THE STATUS OF HOA FORECLOSURE QUIET TITLE ACTIONS IN STATE AND FEDERAL COURT

Last week on the Property Line, we broke the news that the United States Supreme Court denied certiorari in Bourne Valley Court Trust. [1]  Denying certiorari meant the Ninth Circuit's three judge panel holding that Nevada's "opt-in" provision in its HOA foreclosure statute is facially unconstitutional is the law in federal courts.  However, as we noted, the Ninth Circuit's holding is contrary to that of the Nevada Supreme Court in Saticoy Bay LLC Series 350 Durango 104, where the Nevada Supreme Court found that enactment of NRS 116.3116 through 31168 was not sufficient to create state action and that NRS 116.31168 (amend 2015), which incorporated NRS 107.090, made notice mandatory. [2]  Thus, when we broke the news of the United States Supreme Court's decision to deny certiorari, we indicated it would have implications in the outcome of the plethora of quiet title actions in Nevada's state and federal courts.  In this article, we outline those implications and provide additional insight into whether the issues in those cases are now resolved and whether the outcomes can be predicted.  We'll give you a hint, yes and no.

To begin, the effect of Bourne Valley is largely dependent on which court a quiet title action is initiated.  Based on Bourne Valley, HOAs and investors should prefer an action be heard in state court, while servicers, lenders, and/or beneficiaries under a deed of trust will wish to litigate the issue in federal court.  This is so because in Blanton v. N. Las Vegas Mu. Court, the Nevada Supreme Court found that decisions of a federal district court and panels of the federal circuit court of appeals (including en banc panels) are not binding upon the Nevada Supreme Court. [3] It reasoned that Nevada's constitution binds the courts of the State of Nevada to the United States Constitution, as interpreted by the United States Supreme Court. [4] In other words, according to the Nevada Supreme Court, it is bound to the holdings of the United States Supreme Court only, which declined to hear Bourne Valley.  Thus, when a circuit court renders a decision, the Nevada Supreme Court may at its option adopt the holding when it finds the legal reasoning persuasive.  Yet, when it does not, it is free to exercise its independent authority and issue a contrary holding.  Given this, the United States Supreme Court's decision to deny certiorari means the Nevada Supreme Court's contrary holding in Saticoy Bay, which contradicts the Ninth Circuit's holding in Bourne Valley will not be overturned.  Importantly, as noted above, state district courts are bound by the precedent provided by Nevada Supreme Court.

This is exemplified by a recent appeal considered by the Nevada Supreme Court.  In PNC Bank, Assn. v. Saticoy Bat Series, LLC 4208 Rolling Stone Dr. Trust, PNC appealed summary judgment in Saticoy's favor, arguing:

The Court should reverse judgment in favor of Respondent because the HOA Foreclosure Statute is facially unconstitutional under the Due Process Clause. The Ninth Circuit Court of Appeals recently held that the Statute is facially unconstitutional because it does not mandate actual notice to lenders prior to an HOA foreclosure sale. [5]

Essentially, PNC asked the Nevada Supreme Court to reverse Saticoy Bay LLC Series 350 Durango 104 and adopt Bourne Valley.  The Nevada Supreme declined and affirmed summary judgment, citing its decision in SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 130 Nev., Adv. Op. 75, 334 P.3d 408, 418 (2014), wherein it concluded that NRS 116.31168 (2013) incorporated NRS 107.090 (2013), requiring notice to a deed of trust beneficiary. [6]  Then, as if to add insult to the lender's injury, the Nevada Supreme Court also cited Judge Wallace's dissent in Bourne Valley as further support for its conclusion. [7]  

 

Regardless of how one might interpret the Nevada Supreme Court's intent in citing the dissent in   Bourne Valley, one thing is clear, because Nevada's state district courts are bound by the State Supreme Court, barring any other issues (e.g. failure to show notice was sent, the lender tendering payment of the super-priority portion of the association's lien prior to the foreclosure, or a sale specifically made subject to the deed of trust) the purchaser at a HOA foreclosure should be able to quiet title in state court.

 

In federal court, however, the application of Bourne Valley is not optional because federal district courts are bound by decisions of the circuit courts, just as the state district courts are bound to the decisions of the state's appellate and supreme court.  As a reminder, the Ninth Circuit found the HOA foreclosure statute "facially unconstitutional," meaning the Appellate Court did not look to the specific facts of the case, limiting its review to the statute itself, determining that no set of facts or circumstances would render the statute constitutional (thus, its "facially" unconstitutional).  The result of such a determination, in general, is fatal. 

 

For example, in a recent decision in a federal district court case, the investor that purchased a residence at an HOA foreclosure attempted to overcome Bourne Valley, arguing the lender received actual notice.  The Honorable Robert C. Jones disagreed and granted summary judgment in favor of the lender, stating:

 

According to the Ninth Circuit, therefore, these provisions are unconstitutional in each and every application; no conceivable set of circumstances exists under which the provisions would be valid. The factual particularities surrounding the foreclosure notices in this case-which would be of paramount importance in an as-applied challenge-cannot save the facially unconstitutional statutory provisions.

. . . .

Accordingly, the HOA foreclosed under a facially unconstitutional notice scheme, and thus the HOA foreclosure cannot have extinguished the DOT. Therefore, the Court must quiet title as a matter of law in favor of Fannie Mae as assignee of the DOT. [8]

 

Thus, according to Judge Jones, actual notice cannot overcome a facially unconstitutional statute.  Holdings such as this were largely expected following Bourne Valley.  

 

Another argument proffered by investors and HOAs alike to overcome Bourne Valley is an obscure concept called the "return doctrine."  According to proponents of the return doctrine, when a Nevada statute is struck down as unconstitutional, the doctrine operates to restore the previous version of the statute. [9]  The legal reasoning behind the doctrine provides that a legislature's authority arises from the state's constitution, which does not empower it to enact unconstitutional statutes. [10]  Thus, because the legislature lacked authority to enact an unconstitutional statute, the previous version was never abrogated and remains in force as if it was never amended. [11]  Thus, if the previous version is constitutional (which proponents argue it was) and if the sale was conducted according to that statue, it is valid.  Notably, this doctrine was adopted by the Nevada Supreme Court in a criminal case, but holdings in criminal cases apply in civil matters as well. [12]  Thus, it appears HOAs and investors have found a seemingly colorable argument to counteract application of Bourne Valley.  Our research, however, indicates there is a problem with this argument. 

 

Though it was settled long ago that federal courts apply state law, that does not extend to matters governed by the United States Constitution. [13]  A recent holding in federal court verifies this, where the Honorable James C. Mahan disregarded the return doctrine, stating, "[t]he doctrine does not (and could not) function to forgive constitutional offenses committed under the amended version of the statute in the meantime." [14] 

 

Yet, Judge Mahan does provide investors and HOAs another argument.  In SFR Investment Pool 1 LLC, the investor argued that the federal district court should ignore Bourne Valley given the Nevada Supreme Court's contrary decision in Saticoy Bay. [15]  Judge Mahan declined, stating that clear, recent, and binding contrary precedent exists. [16]   In other words, Judge Mahan stated he was obligated to follow Bourne Valley.  Surprisingly, Judge Mahan then found the lender was nevertheless not entitled to summary judgment under Bourne Valley, concluding that actual notice of the foreclosure stripped the lender of Article III standing. [17]  As Judge Mahan explained:

 

The bank has not suffered an injury related to the unconstitutional provision in NRS 116.31163(2). To raise question of constitutionality, the party must have sufficient Article III standing, including, inter alia, a "personal injury fairly traceable to the ... allegedly unlawful conduct." Raines v. Byrd, 117 U.S. 811, 818-19 (citing Allen v. Wright, 468 U.S. 737, 751 (1984)) (emphasis omitted). Importantly, the Ninth Circuit has held that receipt of actual notice deprives a claimant of standing to raise a procedural due process claim. Wiren v. Eide, 542 F.2d 757, 762 (9th Cir. 1976). [18]

 

According to Judge Mahan, the investor provided sufficient evidence showing the lender received actual notice of the foreclosure sale, determining the lender's failure to take any action to prevent the foreclosure and preserve its own interests meant it could not trace its harm to the statute, concluding it did not have standing.   Importantly, when one lacks standing, it means that person does not have a legally recognized right to assert a claim in court.  Accordingly, Judge Mahan granted summary judgment in favor of the investor because the lender had actual notice of the foreclosure.  This is an interesting development, and technically speaking is not at odds with Judge Jones' ruling above that actual notice cannot overcome Bourne Valley. Instead, Judge Mahan found that regardless of the fact the statute is facially unconstitutional, because the lender could not trace its harm to the statute, it was not allowed to assert the argument at all. Thus, Judge Mahan did not issue a contrary holding, but merely took a step backwards, so to speak, to find the claim itself could not be made in a case where actual notice was given.

 

Based on these holdings, the return doctrine will not help investors or HOAs in federal courts.  However, when actual notice is given, depending on which judge hears the case, that fact could be dispositive.  Assuredly, Judge Mahan's decision will be appealed to the Ninth Circuit, meaning the saga in federal courts related to Bourne Valley continues because the outcome of the case is dependent on which judge is assigned to the case.  At this point, there is insufficient information to gauge which of the federal judges will agree with Judge Jones or with Judge Mahan, if any.  Regardless, until the Ninth Circuit weighs in on Judge Mahan's findings regarding Article III standing, it appears the United States Supreme Court's denial of certiorari was not the final word on HOA foreclosure sales in federal courts.

 

Thus, the status of HOA foreclosures does appear settled in state courts, but remains unclear in federal court.  However, with each of these cases, the number of issues that remain unsettled is reduced, making more and more of the cases predictable.  As usual, we will provide further updates as the actual notice issue continues to develop and unfold through an appeal.