I hope you will take my question. I am counsel to several banks that provide loan resources to HOAs. I have always held the position that HOA liens have superpriority, and they do not violate takings or due process.
My concern involves proper notice from an HOA that involves superpriority issues with respect to the Takings Clause and Due Process. I know this can be kind of tricky. I would like your view.
So, in the context of an HOA, how do the Takings and Due Process Clause impact the superpriority lien?
ANSWER
Let’s begin by providing a brief discussion about the meaning of “superpriority.” With respect to Homeowners Associations (HOAs), many states offer “super – priority” of HOA liens set up in connection with townhouse, condominium, and other housing developments. In other words, applicable statutes grant an HOA a lien on its members’ residences for unpaid assessments and charges, rendering that portion superior to all other liens, including the first deed of trust held by the mortgage lender.
Lenders that extend mortgage loans secured by homes located within these HOA developments must be aware of the risk that a borrower might not pay HOA assessments when due, leading to the HOA’s foreclosure in the exercise of its superpriority lien. Accordingly, they need to pay attention to any foreclosure notices they receive regarding HOA proceedings.
Now to expand on your question. I will provide a response by citing recent litigation. The U.S. Court of Appeals for the 9th Circuit considered a bank's desperate attempt to rescue its security interest in a home lost to HOA foreclosure.[*]
Carrasco and Kongnalinh bought a house within the Copper Creek Homeowners Association, financing the purchase with a loan from Wells Fargo Bank secured by the home. The homeowners fell behind on their HOA dues, and the HOA recorded a lien for the delinquent assessments. The HOA foreclosed on the property to satisfy the lien, and Mahogany Meadows Avenue Trust bought the property for $5,332 at a public auction, extinguishing Wells Fargo’s deed of trust.
Wells Fargo conceded that it had received actual notices of the foreclosure sale but argued that the contents of the notices were constitutionally deficient because they did not state that the HOA was foreclosing to satisfy the superpriority portion of the lien, how large the superpriority portion was, or that Wells Fargo’s own lien was in jeopardy. Wells Fargo received precisely the notice prescribed by the statute.
Wells Fargo brought a quiet title action against Mahogany Meadows, the HOA, and the HOA’s agent, seeking a declaration that the foreclosure sale was invalid and Wells Fargo’s deed of trust “continues as a valid encumbrance against the Property,” which had been worth about $200,000. Wells Fargo asserted that the Nebraska state law giving the HOA lien superpriority violated the Takings Clause and the Due Process Clause of the U.S. Constitution.
The Takings Clause and Due Process Clause refers to the Fifth Amendment of the Constitution, where provisions concerning the due process of law and just compensation are explicated.
Check out the commodiously, unexpurgated legalese of the text itself; then I’ll make it easy on the eye with a brief translation:
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
Brief translation: private property cannot be taken for public use without just compensation.
“Just compensation” typically means, in this context, that the property owner has to receive at a minimum the fair market value of the property in its best alternative use – independent of the government taking.
Now, let’s return to the case.
The district court dismissed the complaint and the 9th Circuit affirmed.
First, the “superpriority” statute did not facilitate an uncompensated taking of property or violate the Due Process Clause. The Takings Clause, which states “Nor shall private property [including liens such as Wells Fargo’s deed of trust lien] be taken for public use, without compensation,” governs the conduct of the government, not private actors. The HOA, which conducted the foreclosure, was not an arm of the State of Nebraska.
The U.S. Supreme Court has held that “[p]rivate use of state-sanctioned private remedies or procedures does not rise to the level of state action.” Although Nevada law authorized the HOA’s action, that authorization did not make the HOA’s action government action sufficient to invoke the Fifth Amendment.
Second, because the enactment of the state statute had predated the creation of Wells Fargo’s lien, Wells Fargo could not establish that it suffered an uncompensated taking. The statute was enacted in 1991, the HOA covenants and restrictions were recorded in 2003, and both of these things happened before Wells Fargo acquired its lien. Thus, the interest Wells Fargo asserted – that is, the right to maintain its lien unimpaired by a later HOA lien – was not part of its title to begin with. To be sure, when background principles of state law already serve to deprive the property owner of the interest it claims to have been taken, it cannot assert a claim under Takings Clause.
Wells Fargo had options. It easily could have avoided the harsh result by deeming a lien subject to the statutory scheme inadequate security for its loan and refusing to lend. Or, Wells Fargo could have paid off the HOA lien to avert loss of its security, or established an escrow for HOA assessments to avoid having to use its own funds to pay delinquent dues.
Third and finally, regarding due process, because Wells Fargo did not dispute that it received actual notice, its due process rights were not violated.
Wells Fargo did not argue that it was particularly unsophisticated so that a level of notice that might be adequate for an average person would be inadequate for it. Instead, it argued that the notice contemplated by the statute was insufficient. If that were correct, then the notice would be equally insufficient for any holder of an interest in the property, which would mean that essentially all applications of the statute would be invalid. Yet the court had already held the opposite in an earlier decision.
So, here’s my observation.
As I see it, the 9th Circuit rejected Wells Fargo’s assertion that it could not have known about the potential impairment of its lien because even though the statute had been enacted before it acquired its lien, only in a Nevada Supreme Court decision rendered after Wells Fargo obtained its lien “did the [court] radically reinvent [the statute] and hold that it not only granted a homeowner’s association first-payment priority during foreclosure, but that foreclosure of such a lien also destroyed every other lien on the property.”
The Nevada Supreme Court had explained that its decision did not change the law, but “did no more than interpret the will of the enacting legislature.” If the Nevada courts wished to treat that interpretation as reflecting the statute's meaning from the day it was enacted, no principle of federal constitutional law prevented them from doing so.
Furthermore, the 9th Circuit noted that no contrary interpretation had been established before the Nevada Supreme Court decision. The Takings Clause only protects property rights as they are established under state law, not as they might have been established or ought to have been established.
Several points, therefore, deserve reiteration.
The creditor easily could have avoided the harsh result of the decision. It could have refused to lend because of the statutory superpriority scheme. Alternatively, as part of the loan setup, it could have made the loan and implemented a procedure, including training, to assure receipt, and employee understanding of, notices from the HOA. Upon receiving notice, the creditor could have paid off the HOA lien to prevent loss of its security. From the beginning of the loan, the creditor could have required an escrow account for HOA assessments and coordinated payments with the HOA.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
First, the “superpriority” statute did not facilitate an uncompensated taking of property or violate the Due Process Clause. The Takings Clause, which states “Nor shall private property [including liens such as Wells Fargo’s deed of trust lien] be taken for public use, without compensation,” governs the conduct of the government, not private actors. The HOA, which conducted the foreclosure, was not an arm of the State of Nebraska.
The U.S. Supreme Court has held that “[p]rivate use of state-sanctioned private remedies or procedures does not rise to the level of state action.” Although Nevada law authorized the HOA’s action, that authorization did not make the HOA’s action government action sufficient to invoke the Fifth Amendment.
Second, because the enactment of the state statute had predated the creation of Wells Fargo’s lien, Wells Fargo could not establish that it suffered an uncompensated taking. The statute was enacted in 1991, the HOA covenants and restrictions were recorded in 2003, and both of these things happened before Wells Fargo acquired its lien. Thus, the interest Wells Fargo asserted – that is, the right to maintain its lien unimpaired by a later HOA lien – was not part of its title to begin with. To be sure, when background principles of state law already serve to deprive the property owner of the interest it claims to have been taken, it cannot assert a claim under Takings Clause.
Wells Fargo had options. It easily could have avoided the harsh result by deeming a lien subject to the statutory scheme inadequate security for its loan and refusing to lend. Or, Wells Fargo could have paid off the HOA lien to avert loss of its security, or established an escrow for HOA assessments to avoid having to use its own funds to pay delinquent dues.
Third and finally, regarding due process, because Wells Fargo did not dispute that it received actual notice, its due process rights were not violated.
Wells Fargo did not argue that it was particularly unsophisticated so that a level of notice that might be adequate for an average person would be inadequate for it. Instead, it argued that the notice contemplated by the statute was insufficient. If that were correct, then the notice would be equally insufficient for any holder of an interest in the property, which would mean that essentially all applications of the statute would be invalid. Yet the court had already held the opposite in an earlier decision.
So, here’s my observation.
As I see it, the 9th Circuit rejected Wells Fargo’s assertion that it could not have known about the potential impairment of its lien because even though the statute had been enacted before it acquired its lien, only in a Nevada Supreme Court decision rendered after Wells Fargo obtained its lien “did the [court] radically reinvent [the statute] and hold that it not only granted a homeowner’s association first-payment priority during foreclosure, but that foreclosure of such a lien also destroyed every other lien on the property.”
The Nevada Supreme Court had explained that its decision did not change the law, but “did no more than interpret the will of the enacting legislature.” If the Nevada courts wished to treat that interpretation as reflecting the statute's meaning from the day it was enacted, no principle of federal constitutional law prevented them from doing so.
Furthermore, the 9th Circuit noted that no contrary interpretation had been established before the Nevada Supreme Court decision. The Takings Clause only protects property rights as they are established under state law, not as they might have been established or ought to have been established.
Several points, therefore, deserve reiteration.
The creditor easily could have avoided the harsh result of the decision. It could have refused to lend because of the statutory superpriority scheme. Alternatively, as part of the loan setup, it could have made the loan and implemented a procedure, including training, to assure receipt, and employee understanding of, notices from the HOA. Upon receiving notice, the creditor could have paid off the HOA lien to prevent loss of its security. From the beginning of the loan, the creditor could have required an escrow account for HOA assessments and coordinated payments with the HOA.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
[*] Wells Fargo
Bank v. Mahogany Meadows Ave. Trust, 979 F.3d 1209 (9th Circuit 2020)
