Wells Fargo’s Nevada Mortgages May Get Top Court Test

By Chris Bruce

A court conflict testing some Nevada mortgage holdings of Wells Fargo and other major banks affected by homeowners’ association liens may be headed to the U.S. Supreme Court ( Bourne Valley Court Tr. v. Wells Fargo Bank N.A. , U.S., 16-cv-01208, petition filed 4/3/17 ).

At issue is 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.

Courts have clashed over the law in two important cases that both involve Wells Fargo. Last year, the U.S. Court of Appeals for the Ninth Circuit said the statute is unconstitutional, but in January, the Nevada Supreme Court disagreed and said the statute passes muster.

Bourne Valley Court Trust, which owns the foreclosed loan that sparked the case in the Ninth Circuit, April 3 asked the U.S. Supreme Court to resolve that conflict. The law was amended in 2015, but plenty is still at stake, according to Jacqueline A. Gilbert, a partner with Kim Gilbert Ebron in Las Vegas who represents Bourne Valley Court Trust.

“The issue is not dead because of the amendment,” Gilbert told Bloomberg BNA April 13. “There are well more than 1,000 cases pending in Nevada because of this question.”

Judges are staying many existing cases, citing the potential for U.S. Supreme Court action. For example, on April 12 alone, the U.S. District Court for the District of Nevada stayed more than 20 cases in orders that suggest the potential impact on major institutions.

Of those orders, three involve Wells Fargo, four involve Bank of America, another four involve U.S. Bank, five involve Bank of New York Mellon, and one involves Deutsche Bank.

Nevada Hard-Hit

Hanging in the balance are a large body of court battles arising from foreclosures in Nevada, one of the states hardest hit in the recent housing meltdown.

However, other states could be affected as well, according to Bourne Valley Court Trust’s petition. It said the Ninth Circuit ruling calls “into constitutional doubt” nonjudicial foreclosure laws—which allow foreclosures without the involvement of a court—of at least 10 other states, including Arizona in the Ninth Circuit.

“The decision thus casts a cloud on the title of countless properties sold in compliance with statutes whose constitutionality was reasonably deemed settled decades ago,” the petition said. “This Court must intervene.”

According to Gilbert, the two rulings have created a split between the federal courts and the Nevada Supreme Court.

“What we have is the set-up for blatant forum-shopping—depending on which side of Las Vegas Boulevard one files a case, the statutes are either unconstitutional or not,” Gilbert told Bloomberg BNA. “How the same statutes are applied should not depend on what court one is in,” she said.

Wells Fargo Action?

The justices don’t have to take the case, and probably won’t make that decision for some time. Wells Fargo has until May 8 to respond to the Bourne Valley Court Trust petition. It’s also possible that Wells Fargo could file a separate petition asking the U.S. Supreme Court to review the Nevada Supreme Court ruling.

Wells Fargo spokesman Tom Goyda April 13 declined to comment on the dispute.

Ground zero for the battle is Section 116.3116 of the Nevada Revised Statutes. Until 2015, when it was amended, the law didn’t require the HOA to alert the first mortgage holder, such as a bank, of the HOA foreclosure unless the bank had already asked to be notified.

In its 2016 decision, the Ninth Circuit said 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 Section 116.3116, the Ninth Circuit said.

“Rather than complaining about the foreclosure specifically, Wells Fargo contends—and we agree—that the enactment of the Statute unconstitutionally degraded its interest in the Property,” the court 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.

Nevada’s Supreme Court reached a different conclusion in January in a case with similar facts that also involved Wells Fargo. “We hold that neither the HOA’s nonjudicial foreclosure, nor the Legislature’s enactment of the statutes, constitute state action,” the Nevada court said. “Therefore, the statutes do not implicate due process.”

In addition to Gilbert, Bourne Valley Court Trust is represented by Thomas C. Goldstein and Kevin K. Russell of Goldstein & Russell in Washington, and Howard C. Kim and Diana C. Ebron of Kim Gilbert Ebron.

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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