Lower court stripped the deed. Supreme Court reversed. Here's what lenders need to know
First deeds of trust survive HOA foreclosure sales when homeowners satisfy superpriority liens, Nevada Supreme Court rules.
A residential property in Nevada governed by two homeowners' associations became the center of a legal dispute that clarified how HOA lien foreclosures interact with first deeds of trust. Deutsche Bank National Trust Company held a first deed of trust on the property as trustee under a pooling and servicing agreement related to IMPAC Secured Assets Corp., Mortgage Pass-Through Certificates, Series 2006-3. The property was subject to assessments from both Aliante Master Association and Autumn Ridge at Aliante Community Association.
When the homeowner fell behind on monthly assessments, both HOAs recorded notices of claims of lien against the property. However, only Aliante proceeded to foreclosure sale. Before the sale occurred, the homeowner made several payments to Aliante totaling $550. At the time Aliante recorded its notice of lien, its monthly assessments were $34 and the homeowner was either six or seven months behind in payments. This meant Aliante's superpriority lien amounted to $238, representing seven months of delinquent pre-notice assessments at $34 per month.
The homeowner did not direct Aliante on how to apply his payments. Aliante applied the payments to the lien debt as a whole rather than to the oldest assessments first. This left $19 of the superpriority lien debt outstanding when Aliante proceeded to foreclosure.
Collegium Fund LLC Series 16 purchased the property at the foreclosure sale and subsequently filed suit to quiet title. Collegium argued that Aliante properly foreclosed its superpriority lien and that the sale extinguished Deutsche Bank's deed of trust, since a superpriority lien is senior to a first deed of trust. Deutsche Bank countered that the homeowner's payments were sufficient to satisfy the superpriority portion of Aliante's lien, leaving only a subpriority lien to foreclose. Since a subpriority lien is junior to a first deed of trust, Deutsche Bank maintained its deed of trust survived the foreclosure sale.
After a three-day bench trial, the district court ruled in favor of Collegium Fund. The court found that Aliante had discretion to apply the homeowner's payments to the past-due assessments as a whole rather than to older assessments comprising the superpriority lien first.
The district court also relied on an alternative ground, determining that both HOA superpriority liens needed to be paid off before the sale for it to convert to a subpriority-lien-only sale. Since no evidence showed payments were made to Autumn Ridge, the district court concluded the sale proceeded as a superpriority lien foreclosure that extinguished Deutsche Bank's first deed of trust.
The Nevada Supreme Court reversed on appeal. The court held that the district court failed to recognize a critical principle from the recent Swaggerty decision: in the absence of express allocation by the debtor, an HOA may not direct payments in a way that preserves the superpriority lien to the detriment of the homeowner and bank, whose interest lies in protecting the first deed of trust by paying off the superpriority lien.
The court determined that any such unauthorized allocation is invalid as a matter of law, and that principles of justice and equity presume the superpriority lien is paid first unless there is a compelling reason to conclude otherwise.
The Supreme Court also rejected the district court's interpretation of the Southern Highlands case. The district court had interpreted that decision to mean that when multiple HOAs have liens on a property, the superpriority portions of all HOA liens must be paid off before a foreclosure sale converts to a subpriority-lien-only sale.
The Supreme Court clarified that extinguishing a lien is not the same as foreclosing it. When a homeowner or bank pays off the superpriority portion of a foreclosing HOA's lien, the payment reduces the lien being foreclosed to a subpriority lien.
From that point forward, the foreclosing HOA has only a subpriority lien while the non-foreclosing HOA's lien retains its superpriority status. Since the liens are no longer of equal priority, the non-foreclosing HOA's superpriority lien survives the foreclosure sale along with the first deed of trust because both are senior to the junior subpriority lien being foreclosed.
The court emphasized that requiring payment of both HOAs' superpriority liens would undermine efficiency and the bank's and homeowner's interests in preserving the first deed of trust.
For mortgage lenders and servicers, this decision provides critical clarity on protecting first deeds of trust in Nevada properties subject to HOA liens. When homeowners make payments to HOAs conducting foreclosures, those payments must be applied to superpriority liens first, regardless of whether the homeowner specifies payment allocation.
This automatic application protects the lender's security interest by converting the foreclosure to a subpriority sale that does not extinguish the first deed of trust. Importantly, lenders need only ensure the foreclosing HOA's superpriority lien is satisfied, not the superpriority liens of other non-foreclosing HOAs on the same property.
Servicers should monitor HOA lien foreclosure proceedings and track whether partial payments have converted noticed superpriority foreclosures into subpriority sales. Under the Supreme Court's ruling, Collegium Fund took title subject to Deutsche Bank's first deed of trust.
