SUPERPRIORITY LIENS: YEP. THE DEVIL IS IN THE DETAILS.
THE NEVADA SUPREME COURT RESOLVES FOR HOW LONG AND FOR HOW MUCH AN HOA SUPERPRIORITY LIEN WILL IMPACT YOUR RECORDED DEED OF TRUST
Horizons At Seven Hills Homeowners Association v. IKON Holdings, LLC (132 Nev. Advance Opinion 35) (April 28, 2016)
Alan B. Rabkin, Ph.D., J.D., LL.M. (Tax), LL.M. (European Law), B.A., CRCM
Of Counsel, Holland & Hart, LLP
So let’s set the stage. You have a housing development that is managed by an HOA. They charge the usual assessments for co
mmon area maintenance and HOA operations. They recorded the document that created the HOA (often called ‘CC&R’s’). It’s the core, guiding document for an HOA by law. Thereafter a homeowner buys a home subject to the same CC&R’s and the HOA governance. Years later, the same homeowner defaults on the loan payments then due to an out-of-the-area residential mortgage lender. Recall, during the financial crisis, almost every loan default brought about an equivalent HOA assessment default if the property was subject to CC&R’s. So we also have an HOA assessment default almost by definition.
The lender came off the blocks first and filed the usual foreclosure cycle of documents as to the mortgage loan and the homeowner went on to lose the home to foreclosure. Thereafter, the home (through foreclosure bid or REO sale) comes into the hands of the new homeowner. The focus of this case is what the HOA could do on its parallel track HOA assessment de
fault to collect a priority amount ahead of the mortgage lender and from a new homeowner and whether they can also collect fees and costs to enforce the HOA assessment lien.
Well, it did not take the HOA long to react after the mortgage foreclosure. Soon after the new owner filed its trustee’s deed or later REO transfer deed, the new owner heard from the HOA who said, in essence, hey, new owner guy, please pay up on the prior owner’s ‘priority’ assessment. The surprised new homeowner likely said, huh?—how much is that? Well, said the HOA, it will be 9 months of missed assessments, plus collection fees and costs of $2700 (which fees and costs are more heavily regulated by further statutory change since the relevant dates of this case). So, they said, the combined amount will be about $6000 total.
So did the ho
meowner just pay the $6000? Many do—but not the one in this case. The HOA and the new homeowner interpreted the statute that existed at the time of all of this 6 years ago differently as to that portion of the assessment that comes before any other financing deed of trust or other lien. The HOA felt it had a 9 month entitlement to ‘priority’ assessments plus ‘priority’ fees, costs and interest. Not so, said the new homeowner. They could not agree so they asked the courts to help them sort out who was right.
As for the 9 month issue, and while the statute even at that time stated that the new homeowner could be liable for up to 9 months of unpaid assessments, the new homeowner said it should only be assessed for 6 months of ‘priority’ HOA assessment because the recorded and binding CC&R’s creating the HOA specifically stated that the priority lien would be limited to 6 months. In essence, 3 months less and no one had bothered to find the issue and seek a change in the limiting 6 month ve
rbiage of the CC&R’s. In essence, the HOA wanted more by statute than they had even gotten though their own CC&R’s.
The court said that even though they had a fewer number of months in their own recorded CC&R’s they could still benefit from the higher number of 9 months set out in the statute. The CC&R’s would be deemed changed from 6 months to 9 months because the statute allowed 9 months. This is despite the fact that any lender reading the CC&R’s when making a loan could have been misled into believing the HOA only intended to seek 6. Also, the CC&R’s remain, we assume, unchanged for any other pur
pose. So the HOA won this issue and judicially altered the CC&R’s to conform with Chapter 116 of the NRS.
What about the second issue—the collection of $2700 fees and costs during the attempted (and it appears non-judicial) collection
of assessments? These fees and costs are for preparing notices and lien letters—often by affiliates of corporate HOA managers. So you are not confused, recall that these fees, costs and interest can be split into potentially two parts: first, those fees, costs and interest that may have a priority; and. second, all the other fees, costs and interest with no priority. This case is asking whether any of the fees, costs and interest in this case have priority. They are not saying you cannot collect the non-priority fees, costs and interest elsewhere. The Supreme Court said, no, there is no priority for fees, costs and expenses a
t the time this case occurred (and that has changed somewhat since). The HOA had no authority to claim priority status for its fees, costs and interest as to the missing 9 months of HOA assessments. Sure, it could collect them against the defaulting homeowner in another non-priority matter. It just had no legal right to collect them from the new homeowner on a priority basis. So the homeowner won this issue.
This case shows that HOA’s, increasingly managed by professional, corporate HOA managers operating in many states with countless different law variations, can and do misread laws and/or may try to stretch their recovery of non-priority fees, costs and interest incurred
in an assessment matter presented to a foreclosing bank or to a new homeowner that buys a residential REO. In this case, the homeowner suspected an overcharge both as to the period of the assessment (6 versus 9) in light of the CC&R’s expressing a lesser period and as to fees, costs and interest ($2700 versus $0). While the Supreme Court excused the HOA from failing to properly amend their CC&R’s and allowed an increase from the stated 6 months in their recorded CC&R document to the authorized 9 month allotment which the statute in Chapter 116 granted, they did not excuse extracting from the homeowner inappropriate fees, costs and interest the Legislature did not allow by law.
CASE TAKEAWAY: You should educate your bank foreclosure trustee(s) and REO manager(s) to review the HOA lien statute as part of every residential foreclosure where there is a lien for non-payment of HOA assessments. They should become familiar with what constitutes priority amounts before accepting an HOA’s ‘priority’ statement and blindly paying it. It may be replete with unauthorized charges or it may be perfect. But you must review it. While a 9 month period for assessments is better known now than it was in 2009 when this case commenced, and is usually the default assessment liability, there have been other statutory changes that could impact the other issues of fees, costs and interest.
The best practices rule of thumb is this: Not all amounts are necessarily priority in nature. Any non-priority amounts are left to the HOA to either collect through small claims, justice court or district court or write off as bad debt. Decide what may be charged and tender that amount with your own priority accounting at foreclosure or later sale to the HOA if its accounting is wrong and cite to the statute as to your accounting version and each part thereof. Also, always reveal unpaid HOA assessments at foreclosure and to a buyer of REO and consider including verbiage in the Notice of Sale and/or a contractually shifting of financial responsibility in a PSA to the bidder or buyer so liability remains clear for unpaid priority assessments. Never hide the issue of delinquent assessments and raise them immediately with all concerned. Oh, and never assume that a bidder or buyer of residential real estate or an HOA will not go full term through trial and appellate courts to prove a tiny HOA’s $6000 total priority demand correct or incorrect. They will and they do as this case shows. So be reasonable and flexible and pursue the defaulting homeowner for any balance billing.
ALAN B. RABKIN is a banking regulatory and compliance law expert and Of Counsel at the Law Firm of Holland & Hart, LLP. He has served as General Counsel of half a dozen Nevada banks over 38 years of practice in California, Nevada and Arizona. An adjunct law professor, Alan holds both a J.D. and a Ph.D. (with a focus in bank law); a CRCM (as to regulatory and compliance matters); and, he serves on the advisory panel of City National Bank in Nevada. He has been active as to deficiency and HOA ‘super lien’ matters, as well as numerous other bank matters, in 14 prior sessions of the Nevada Legislature on behalf of banks and NBA. He can be reached at (775) 230-3620 or