For the second time in a week, we report a decision where the Ninth Circuit had no sympathy for a lender who was asleep at the switch and woke up to find its mortgage wiped out.
This time, the San Francisco-based appeals court upheld the constitutionality of a Nevada statute giving superpriority status to the lien of a homeowners’ association for unpaid assessments. Last week, we saw the Ninth Circuit rule that a subordinate mortgage lender did not have appellate standing to challenge the bankruptcy court’s annulment of the automatic stay in favor of an HOA, even when it meant that an HOA’s small lien wiped out a $1.4 million mortgage. To read ABI’s report on Bank of New York Mellon v. 2298 Driftwood Tide Trust (In re Barrett), 19-60043, 2020 BL 416716 (9th Cir. Oct. 28, 2020), click here.
The Superpriority HOA Lien
Nevada adopted a statute in 1991 giving superpriority status to a portion of an HOA’s lien for unpaid assessments. The statute makes the HOA’s lien superior to all other liens, including deeds of trust.
A couple purchased a home in 2008. Three years later they became delinquent on the mortgage. The HOA recorded a lien for the delinquent assessments, foreclosed the lien, and sold the property at public auction in 2013 for about $5,300.
The mortgage lender brought a quiet-title action in 2017, claiming that the property was worth some $200,000. The lender contended that the state statute violated both the Takings Clause and the Due Process Clause of the U.S. Constitution. The district court dismissed the suit for failure to state a claim.
The appeals court upheld dismissal in a November 5 opinion by Circuit Judge Eric D. Miller, who was confirmed by the Senate in 2019 without consent from either of the senators in Washington, his home state. His was the first confirmation without a so-called blue slip from his home state senators. After law school, Judge Miller clerked on the D.C. Circuit and for Justice Clarence Thomas.
No Constitutional Infirmities
Judge Miller first examined the Takings Clause claim.
Made applicable to the states by the Fourteenth Amendment, the Takings Clause of the Fifth Amendment provides that no “private property [shall] be taken for public use, without just compensation.”
Because the clause only deals with government conduct, the lender contended that the state statute violated the Takings Clause, not the foreclosure.
The lender’s argument failed, because its lien attached to the property long after the statute was enacted. Therefore, Judge Miller said, the lender “cannot establish that it suffered an uncompensated taking.”
With regard to the lender’s Due Process argument, the Ninth Circuit had previously held that the same statute was not facially unconstitutional. Bank of America, N.A. v. Arlington West Twilight Homeowners Association, 920 F.3d 520 (9th Cir. 2019).
The lender therefore argued that the statute was unconstitutional as applied.
Although conceding that it had received actual notice as prescribed by the statute, the lender contended that the notice was inadequate because it did not state that the HOA was foreclosing a prior lien, nor did it state the amount of the prior lien or say that the bank’s lien was in jeopardy.
Judge Miller upheld dismissal of the Due Process claim because Arlington West held that the statutorily prescribed notice was constitutionally sufficient.
Observations
Do we see a pattern here?
The cases this week and last week involved mortgage lenders who didn’t want to take back property during the housing crisis, because doing so would have obliged them to pay taxes, HOA fees, and insurance. Ten years later, housing prices skyrocketed, and the mortgages would have been valuable if they had been protected 10 years ago.
In both cases, the Ninth Circuit allowed buyers at foreclosure to pocket profits they made by taking risks years ago.
More significantly, Judge Miller’s opinion cites Supreme Court and appeals court authorities on the Taking Clause regarding the permissibility of statutes that impair the rights of secured parties. If the new administration proposes legislation modifying the Bankruptcy Code that erodes rights of secured creditors, the amendments might have prospective effect only — that is, they would apply only to liens created after the effective date.
For the second time in a week, we report a decision where the Ninth Circuit had no sympathy for a lender who was asleep at the switch and woke up to find its mortgage wiped out.
This time, the San Francisco-based appeals court upheld the constitutionality of a Nevada statute giving superpriority status to the lien of a homeowners’ association for unpaid assessments. Last week, we saw the Ninth Circuit rule that a subordinate mortgage lender did not have appellate standing to challenge the bankruptcy court’s annulment of the automatic stay in favor of an HOA, even when it meant that an HOA’s small lien wiped out a $1.4 million mortgage. To read ABI’s report on Bank of New York Mellon v. 2298 Driftwood Tide Trust (In re Barrett), 19-60043, 2020 BL 416716 (9th Cir. Oct. 28, 2020), click here.
The Superpriority HOA Lien
Nevada adopted a statute in 1991 giving superpriority status to a portion of an HOA’s lien for unpaid assessments. The statute makes the HOA’s lien superior to all other liens, including deeds of trust.
A couple purchased a home in 2008. Three years later they became delinquent on the mortgage. The HOA recorded a lien for the delinquent assessments, foreclosed the lien, and sold the property at public auction in 2013 for about $5,300.
The mortgage lender brought a quiet-title action in 2017, claiming that the property was worth some $200,000. The lender contended that the state statute violated both the Takings Clause and the Due Process Clause of the U.S. Constitution. The district court dismissed the suit for failure to state a claim.
The appeals court upheld dismissal in a November 5 opinion by Circuit Judge Eric D. Miller, who was confirmed by the Senate in 2019 without consent from either of the senators in Washington, his home state. His was the first confirmation without a so-called blue slip from his home state senators. After law school, Judge Miller clerked on the D.C. Circuit and for Justice Clarence Thomas.