As we’ve discussed on this blog before, Nevada’s courts remain a battleground for lenders seeking to establish that their security interests were not eliminated by homeowners’ association foreclosure sales under NRS 116. In recent weeks, the Ninth Circuit and Supreme Court of Nevada have issued new opinions providing more guidance to ultimately resolve those issues. Lenders now have more support for two of their strongest arguments. First, for loans owned by Fannie Mae and Freddie Mac, the Nevada Supreme Court held that the security interests could not have been extinguished by a homeowners’ association’s foreclosure sale due to the preemptive effect of the Housing and Economic Recovery Act (HERA), even if the loan had been placed into a securitized trust. Second, the court reaffirmed its recognition of the doctrine of tender, holding that under longstanding blackletter law, a lender’s unconditional offer to pay the full superpriority amount of the association’s lien caused that lien to be discharged, and protected the lender’s security interest in the ensuing association foreclosure sale. On the other hand, the Nevada Supreme Court also issued a decision in favor of association-sale purchasers, holding that an association’s sale of the right to receive payment from a delinquent homeowner’s account to a third party did not deprive the association of standing to foreclose upon its lien.
First, HERA seems to be the lenders’ strongest arguments, and both the Ninth Circuit and the Nevada Supreme Court have consistently ruled in favor of lenders on that point. In 2017, the Ninth Circuit endorsed the argument in Berezovsky v. Moniz, holding that HERA’s so-called “Federal Foreclosure Bar” barred NRS 116 sales from extinguishing deeds of trust securing loans owned by Fannie Mae and Freddie Mac. In March 2018, the Supreme Court of Nevada reached the same conclusion in Saticoy Bay LLC Series 9641 Christine View v. Fannie Mae.
On June 25, 2018, the Ninth Circuit issued its second major opinion on HERA in FHMLC v. SFR Investments Pool 1, rejecting an argument made by SFR (the purchaser at the association’s sale and a frequent player in the litigation) that the Federal Foreclosure Bar did not apply to loans that had been securitized. The court held that the securitization of a loan did not prevent the Federal Housing Finance Agency (FHFA) from succeeding to ownership of that loan when it became conservator of Fannie Mae and Freddie Mac. To the contrary, the court wrote that HERA “confers additional protections upon [Fannie and Freddie’s] securitized mortgage loans” (emphasis original). The court also rejected SFR’s argument that FHFA deprived it of a property right without due process. The court wrote that NRS 116 “does not mandate … vestment of rights in purchasers at HOA foreclosures sales” and so held that purchasers “lac[k] a legitimate claim of entitlement.”
Purchasers will probably continue to seek to challenge the application of HERA, even after the FHLMC decision, possibly by challenging specific evidence offered in support of the lender’s position that Fannie Mae or Freddie Mac owned the loan at the time of the association’s foreclosure sale. But both the Ninth Circuit and the Nevada Supreme Court have consistently rejected every argument the purchasers have raised to date; after FHMLC, it looks like that streak will continue.
Second, the Nevada Supreme Court recently addressed another one of the lenders’ strongest arguments: that a lender or servicer’s pre-foreclosure offer to pay the association’s superpriority lien extinguished that lien, and thereby protected the lender’s security interest in the association’s foreclosure sale. On April 27, the Nevada Supreme Court issued its opinion in Bank of America, N.A. v. Ferrell Street Trust, which reaffirmed the underlying validity of the lenders’ tender arguments, even if it did not address every issue. In Ferrell Street Trust, the court made several pro-lender statements about the law of tender: (1) Tender is sufficient to discharge the lien and preserve the lender’s interest; (2) an unjustified rejection of valid tender does not prevent the lien from being discharged; (3) the tendering party does not have to deposit a rejected payment into escrow to “keep the tender good;” and (4) an “unconditional offer to pay” is valid tender. The court reversed the district court’s grant of summary judgment for the purchaser and remanded the case for further development with proper application of the tender doctrine.
Ferrell Street Trust was an unpublished, non-binding decision and did not purport to resolve every issue concerning the application of the tender doctrine in HOA sale cases. While it is helpful in noting that the underlying premise of the tender argument appears to be valid and well-grounded in the law, we will have to wait for a more comprehensive published decision (which could come at any time) for the final word on tender.
Finally, in West Sunset 2050 Trust v. Nationstar Mortgage, LLC, the Nevada Supreme Court ruled against lenders’ interest in a case that involved an unusual, though not unique, fact pattern. In West Sunset, a third party had entered into a factoring agreement with the homeowners’ association, under which the third party received the right to any recovery by the association against a homeowner’s delinquent account. After the association foreclosed, the servicer challenged the validity of the foreclosure sale, arguing that the factoring agreement had severed the lien from the underlying debt and thereby made the lien unenforceable. The Nevada Supreme Court rejected this argument, holding that the agreement did not affect the relationship between the association and the homeowner—and thus, by extension—could not be challenged by the party with a security interest on the homeowner’s property. The court concluded with a note that it is “disinclined to so interfere with HOA’s financing practices” absent a policy rationale.
The latest trio of decisions provides some more clarity to the Nevada landscape, although—as we’ve reported for years now—there are still issues to be decided. The application of HERA seems nearly unassailable at this point, however, representing a significant victory for lenders’ interests. We will continue to monitor the courts in hopes of a similar comprehensive victory on the tender issue.