The Nevada Supreme Court recently issued a decision addressing associations’ super-priority portion of the lien for unpaid assessments. In Horizons at Seven Hills Homeowners Association v. Ikon Holdings, Inc., the Nevada Supreme Court addressed two important issues regarding the super-priority portion of the lien: (1) whether the super-priority portion of the lien for common expense assessments pursuant to NRS 116.3116(2) includes collection fees and foreclosure costs incurred by a homeowners’ association, and (2) whether an association’s CC&Rs that limited the super-priority portion of the lien covering certain fees and costs over six months preceding foreclosure are superseded by the terms of the super-priority portion of the lien created by NRS 116.3116(2). The Court concluded that the super-priority portion of the lien created by NRS 116.3116(2) does not include collection costs and foreclosure fees. However, this analysis applies only to the pre 2015 amendments to NRS 116.3116, as discussed in further detail below. Additionally, the Court found that the super-priority provisions in an association’s CC&Rs are subordinate to the provisions of Chapter 116 to the extent the CC&Rs are inconsistent with the provisions of the statute.
In Ikon Holdings, the facts were as follows: after the owner became delinquent on his assessments, the association recorded a notice of default in the amount of roughly $4,300. The owner was also delinquent on his mortgage payments, and the bank recorded a notice of default the same month. The bank conducted a foreclosure sale and sold the property at auction to a third party, who subsequently transferred the property to Ikon Holdings through a quitclaim deed. The association then sought payment of its non-extinguished super-priority portion of the lien from Ikon Holdings. The association sought roughly $6,000, which included the unpaid assessments and collections costs and foreclosure fees. Ikon Holdings asserted that the super-priority portion of the lien did not encompass the collection costs and foreclosure fees and that the super-priority portion of the lien was limited to six months unpaid assessments, based upon the provision of the association’s CC&Rs, rather than the nine months provided for in NRS116.3116.
Analysis of Court’s Holding
1. The super-priority lien under NRS 116.3116(2) does not include fees or collection costs related to foreclosure.
Horizons argued that the super-priority portion of the lien necessarily includes collection fees and foreclosure costs incurred by the association in the nine months preceding a foreclosure, in addition to the nine months of unpaid assessments. Ikon Holdings maintained that collections costs and foreclosure fees are not collectible under NRS 116.3116(2). For the reasons set forth below, the Court disagreed with the association’s position and held that the previously effective version of NRS 116.3116 does not include collections fees and costs in the super-priority portion of the association’s lien.
a. NRS 116.3116
The association argued that the portion of the association’s lien which was given priority pursuant to NRS 116.3116(2) included collection fees and foreclosure costs incurred by the association because the statute was designed to put the association in the same position it would have been but for the owner’s default. The association urged the Court to adopt the reasoning of the Supreme Court of Connecticut as set forth in Hudson House Condominium Ass’n, Inc. v. Brooks, 611 A.2d 862 (Conn. 1992), in which the court interpreted a Connecticut statute identical to the Nevada statute. Unfortunately, and contrary to the opinion of nearly every other attorney who regularly practices in this area and many lower court decisions, the Nevada Supreme Court did not find the Connecticut case persuasive and refused to adopt its reasoning. Rather, the Court noted that because NRS 116.3116(2), which creates the super-priority portion of the lien, does not mention collection fees and costs and only refers to “the assessments for common expenses,” then such collection fees and costs cannot be recovered as part of the super-priority portion of the lien. Additionally, while the Connecticut court relied on policy concerns regarding the inability of associations to enforce the lien without also being able to collect fees and costs, the Nevada Supreme Court rejected such reliance.
b. NAC 116.470
In addition, the association supported its argument by pointing out that NAC 116.470, which sets a cap of $1,950 for collection fees and costs, must be read in conjunction with NRS 116.3116(2). The association contended there would be no need for a cap on collection fees and foreclosure costs if the super-priority amount of the lien did not include those fees and costs. The Court found these arguments similarly unpersuasive. The Court held that NRS 116.3116(2) speaks only to the priority portion of the lien, while NAC 116.470 provides what amounts associations can charge for collection fees and foreclosure costs, but does not touch on priority. Simply put, the designation of amounts associations are authorized to charge for collection and foreclosure of the lien in NAC 116.470 has no bearing on whether those amounts were part of the super-priority part of the lien. The Court found that the language in NRS 116.3116(2) (pre 2015 amendments) created a super-priority portion of the lien limited to “the extent of the assessments for common expenses.”
c. Legislative History
The Court reviewed the legislative history for further support that collections fees and foreclosure costs are not included in an association’s super-priority lien. The Court placed significant weight on the fact that revisions to NRS 116.3116 were proposed to the legislature in 2011 which would have added language incorporating the collection costs permitted under NRS 116.310313 to become part of an association’s super-priority lien. But those revisions were never approved and incorporated into the statute. The Legislative Action Committee of CIA (“LAC”) took the position we were clarifying the law at that time, but unfortunately the Nevada Supreme Court interpreted the legislative history as changing the statute, rather than clarifying. According to the Court, because the collection costs identified in NRS 116.310313 were not included in NRS 116.3116(2), the legislature did not intend for those costs to be part of the super-priority portion of the lien.
d. Advisory Opinions
The Court found further support for its conclusion in the advisory opinion issued by the Nevada Real Estate Division (“NRED”) in December of 2012, which addressed what amounts are encompassed in an association’s super-priority lien. The NRED, which is the agency charged with administering Chapter 116, opined that the association’s super-priority portion of the lien does not include the costs of collecting defined by NRS 116.310313. While the NRED opinion is not controlling for the Court, the Court gave deference to the opinion and agreed with the NRED’s analysis. All of the members of LAC were vehemently against that opinion when it was issued.
2. Horizons’ CC&Rs are superseded by NRS 116.3116.
Horizons’ CC&Rs purported to limit the super-priority portion of the lien to six months of unpaid assessments plus collection fees and costs. Six months was also in the original NRS116.3116. We were successful several years after Chapter 116 was adopted in convincing the legislators to increase the super-priority portion of the lien to nine months. The Court agreed the provisions of the CC&Rs are unenforceable to the extent they are inconsistent with Chapter 116. Relying on NRS 116.1206, which provides that any provisions in the governing documents of an association which violate the provisions of Chapter 116 are superseded by the provisions of Chapter 116, the Court refused to give effect to the provisions of Horizons’ CC&Rs which limited the portion of the super-priority portion of the lien to six months and include collection fees and costs in the super-priority portion.
Effect of Court’s Holding
While associations may fear this decision, it is a small victory for lenders in the battle of super-priority litigation. It is my opinion the effects of the case are limited. Associations must remember that the Court’s analysis is limited to the statute effective before the most recent amendments to Chapter 116, which amendments were enacted in the wake of the SFR decision. In 2015, the Legislature took important steps to clarify the amounts encompassed in the association’s super-priority portion of the lien. NRS 116.3116 now provides:
- The amount of the costs of enforcing the association’s lien that are prior to the security interest described in paragraph (b) of subsection 2 must not exceed the actual costs incurred by the association, must not include more than one trustee’s sale guaranty and must not exceed:
(a) For a demand or intent to lien letter, $150.
(b) For a notice of delinquent assessment, $325,
(c) For an intent to record a notice of default letter, $90.
(d) For a notice of default, $400.
(e) For a trustee’s sale guaranty, $400.
No costs of enforcing the association’s lien, other than the costs described in this subsection, and no amount of attorney’s fees may be included in the amount of the association’s lien that is prior to the security interest described in paragraph (b) of subsection 2.
The statute is now very clear as to what collection costs and foreclosure fees are included in the amount of the super-priority portion of the lien. Therefore, the Ikon Holdings’ decision has no effect on the amounts that associations may charge from October 1, 2015 forward. It does, however, underscore that we must do everything to protect the super-priority portion of the lien. It is still under assault and we will need everyone’s help in the next legislative session.
I have heard that some are afraid that the Court’s holding has the potential to subject associations to liability for collecting or seeking to collect amounts in the super-priority portion of the lien other than for nine months unpaid assessments in foreclosures that pre-date the 2015 amendments to Chapter 116. However, as outlined below, it is my opinion that the potential liability of associations going forward is very limited. Though facing possible liability is certainly unsettling, events potentially giving rise to liability of associations have already transpired.
First, the Court’s holding does not create an additional cause of action for lenders to challenge associations’ foreclosures. This case arose under a claim for declaratory relief in which the third party purchaser sought a ruling that the super-priority portion of an association’s lien under NRS 116.3116(2) does not include collection fees and costs. Again, the Court’s conclusion only applies to demands that pre-date the 2015 amendments to Chapter 116 and I would argue, only the demands that are still pending. Such demands are rare as most have been resolved.
Second, in most cases lenders have no standing to challenge payments already tendered, even if the Association demanded payment of collection costs. If the lender (or other third party purchaser) paid the amount identified, such payment would constitute a voluntary payment. In Nevada Association Services, Inc. v. Eighth Judicial District Court, the Nevada Supreme Court addressed the voluntary payment doctrine with regard to fees paid towards an association’s lien. The voluntary payment doctrine provides that one who makes a voluntary payment cannot subsequently recover return of that payment on the grounds that there was no obligation to make the payment. In order to be voluntary, a payment must be made without protest and with knowledge of the facts. While the Court stated a payment may not be considered voluntary when made in defense of property, such as when a lien is subject to ongoing or imminent foreclosure proceedings, the Court clarified that where a reasonable legal remedy is available to the payor, the payment is voluntary. Simply disagreeing with the demand does not mean it was not a “voluntary” payment. Various legal remedies were available to lenders at the time instead of paying the full amount. For example, legal action could have been taken to try and stop the sale from proceeding. Ultimately, therefore, I do not believe that a challenge to an association’s foreclosure based upon a valid tender, which included collections fees and costs in the super-priority amount, would be successful.
In another recent Nevada Supreme Court case, Shadow Wood Homeowners Association v. New York Community Bankcorp, issued on January 28, 2016, the Court addressed the effect of a third party bona fide purchaser for value on a lender’s challenges to amounts collected by the association in the foreclosure. The Court noted that the potential harm to a bone fide purchaser for value must be taken into account before setting aside an association’s sale. Additionally, the Court found that just because a buyer purchases a property at an association foreclosure sale does not necessarily mean that the buyer had notice of the future dispute as to title, and therefore may qualify as a bona fide purchaser for value absent any actual knowledge of such a dispute. As a result, there is an argument that properties sold to third parties, despite the fact that the association included collection costs and foreclosure fees in the super-priority amount that may have been identified to a lender, may not be set aside because of the negative impact on the third party buyer.
It is not clear what the result would be to a challenge when (1) an association refused to accept a lender’s attempted tender of only nine months assessments as the super-priority portion, and (2) the lender chose not to pay the super-priority amount as calculated by the association with collection fees and costs or challenged the amount due. There are some cases currently pending in Nevada’s courts which may require that issue to be addressed. I anticipate, however, defending those issues and any challenges to a sale as we have done thus far based upon the appropriate legal defenses. Indeed, the Court in the SFR decision recognized that a lender could not simply sit on its hands, allow a “disputed” foreclosure to proceed, and then later seek to unwind the sale.
Of course, there are also applicable statutes of limitation precluding claims for causes of action which arose beyond the statutory period. For example, a claim for breach of contract under NRS 116.1113 would be barred by the three-year statute of limitations imposed by NRS 11.190(3). See Nationstar Mortg. LLC v. Amber Hills II Homeowners Ass’n, 2016 U.S. Dist. LEXIS 43592 (D. Nev. Mar. 31, 2016). A claim for wrongful foreclosure must also be brought within three years. Id. Additionally, a claim for quiet title must be brought with 5 years. Id. Depending on the challenges asserted by lenders, there would be applicable statutes of limitation to cut off claims on the actions of the association. In addition, there were often legal remedies available to lenders that they never availed themselves of taking. Just as the court found when looking at the voluntary payment doctrine, lenders could have commenced an action to stop the foreclosure. The failure to exercise a remedy in a timely manner should bar the lender from any action now. Unfortunately, it does not mean that they will not file even more lawsuits, even if their claims are without merit.
The effects of Ikon Holdings will undoubtedly unfold over time. I anticipate that associations will face challenges from lenders to foreclosures conducted pre-2015 amendments to NRS Chapter 116. However, based upon the language of other recent Nevada Supreme Court opinions, many of these challenges will be without merit and ultimately unsuccessful. I do not anticipate that this decision will have sweeping negative impacts on associations, except for the increase in legal fees defending what will be an unfounded challenge by a lender or third party purchaser.