Bourne Valley Cert. Denied by U.S. Supreme Court
The legal landscape of HOA foreclosures in Nevada was thrown somewhat into disarray by the Ninth Circuit Court’s ruling in the Bourne Valley case (Bourne Valley Court Trust v. Wells Fargo Bank, N.A., 832 F.3d 1154 (9th Cir. 2016)). The Bourne Valley Court ultimately held that “Nevada Revised Statutes [NRS] section 116.3116’s ‘opt-in’ notice scheme facially violated mortgage lenders’ constitutional due process rights.” Id. at 1160.
This holding is broad, and essentially undermines the entirety of the NRS 116 foreclosure mechanism by rendering any foreclosure proceedings void ab initio due to presumptively defective notices to first deed of trust holders.
Further complicating matters is the subsequent holding in Saticoy Bay LLC v. Wells Fargo Home Mortg., 388 P.3d 970 (Nev., 2017). In that state court case, the Nevada Supreme Court held that “the Due Process Clauses of the United States and Nevada Constitutions are not implicated in an HOA’s nonjudicial foreclosure of a superpriority lien.” Id. at 975. This is the opposite of the holding in Bourne Valley, and the Nevada Supreme Court acknowledged it disagreed with the Bourne Valley decision on that issue.
Buyer’s counsel in Bourne Valley raised the issue on appeal to the United States Supreme Court, asking it to resolve this discrepancy with regard to NRS 116- specifically, whether the statute’s purported “opt-in” notice scheme violated Due Process. On June 26, 2017, the U.S. Supreme Court denied a petition to review the Ninth Circuit’s decision, leaving the question as to how the law can be applied in present and future cases.
To begin our analyses, we apply Bourne Valley without consideration for the Saticoy decision (for example, the federal court either ignores Saticoy or does not find it to be controlling). The simplest explanation is that any case brought before the federal court will rely on Bourne Valley as controlling- thus, NRS 116 is unconstitutional, and any foreclosure performed under this version (prior to the May 2015 legislative revision) may either be rescinded as void, or the buyer takes the title subject to the first deed of trust holder’s interest.
In the first scenario, the foreclosure is voided, or rescinded as if it never took place. This would immediately divest the buyer of title to the property, leaving them with no interest in—and no right to—the property. This example, while apparently obvious and logical in the event of a voided sale, is nevertheless complicated due to the inherent inequity. While many of these properties have been purchased by investors either for resale (“house flipping”) or as rental/investment properties, some of them have been purchased by earnest, good-faith homebuyers who moved in and occupied the property as a primary residence. Such buyers would potentially be forced from the property or subject to foreclosure as the deed of trust holders reasserted their rights under the deed of trust.
Even in the event of an investor-buyer, the equities may argue against a complete rescission of the foreclosure sale. For example, any renters/tenants of an investment property would be forced out with little-to-no notice. Alternately, a good faith, third-party purchaser—one who purchased the house from the foreclosure buyer in a “house flipping” scenario—could have their presumptive interest rescinded through no fault of their own. At the very least, such a strong response to Bourne Valley would surely invite further litigation as buyers and tenants/third-party purchasers alike sought either to vindicate their interest, or to delay eviction proceedings for as long as possible.
The second scenario under a Bourne Valley-controlling analysis is that the court simply orders that any properties affected by the decision be taken subject to the first deed of trust holder’s interest. While less ideal, this scenario would be a more equitable decision in that any tenants in the property would not face immediate eviction (as they presumably would under a rescission/void scenario). In the case of an investor-buyer, the buyer would be left with a result that was foreseeable from the outset, i.e. a loss in the litigation following an HOA foreclosure sale. Lastly, a third-party buyer that purchased the property in good faith from an investor, saddled as they would be with a potentially unanticipated first deed of trust on the property, could seek rescission of their purchase from the investor-buyer.
Under either of these options (stemming from a Bourne Valley-controlling analysis), there are two risks to the HOA. In the event a sale is rescinded/voided, the HOA would need to disgorge the purchase price paid at the foreclosure sale. Where this option becomes problematic is that most HOAs do not have these kinds of funds available- a problem that becomes more pronounced in the event an HOA must disgorge the proceeds of several purchases so voided by this ruling. Where a property is rendered subject to a first deed of trust, the investor-buyer may sue to recover the monies paid at foreclosure on numerous theories, such as breach of contract, lack of good faith, misrepresentation, etc.- blaming the HOA for the investor-buyer’s purchase of an (ultimately) encumbered property.
Another possibility under a Bourne Valley-controlling analysis is the practical application of the decision to active litigation cases. Specifically, the Bourne Valley court remanded that case back to the lower federal district court for proceedings consistent with the opinion. This would also need to be done for each case before that court (the first deed of trust holders would need to seek a ruling in their favor under Bourne Valley). Rather than incur the costs of litigation (to include attempts by adverse counsel to delay such a holding, and resulting appellate procedures), the first deed of trust holders may opt for a settlement in lieu of pursuing the judgment.
Our second analysis follows long-standing doctrine, under which federal courts applying a state statute must defer to the interpretation of the state’s highest court, in this case, the Nevada Supreme Court. The policy behind this doctrine is that federal and state courts should interpret and apply the law uniformly in order to discourage “forum shopping” (where a party files in federal or state court due to a greater chance of success based on an uneven or inconsistent application of the law). Under this analysis, the Nevada Supreme Court’s holding in Saticoy that NRS 116 did not implicate Due Process concerns would control the federal courts. This would in essence override Bourne Valley, and would return HOA foreclosure cases in the federal court to the posture they were in pre-Bourne Valley, wherein the first deed of trust holders would have to convince the court that some other nuance of the foreclosure sale (federal preemption, lack of commercial reasonableness, tender of the suprepriority lien amount prior to the sale, etc.) merits a rescission of the sale or a reinstatement of the first deed of trust.
We are unable to predict whether the federal courts will interpret the cases in this manner. To clarify, Saticoy considered largely the same issues as Bourne Valley, but the holding is broader than Bourne Valley. This could leave the federal courts an avenue to find that Saticoy was not dispositive of the Due Process issues as analyzed and applied in Bourne Valley. Furthermore, the federal courts could decide to ignore Saticoy altogether and continue to apply Bourne Valley as the controlling precedent within the federal district courts (as discussed in our first analysis, above).
In our experience thus far, it appears that the lower Nevada State courts intend to look to the Saticoy decision as controlling. Accordingly, with respect to the state courts (as well as to the federal courts to the extent they choose to apply Saticoy), the risk to the HOAs would be the same as it has always been. HOAs would be left to defend against claims of wrongful foreclosure, either on the HOA’s part or that of its trustee. Numerous cases in both federal and state courts have been stayed pending the outcome of the appellate proceedings. With the U.S. Supreme Court’s denial of certiorari review, these cases will no doubt begin rotating out from under the stayed status, and litigation will resume. The next couple of months will prove informative as we begin to see how federal courts (and some state courts) apply the law- and indeed what law they apply. We will monitor and provide regular updates as we begin to compile results.