Nevada Supreme Court Holds that Foreclosure Of HOA Lien Extinguishes Equal Priority HOA Lien.

In Nevada’s master-planned communities it is common for one home to be in multiple homeowners’ associations.  In such cases there is generally a master association for the master-planned community and then sub-associations for specific developments within the master-planned community.  The liens of the master association and the sub-association have equal priority unless their declarations provide otherwise. See NRS 116.3116(8) (formerly NRS 116.3116(4)).  Earlier this year in Southern Highlands Community Association v. San Florentine Avenue Trust, 132 Nev. Adv. Op. 3 (Jan. 14, 2016), the Nevada Supreme Court (the “Court”) had the opportunity to discuss the effect of the foreclosure by one association on the other association’s lien of equal priority.

In Southern Highlands, The Foothills at Southern Highlands Homeowners Association (“Foothills”) sold property to San Florentine at a foreclosure sale.  Following the sale, Southern Highlands initiated foreclosure proceedings on the same property.  San Florentine sued Southern Highlands to enjoin its foreclosure proceedings, arguing that Southern Highland’s lien was extinguished by Foothills’ foreclosure sale and Southern Highlands’ remedy instead was to satisfy its lien from the foreclosure proceeds received by the sub-association.  The Court agreed.

The Court initially held that NRS 116.3116(4) unambiguously provided that the associations’ liens are of equal priority.  The Court then held that the term “equal priority” was ambiguous because it could mean that “(1) an equal priority lien survives the foreclosure sale of another equal priority lien, or (2) an equal priority lien is extinguished but entitles the lienholder to sale proceeds when another equal priority lienholder forecloses.”  The Court was unable to resolve this ambiguity after examining NRS chapter 116 and its legislative history, the Uniform Land Transactions Act and the Uniform Common Interest Ownership Act, upon which NRS chapter 116 is based.  The Court then adopted the California rule related to foreclosing upon mechanics’ liens of equal priority which generally provides that “equal priority mechanic’s lienholders are entitled to the proceeds in the same priority position as the foreclosing lienholder and their liens are extinguished.”  Thus, the Court held that when Foothills foreclosed on its lien, the lien of Southern Highlands was extinguished and its remedy was to seek its pro-rated share of the proceeds paid at the Foothills foreclosure sale.

There is a stark difference between mechanics’ lien foreclosures and HOA foreclosures even if the liens are of equal priority.  Generally a mechanics’ lien foreclosure is a judicial foreclosure proceeding where all of the lien holders have an opportunity to appear, be heard and defend their interests.  On the other hand, HOA foreclosures are generally non-judicial and other lienholders, even those with equal priority, do not have an opportunity to participate or be heard.  It is also unlikely that the foreclosing HOA has either the incentive or ability to do anything to protect the interests of the holder of the other equal priority lien holder because its credit bid is limited to the amount of its lien – it cannot credit bid a third-party’s lien.

The better approach would have been to hold that a foreclosure of a lien does not extinguish liens of equal priority.  Such is the case in Nevada with statutory liens.  An example of this is seen with liens of local improvement districts.  Generally those liens have are “[c]oequal with the latest lien thereon so secure payment of general taxes” and are “[n]ot subject to extinguishment by the sale of any property on account of the payment of general taxes.”  NRS 271.420(3).  A rule that a foreclosure of an HOA’s lien does not extinguish liens of equal priority would enable the holder of the non-foreclosing lien to protect its interests.  This is not, however, the law in Nevada.  Perhaps the Nevada legislature can address this issue in the future.