In another blow to the financial services industry, the Nevada Supreme Court has dropped a bombshell on lenders who make senior loans secured by real property in Nevada, and potentially other states that have adopted the Uniform Common Interest Ownership Act (“UCIOA”). SFR Invs. Pool I, LLC v. U.S. Bank, N.A., 334 P.3d 408 (Nev. 2014). UCIOA was promulgated in its initial form in 1982 by the National Conference of Commissioners on Uniform State Laws, with the intent to govern the formation, management and termination of a common interest community, whether a condominium, planned community or real estate cooperative. Alaska, Colorado, Connecticut, Minnesota, Nevada and West Virginia enacted the original 1982 version of UCIOA. UCIOA was subsequently amended in 1994 and again in 2008. Connecticut and Vermont enacted the 1994 version, and Connecticut, Delaware and Vermont enacted the 2008 version.

In SFR Investments, U.S. Bank made a mortgage loan to borrowers secured by a first deed of trust encumbering a residential common interest unit in Las Vegas. The borrowers subsequently defaulted in the payment of both common area assessments and the mortgage loan. Both U.S. Bank and the homeowners’ association (“HOA”) instituted nonjudicial foreclosure proceedings. While U.S. Bank’s trustee sale was postponed, the HOA’s trustee sale went forward. A third party purchaser acquired the unit for $6,000 and commenced an action to quiet title and enjoin the sale by U.S. Bank. Having obtained an adverse decision in the trial court, the purchaser appealed to the Nevada Supreme Court.

The primary issue before the SFR Investments court concerned whether a nonjudicial foreclosure commenced by the HOA to foreclose an assessment lien extinguished the lender’s first deed of trust. The SFR Investments court, in a 4-3 decision, answered in the affirmative.

Prior to the SFR Investments decision, the Nevada courts were split on the issue. Certain courts had ruled that nonjudicial foreclosure of an assessment lien created a parity between the two liens. Other courts had ruled that an assessment lien was senior to all junior liens, including a first deed of trust. Compare 7912 Limbwood Court Trust v. Wells Fargo Bank, N.A., 979 F. Supp. 2d 1142, 1149 (D. Nev. 2013) (“[A] foreclosure sale on the HOA super priority lien extinguishes all junior interests, including the first deed of trust”) with Bayview Loan Servicing, LLC v. Alessi & Koenig, LLC, 962 F. Supp. 2d 1222, 1225 (D. Nev. 2013) (“The super-priority amount is senior to an earlier-recorded first mortgage in the sense that it must be satisfied before a first mortgage upon its own foreclosure, but it is in parity with an earlier-recorded first mortgage with respect to extinguishment, i.e., the foreclosure of neither extinguishes the other.”)

In SFR Investments, the Nevada Supreme Court put the issue to rest. The decision was based on the court’s interpretation of NRS 116.3116(2), Nevada’s version of Section 3-116(b) of UCIOA, and specifically, the priority of an assessment lien vis-à-vis a first deed of trust after nonjudicial foreclosure of the assessment lien. NRS 116.3116(2) provides, in part, that an assessment lien does not have priority over a “first security interest on the unit recorded before the date on which the assessment sought to be enforced became delinquent.” NRS 116.3116(2)(b). However, the section further provides that an assessment lien for costs associated with abatement of a nuisance or common interest charges that “would have become due in the absence of acceleration during the 9 months immediately preceding institution of an action to enforce the lien” will have super-priority over all security interests, including a first deed of trust.

While the SFR Investments dissent argued that the inclusion of the words “institution of an action” in the statute required the HOA to judicially foreclose to extinguish a senior lien, the majority did not agree, holding little sympathy for U.S. Bank. As the court stated, “U.S. Bank’s final objection is that it makes little sense and is unfair to allow a relatively nominal lien—nine months of HOA dues—to extinguish a first deed of trust securing hundreds of thousands of dollars of debt. But as a junior lienholder, U.S. Bank could have paid off the [HOA] lien to avert loss of its security; it also could have established an escrow for [HOA] assessments to avoid having to use its own funds to pay delinquent dues. The inequity U.S. Bank decries is thus of its own making and not a reason to give NRS 116.3116(2) a singular reading at odds with its text and the interpretation given it by the authors and editors of the UCIOA.” SFR Investments, 334 P.3d at 414.

While SFR Investments is not binding precedent on the courts of other states, it may be sufficiently persuasive to tip the balance in favor of a party who acquires a valuable property lien-free for a pittance. For lenders who have made senior loans to borrowers residing in Nevada and in other states that have enacted either the original or subsequent versions of UCIOA (the subsequent amendments made no change to Section 3-116(b) of the original version of UCIOA), the lesson is to periodically monitor loans secured by residential common interest units as well as loans to borrowers secured by commercial properties subject to CC&Rs that have expressly adopted UCIOA (while UCIOA applies primarily to residential common interest developments, it will apply if the CC&Rs of a commercial development expressly adopt UCIOA, and a careful reading of the CC&Rs as part and parcel of the underwriting process is essential) and to cure any delinquent assessment liens prior to foreclosure so as to avoid the fate of U.S. Bank.

In the case of Washington & Sandhill Homeowners Ass’n v. Bank of America, N.A., 2014 WL 4798565 (D. Nev. Sept. 25, 2014), there may be a ray of hope for those lenders whose loans are insured by HUD. The Sandhill court held that the HOA’s foreclosure of an assessment lien on a HUD-insured residential common interest unit was barred by and invalid under the Supremacy Clause of the United States Constitution, state law notwithstanding. The Sandhill case has been appealed to the Ninth Circuit, with appellant’s opening brief having been due on January 22, 2015. This battle is not over yet.

For more information about UCIOA, contact Susan M. Santerelli at