Nevada State Supreme Court decision (September 18, 2014):
The Nevada State Supreme Court has ruled that a homeowners associations foreclosure of a super priority lien can extinguish a first deed of trust on the property.
The property in question was owned by a real estate investment company that acquired title by purchasing the property at a nonjudicial foreclosure sale on a super priority lien in the amount of $6,000 that was held by the homeowners association for the community in which the property is located. The investment company contended that the foreclosure wiped out the lien created by a first deed of trust held by U.S. Bank which secured a loan in the amount of $885,000.
In opposition, the bank argued that a decision in favor of the investment company would improperly reward speculators who purchased valuable properties for pennies on the dollar and would substantially damage lenders. They further argued that a ruling against the lenders would result in lenders ceasing lending activity in Nevada or charging higher interest rates to protect against the risks of their losing their interest in the property as a result of an HOA lien foreclosure sale and this would hurt homebuilders, re-sales, and the Nevada housing sector in general.
The Supreme Court ruled in favor of the investment company in deciding that the super priority lien was prior to all other liens and encumbrances on the homeowners property — even a first deed of trust that was recorded by a lender before the dues became delinquent. The decision also indicated that the HOA liens having priority are limited to nine months of HOA assessments. In response to the argument that it was unfair to allow a relatively nominal lien stemming from nine months of HOA dues to extinguish a first deed of trust, the Court commented that the bank could have paid off the lien to avert the loss and that the inequity that the bank was complaining of was of its own making.
See case decision: SFR Investments Pool I. LLC v U.S. Bank, N.A. al.