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WBK Industry News - Litigation Developments

9th Circuit: Federal Foreclosure Bar Preempts Nevada’s HOA Superpriority Lien Law

On August 25, 2017, the U.S. Court of Appeals for the Ninth Circuit held that the prohibition on nonconsensual foreclosure of Federal Housing Finance Agency (FHFA) assets under the asset protection clause (also known as the Federal Foreclosure Bar) preempted Nevada’s superpriority lien provision.

In 2013, the plaintiff purchased a delinquent debtor’s home (Property) at a homeowners association (HOA) foreclosure sale after the debtor fell behind on his HOA payments.  The plaintiff took the position that Nevada’s superpriority lien provision allowed the HOA to sell the Property to him free and clear of any other liens.  Freddie Mac, the owner of the debtor’s mortgage loan for the Property, claimed it had a priority interest in the Property.

As background, Freddie Mac is under FHFA conservatorship.  In placing Freddie Mac into conservatorship, FHFA acquired Freddie Mac’s “rights, titles, powers, and privileges . . . with respect to [its] assets” for the life of the conservatorship. 12 U.S.C. § 4617(b)(2)(A)(I).  Additionally, FHFA’s conservatorship assets are shielded from certain adverse actions as spelled out by statute.  The Federal Foreclosure Bar provides that “[n]o property of [FHFA] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of [FHFA], nor shall any involuntary lien attach to the property of [FHFA].” 12 U.S.C. § 4617(j)(3).

When the plaintiff sued to quiet title, Freddie Mac intervened, counterclaimed for the Property’s title, and moved for summary judgement.  FHFA joined Freddie Mac’s counterclaim.  Freddie Mac and FHFA argued that the plaintiff did not acquire “clean title” because the Federal Foreclosure Bar preempted Nevada law and invalidated any purported extinguishment of Freddie Mac’s interest through the HOA foreclosure sale.  The trial court agreed with Freddie Mac and FHFA, and granted summary judgment for Freddie Mac.

On appeal, the plaintiff raised three arguments.  First, the plaintiff argued that the Federal Foreclosure Bar does not apply to private HOA foreclosures because it only protects FHFA property from state and local tax liens.  Second, the plaintiff stated that that the Federal Foreclosure Bar did not apply in this case because Freddie Mac and FHFA implicitly consented to the foreclosure when they took no action to stop the sale.  Third, the plaintiff argued that the Federal Foreclosure Bar did not preempt Nevada state law.

Regarding the plaintiff’s first argument, the Ninth Circuit found that a “plain reading of the statute discloses that the Federal Foreclosure Bar is not focused on or limited to tax liens.”  The Court went on to state that the Federal Foreclosure Bar applied to any property for which FHFA served as conservator and immunized such property from any foreclosure without FHFA’s consent.  The Ninth Circuit also rejected the plaintiff’s second argument and explained that the “Federal Foreclosure Bar does not require [FHFA] to actively resist foreclosure.”

Next, the Court addressed the issue of whether the Federal Foreclosure Bar preempted Nevada state law.  The Court noted that this issue has triggered multiple lawsuits and that the federal district courts in Nevada have generally unanimously held that the Federal Foreclosure Bar preempts Nevada’s superpriorty lien law.  Although the Ninth Circuit determined that the Federal Foreclosure Bar did not “demonstrate clear and manifest intent to preempt Nevada’s superpriority lien provision through an express preemption clause,” the Court ultimately found that “the Federal Foreclosure Bar implicitly demonstrated a clear intent to preempt Nevada’s superpriority lien law by expressly prohibiting foreclosures on [FHFA] property without consent.”

The Court stated that because Freddie Mac possessed an enforceable property interest and was under FHFA’s conservatorship at the time of the HOA foreclosure sale, “the

Federal Foreclosure Bar served to protect the deed of trust from extinguishment. Freddie Mac continued to own the deed of trust and the note after the sale to [the plaintiff].”  Therefore, the Ninth Circuit agreed with the district court’s ruling and affirmed the summary judgement in favor of Freddie Mac.

The Ninth Circuit’s full opinion can be found at: http://cdn.ca9.uscourts.gov/datastore/opinions/2017/08/25/16-15066.pdf.