Christiana Trust v. K&P Homes

Filing 56

ORDER that Plaintiff must submit a proposed judgment quieting title in its favor consistent with the Court's orders by 1/23/2018. Signed by Judge Robert C. Jones on 1/16/2018. (Copies have been distributed pursuant to the NEF - LH)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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______________________________________
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CHRISTIANA TRUST,
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Plaintiff,
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vs.
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K&P HOMES et al.,
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Defendants.
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2:15-cv-01534-RCJ-VCF
ORDER

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I.

FACTS AND PROCEDURAL HISTORY

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This case arises out of a homeowners’ association foreclosure sale. In 2007, Rita

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Wiegand purchased real property in Las Vegas, Nevada, giving the lender a promissory note for

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$284,200 secured by a deed of trust (“the DOT”). In 2013, the Tuscalante Homeowners

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Association (“the HOA”) sold the property at auction to K&P Homes (“K&P”) for $40,000. In

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2014, Bank of America assigned the note and DOT to Christiana Trust (“the Trust”). The Trust

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sued Wiegand and K&P in this Court for unjust enrichment and to quiet title, i.e., for a

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declaration that the DOT still encumbers the property because (among other reasons) the sale did

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not comport with due process. K&P filed a Counterclaim to quiet title and filed a Third-Party

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Complaint against Wiegand. The Court granted the Trust’s motion to dismiss the Counterclaim,

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anticipating that SFR Investments Pool I, LLC v. U.S. Bank, N.A., 334 P.3d 408 (Nev. 2014) did

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not apply retroactively.
K&P asked the Court to certify the retroactivity question to the Nevada Supreme Court.

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The Court granted the motion, because the issue was potentially dispositive of the quiet title

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claim. Earlier this year, the Nevada Supreme Court answered the certified question in the

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affirmative, i.e., that SFR Investments Pool I does apply retroactively. In the meantime,

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however, the Court of Appeals had decided Bourne Valley Court Trust v. Wells Fargo Bank,

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N.A., 832 F.3d 1154 (9th Cir. 2016), holding that the previous opt-in notice scheme under

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Chapter 116 was facially unconstitutional under the Due Process Clause of the Fourteenth

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Amendment. The Court had previously rejected the due process argument, but Bourne Valley

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appeared to require the Court to reconsider and quiet title in favor of Plaintiff. See Bank of N.Y.

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Mellon v. Ravenstar Invs., LLC, No. 3:17-cv-116, 2017 WL 2588088, at *3–4 (D. Nev. June 14,

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2017) (Jones, J.). The Court noticed the issue when the parties notified the Court of the issuance

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of the Nevada Supreme Court’s opinion answering the certified question. The Court therefore

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ordered K&P to show cause why title should not be quieted in Christiana Trust’s favor. The

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parties have briefed the issue, and the Court now addresses it.

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II.

DISCUSSION

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A.

The Precedential Value of Bourne Valley

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K&P argues that Bourne Valley does not control because the case “is not complete—it

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was remanded for further proceedings.” But the fact that Bourne Valley was remanded (in the

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usual manner) “for proceedings consistent with this opinion” does not imply that the issues

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decided are not yet binding in that case or throughout the Circuit. It simply means that the

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district court is to proceed to judgment in the particular case in accordance with the legal rule(s)

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declared by the Court of Appeals. The issue—the unconstitutionality of the previous opt-in

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notice scheme under Chapter 116—has been finally decided and is binding on this Court. The

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Supreme Court has denied certiorari in Bourne Valley, and the mandate has issued.

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B.

Interpretation of Chapter 116

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Next, K&P argues that even when the unconstitutional opt-in provisions of Chapter 116

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are severed, Nevada Revised Statutes section (“NRS”) 116.31168(1) previously incorporated

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NRS 107.090’s notice requirements. But both this Court and the Court of Appeals have ruled

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that NRS 116.31168(1) did not incorporate subsections (3) and (4) of NRS 107.090, and that

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even if it had done so, that would not have required notice to first deed of trust holders. See

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Bourne Valley Court Tr., 832 F.3d at 1159; US Bank, N.A. v. SFR Invs. Pool 1, LLC, No. 3:15-

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cv-241, 2016 WL 4473427, at *5 & n.1 (D. Nev. Aug. 24, 2016) (Jones, J.). Even if this Court

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were to reconsider its own rulings—which it does not—it would be bound by the Court of

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Appeals’ ruling on the issue.

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K&P notes that Judge Boulware has certified to the Nevada Supreme Court the question

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of whether the pre-October 1, 2015 version of NRS 116.31168(1) required notice to the first

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deed of trust holder. If the answer were “yes,” then the notice scheme would presumably not be

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facially unconstitutional, and the facts of notice in this case would have to be litigated. But a

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plain reading of the statutes and both the objective and subjective legislative intent behind the

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2015 amendments lead to the inescapable conclusion that notice was not previously required.

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See, e.g., Nationstar Mortg., LLC v. SFR Invs. Pool 1, LLC, No. 2:15-cv-583, 2017 WL

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3526256, at *2 (D. Nev. Aug. 16, 2017) (Jones, J.) (citing US Bank, N.A., 2016 WL 4473427, at

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*5 & n.1).

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A plain reading of NRS 107.090 indicates that even if fully incorporated into NRS

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116.3168, notice to a first deed of trust holder was not required thereunder, because the statute

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required notice only to those who opted in and to “[e]ach other person with an interest whose

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interest or claimed interest is subordinate to the deed of trust,” and a deed of trust is not

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subordinate to itself. Nev. Rev. Stat. § 107.090(3)(b) (emphasis added). In other words, even the

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total incorporation of NRS 107.090 would not require notice to first deed of trust holders. The

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previous incorporation statute read, “The provisions of NRS 107.090 apply to the foreclosure of

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an association’s lien as if a deed of trust were being foreclosed.” Id. § 116.31168(1) (2005)

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(emphasis added). It did not read, “The provisions of NRS 107.090 apply to the foreclosure of

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an association’s lien, except that a deed of trust holder is also entitled to the notice that

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subordinate lienholders would be entitled to were the deed of trust itself being foreclosed.”

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Something like the latter emphasized language would be required to conclude that deed of trust

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holders were entitled to the same notice under Chapter 116 that subordinate lienholders were

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entitled to under Chapter 107.

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As this Court has noted, the objective legislative intent clearly indicates that notice was

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not previously required, because the Nevada Legislature amended NRS 116.31162–.31163 in

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2015 to provide for notice to deed of trust holders. And the subjective legislative history—an

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analysis the Court now undertakes for the first time, because although it is not the Court’s

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preferred method of statutory interpretation, another court may find it important—leaves no

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doubt that it was the intent of the Nevada Legislature when adopting the 2015 amendments to

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Chapter 116 (via Assembly Bill 240 (“AB 240”) and companion Senate Bill 306 (“SB 306”)) to

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add a notice requirement that did not previously exist. See Nev. Ass. Jud. Subcomm. Hr’g, Mar.

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19, 2015, available at http://nvleg.granicus.com/ MediaPlayer.php?clip_id=3847. At a time

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when an early draft version of AB 240 would have gone so far as to require judicial foreclosure

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under Chapter 116, Vice Chair of the Assembly Judiciary Subcommittee David Gardner testified

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that he and his co-sponsors might amend AB 240 to replace the judicial foreclosure requirement

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with changes to the notice requirements that would provide due process to first deed of trust

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holders. See id. 11:00–11:49.

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The bill was indeed so amended, according to the testimony of SB 306 co-sponsor

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Senator Aaron Ford. See Nev. Sen. Jud. Comm. Hr’g, Apr. 7, 2015, available at

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http://nvleg.granicus. com/MediaPlayer.php?clip_id=4205 (“Because [under the Nevada

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Supreme Court’s 2014 interpretation of NRS 116.3116] a foreclosure of an HOA’s superpriority

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lien extinguishes the first mortgage lien on a home and on other subordinate liens, it is important

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that those lienholders receive notice of the HOA’s foreclosure that is sufficient to enable those

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lienholders to protect their interest.”). It is inconceivable that Senator Ford would have made

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that statement if he perceived that such notice was already required. Senator Ford explained to

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Senate Judiciary Committee Chairman Greg Brower that the reason for the notice provisions was

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to give lienholders the opportunity to prevent the loss of a several-hundred-thousand-dollar lien

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via an auction for a few thousand dollars—a common occurrence. See id. 16:55–17:30. General

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Counsel for the Federal Housing Finance Agency (“FHFA,” the federal statutory conservator of

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Fannie Mae and Freddie Mac) testified that notice to lienholders was a “core issue” to his

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agency’s support of the bill; although the FHFA was opposed to the extinguishment of a first

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mortgage via an HOA foreclosure as a general matter, SB 306 would avoid that result as a

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practical matter because of the new notice requirements. See id. 29:00–46:00. The issue of the

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need for notice to deed of trust holders in order to avoid the “problematic” inequity of the

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extinguishment of large liens via the foreclosure of comparatively tiny liens was stressed

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throughout the hearing in exchanges between Chairman Brower and representatives of both the

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banking and HOA industries. (See id. passim).

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Senator Ford testified at a later hearing that “Section 2 . . . adds a requirement that the

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notice of default and election to sell must include a detailed and itemized statement of the

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amounts due to the association and must be mailed to each holder of a recorded security interest,

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again addressing the notice issue and the specificity issue that were the main contentions of

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disagreement.” See Nev. Ass. Jud. Subcomm. Hr’g 2:03:35–2:03:57, Apr. 28, 2015, available at

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http://nvleg.granicus.com/MediaPlayer.php?clip_id=4497. He also testified that section 3 of the

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bill “eliminates the current requirement that security holders must notify the association of their

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interest in order to receive notice.” Id. 2:04:43–2:04:51 (emphasis added).
In summary, both the objective and subjective legislative intent, along with a plain

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reading of the previous statutes, compel the conclusion that notice was not previously required

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outside of the constitutionally insufficient opt-in procedure and publication.

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C.

The “Return Doctrine”

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Next, K&P argues that the sale in this case is saved by Nevada’s “return doctrine.” That

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is, although the 1993 opt-in version of Chapter 116’s notice scheme was ruled unconstitutional in

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Bourne Valley, the previous version required the HOA to give notice without an opt-in

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requirement. See Nev. Rev. Stat. § 116.31168 (1991) (“The association must also give

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reasonable notice of its intent to foreclose to all holders of liens in the unit who are known to

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it.”). K&P argues that under the return doctrine, an unconstitutional statute reverts to its latest

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constitutional version, see We the People Nev. ex rel. Angle v. Miller, 192 P.3d 1166, 1176 (Nev.

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2008), so the Court should assess the constitutionality of the HOA’s sale in this case under the

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1991 version of NRS 116.31168. The Trust argues that the doctrine does not even exist in the

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way K&P suggests. Even presuming that it does, the Court rejects the argument for reasons

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given by another judge of this District. See PNC Bank, N.A. v. Wingfield Springs Cmty. Ass’n,

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No. 3:15-cv-349, 2017 WL 4172616, at *3 (D. Nev. Sept. 20, 2017) (Du, J.).

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Upon even closer examination, the Court is convinced that the 1991 version of NRS

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116.31168 is also insufficient under the Due Process Clause. First, the previous statute only

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required notice of the “intent to foreclose,” Nev. Rev. Stat. § 116.31168 (1991), e.g., via a notice

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of default and election to sell. The Due Process Clause, however, requires “[n]otice by mail or

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other means as certain to ensure actual notice” of the “proceeding which will adversely affect the

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liberty or property interests of any party,” e.g., via a notice of sale. Mennonite Bd. of Missions v.

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Adams, 462 U.S. 791, 800 (1983) (“[A] mortgagee’s knowledge of delinquency in the payment

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of taxes is not equivalent to notice that a tax sale is pending.”). Second, the Due Process Clause

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requires notice not only to those lienholders “who are known,” Nev. Rev. Stat. § 116.31168

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(1991), but to all lienholders whose “name[s] and address[es] are reasonably ascertainable.”

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Mennonite Bd. of Missions, 462 U.S. at 800. Because the 1991 version of NRS 116.31168

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permitted foreclosure without reasonable notice of the time and place of sale to all lienholders

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whose identities and addresses were reasonably ascertainable, but only notice of the bare intent

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to foreclose to those lienholders who were already known, the return doctrine cannot validate the

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foreclosure here even assuming the doctrine applies precisely as K&P argues it does.

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D.

State Action

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Finally, K&P argues that the Court should not follow rulings by the Court of Appeals as

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to state law issues where the Nevada Supreme Court has since issued contrary rulings. The

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Court agrees with that statement as a general matter. See Erie R.R. Co. v. Thompkins, 304 U.S.

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64, 78 (1938). And it is correct that the Nevada Supreme Court has ruled that Chapter 116

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foreclosures do not constitute state action so as to implicate the Due Process Clause, disagreeing

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with Bourne Valley. See Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortg.,

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388 P.3d 970, 973–74 & n.5 (Nev. 2017). But the issue of state action under the Due Process

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Clause is indisputably an issue of federal law. See, e.g., Marshall v. Sawyer, 301 F.2d 639, 646

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& n.5 (9th Cir. 1962) (citing Burton v. Wilmington Parking Auth., 365 U.S. 715 (1961)). The

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Nevada Supreme Court of course has the power to rule on federal issues wherever it has

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jurisdiction over a case, but this Court must adhere to the rulings of the Court of Appeals on

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federal issues. Even where federal appellate law is silent on an issue, a state court’s opinion on

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an issue of federal law is only potentially persuasive, not binding; and where the Court of

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Appeals has actually ruled on the federal issue, as here, this Court may not even consider a

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contrary state court ruling. See Bittaker v. Enomoto, 587 F.2d 400, 402 n.1 (9th Cir. 1978).
CONCLUSION

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IT IS HEREBY ORDERED that Plaintiff shall submit a proposed judgment quieting title
in its favor consistent with the Court’s orders within seven (7) days.

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IT IS SO ORDERED.

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January 16, 2018.
Dated this 6th day of October, 2017.

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_____________________________________
ROBERT C. JONES
United States District Judge

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