Supreme Court Leaves Standing Wells Fargo Win on Nevada Lien Law

By Chris Bruce

The U.S. Supreme Court left standing a federal appeals court ruling that could help Wells Fargo and other major banks affected by a Nevada statute covering homeowners’ association liens ( Bourne Valley Court Trust v. Wells Fargo Bank N.A. , U.S., 16-cv-01208, cert. den. 6/26/17 ).

The decision not to take the appeal means that a conflict will persist in how those cases are handled, an attorney who handles cases driven by the statute told Bloomberg BNA. Although the justices’ action will clarify cases in federal courts, questions will plague cases in state courts, said Natalie C. Lehman, an attorney with Wright Finlay & Zak in Las Vegas.

The court, closing out its term on June 26, turned away a petition urging review of a Nevada law that allows a foreclosure by a homeowners’ association (HOA) to wipe out even first mortgages, as long as the HOA’s action is based on unpaid HOA fees over the previous nine months.

Last year, the U.S. Court of Appeals for the Ninth Circuit agreed with Wells Fargo that the statute is unconstitutional, marking that court’s first decision on the constitutionality of an “opt-in” notice scheme of the kind presented by the case.

The case involves a Nevada statute that, until it was amended in 2015, didn’t require an HOA to alert a first mortgage holder, such as a bank, of an HOA foreclosure unless the bank had already asked to be notified.

According to the Ninth Circuit, the statute violates the U.S. Constitution’s guarantee of due process under the Fourteenth Amendment. Although the due process claim requires state action, that requirement was met when Nevada lawmakers passed the law, the Ninth Circuit said.

The decision by a three-judge panel wasn’t unanimous. Judges Dorothy W. Nelson and John B. Owens ruled for Wells Fargo, but Judge J. Clifford Wallace dissented, saying there was no state action.

More Questions Ahead

Questions about the Nevada statute have raised a host of uncertainties while driving litigation across the federal and state courts on a massive scale. Phyllis Gurgevich, president and chief executive officer of the Nevada Bankers Association, said the court’s decision to turn away the appeal means that questions will continue. Although the Nevada legislature made some progress when it revised the law in 2015, more work is needed, she said.

“The Supreme Court decision not to hear the appeal continues the contradiction between state and federal interpretations on due process and regulatory taking,” Gurgevich said in an email to Bloomberg BNA. “These types of uncertainties tend to increase costs to borrowers and decrease lender participation in the state.”

Lehman, whose firm is handling several hundred cases in connection with the Nevada statute, said the ruling will answer some questions, but not all. Although the court’s denial of the petition leaves the Ninth Circuit ruling in Bourne Valley standing, the court passed up the opportunity to resolve a conflict between the Ninth Circuit case and Saticoy Bay v. Wells Fargo, a January ruling by the Nevada Supreme Court. The Ninth Circuit said the state-action requirement was met on the due process question, but Saticoy Bay said there was no state action and so due process wasn’t implicated.

As a result, Lehman said, the Supreme Court’s June 26 order will have a mixed impact, depending on whether the underlying litigation is in federal or state court. In the federal courts, she said, the Ninth Circuit’s ruling in Bourne Valley will be applied to cases that have been stayed awaiting the Supreme Court’s action. Meanwhile, in state courts, cases will move ahead and address whether first lien holders may be able to mount defenses.

“Had SCOTUS accepted the petition, it would have resolved the conflict and both state and federal courts would have been bound by its decision, whichever way it came down,” Lehman said.

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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