Bourne Valley decision

The 9th Circuit, via a three-judge panel, issued an Opinion vacating a lower federal district court’s grant of Summary Judgment to Bourne Valley Court Trust (“Bourne Valley”). This reversal of the Summary Judgment was based on the panel’s finding that NRS 116's so-called “opt-in” notice scheme was unconstitutional as it violates federal due process protections to lenders similarly situated to Wells Fargo. The decision may have far-reaching implications across the landscape of HOA foreclosure law. In order to provide context for the decision, and to quell any rumors or misconceptions about the nature, extent, and effect of this decision, we are preparing for our clientele this analysis of the case. This analysis will consider the legal concepts underlying and informing the judges’ decision, and it will speculate as to the likely outcomes in current live cases in both state and federal court. This analysis will also consider potential “fallout” from the decision, as well as take a look at some contrary authority that can limit the impact of this decision somewhat.

Analysis of the Holding
The issue in Bourne Valley was simple: is NRS 116's notice provision facially unconstitutional? Wells Fargo’s basic argument was that because NRS 116.31163(2) appears to require that first deed holders such as Wells Fargo request notice of the pendency of an HOA lien and foreclosure (a so-called “opt-in” notice structure), this violates Wells Fargo’s due process rights. In other words, Wells Fargo, as the holder of a first deed of trust, should not have to request notice, but notice should be automatic.

Bourne Valley’s argument was twofold. First, that NRS 116's notice provision does not apply to Wells Fargo as a first deed holder, but to other claimants on title (such as those in lower priority). Second, that NRS 116 incorporates the language of NRS 107.090, which governs the notice required and to whom such notice must be sent in other types of foreclosures.

The court rejected Bourne Valley’s defense and found the notice provision of NRS 116 to be opt-in, and thus facially unconstitutional.

In reaching this conclusion, the court relied on two concepts of law. First, that Bourne Valley’s reliance on the incorporation of NRS 107.090 would have rendered certain other portions of NRS 116 (most notably NRS 116.31163(2)) superfluous and without effect. This would violate a canon of statutory interpretation, and thus the court rejected Bourne Valley’s argument.

Second, the court found that the test for a facially unconstitutional statute had been met. This test requires two elements to find a statute facially unconstitutional: 1- the deprivation of a constitutional right or privilege, caused by the exercise of a right or the imposition of a rule created by the State; and 2- that the person charged with the deprivation may fairly be said to be a state actor. NRS 116, as the court held, is obviously in line with the first element. It is a right or privilege created by the State (NRS 116 grants to HOAs in Nevada the right to foreclose non-judicially) that leads to a deprivation of the rights of another (first deed holders’ rights of notice, and of due process). The court then found that because Nevada HOAs were foreclosing on properties under color of NRS 116, such HOAs are now state actors.

The opinion and holding was reached by a 2-1 vote of the three-judge panel. The opposing judge, Judge John Wallace, wrote a lengthy and detailed dissent of the majority opinion. Judge Wallace’s arguments attack the majority’s reliance on one statutory interpretation canon at the expense of another, questions the majority’s opinion that Nevada HOAs are state actors, and argues that Wells Fargo did in fact receive notice, satisfying due process.

First, Judge Wallace questions why the majority would choose to ignore NRS 116's incorporation of the notice provisions of NRS 107.090, with the result of finding NRS 116.31163(2) unconstitutional. This, he argues, is contrary to another canon of statutory interpretation: constitutional avoidance. Under this concept, judges are expected to interpret statutes in a way that saves them from being rendered unconstitutional if there is a reasonable interpretation to that effect. So follows the argument that by deciding to find NRS 116.31163(2) unconstitutional where the incorporation of NRS 107.090 would have saved that provision (as argued by Bourne Valley), the majority has ignored one canon of interpretation in favor of the other, rather than adopting the outcome that would have observed both canons.

Second, Judge Wallace argues that not only has there been no overt action by a state actor, but that the majority ignored/missed this inquiry entirely. Instead, he argues, the majority incorporates both requirements into one- that because the State passed NRS 116 that arguably degraded Wells Fargo’s due process rights, that itself is both the state action and the state actor. Furthermore, Judge Wallace argues that the state action portion is defective as applied to Wells Fargo as well. This is because the statute at issue was passed before Wells Fargo ever had an interest in the property, thus Wells Fargo was on notice (or should have been on notice) of this statutory scheme.

Continuing, Judge Wallace also argues that the majority misapplied the relevant case law in reaching its holding. This argument is not stating so much that the majority misapplied the case law, but that it failed to acknowledge it entirely. Judge Wallace lists numerous cases from the 9th Circuit that clearly defined what a “state actor” is, and then illustrates how none of those definitions are applicable to Bourne Valley. He even cites to one case where a creditor, acting under the authority of a state statute to conduct a non-judicial foreclosure sale, was held not to have been a state actor. In essence, Judge Wallace argues in his dissent that a strong history of both 9th Circuit and U.S. Supreme Court precedent indicate that non-judicial foreclosures do not have sufficient “overt official involvement” to be state actions.

Judge Wallace’s final point highlights that Wells Fargo did in fact receive notice of the action against its interest. This is a bit of a subjective argument, as it relies on the bedrock of due process: notice reasonably calculated to apprise the lender of the action against its interest, and afford it an opportunity to protect itself. While Judge Wallace makes several salient points as to the notice that was provided, and how that notice should have been sufficient to apprise Wells Fargo of the threat to its deed of trust, this argument is academic as another analysis could reasonably find that the notice was not sufficient to apprise Wells Fargo.

Impact of the Holding
The first question that everyone likely has is something akin to, “What does this mean for HOA foreclosure cases going forward?” This answer is both time- and court-specific.

As to time, Bourne Valley only applies to HOA foreclosures taking place prior to the legislatures amendment of the statute in 2015. Accordingly, Nevada cured this defect in NRS 116 by rewriting it to mandate clearly that HOAs must provide notice to first deed holders. This leads to an analysis of the court-specific impact of Bourne Valley.

In any case within the federal district courts of Nevada, or any case rising to the 9th Circuit Court of Appeals, this holding is now binding. This means that, essentially, the first deed holders will win on each and every challenge brought with similar facts and circumstances in an HOA foreclosure case.

This is because the 9th circuit ruling has both horizontal and vertical precedential value under the concept of stare decisis. Horizontal precedence means that any appeal of case to the 9th Circuit that has essentially the same facts and circumstances must have the same result as the Bourne Valley case. In other words, the rules of the Circuit prevent one panel from ruling contrary to another if the cases are factually identical, lest a split of authority be created within the circuit itself.

Vertical precedent means simply that the lower courts of the 9th Circuit (the federal district courts) are bound by the panel’s Bourne Valley opinion.

What is not clear from this holding then is exactly what facts are or may not be identical in subsequent cases. The Bourne Valley opinion does not set forth the individual facts of the case, other than the procedural history (in short, Bourne Valley sued for quiet title and won on summary judgment, and the appeal followed). This could mean either that the opinion will be broadly applied to the vast majority of HOA foreclosure cases, or it could actually serve to limit the Bourne Valley opinion somewhat as individual cases seek to distinguish their facts and circumstances from Bourne Valley’s.

Particularly, and as highlighted in Judge Wallace’s dissent, the questions of actual notice may prove to be key in such distinctions. The only treatment the majority gave to actual notice was to say that Wells Fargo could not prove that it did not get notice (and the majority opines as to the fairness and efficacy of proving a negative). After Judge Wallace’s dissent, whereby he spoke at length about what notice Wells Fargo did in fact receive, and his opinion as to its sufficiency, investor-buyers similarly situated to Bourne Valley may argue that actual notice was given to lenders and holder of the first deed in other HOA foreclosure cases.

There may be some merit to this claim. First, and at the very least, Judge Wallace (and any other circuit judges like him) will be receptive to this argument. Second, it is a well-established principle of law that a party may only complain of/sue for a harm that actually occurred, and not some speculative or “maybe” harm that it alleges. In other words, a first deed holder should not be able to claim that its due process rights to notice have been violated, if in fact it was provided notice. In many of these HOA foreclosure cases, notice is not questionable- the collection agencies typically have in their files copies of the notices sent, copies of the certified mailings, and copies of the returned receipt that was signed by an agent of the first deed holder upon receipt. Whether this was the situation in Bourne Valley is unclear as the majority did not go into it, or cite any facts to that effect.

With regard to Nevada state courts, Bourne Valley is not binding on district court judges. This is basic separation of authority legal concept, but it is also supported by case law as well. For example, in United States ex rel. Lawrence v. Woods, 432 F.2d 1072 (7th Cir. Ill., 1970), it was held that state courts are subject only to the supervisory judgment of the U.S. Supreme Court and not the decisions of the federal appellate courts or district courts unless those courts had jurisdiction over the action. This is an outflow from the basic principles of jurisdiction. Simply, the U.S. Supreme Court has jurisdiction over federal questions arising in any state or federal proceedings, and the effect of those decisions is carried to the states by the Supremacy Clause of the Constitution. There is no such authority conferred on federal district or appellate courts to bind states to its precedents.

In another case, Bargas v. Warden, Nev. State Prison, 87 Nev. 30, 482 P.2d 317 (Nev., 1971), the Nevada Supreme Court held that even though it may follow the decisions of other federal courts, it is not bound by any such decisions other than those issuing from the U.S. Supreme Court. Finally, in a much stronger statement of Nevada state autonomy, the Nevada Supreme Court, in the case of Blanton v. North Las Vegas Mun. Court, 103 Nev. 623, 748 P.2d 494 (Nev., 1987), held that “Even an en banc decision of a federal circuit court would not bind Nevada to restructure the court system of this state.” Blanton, 748 P.2d at 500. This statement, taken together with prior holdings, means only one thing: while the individual courts in Nevada may choose to follow the Bourne Valley decision, they are not obligated to do so.

In any event, the immediate result for those federal court cases, as well as any state court cases that apply Bourne Valley, is that the title will now be subject to the reinstated first deed of trust. For the most part, this will resolve many of these cases for our HOA clients in that the first deed will reattach to title, while simultaneously shielding those HOAs from any claims for damages stemming from wrongful foreclosure for reasons both procedural and practical. Procedurally, first deed holders relying on Bourne Valley will not need to prove any aspect of a wrongful foreclosure as the federal courts in Nevada will likely defer to this decision and hold the process was void due to the constitutionality issue. Practically, banks will likely opt to take this route in any pending or subsequent lawsuits rather than risk the factual ambiguity of alleging and proving that the foreclosure was wrongful due to some other defects in the process. Put another way, the ruling that NRS 116 is unconstitutional with regard to notice in a way obviates the need to prove any other deficiencies, and thus eliminates the risk that a judge or jury may disagree and find the foreclosure to have been sound.

Lastly, we have already received word that Bourne Valley, with other buyers’ counsel, is planning to petition the 9th Circuit for an en banc panel review. If granted, this could mean that the Bourne Valley gets reversed. Due to the impact that Bourne Valley may have on buyers’ rights, HOA foreclosures, and other active cases, it is more likely that such a petition would be granted and heard on an accelerated timeline. Furthermore, the issues involved in Bourne Valley are ripe for an en banc review, and therefore will likely be approved for such.

To this end, the day after Bourne Valley was released, the Nevada Supreme Court set for oral argument on September 8, 2016, several cases dealing with the same constitutional issues/analysis. It is unclear if this is related to the Bourne Valley decision, or if the timing is merely coincidental.

The Bourne Valley decision appears to close the door on HOA foreclosures in Nevada (pre-2015). For any such cases where the foreclosure took place prior to 2015, and where the first deed holders are filing in federal court, it appears that the stage is set for quick suits and easy victories for the first deed holders. Unless the different federal courts are willing to hear further, distinguishing facts on each case, this notice deficiency/unconstitutionality of NRS 116 may conclude these cases in near-summary fashion.

For state courts, we are in a “wait and see” mode as to which judges will adopt Bourne Valley, reject it wholesale, or allow it as persuasive authority for their consideration of the facts of each case.

Chris Anthony