Wells Fargo Bank, N.A. v. Mahogany Meadows Ave. Trust

• Decision Date: 05 November 2020
• Docket Number: No. 18-17320,18-17320
• Citation: 979 F.3d 1209
• Parties: WELLS FARGO BANK, N.A., Plaintiff-Appellant, v. MAHOGANY MEADOWS AVENUE TRUST, Defendant-Appellee, and Copper Creek Homeowners Association ; Hampton & Hampton Collections, LLC, Defendants.
• Court: U.S. Court of Appeals — Ninth Circuit

979 F.3d 1209

WELLS FARGO BANK, N.A., Plaintiff-Appellant,

v. MAHOGANY MEADOWS AVENUE TRUST, Defendant-Appellee,andCopper Creek Homeowners Association ; Hampton & Hampton Collections, LLC, Defendants.

No. 18-17320

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 12, 2020 Pasadena, California

Filed November 5, 2020

Andrew M. Jacobs (argued), Snell and Wilmer LLP, Phoenix, Arizona; Kelly H. Dove, Snell and Wilmer LLP, Las Vegas, Nevada; for Plaintiff-Appellant.

Michael F. Bohn (argued), Law Offices of Michael F. Bohn, Henderson, Nevada, for Defendant-Appellee.

Before: Mary H. Murguia and Eric D. Miller, Circuit Judges, and George Caram Steeh III,^* District Judge.

MILLER, Circuit Judge:

Nevada law gives a homeowners association (HOA) a superpriority lien on properties within the association for certain unpaid assessments. By foreclosing on a property, an HOA can extinguish other liens, including a first deed of trust held by a mortgage lender. We are asked to decide whether this scheme effects an uncompensated taking of property or violates the Due Process Clause. We conclude that it does not.

I

Many residential developments include amenities that are held in common by owners of property within the development and managed by an HOA. See generally Nahrstedt v. Lakeside Vill. Condominium Ass'n , 8 Cal.4th 361, 33 Cal.Rptr.2d 63, 878 P.2d 1275, 1279–84 (1994). To maintain those amenities, HOAs may levy assessments on their members.

Nevada Revised Statutes section 116.3116 grants an HOA a lien on its members’ residences for certain unpaid assessments and charges. Nev. Rev. Stat. § 116.3116(1). (All statutory references are to the version in effect in 2013.) Of particular relevance here, section 116.3116 grants superpriority status to a portion of the HOA lien—specifically, the portion that "consists of the last nine months of unpaid HOA dues and any unpaid maintenance and nuisance-abatement charges." Bank of Am., N.A. v. Arlington W. Twilight Homeowners Ass'n , 920 F.3d 620, 622 (9th Cir. 2019) (per curiam); Nev. Rev. Stat. § 116.3116(2). With only a few exceptions, the superpriority portion of the lien "is superior to all other liens on the property, including the first deed of trust held by the mortgage lender." Arlington W. , 920 F.3d at 622 ; accord SFR Invs. Pool 1, LLC v. U.S. Bank, N.A. , 130 Nev. 742, 334 P.3d 408, 410 (2014). "This means that an HOA can extinguish the first deed of trust by foreclosing on its superpriority lien." Arlington W. , 920 F.3d at 622.

In 2008, Luis Carrasco and Janet Kongnalinh purchased a house in Las Vegas that was within the Copper Creek HOA and subject to its covenants, conditions, and restrictions, including an obligation to pay dues and other assessments to the HOA. They financed the purchase with a loan from Wells Fargo, N.A., and to secure the loan, they recorded a deed of trust in favor of Wells Fargo. About three years later, Carrasco and Kongnalinh fell behind on their HOA dues, and the HOA recorded a lien for the delinquent assessments. The HOA ultimately foreclosed on the property to satisfy its lien, and in 2013, Mahogany Meadows Avenue Trust purchased the property at a public auction for $5,332, extinguishing Wells Fargo's deed of trust.

Wells Fargo then brought this quiet-title action against Mahogany Meadows, the HOA, and the HOA's agent. Wells Fargo sought a declaration that the foreclosure sale was invalid and that Wells Fargo's deed of trust "continues as a valid encumbrance against the Property," which was then worth approximately $200,000. Wells Fargo asserted that section 116.3116 violates the Takings Clause and the Due Process Clause.

The district court dismissed Wells Fargo's complaint for failure to state a claim. First, as to the takings claim, the district court relied on Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortgage, a Division of Wells Fargo Bank, N.A. , 133 Nev. 28, 388 P.3d 970, 975 (2017), in which the Nevada Supreme Court held that "the extinguishment of a subordinate deed of trust through an HOA's nonjudicial foreclosure does not violate the Takings Clause[ ]." Second, as to the due-process claim, the district court determined that Wells Fargo received actual notice of the delinquent assessment and the foreclosure sale, and it concluded that the notice to Wells Fargo was sufficient to satisfy due process.

Wells Fargo moved for reconsideration, arguing for the first time that because Carrasco was an active-duty member of the Army Reserve, the foreclosure sale violated the Servicemembers Civil Relief Act, 50 U.S.C. § 3953. The district court denied reconsideration because Wells Fargo did not explain why it was unable to discover Carrasco's status earlier.

II

As the district court noted, the Nevada Supreme Court has held that section 116.3116 does not violate the Takings Clause. See Saticoy Bay , 388 P.3d at 975. Although we give respectful consideration to that decision, we are not bound by a state court's resolution of a federal constitutional question but instead consider the question de novo. See William Jefferson & Co. v. Bd. of Assessment & Appeals No. 3 ex rel. Orange County , 695 F.3d 960, 963 (9th Cir. 2012). We also review the district court's grant of a motion to dismiss de novo. Sonoma Cnty. Ass'n of Retired Emps. v. Sonoma County , 708 F.3d 1109, 1115 (9th Cir. 2013). We agree with both the Nevada Supreme Court and the district court, and we conclude that Wells Fargo has not suffered an uncompensated taking.

The Takings Clause of the Fifth Amendment, made applicable to the States through the Fourteenth Amendment, provides: "[N]or shall private property be taken for public use, without just compensation." U.S. Const. amend. V ; see Chicago, B. & Q.R. Co. v. Chicago , 166 U.S. 226, 247, 17 S.Ct. 581, 41 L.Ed. 979 (1897). The Supreme Court has long recognized that contingent interests in property, including liens such as Wells Fargo's deed of trust, constitute "property" under the Takings Clause. See United States v. Security Indus. Bank , 459 U.S. 70, 76, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982) ; Armstrong v. United States , 364 U.S. 40, 48, 80 S.Ct. 1563, 4 L.Ed.2d 1554 (1960) ; Louisville Joint Stock Land Bank v. Radford , 295 U.S. 555, 602, 55 S.Ct. 854, 79 L.Ed. 1593 (1935). Although "[t]he ‘bundle of rights’ which accrues to a secured party is obviously smaller than that which accrues to an owner in fee simple," the Court has rejected "the proposition that differences such as these relegate the secured party's interest to something less than property." Security Indus. Bank , 459 U.S. at 76, 103 S.Ct. 407.

At first glance, Wells Fargo's theory appears straightforward. A lien is property; Wells Fargo once had a lien; the HOA's foreclosure sale extinguished that lien; and Wells Fargo was not paid compensation. Wells Fargo argues that it suffered "a complete ouster of a property interest" that constitutes "a per se , physical taking." Because Wells Fargo's lien was an intangible interest, we are not sure that it makes sense to apply the analysis applicable to physical takings, as opposed to the regulatory-takings analysis of Penn Central Transportation Co. v. New York City , 438 U.S. 104, 98 S.Ct. 2646, 57 L.Ed.2d 631 (1978).

We need not dwell on that question, however, because under any analysis, Wells Fargo's theory quickly encounters a problem: identifying exactly what action constituted the taking. The most obvious candidate is the foreclosure proceeding, but Wells Fargo does not argue that the foreclosure was a taking, and with good reason. The Takings Clause governs the conduct of the government, not private actors. See Landgraf v. USI Film Prods. , 511 U.S. 244, 266, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994). The Copper Creek HOA, which conducted the foreclosure here, is not an arm of the State of Nevada.

The Supreme Court has held that "[p]rivate use of state-sanctioned private remedies or procedures does not rise to the level of state action." Tulsa Prof'l Collection Servs., Inc. v. Pope , 485 U.S. 478, 485, 108 S.Ct. 1340, 99 L.Ed.2d 565 (1988). So although the HOA's action was authorized by Nevada law, that authorization "does not transmute it into government action sufficient for the Fifth Amendment." Broad v. Sealaska Corp. , 85 F.3d 422, 431 (9th Cir. 1996) ; accord Apao v. Bank of N.Y. , 324 F.3d 1091, 1095 (9th Cir. 2003) (nonjudicial foreclosure authorized by Hawaii law was not state action); Charmicor v. Deaner , 572 F.2d 694, 695 (9th Cir. 1978) (trustee's sale authorized by Nevada statute was not state action). Indeed, in considering a due-process challenge to section 116.3116, we held that although the Nevada Legislature's enactment of the statute was state action, "the foreclosure sale itself is a private action." Bourne Valley Court Trust v. Wells Fargo Bank , 832 F.3d 1154, 1160 (9th Cir. 2016).

Wells Fargo therefore focuses not on the foreclosure proceeding, but on the enactment of section 116.3116. Here, however, its theory encounters a different problem: Section 116.3116 was enacted in 1991; the HOA's covenants, conditions, and restrictions, which created the obligation to pay dues, were recorded in 2003; and both of those things had happened before 2008, when Wells Fargo acquired its lien. The interest Wells Fargo is asserting—that is, the right to maintain its lien unimpaired by a later HOA lien—was "not part of [its] title to begin with." Lucas v. South Carolina Coastal Council , 505 U.S. 1003, 1027, 112 S.Ct. 2886, 120 L.Ed.2d 798 (1992). When " ‘background principles’ of state law already serve to deprive the property owner" of the interest it claims to have been taken, it cannot assert a claim under the Takings Clause. Esplanade Props., LLC v. Seattle , 307 F.3d 978, 985 (9th Cir. 2002) (quoting Lucas , 505 U.S. at 1029, 112 S.Ct. 2886 ). The State cannot take what the owner never had.

The Supreme Court applied that principle in Security Industrial Bank , in which it...