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Bourne Valley Court Trust v. Wells Fargo Bank, NA

United States Court of Appeals, Ninth Circuit

August 12, 2016

Bourne Valley Court Trust, Plaintiff-Appellee,
v.
Wells Fargo Bank, NA, Defendant-Appellant.

          Argued and Submitted June 13, 2016 San Francisco, California

         Appeal from the United States District Court for the District of Nevada, D.C. No. 2:13-cv-00649-PMP-NJK Philip M. Pro, Senior District Judge, Presiding

          Andrew M. Jacobs (argued), Snell & Wilmer L.L.P., Tucson, Arizona; Amy F. Sorenson, Snell & Wilmer L.L.P., Salt Lake City, Utah; Kelly H. Dove, Snell & Wilmer L.L.P., Las Vegas, Nevada; for Defendant-Appellant.

          Michael F. Bohn (argued), Law Offices of Michael F. Bohn, Esq., Ltd., Las Vegas, Nevada, for Plaintiff-Appellee.

          Before: J. Clifford Wallace, Dorothy W. Nelson, and John B. Owens, Circuit Judges.

         SUMMARY[*]

         Nevada Foreclosures

         The panel vacated the district court's summary judgment entered in favor of Bourne Valley Court Trust in the Trust's action to quiet title on real property that it had acquired after the property had been foreclosed by a homeowners' association.

         Nevada Revised Statutes section 116.3116 et seq. strips a mortgage lender of its first deed of trust when a homeowners' association ("HOA") forecloses on the property based on delinquent HOA fees.

         The panel held that the Statute's "opt-in" notice scheme, which required a HOA to alert a mortgage lender that it intended to foreclose only if the lender had affirmatively requested notice, facially violated the lender's constitutional due process rights under the Fourteenth Amendment to the Federal Constitution. The panel held that the "state action" requirement for purposes of constitutional due process was met by the Nevada Legislature's enactment of the Statute, which unconstitutionally degraded the mortgage lender's interest in the property. The panel remanded for further proceedings.

         Judge Wallace dissented because he would hold there was no state action, and because the Statute satisfied due process by incorporating another provision in the Nevada Revised Statues that required HOAs to provide written notice to a mortgage lender.

          OPINION

          D.W. NELSON, Circuit Judge:

         Nevada Revised Statutes section 116.3116 et seq. (the Statute)[1] strips a mortgage lender of its first deed of trust when a homeowners' association forecloses on the property based on delinquent HOA dues. Before it was amended, it did so without regard for whether the first deed of trust was recorded before the HOA dues became delinquent, and critically, without requiring actual notice to the lender that the homeowners' association intends to foreclose.

         We hold that the Statute's "opt-in" notice scheme, which required a homeowners' association to alert a mortgage lender that it intended to foreclose only if the lender had affirmatively requested notice, facially violated the lender's constitutional due process rights under the Fourteenth Amendment to the Federal Constitution. We therefore vacate the district court's judgment and remand for proceedings consistent with this opinion.

         BACKGROUND

         This case arises out of an action to quiet title to real property located at 410 Horse Pointe Avenue (the Property) purchased at a homeowners' association foreclosure auction in North Las Vegas, Nevada.

         Renee Johnson, the original homeowner, purchased the Property in 2001 with a loan for $174, 000 from Plaza Home Mortgage, Inc. (Plaza). The Property is part of a planned development governed by the Parks Homeowners' Association (Parks). Plaza recorded a deed of trust securing a note on the property, and Appellant Wells Fargo was assigned all beneficial interest in the note and deed of trust in February 2011.

         Johnson fell behind on payments for her HOA dues, and Parks recorded a Notice of Delinquent Assessment Lien on August 30, 2011. The total amount due was $1, 298.57. On October 12, 2011, Parks recorded a Notice of Default and Election to Sell. On April 9, 2012, Parks recorded a Notice of Trustee/Foreclosure Sale against the Property.

         On May 22, 2012, a Trustee's Deed Upon Sale was recorded, reflecting that Horse Pointe Avenue Trust paid $4, 145 at the homeowners' association foreclosure sale. Horse Pointe Avenue Trust conveyed its interest in the Property to Appellee Bourne Valley Court Trust (Bourne Valley).

         Bourne Valley filed an action to quiet title in Nevada state court. The action was removed to the federal district court for the District of Nevada pursuant to 28 U.S.C. § 1441. The district court granted summary judgment for Bourne Valley.

         The district court's ruling was based largely on the Nevada Supreme Court's decision in SFR Investments Pool 1 v. U.S. Bank, 334 P.3d 408 (Nev. 2014). There, the Nevada Supreme Court interpreted the Statute to give a homeowners' association a "super priority" lien on an individual homeowner's property for up to nine months of unpaid HOA dues. 334 P.3d at 419. As the Nevada Supreme Court interpreted the Statute, the foreclosure of a homeowners' association "super priority" lien extinguished all junior interests in the property, including even a mortgage lender's first deed of trust. Thus, following the Nevada Supreme Court's interpretation of the Statute, the district court held that Parks's foreclosure extinguished Wells Fargo's interest in the Property.

         Wells Fargo timely appealed.

         JURISDICTION AND STANDARD OF REVIEW

         The district court had jurisdiction pursuant to 28 U.S.C. § 1332. We have jurisdiction pursuant to 28 U.S.C. § 1291.

         We review a district court's order granting summary judgment de novo. Fed. Deposit Ins. Corp. v. New Hampshire Ins. Co, 953 F.2d 478, 485 (9th Cir. 1991).

         ANALYSIS

         I. The Statute was facially unconstitutional.

         Before explaining why the Statute's notice scheme rendered the Statute unconstitutional, we first review how the Statute would have otherwise permitted a homeowners' association lien foreclosure to extinguish a mortgage lender's first deed of trust.

         Section 116.3116(2) set forth the priority of the homeowners' association lien with respect to other liens. Pursuant to that section, a homeowners' association lien took priority over all other liens except:

(a) Liens and encumbrances recorded before the recordation of the declaration and, in a cooperative, liens and encumbrances which the association ...

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