Date: 01-26-2017

Case Style:

Case Number: 68630

Judge: Parraguirre

Court: Supreme Court of Nevada on appeal from the Eighth Judicial District Court, Clark County

Plaintiff's Attorney: Kim Gilbert Ebron and Jacqueline A. Gilbert and Mike Bohn

Defendant's Attorney: Andrew Jacobs and Kelly Dove

Description: NRS 116.3116-.31168 2 grant a homeowners' association (HOA)
a superpriority lien for certain unpaid assessments and allow an HOA to
nonjudicially foreclose on such a lien if specific requirements are met. In
this appeal, we must determine whether these statutes violate a first
security interest holder's due process rights. We hold that neither the
HOA's nonjudicial foreclosure, nor the Legislature's enactment of the
statutes, constitute state action. Therefore, the statutes do not implicate
due process. Additionally, we consider whether the extinguishment of a
subordinate deed of trust through an HOA's nonjudicial foreclosure
violates the Takings Clauses of the United States and Nevada
Constitutions. We hold it does not, and we therefore reverse the district
court's order and remand for further proceedings consistent with this
opinion.

FACTS AND PROCEDURAL HISTORY

Nonparties to this appeal Roy and Shirley Senholtz took out
an $81,370 loan from respondent Wells Fargo Home Mortgage, a division

1The Honorable Kristina Pickering, Justice, voluntarily recused
herself from participation in the decision of this matter. The Honorable
Lidia S. Stiglich, Justice, did not participate in the decision of this matter.

2Any discussion in this opinion related to these statutes refers to the
statutes in effect prior to the Legislature's 2013 and 2015 amendments.
See Horizons at Seven Hills Homeowners Ass'n v. Ikon Holdings, LLC, 132
Nev., Adv. Op. 35, 373 P.3d 66, 67 n.2 (2016) (referring to the statutes in
effect at the time the underlying cause of action arose).

of Wells Fargo Bank, N.A. (Wells Fargo) in order to refinance their
mortgage on property located in Summerlin, Nevada. Wells Fargo's loan
was secured by a deed of trust on the property, and the property was
governed by an HOA's covenants, conditions, and restrictions (CC&Rs).
The Senholtzes subsequently failed to pay their HOA dues and mortgage,
and both Wells Fargo and the HOA recorded notices of default and election
to sell. Thereafter, the HOA conducted a nonjudicial foreclosure sale,
wherein the property was sold to appellant Saticoy Bay LLC Series 350
Durango 104 (Saticoy Bay) for $6,900.

Saticoy Bay filed a complaint seeking an injunction preventing
Wells Fargo from foreclosing on the property and a declaration that it was
the rightful owner of the property, free and clear from any encumbrances
or liens. Wells Fargo filed a motion to dismiss, arguing (1) NRS 116.3116
et seq. violate the Due Process Clause and the Takings Clause of both the
United States and Nevada Constitutions; (2) this court's interpretation of
NRS 116.3116 et seq. in SFR Investments Pool 1, LLC v. U.S. Bank, N.A.,
130 Nev., Adv. Op. 75, 334 P.3d 408 (2014), conflicts with public policy;
and (3) the purchase price of the property was commercially unreasonable.
The district court held that the statutes violated Wells Fargo's due process
rights and granted the motion; the district court did not address Wells
Fargo's other arguments. Saticoy Bay now appeals the district court's
order.

DISCUSSION

On appeal, Saticoy Bay argues the foreclosure statutes do not
violate a first security interest holder's due process rights. We also
consider Wells Fargo's argument that the foreclosure statutes violate the
Takings Clauses of the United States and Nevada Constitutions. See Tam
v. Eighth Judicial Dist. Court, 131 Nev., Adv. Op. 80, 358 P.3d 234, 238-39
(2015) ("Although this court would not normally address an issue that the
district court declined to consider and develop the factual record, this
court can consider constitutional issues for the first time on appeal."). We
review the district court's legal conclusions, such as the constitutionality
of a statute, de novo. Buzz Stew, LLC v. City of N. Las Vegas, 124 Nev.
224, 228, 181 P.3d 670, 672 (2008); Silvar v. Eighth Judicial Dist. Court,
122 Nev. 289, 292, 129 P.3d 682, 684 (2006).

Nevada's superpriority lien statutes do not violate a first security interest
holder's due process rights

Wells Fargo argues that the foreclosure procedures specified
in NRS 116.3116 et seq. are facially unconstitutional because they do not
require an HOA to give a first security interest holder actual notice of a
foreclosure that, once conducted, may extinguish the security interest. Cf.
SF]? Investments Pool 1, 130 Nev., Adv. Op. 75, 334 P.3d at 419 ("NRS
116.3116(2) gives an HOA a true superpriority lien, proper foreclosure of
which will extinguish a first deed of trust."). Saticoy Bay argues that an
HOA's nonjudicial foreclosure does not violate due process because (1) no
state actor participates in an HOA's nonjudicial foreclosure, and (2) NRS
116.31168 incorporates the notice requirements set forth in NRS 107.090.

The Due Process Clauses of the United States and Nevada
Constitutions protect individuals from state actions that deprive them of
life, liberty, or property without due process of law. U.S. Const. amend.
XIV, § 1; Nev. Const. art. 1, § 8(5); see also Lugar v. Edmondson Oil Co.,
457 U.S. 922, 936 (1982). The United States Supreme Court has provided
a two-part test for determining whether the deprivation of a property
interest is the result of state action. See Lugar, 457 U.S. at 937. First, it
must be determined whether "the deprivation [was] caused by the exercise
of some right or privilege created by the State." Id. Second, it must be
determined whether "the party charged with the deprivation [is] a person
who may fairly be said to be a state actor." 3 Id.

The State created the HOA's superpriority lien, as well as its
right to conduct a nonjudicial foreclosure upon default. See NRS 116.3116
et seq. In addition, Wells Fargo's security interest was extinguished
because the HOA exercised its statutory right to conduct a nonjudicial
foreclosure. Therefore, the first element of the Lugar test is satisfied.
However, it must still be determined whether "the party charged with the
deprivation" may be characterized as a state actor.

We conclude that an HOA acting pursuant to NRS 116.3116 et
seq. cannot be deemed a state actor. The United States Supreme Court
has held that lalction by a private party pursuant to [a] statute, without
something more, [is] not sufficient to justify a characterization of that
party as a 'state actor." Lugar, 457 U.S. at 939 (emphasis added); see also
Am. Mfrs. Mitt. Ins. Co. v. Sullivan, 526 U.S. 40, 52 (1999) ("Action taken
by private entities with the mere approval or acquiescence of the State is
not state action."). Several courts have recognized "that nonjudicial
foreclosure statutes do not involve significant state action" so as to
implicate due process. See Charmicor, Inc. v. Deaner, 572 F.2d 694, 696

3 We note that the parties have not argued that Nevada's Due
Process Clause provides more protection than its federal counterpart. In
addition, we have previously relied on federal precedent in determining
the scope of Nevada's Due Process Clause. See Hernandez v. Bennett-
Haron, 128 Nev. 580, 587, 287 P.3d 305, 310 (2012) ("[Tlhe similarities
between the due process clauses contained in the United States and
Nevada Constitutions ... permit us to look to federal precedent for
guidance . . . .") Therefore, we employ the Lugar test to determine
whether the deprivation of a property interest is the result of state action
under both the state and federal Due Process Clauses.

(9th Cir. 1978) (holding that Nevada's nonjudicial foreclosure procedures
regarding a deed of trust do not amount to state action); see also Levine v.
Stein, 560 F.2d 1175, 1176 (4th Cir. 1977) (same with regard to Virginia's
nonjudicial foreclosure procedures); see also Northrip v. Fed. Nat'l Mortg.
Ass'n, 527 F.2d 23, 28-29 (6th Cir. 1975) (finding no state action in a
nonjudicial foreclosure, notwithstanding the fact that the sheriff
conducted the foreclosure and the deed had to be registered with the
county).

Additionally, we reject Wells Fargo's argument that the
Legislature may be charged with the deprivation because it enacted NRS
116.3116 et seq. As stated previously, the first prong of the Lugar test
identifies whether the state created a right or privilege that caused the
deprivation. However, once this inquiry is satisfied, the analysis shifts to
whether the procedures enacted by the state involve some form of
government action. See Lugar, 457 U.S. at 941 (holding "the procedural
scheme created by the statute [was] obviously [ ] the product of state
action," but that due process was only implicated because state officials
were involved in the seizure of the disputed property); see also Apao v.
Bank of New York, 324 F.3d 1091, 1095 (9th Cir. 2003) (holding a
mortgagee's nonjudicial foreclosure did not constitute state action because
there was no "overt official involvement" in the enforcement of the
creditor's remedy).

Although the two parts of the Lugar test may "collapse into
each other when the claim of a constitutional deprivation is directed
against a party whose official character is such as to lend the weight of the
State to his decisions," Lugar, 457 U.S. at 937, this is not such a case.
Rather, we find the present matter analogous to Flagg Bros., Inc. v.
Brooks, 436 U.S. 149 (1978). In Flagg Bros., the respondent was evicted
from her home, and her property was stored with the petitioner, a private
warehouseman. Id. at 153. A state statute granted the petitioner a lien
on the property and the right to enforce the lien by private sale of the
property. Id. at 151 & n.1. The respondent argued that such a sale would
be attributable to the state because the state had enacted the statute. Id.
at 164. The United States Supreme Court held that, although the state
had enacted the statute, due process was not implicated because the
statute did not compel such a sale, and the state was not otherwise
involved in such a sale. Id. at 157, 166.

Given this federal precedent, the Legislature's mere
enactment of NRS 116.3116 does not implicate due process absent some
additional showing that the state compelled the HOA to foreclose on its
lien, or that the state was involved with the sale. 4 Neither has been
demonstrated here. See NRS 116.31162(1) (stating that an HOA "may
foreclose its lien by sale"); see also NRS 116.3116(6) (stating that the
establishment of a superpriority lien "does not prohibit actions to recover
sums for which subsection 1 creates a lien or prohibit an association from
taking a deed in lieu of foreclosure"). Therefore, we hold that Nevada's
superpriority lien statutes do not implicate due process.° To the extent

4This is true regardless of whether the deprivation is alleged to have
occurred at the time of foreclosure, when Wells Fargo's security interest
was extinguished by the sale, or at the time the statutes were enacted,
when HOA liens were made prior to first security interests on the
property.

We acknowledge that the Ninth Circuit has recently held that the
Legislature's enactment of NRS 116.3116 et seq. does constitute state
action. See Bourne Valley Court Tr. v. Wells Fargo Bank, N.A., 832 F.3d
continued on next page...

this court's decision in SFR Investments Pool 1, LLC v. U.S. Bank, N.A.,
130 Nev., Adv. Op. 75, 334 P.3d 408, 417-18 (2014), suggests otherwise, we
clarify that due process is not implicated in an HOA's nonjudicial
foreclosure. As such, we need not determine whether NRS 116.3116 et
seq. incorporates the notice requirements set forth in NRS 107.090.
The extinguishment of a subordinate deed of trust through an HOA's
nonjudicial foreclosure does not constitute a governmental taking
Wells Fargo argues that NRS 116.3116 et seq. effectuate an
unconstitutional governmental taking because the state authorized the
HOA to destroy its property interest. Saticoy Bay argues that Wells Fargo
acquired its property interest subject to the HOA's superpriority lien
because both NRS 116.3116 and the HOA's CC&Rs predate Wells Fargo's
property interest.

The Takings Clauses of the United States and Nevada
Constitutions prohibit the state from taking private property for public
use without just compensation. U.S. Const. amend. V; Nev. Const. art. 1,
§ 8(6); see also Chicago, Burlington & Quincy R.R. Co. v. Chicago, 166 U.S.
226, 238-41 (1897) (incorporating the Fifth Amendment's Takings Clause
against the states through the Fourteenth Amendment's Due Process
Clause). There are two ways in which the state may effectuate a "taking":

(1) through a "direct government appropriation or physical invasion of
private property"; or (2) through enacting a regulation that is "so onerous
that its effect is tantamount to a direct appropriation or ouster." Lingle v.

...continued
1154, 1159-60 (9th Cir. 2016). However, for the aforementioned reasons,
we decline to follow its holding.

Chevron U.S.A. Inc., 544 U.S. 528, 537 (2005); see also McCarran
Airport v. Sisolak, 122 Nev. 645, 662, 137 P.3d 1110, 1121-22 (2006).

Here, the state has not directly appropriated Wells Fargo's
lien, nor has it directly appropriated the property subject to Wells Fargo's
lien. Cf. Armstrong v. United States, 364 U.S. 40, 48-49 (1960) (holding
that the federal government effectuated a Fifth Amendment taking when
it took title to property subject to the petitioner's liens, thereby rendering
the liens unenforceable and valueless). In addition, Wells Fargo's
intangible property interest is not subject to actual physical invasion.
Therefore, we address whether the enactment of the foreclosure statutes
constitutes a regulatory taking.

In determining whether a regulation constitutes a compensable regulatory taking, this court considers the following factors:

"(1) the regulation's economic impact on the property owner, (2) the
regulation's interference with investment-backed expectations, and (3) the
character of the government action." 6 Sisolak, 122 Nev. at 663, 137 P.3d

6We note that the foreclosure statutes do not fall within the "two
relatively narrow categories" of "regulatory action that generally will be
deemed per se takings for Fifth Amendment purposes." Lingle, 544 U.S. at
538; accord Sisolak, 122 Nev. at 662-63, 137 P.3d at 1122. Specifically,
the foreclosure statutes do not require a landowner to suffer "a permanent
physical occupation" of his or her property, cf. Loretto v. Teleprompter
Manhattan CAIN Corp., 458 U.S. 419, 421, 426 (1982) (holding a New
York statute that required a landlord to "permit a cable television
company to install its cable facilities upon his property" constituted a
taking); nor do they completely "deprive( ] a landowner of all economically
beneficial uses" of his or her land, cf. Lucas v. S.C. Coastal Council, 505
U.S. 1003, 1018, 1006-07, 1029-30 (1992) (holding a South Carolina
statute that prohibited the "petitioner from erecting any permanent
habitable structures" on his land constituted a taking to the extent that
continued on next page...

at 1122; Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124
(1978).

First, the foreclosure statutes do not necessarily have an
economic impact on any given first security interest holder. It is true that
the statutes permit an HOA to foreclose on its lien. Nonetheless, the
statutes do not require an HOA to conduct a foreclosure upon default, and
if the HOA chooses to foreclose on its lien, the proceeds from the sale may
fully satisfy the amount owed to a first security interest holder. See NRS
116.31164(3)(c) (stating the proceeds from such a sale shall be applied to
subordinate claims after the HOA's lien is satisfied).

Second, even assuming that the foreclosure statutes had a
substantial economic impact on Wells Fargo's property interest, the
statutes did not interfere with any legitimate investment-backed
expectation. NRS 116.3116 was enacted in 1991, see 1991 Nev. Stat., ch.
245, §§ 100-104, at 567-71, and the HOA's declaration of CC&Rs was
recorded in 1994. Wells Fargo acquired its security interest in 2003.

Therefore, Wells Fargo "was on notice that by operation of the statute, the
[earlier recorded] CC&Rs might entitle the HOA to a super priority lien at
some future date which would take priority over a [later recorded] first
deed of trust." SFR Investments Pool 1, 130 Nev., Adv. Op. 75, 334 P.3d at
418 (alterations in original) (internal quotation marks omitted); see also
NRS 116.3116(4) ("Recording of the declaration constitutes record notice
and perfection of the lien.").

...continued

"background principles of nuisance and property law" did not
independently restrict the landowner's intended use of the property).

Lastly, the "character of the government action" is as follows:
the State statutorily altered the priority of certain liens. The state did not
physically invade any property interest, nor did it participate in the HOA's
nonjudicial foreclosure. See Penn Cent., 438 U.S. at 124 ("A 'taking' may
more readily be found when the interference with property can be
characterized as a physical invasion by government, than when
interference arises from some public program adjusting the benefits and
burdens of economic life to promote the common good." (internal citation
omitted)).

Wells Fargo does not cite, and we have not found, a single case
that has held a state may not statutorily alter the priority of liens unless
it compensates subsequent lienholders whose interests are diminished or
destroyed as a result. 7 See U.S. Bank, Nat'l Ass'n v. NV Eagles, LLC, No.
2:15-CV-00786-RCJ-PAL, 2015 WL 5210523, at *5 (D. Nev. Sept. 3, 2015)
("The destruction of an undersecured junior lien via the foreclosure of a
senior lien under priority rules published before the junior lienor took his
lien has never been held to implicate the Takings Clause to this Court's
knowledge."). Therefore, we hold that the extinguishment of a
subordinate deed of trust through an HOA's nonjudicial foreclosure does
not constitute a governmental taking.


7We note that Wells Fargo did not acquire its property interest prior
to the enactment of NRS 116.3116 et seq. Therefore, we need not address
whether the foreclosure statutes effectuate a taking with respect to such
lienholders.

Outcome: We hold that the Due Process Clauses of the United States
and Nevada Constitutions are not implicated in an HOA's nonjudicial
foreclosure of a superpriority lien. In addition, we hold that the
extinguishment of a subordinate deed of trust through an HOA's
nonjudicial foreclosure does not violate the Takings Clauses of the United
States and Nevada Constitutions. Because the district court did not
address Wells Fargo's other arguments, we remand the matter so that the
district court may consider them in the first instance. Accordingly, we
reverse the district court's order and remand the matter for further
proceedings consistent with this opinion.

Plaintiff's Experts:

Defendant's Experts:

Comments: