Court ruling seen as clarification for foreclosures market

The court on Thursday, in a significant HOA ruling, held that a super priority lien held by a homeowners association extinguishes a first deed of trust on a property.

Chris Hardin of SFR Investments Pool 1, the Las Vegas real estate investment and management firm that took the case to the Supreme Court, said the ruling has eliminated a lot of legal uncertainty for all stakeholders involved in the process.

“We took a tremendous risk,” he said. “We feel that we’ve done a good thing for Nevada to clear up a lot of law, clear up a lot of confusion, so going forward everyone knows how the rules work.”

Attorney Diana Cline with Howard Kim &Associates, which argued the case for SFR, agreed.

“It answered almost all of the questions we had about the super priority lien,” she said.

U.S. Bank, which challenged the position that an HOA lien took priority over the first deed of trust it held on a property in the Southern Highlands Community Association, had argued in briefs filed in the case that such a ruling could cause lenders to cease doing business in Nevada.

Attorneys for the bank did not return calls seeking comment.

But Cline said in the approximately 235 similar such cases the law firm is handling for SFR, there has never been any evidence offered to substantiate that claim despite asking various lenders for proof that such a concern has substance.

Financial institutions will know how to protect their investments because of the ruling, she said.

“There are lots of avenues for banks to protect themselves,” Cline said. “But it’s not OK to just do nothing.”

SFR acquired the Southern Highlands property for $6,000 at an HOA auction, wiping out a debt of $885,000 held by U.S. Bank as a first deed of trust.

The case will return to District Court in Clark County but only on the issue of whether the bank received proper notice, which Cline said it did.

Hardin objected to calling the acquisition a windfall.

“We invested a lot more than people realized,” he said.

Repairs, paying off assessments and tax liens and the legal costs all required substantial investment, Hardin said. The company is also maintaining the properties it has acquired at auctions, which will become part of a long-term rental portfolio.

Proof that the ruling is a positive one could be seen with HOA auction prices on Friday following the court decision, which were near or even above retail value, he said. The values went up because the legal risks in such acquisitions has been mostly eliminated with the Supreme Court decision, Hardin said.

With HOA auction prices getting closer to lender foreclosure prices, lenders are getting some return on their investments as well, Hardin said.

The Supreme Court was divided only on the issue of whether a nonjudicial or civil court process was required to collect on the super priority lien. The court on a 4-3 ruling said the nonjudicial process was proper.

As to the concern by U.S. Bank 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 was unsympathetic.

“The inequity U.S. Bank decries is thus of its own making … ” the court said.

One of the remaining super priority lien issues awaiting a decision from the Supreme Court is whether it can consist only of nine months worth of assessments or if collection costs and fees can be added on to that amount. A separate case on the issue is awaiting action by the court.

Cline said that although the court did talk about what the super priority lien consists of in the SFR case, it did not say one way or the other what it thought about the issue.

Two Las Vegas attorneys involved in the issue said last week that they believe the court did answer the question in the case and that it can consist of nine months of collections and nothing else.

Contact Capital Bureau reporter Sean Whaley at swhaley@reviewjournal.com or 775-687-3900. Find him on Twitter: @seanw801