HOA Lien Priority

This article has been reproduced here from the March 2016 publication of Clarks’ Secured Transactions Monthly.

Click here to read the full article written by Stefanie Sharp, a real estate finance Partner at Robison, Belaustequi, Sharp & Low.

Landlords and Property Managers Have New Eviction Tools

The 2015 Legislature amended the unlawful detainer-eviction procedures in Nevada Revised Statutes Chapter 40. The amendments provide landlords and property managers of dwellings (not commercial) additional tools for terminating occupancy by a defaulting tenant. The changes are found in Senate Bill 484 effective October 1, 2015 which also enacted new criminal and civil statutes to deal with unauthorized occupants (squatters).

Summary Eviction expanded: An important change was made to the summary eviction (NRS 40.253) for dwelling units only; not available for commercial property. Currently, the summary eviction process is available only for failure to pay rent by the landlord providing the tenant with a five-day notice to quit or pay rent. As revised NRS 40.253 enables the landlord to use the same summary eviction process if the tenant fails to leave the premises at the end of the term of the lease, or at the end of a periodic tenancy, or if the tenant breaches or violates any lease provision or commits waste.

Chapter 40 notices: Another change which is helpful to the landlord and landlord’s agents is a modification of the service of notice provisions in Chapter 40. Prior to October 1, 2015, if any Chapter 40 notice was served on a tenant it required two persons to sign the return of service — the signature of the person delivering the notice and a witness. That statute has been changed to eliminate the witness to the service if the service is done by sheriff, constable, or licensed process server.

Landlord’s Agent; Dwelling unit: Another subtle change is the addition of a definition of “landlord’s agent” who is someone hired or authorized by the property owner to manage or rent a dwelling unit, or who is an agent for service of process, or is a licensed property manager. The definition is important because the Landlord’s Agent is authorized to exercise the new remedies for the owner. A new definition of a “dwelling unit” was added which defined a dwelling unit as a structure occupied or intended for occupancy as a residence or sleeping place by one person who maintains a household, or two or more persons who maintain a common household.

New Crimes: New crimes were added to NRS Chapter 205 to deal with squatters. The crimes are (1) housebreaking or breaking into an uninhabited dwelling; (2) unlawful occupancy — knowingly residing in a home without permission of the owners; and (3) unlawful re-entry of an uninhabited dwelling without authority of the court or permission of the owner after having been arrested or removed for housebreaking or for unlawful occupancy, when the homeowner has changed the locks or obtained an order of removal of an occupant who is guilty of forcible entry or forcible detainer.

New Civil Remedies: The old definitions of “forcible entry” and “forcible detainer” were modified basically to match the elements of the criminal offenses of housebreaking and unlawful occupancy.

New civil remedies were provided to owners and property managers to deal with squatters. If an unauthorized occupant has been arrested and removed for housebreaking or unlawful entry, the homeowner is permitted to take possession of and secure the property by changing the locks or otherwise securing the property. Note this remedy is only available if the premises are vacant, that is, the squatter has been removed. There are statutory notices that must be posted if the owner, or landlord’s agent uses this remedy.

The second new remedy creates a civil process for the property owner or authorized agent, to seek an order for removal of a squatter who is guilty of forcible entry or forcible detainer. Basically, if there is an unauthorized occupant of a dwelling unit who refuses to move out and remains in possession by violence or threat of violence, or has obtained possession by violence or threat of violence, the dwelling unit owner or authorized agent can send a notice to vacate within four (4) judicial days after receiving the written notice, or file an affidavit stating the reason the occupant is not guilty of forcible entry or forcible detainer. If there is no voluntary surrender or the occupant files an affidavit then the owner files a complaint for eviction. If the court determines the occupant is guilty of forcible entry or forcible detainer, the court issues an order for removal or non-admittance for execution by the sheriff within twenty-four (24) hours after receipt of the order.

All of these new remedies require notices to be posted by the owner or its authorized agent and provides the unauthorized occupant the right to contest and to have his personal property secured by the landlord if the locks are changed. If personal property is not claimed in 21 days and no complaint for reentry is filed by the displaced occupant the personal property can be sold.

Conclusion: Property owners who have rental dwelling units, property managers, and other authorized agents of dwelling unit should examine the SB 484 in detail and become familiar with the new procedures to adequately take advantage of its benefits.

Pro Bono Services

The firm is pleased to announce a significant and favorable result in one  of the firm’s substantial involvement in pro per lawyer services. Therese Shanks agreed to represent an indigent prisoner (David Abarra) who for disciplinary reasons had been deprived access to his former job in the law library serving as law clerk for various inmates.

The First Judicial District entered an Order of Dismissal on Mr. Abarra’s complaint challenging the disciplinary decision made by prison officials. Therese appealed the District Court’s decision resulting in the Nevada Supreme Court’s reversal of the District Court’s decision.

The firm is proud of the extraordinary services performed by Therese which is only an example of the firm’s contribution of pro bono services within the State of Nevada. The appeal of this indigent’s claim required substantial labor, effort, and appellate acumen, including oral argument before the Nevada Supreme Court.

The firm congratulates Therese and commends her for extraordinary services to the needs of pro bono litigants.

A Cautionary Tale – Beware the Nevada Homeowners Association

Lenders who fail to pay delinquent Homeowners Association (“HOA”) dues and fees risk losing their collateral. That was the lesson the Nevada Supreme Court taught a lender who relied on the presumption that the HOA’s lien established only a payment priority between the lender and the HOA in SFR Investments Pool 1, LLC, a Nevada limited liability company v. U.S. Bank, a National Association as Trustee for the Certificate Holders of the Banc of America Mortgage Pass-Through Certificates, Series 2008-A, 130 Nev. Advance Opinion 75 (September 18, 2014) (the “SFR Case”). Prior to the decision of the Nevada Supreme Court in the SFR Case, it was generally accepted that the HOA’s foreclosure extinguished the borrower’s title and interest in the property; however, the issue of whether the lien of the first priority deed of trust was also extinguished had not been determined.

The Decision In SFR


The fact pattern in the SFR Case presented a typical non-performing residential mortgage loan scenario. The homeowners defaulted under their loan and also failed to pay their HOA dues.

Both the HOA and the lender initiated separate trustee’s sale proceedings. The lender took no action to pay the delinquent amounts owed to the HOA. The HOA completed their sale first. SFR Investments Pool 1, LLC (“SFR”) was the successful bidder at the HOA’s trustee’s sale. Thereafter, it received and recorded a Trustee’s Deed Upon Sale reciting compliance with all applicable notice requirements.

Days before the lender’s trustee’s sale, SFR filed suit for quiet title and to enjoin the sale. SFR contended that the foreclosure of the HOA lien by power of sale extinguished the lien of the lender’s first priority deed of trust and vested clear title in SFR. Therefore, the lender had nothing to foreclose.

The Nevada Supreme Court agreed.

The Court held that Nevada’s version of the Uniform Common Interest Ownership Act of 1982 1 (the “Nevada HOA Act”) provides HOAs with a “superpriority” lien. The “superpriority” portion of the lien consists of maintenance and nuisance abatement charges and the last 9 months of unpaid assessments for common expenses (HOA dues) 2. This “superpriority” portion is senior to the lien of a first priority deed of trust. The remainder, the HOA’s “subpriority” lien, consisting of all other HOA fees or assessments, is subordinate to the lien of the first priority deed of trust.

The Court also found that the Nevada HOA Act permits an HOA to foreclose both its “superpriority” and “subpriority” liens by non-judicial foreclosure, subject to the special notice requirements and protections provided for in the Nevada HOA Act.

The argument by the lender that its due process rights were violated by the non-judicial foreclosure was rejected by the Court. The Court also quickly dispensed with the lender’s argument that the “mortgage savings clause” in the Covenants Conditions and Restrictions (CC&Rs) subordinated the HOA lien to the lien of the first priority deed of trust, holding that the “mortgage savings clause” was invalid because the Nevada HOA Act did not allow for waiver or modification of its provisions related to liens.

The overall tone of the Court in the opinion was that the lender, by “sitting on its hands,” created its own inequity. The lender could have taken steps to protect its own interests by requesting that it be provided with HOA notices of default and sale, escrowing the HOA dues and fees or paying off the HOA lien.

Certain arguments and issues were not presented or addressed in the SFR Case. The Court did not address the effect of an improperly noticed HOA non-judicial foreclosure sale and/or if improper notice renders such sale invalid. The result in the case might also have been different had the lender requested the amount to pay off the lien from the HOA with either no response from the HOA or a refusal by the HOA to provide the information or accept payment. HOAs have been known to assert that they are not required to provide a lien release amount and/or allow a lender to tender payment.

The commercial reasonableness of the HOA sale also did not present itself in the SFR Case. The typical fact pattern occurring in these HOA foreclosure sale scenarios is that an investor group will acquire the property for a very low price – between $5,000 and $10,000 – a fraction of the fair market value.

The Federal Court Weighs In


Shortly after the decision of the Nevada Supreme Court in the SFR Case, the United States District Court for the District of Nevada addressed the HOA lien priority issue in a case involving a residential mortgage loan insured by HUD through the Single Family Mortgage Insurance Program (the “FHA”) 3. The District Court held that the foreclosure of an HOA’s lien did not extinguish the lien of the first priority deed of trust securing an FHA insured loan. Federal, not state, law applied in cases involving FHA insured mortgages “to assure the protection of the federal program against loss, state law to the contrary notwithstanding 4.”

When a mortgage is insured by a federal agency under the FHA insurance program, state laws cannot operate to undermine the federal agency’s ability to obtain title after foreclosure and resell the property 5. An HOA would generally be able to conduct a foreclosure pursuant to the Nevada HOA Act that would extinguish the first priority deed of trust, however such a foreclosure in the case of an FHA insured loan would “operate[ ] to impede or condition the implementation of federal policies and programs” and “must yield under the supremacy clause of the Constitution to the interests of the federal government.” 6 Therefore, the HOA’s foreclosure was invalid under the United States Constitution and did not extinguish the lien of the first priority deed of trust securing the FHA insured mortgage loan.

This decision is at the trial court level and may not be cited as controlling, although it may be cited in future cases as persuasive. It should not be relied upon by lenders as a basis for not taking steps (see discussion below) to protect against an HOA foreclosure. It is unknown if the Nevada Federal Courts would extend the reasoning in this case to loans held by Freddie Mac or Fannie Mae.

Implications & Protective Measures


The decision in the SFR Case has implications for both borrowers and residential mortgage lenders in Nevada. Lenders left with large unsecured loans will look to borrowers to collect the large deficiency. Underwriting and structuring of residential mortgage loans in Nevada will also need to be carefully reviewed by lenders.

It is highly recommended that lenders participating in residential lending in Nevada take additional steps to protect their security for loans secured by property in common interest ownership developments.

Lenders should seriously consider escrowing HOA dues and/or assessments for all new loans of this type. At the time of origination the lender should record a Request for Common Interest Community Association & Homeowner’s Association: (1) Notices of Default and Notices of Sale; (2) Notices of Delinquent Assessments; (3) Notices of Delinquent Maintenance and Nuisance Abatement Charges; and (4) Request for Duplicate Statements. A Notice to Common Interest Community Association of Mortgage Lien with Notification of Contact Information Pursuant to NRS 116.310312, Request for Notices of Default and Notices of Sale Pursuant to NRS 116.31168 & Request for Copies of Billing Statements and Invoices should also be sent directly to the HOA. It is also recommended that lenders verify on a quarterly basis that all HOA dues, fees and assessments are paid current.

For existing residential mortgage loans of this type, it is strongly recommended that the two forms be completed, sent and recorded and that the lender verify on a quarterly basis that all HOA dues, fees and assessments are paid current. Depending on the borrower’s payment and performance history, escrowing common interest dues and assessments should also be considered.

In the case of a default under this type of residential mortgage loan, the lender should immediately take the forgoing steps to protect its interests if it has not already done so. Additionally, the lender should contact the HOA to verify if the borrower is current. A protective advance should be made to cure any delinquencies and the lender should take the steps necessary to ensure the dues are kept current until the borrower cures or the lender completes its foreclosure.

Future Developments?


The issues surrounding, and the implications of, the decision in the SFR Case are far from resolved. The next bi-annual session of the Nevada Legislature commences on February 2, 2015. Various groups are already lobbying for legislation to modify the provisions of the Nevada HOA Act to provide lenders with additional protections from the foreclosure of an HOA lien. As noted above, there are also unresolved issues not addressed in the SFR Case, a fact which is highlighted by the decision of the United States District Court for the District of Nevada discussed in this article. The decision in the SFR Case is the first step in addressing one of the many issues confronting residential mortgage lenders since the housing crisis.

Notes:

  1. Chapter 116 of Nevada Revised Statutes
  2. If federal regulations adopted by the Hederal Home Loan Mortgage Corporation or the Federal National Mortgage Association required a shorter period of priority for the lien, the period during which the HOA lein is prior to the first priority deed of trust muyst be determined in accordance with those federal regulations, the period of priority for the lien must not be less than the 6 months immediately preceding institution of an action to enforce the lien
  3. Washington & Sandhill Homeowner’s Association v. Bank of America and HUD, 2014 WL 4798565 (U.S. District Court D. Nevada 2014). This decision was issued on September 25, 2014.
  4. Citing United States v. Stadium Apartments, Inc., 425 F.2c 358, 362 (9th Cir. 1970); United States v. View Crest Garden Apartments, Inc., 268 F.2d 380, 383 (9th Cir. 1959); and United States v. Victory Highway Vill., Inc., 662 F.2d 488, 497 (8th Cir. 1981).
  5. Citing Rust v. Johnson, 597 F.2d 174, 179 (9th Cir. 1979)
  6. Citing Rust, F.2d. at 179.

Barry Breslow

Barry Breslow was recently voted in as Chairman of Nevada’s Commission for Common Interest Communities and Condominium Hotels. He was appointed, by Governor Sandoval, to fill the attorney vacancy on Nevada’s seven-person Commission in 2011. The Commission meets quarterly and is tasked with various responsibilities involving the application of Nevada law and regulations which govern Homeowner associations and community managers. It is a three-year appointment.

Chambers & Partners Ranking

Chambers & Partners ranked two members, Kent Robison and DeArmond Sharp, as being among the top lawyers in the state. Chambers & Partners, the publisher of the widely-utilized, annual directory for the legal profession in America, Chambers USA, conducts independent and objective research, interviewing thousands of lawyers and their clients. By way of that research, Chambers & Partners identified Ken Robison and DeArmond Sharp as top ranked lawyers in Nevada.

Kent Robison was ranked in the first band for Nevada Litigation Attorneys. Sources describe Kent as “so persuasive, he relates well to jurors, and is adept in all phases of a trial.” DeArmond Sharp was recognized as a notable practitioner in the area of Real Estate Law. He was described as “always having a good perspective on the issues, both from the pure transactional as well as the litigation side.”

Top 40 Under 40 Litigation Lawyers

The American Society of Legal Advocates has named Michael A. Burke as one of the Top 40 Under 40 Litigation lawyers in the State of Nevada for 2014

The American Society of Legal Advocates (“ASLA”) is an invitation-only, nationwide organization of elite lawyers. ASLA draws it’s membership from lawyers who combine stellar legal credentials with a proven commitment to community engagement and the highest professional standards. ASLA limits it’s membership to less that 1.5% of all licensed lawyers nationwide.

According to ASLA, the Top 40 Lawyers Under 40 list “identifies and recognizes lawyers demonstrating leadership and talent early on in their careers, not only in their practice, but in exemplifying the characteristics that will demonstrate the best that the legal profession has to offer.”

Kent Robison has received Best Lawyers recognition-20 years

Best Lawyers has become universally regarded as the definitive guide to legal excellence. Because Best Lawyers is based on an exhaustive peer-review survey in which almost 50,000 leading attorneys cast nearly five million votes on the legal abilities of other lawyers in their practice areas, and because lawyers are not required or allowed to pay a fee to be listed, inclusion in Best Lawyers is considered a singular honor. Corporate Counsel magazine has called Best Lawyers“the most respected referral list of attorneys in practice”.

Kent Robison has received this recognition for over 20 years and has also received the highest designation of the Bet-the-Company Litigation, Commercial Litigation and Personal Injury Litigation. DeArmond Sharp has also received the Best Lawyers in America designation for over 20 years in Real Estate Law and Corporate Law. Keegan Low has received Best Lawyers in America designation in Commercial Litigation and Litigation – Real Estate. (Copyright 2013 by Woodward/White, Inc., Aiken, SC).

Ninth Circuit Court of Appeals grants absolute immunity from Civil Rights Lawsuits to Nev. State Board of Medical Examiners

The Ninth Circuit Court of Appeals publishes a landmark opinion affirming the finding of absolute immunity from Civil Rights lawsuits, the Nevada State Board of Medical Examiners, an RBSL client.

The Ninth Circuit Court of Appeals published an Opinion affirming the Order of the United States District Court dismissing a lawsuit against The Nevada State Board of Medical Examiners, an RBSL client. Michael Sullivan, Barry Breslow, and Frank Gilmore represented the Board in front of the Ninth Circuit and the District Court. The lawsuit arose when a Nevada physician filed a Complaint alleging violations of his civil rights when the Board suspended his right to prescribe, administer, and dispense controlled substances. On behalf of the Board, RBSL filed a Motion to Dismiss, arguing that federal law immunizes the Board from civil rights lawsuits, and, additionally, that the federal court should abstain from hearing the case, pending a formal hearing in front of the Board through Nevada’s Administrative Procedures Act. RBSL argued that the doctrine of “absolute immunity” precluded physicians from suing the Board for violations of civil rights. Citing an analogy to the immunity enjoyed by Judges and Prosecutors, RBSL argued that the function of the Board is “judicial or quasi-judicial”, and, as such, the Board should be absolutely immune from lawsuits under 28 U.S.C. 1983.

In the landmark opinion, the Ninth Circuit determined that the Board and it’s individual members are immune from civil rights lawsuits seeking damages. The Court adopted, for the first time, RBSL’s argument that the Federal Courts should abstain from exercising jurisdiction while a parallel action is pending at the state level pursuant to Nevada’s Administrative Procedures Act. Relying on the United States Supreme Court case of Younger v. Harris, 401 U.S. 37 (1971), RBSL argued that the District Court properly dismissed the case under the Younger Abstention Doctrine. The Ninth Circuit agreed, finding that all four elements of the Younger Doctrine were present: (1) the Board’s administrative hearings were a “state action” that were judicial in nature, (2) the proceedings were ongoing, (3) the administrative hearings implicated an important state interest, and (4) the pending administrative proceedings afforded the plaintiff an adequate remedy. The landmark opinion on the application of the Younger Abstention Doctrine has already proved to be an effective shield against future lawsuits by physicians who improperly bring federal lawsuits without having first exhausted their available Administrative procedures.

The Ninth Circuit followed up the published opinion with an Order affirming the dismissal of a similar lawsuit brought by a Nevada physician who was disciplined for conduct which “brings the medical profession into disrepute”. The Court again confirmed the prior holding that when state administrative proceedings are ongoing, and the state proceedings are capable of providing a suitable remedy for the harm alleged, the federal courts should refrain from exercising jurisdiction in deference to parallel proceedings at the state level.

BRESLOW APPOINTED TO THE COMMISSION FOR COMMON-INTEREST COMMUNITIES AND CONDOMINIUM HOTELS

Barry Breslow was recently appointed by Governor Sandoval to fill the attorney vacancy on Nevada’s seven-person Commission for Common-Interest Communities and Condominium Hotels created by NRS chapter 116.600. The Commission meets quarterly and is tasked with various responsibilities involving the application of Nevada law and regulations which govern Homeowner associations and community managers. It is a three-year assignment.