David v. Goliath: Nevada Assessment Liens May Extinguish Lender Deeds of Trust

by Financial Services Industry Group


On November 5, 2020, the U.S. Ninth Circuit Court of Appeals upheld a district court’s decision that a lender did not suffer an uncompensated taking when a homeowners association’s relatively small assessment lien foreclosure extinguished the lender’s first-in-time mortgage deed of trust.


Many residential communities include certain common amenities that are managed by a homeowners association (“HOA”). The HOA may levy certain assessments and charges to maintain those common amenities. A relatively unique Nevada statute grants certain portions of these HOA assessment liens super-priority. This means, with a few exceptions, that portions of an HOA assessment lien are superior to all other liens on the property, including the first deed of trust held by the mortgage lender. In the event that the HOA foreclosed on such a lien, that foreclosure could extinguish the first deed of trust, even if that deed of trust existed before the assessment lien.


This was the case in Wells Fargo v. Mahogany Meadows Avenue Trust. Luis Carrasco and Janet Kongnalinh purchased a home in Las Vegas using a loan from Wells Fargo and secured by a deed of trust in favor of the bank. The property was located within a planned community, and therefore the new homeowners were obligated to pay certain dues and assessments to the Copper Creek HOA. Years later, when Carrasco and Kongalinh fell behind on their dues, the HOA recorded a lien for the delinquent assessments. Eventually, the HOA foreclosed on the property to satisfy its lien, and that foreclosure extinguished all junior security interests, which included Wells Fargo’s deed of trust.


Wells Fargo filed a quiet title action that sought to have the foreclosure sale declared invalid and alleged that the Nevada statute granting super-priority to the HOA assessment lien violated the Takings Clause and the Due Process Clause. The district court dismissed Wells Fargo’s action for failure to state a claim.


On appeal, the Ninth Circuit Court of Appeals held that Wells Fargo had not suffered an uncompensated taking. The Court began by reasoning that the Takings Clause applies only state actions, and the HOA’s nonjudicial foreclosure sale was not a state action. Next, the Court reasoned that the enactment of the Nevada statute could constitute state action. However, both the statute and the HOA’s covenants existed before the creation of Wells Fargo’s interest in the property. Accordingly, the Court held that the Nevada statute did not transform the HOA’s otherwise private foreclosure into a state action in violation of the Takings Clause.


Moving to the Due Process claim, the Court again upheld the district court’s dismissal. The Court found that Wells Fargo received precisely the notice contemplated by the Nevada statute and that the Court had previously upheld the Due Process constitutionality of the statute’s notice requirements in a prior decision. Accordingly, the Court found that Wells Fargo’s due process rights were not violated.


To summarize, under Wells Fargo v. Mahogany Meadows Avenue Trust, Nevada law may allow a relatively small assessment lien foreclosure to extinguish a lender’s first-in-time mortgage deed of trust.


It is unlikely that the U.S. Ninth Circuit Court of Appeals would encounter the same issue under Oregon law. Although ORS §94.709 allows a kind of limited super-priority for planned community assessment liens over homestead exemptions and “all other liens and encumbrances,” it specifically carves out an exception for the first mortgage or trust deed of record. For condominiums under ORS §100.450, the same exception exists, unless the condominium consists of fewer than seven entirely nonresidential units and the holder of the mortgage or trust deed executes a separate subordination of their interest stating that they understand the subordination to the assessment lien.


The foregoing is a brief description of recent U.S. Ninth Circuit Court of Appeals case law in the field of creditor’s rights and is not intended to provide exhaustive analysis or legal advice. If you have questions about how the law applies to you or your business, please contact Jared Anderson or another member of the Creditor’s Rights Practice Group.