Article courtesy of Edward J. McNeilly and David P. Simonds, each of Hogan Lovells US LLP
Ninth Circuit Holds That Lender May Rely on State Quiet Title Statute to Void Foreclosure Sale Made in Violation of the Automatic Stay
In Bank of New York Mellon v. 732 Hardy Way Trust, 2 F.4th 1229 (9th Cir. 2021), the United States Court of Appeals for the Ninth Circuit held that an HOA’s nonjudicial foreclosure of an HOA lien on a residential property in violation of the automatic stay was void, and that a lender with a deed of trust against the property had standing to sue under Nevada’s quiet title statute.
In 2013, Bank of New York Mellon (the “Bank”) took assignment of a loan made to Harold Hill (the “Debtor”) in 2005 to purchase a property in Mesquite, Nevada (the “Property”). The Property was located in a homeowners’ association (“HOA”) that was subject to a 2003 Declaration of Covenants, Conditions and Restrictions. Under Nevada law, an HOA lien has superpriority statutory status. In January 2014, Hill fell behind on his HOA dues and the HOA recorded a Notice of Delinquent Assessment Lien. In April 2014, Hill filed for chapter 13 bankruptcy and stated in his bankruptcy plan that he was surrendering the Property to the Bank and the HOA. The automatic stay went into effect, staying “any act to … enforce any lien against property of the estate.” 11 U.S.C. § 362(a)(4).
In July 2014, while the bankruptcy case was still pending, the HOA recorded a notice of foreclosure sale and a few weeks later sold the Property to 732 Hardy Way Trust (the “Trust”) at a non-judicial foreclosure sale. The Bank subsequently initiated litigation in the United States District Court for the District of Nevada, in which the Bank (1) sued the HOA and the Trust to quiet title and for declaratory relief on the basis that the foreclosure sale was void and therefore did not extinguish the Bank’s first deed of trust; (2) sought a preliminary injunction to prevent the Trust from selling or transferring the Property; and (3) requested an order declaring that the Bank could foreclose on its deed of trust. The Bank also sued the HOA for breach of Nevada Revised Statute 116.1113 and wrongful foreclosure.
The Bank and the Trust each moved for summary judgment. The Trust argued it had superior title because the HOA foreclosure sale extinguished the Bank’s deed of trust. Conversely, the Bank argued that the HOA foreclosure sale did not extinguish its lien because, inter alia, the sale violated the automatic bankruptcy stay and was thus void under Nevada and Ninth Circuit precedent or, alternatively, Nevada’s HOA foreclosure statute violated due process. The district court granted summary judgment in favor of the Trust and dismissed the remaining claims against the HOA, holding simply “that the foreclosure sale extinguished the [Bank’s] deed of trust on the [P]roperty and that [the Trust] purchased the property free and clear of the deed of trust.”
The Ninth Circuit reversed the district court’s decision in a two to one decision. The district court had relied on the Ninth Circuit case of Tilley v. Vucurevich (In re Pecan Groves), 951 F.2d 242, 245 (9th Cir. 1991), in finding that the Bank lacked standing to challenge any violation of the automatic stay because it “was neither a party, a debtor, or a trustee in [the underlying] bankruptcy matter.” However, the Ninth Circuit majority held that the district court had erred, as the Bank had brought its claim under Nevada’s quiet title statute pursuant to Nevada precedent invalidating HOA foreclosure sales when the HOA has violated the automatic stay. The Ninth Circuit further held that any HOA foreclosure sale in violation of the automatic bankruptcy stay was void under Nevada law, thereby giving the Bank an interest in the Property superior to that of the Trust.
Thus, in the Ninth Circuit, a lender may rely on a state court statute to void a completed super-priority lien foreclosure sale if the sale violates the bankruptcy automatic stay.
In a dissenting opinion, Judge Forrest dissented from the majority, writing that she would have found that the Bank was not entitled to set aside the foreclosure on the grounds that the foreclosure violated the automatic stay because the Bank was not acting as a “creditor” within the meaning of the Bankruptcy Code. However, Judge Vandyke, in a concurring opinion, noted that there was “something peculiar about the dissent’s conclusion that, yes, the HOA foreclosure sale at issue in this case was void as a matter of federal bankruptcy law, but Nevada property law must turn a blind eye to that fact. That approach would force Nevada to ignore a reality that our own court has recognized again and again: violations of a bankruptcy stay are void, not merely voidable.”