nevada Supreme Court further clarified how the test applies in this context in Shadow Canyon , 133 Nev. at 741, 405 P.3d 641. Shadow Canyon suggested that the two-part test included a sliding scale: "where the inadequacy of the price is great, a court may grant relief based on slight evidence of fraud, unfairness, or oppression." Id. (emphasis added) (citing Golden , 79 Nev. at 514–15, 387 P.2d 989 ). Again focusing on the second part of the test, Shadow Canyon provided a nonexhaustive list of "irregularities that may rise to the level of fraud, unfairness, or oppression." Id. at 749 n.11, 405 P.3d 641. One such irregularity was "an HOA's representation [to a lender] that the foreclosure sale will not extinguish the first deed of trust." Id . In making this observation, the Nevada Supreme Court relied on a case from a federal district court in Nevada, ZYZZX2 v. Dizon , ...