Wells Fargo Bank N.A. v. Mahogany Meadows Avenue Trust

The appeals court allows a tiny lien to wipe out a big mortgage if the bank wasn’t vigilant at the time of foreclosure.

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Case Type:
Case Status:
18-17320 (9th Circuit, Nov 05,2020) Published
Wells Fargo (WF), the panel held, did not suffer an uncompensated taking under the Constitution’s Takings Clause (TC). Below, WF had attacked a foreclosure sale by a homeowners’ association (HOA) as invalid. According to this panel, the TC governs state actors, not private ones like the HOA; the Nevada law granting an HOA a preeminent lien for some costs could not be a taking because its enactment predated WF’s lien; WF had gotten legally adequate notice; and the district court had not abused its discretion in denying WF’s reconsideration motion, WF having failed to make its argument earlier.
Procedural context:
Before the district court (DC), WF brought a quiet-title action against Mahogany Meadows, the HOA, and the HOA’s agent. As noted above, it sought a declaration that the foreclosure sale was invalid, meaning that its DOT “continues as a valid encumbrance against the Property,” which was then worth approximately $200,000.” The crux of this argument was the assertion that section 116.3116 violates the Takings Clause and the Due Process Clause. The district court (DC) dismissed WF’s complaint for failure to state a claim. First, as to the takings claim, the DC relied on Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortg., 388 P.3d 970, 975 (Nev. 2017), in which the Nevada Supreme Court held that "the extinguishment of a subordinate deed of trust through an HOA’s nonjudicial foreclosure does not violate the Takings Clause[]." Second, as to the due-process claim, the DC determined that WF had received actual notice of the delinquent assessment and the foreclosure sale, notice at least sufficient to satisfy due process. WF promptly moved for reconsideration. In that motion, it argued for the first time that because one of the debtors—Luis Carrasco—was an active-duty member of the Army Reserve, the foreclosure sale violated the Servicemembers Civil Relief Act. The DC denied this request because WF did not explain why it was unable to discover Luis's status earlier.
Section 116.3116 of the Nevada Revised Statutes (Section 116.3116) grants an HOA a lien on its members’ residences for certain unpaid assessments and charges. Section 116.3116 grants super-priority status to a portion of the HOA lien—specifically, the portion that consists of the last nine months of unpaid HOA dues and any unpaid maintenance and nuisance-abatement charges. With only a few exceptions, the superpriority portion of the lien, the Nevada Supreme Court has noted, is superior to all other liens on the property, including a first deed of trust held by the mortgage lender. As such, an HOA can extinguish the first deed of trust by foreclosing on its superpriority lien. In 2008, Luis Carrasco and Janet Kongnalinh (Debtors) purchased a house in Las Vegas that was within the Cooper Creek HOA, thus making them and their property subject to its covenants, conditions, and restrictions, including an obligation to pay dues and other assessments to the HOA. They financed the purchase with a loan from WF; to secure the loan, the Debtors recorded a deed of trust (DOT) in favor of WF. Approximately three years later, the Debtors fell behind on their HOA dues, and the HOA recorded a lien for the delinquent assessments. The HOA ultimately foreclosed on the property to satisfy its lien, and in 2013, Mahogany Meadows Avenue Trust purchased the property at a public auction for $5,332, extinguishing the DOT.
Mary H. Murguia; Eric D. Miller; and George Caram Steeh III

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