In a divided decision, the Ninth Circuit held that Nevada's homeowner association lien statute (Nevada Revised Statutes § 116.3116) was facially unconstitutional for lack of a notice provision to lenders in violation of the Fourteenth Amendment's Due Process Clause. The majority erred for two primary reasons: (1) no state action or state actor was involved in the HOA foreclosure sale and (2) even if state action or state actor were involved, the statute expressly incorporates provisions requiring written notice to lenders.
This case is of substantial importance, involving the ability of a community association to maintain common property and deliver essential services. Such services benefit all properties in the community, and protect the value of all parties having an interest in the properties, including all lenders with loans in the community. Homeowners rely on their associations to be financially stable and able to carry out their functions; in turn, associations rely on effective means to recover delinquent assessments to achieve financial stability.
Beyond the parties here, this case affects homeowners in all community associations in the 21 states, the District of Columbia and Puerto Rico that have adopted state lien priority statutes similar to the Nevada statute; approximately half of those states have similar notice provisions. This approach to association lien priorities is modeled on the Uniform Condominium Act ("UCA"), Uniform Common Interest Ownership Act ("UCIOA"), and Uniform Planned Community Act ("UPCA"), all drafted by the Uniform Law Commission (formerly known as the National Conference of Commissioners on Uniform State Laws). This ruling may affect approximately 66.7 million Americans because over twenty percent (20%) of the U.S. population resides in a community association.
Circuit Court Brief
Prior Rulings: United States Court of Appeals for the Ninth Circuit
Brief Author: Ms. Jaime Fraser Carr, Esq. and Mr. Marvin J. Nodiff, Esq.
This appeal arises out of a Bankruptcy Court decision which held that the Anti-Modification Clause did not apply to the lien filed by the Association on the debtors' principal residence. By way of background, the debtors' Chapter 13 plan alleged that the value of the unit was less than the amount of the first mortgage and proposed to pay the Association six months of maintenance fees in full satisfaction of the Association's secured claim.
The Association filed an objection to the plan opposing the debtors' motion to modify its secured claim based upon the fact that a portion of the Association's lien was elevated above the first mortgage by the six-month lien priority of N.J.S.A. 46:8B-21 and was thus attached to equity in the unit. The specific provision of the Association's governing documents providing the basis for a consensual lien was presented to the Court. The Association argued that the Anti-Modification Clause prohibited modification of the Association's secured claim because it was attached to equity in the unit. Moreover, the Association argued that the public policy underlying the bankruptcy code prohibits the Association from being treated worse in this Chapter 13 than it was in the debtors' prior Chapter 7 case, where the lien at issue remained intact.
The debtors argued that the lien is statutory in nature and is therefore subject to modification under 1322(b)(2) and that the New Jersey priority lien statute does not afford the Association priority, but rather a right to payment. Additionally, the debtors argued that the statute bifurcates the lien and creates two separate liens: one with priority and the other subordinate to the first mortgage.
In overruling the Association's objection and supporting confirmation of the debtors' plan, the Court erroneously reasoned that the six-month lien priority created by New Jersey statute creates an entirely separate lien that is statutory in nature and thus outside the purview of the Anti-Modification Clause. In attempting to create the legal fiction of two separate liens where only one lien actually exists, the Court ignored the definition of "statutory lien" 11 U.S.C. 101 (53), which expressly states that the basis of the lien must arise "solely by force of a statute ... and does not include security interest or judicial lien.") (emphasis added). The Court also ignored the obvious fact that the Association could not have taken advantage of the six-month lien priority provision of the Condominium Act if its governing documents had not been recorded first and despite that the Association's governing documents predated the 1996 Amendment to the New Jersey Condominium Act establishing the six-month lien priority
If not overturned, this decision will have extraordinarily adverse effects on the community association industry. The Court appears to have preselected a desired outcome of this case and chose to take whatever meandering or erroneous legal pathway was required to reach that decision.
Prior Rulings: United States Bankruptcy Court District of New Jersey Memorandum Decision
CAI Amicus Review Committee: Mr. Robert Diamond, Esq., Chair of Amicus Committee; Mr. James Strichartz, Esq., Ms. Laurie Poole, Esq.,Mr. Steven Sugarman, Esq.
Brief Author: Mr. Timothy Duggan, Esq.
The issue presented in this case is whether a "poison pill" inserted in condominium by-laws that requires a Condominium Board to obtain an 80% vote (among other things) of all unit owners prior to commencing litigation against third parties, e.g. the condominium developer: (1) violates the Massachusetts Condominium Act or is overreaching, (2) contravenes public policy, and/or (3) violates the Massachusetts Declaration of Rights.
In 2014, the Condominium Trust filed suit against the Developer, its related management and construction entities and some contractors alleging that there were significant construction defects. Prior to initiating suit, the Condominium Trust and its then counsel and opposing counsel entered into a tolling agreement, which purported to toll all statutes of limitations and repose. Suit was only filed after the tolling agreement was terminated. This is significant because the statute of repose for construction defects claims in Massachusetts is six years.
At the time the suit was filed, more than 6 years after the condominium was constructed, the Developer and/or his affiliates, still owned more than 20% of the units, making compliance with the 80% litigation consent vote impossible. The developer's retention of more than 20% of the units more than 6 years after completion of the condominium, acts a mechanism to effectively allow the developer to run out the clock. As alleged in the Complaint, the Condominium Trust did obtain the permission of more than 50% of the unit owners to proceed with the litigation.
Out of an abundance of caution, the Condominium Trust included a count for declaratory judgment in the Complaint alleging that the anti-litigation provision was unenforceable and void on public policy. To that end, the Condominium Trust affirmatively moved for partial summary judgment to authorize it to proceed with the lawsuit. The Condominium Trust did not attempt to go through the exercise of undertaking a futile vote to convince the developer to authorize itself to be sued.
The Court initially granted the motion, holding that because the Developer owned 20% of the units, all that was required was that the Condominium Trust obtain 80% of the votes of nondeveloper affiliated units (or non-interested units). However, the Court held that the antilitigation provision was otherwise enforceable and did not violate public policy. The Condominium Trust moved for reconsideration of that Order and the Court did reconsider the Order, however, not in the way that the Condominium Trust wanted. Instead, the Court decided that the provision was enforceable as written, to wit: that an 80% vote of all unit owners, including developer affiliated and owned units was also required before proceeding with litigation.
The Developer and the other Defendants filed a Motion to Dismiss the case, for failure to comply with the anti-litigation provision. The Court issued an initial decision once again holding that the provision did not violate public policy and issued a Decision dismissing the Condominium Trust's lawsuit and this appeal followed.
The anti-litigation provision and the Decision issued in this case provides an effective roadmap for developers in Massachusetts to avoid liability for construction defects and/or other developer misdeeds. In the construction defect arena, if a developer is patient enough to retain a sufficient block of units (or has the foresight to retain or collect voting proxies) it has the ability to run out the clock (the statute of repose) on construction defect claims. If the Appeals Court or the Massachusetts Supreme Judicial Court do not address this developer practice, condominium associations in Massachusetts will find it increasingly difficult to commence litigation against developers.
June 29, 2015 - Superior Court Memorandum of Decision and Order on Defendants' Motion for Reconsideration and Request for a Hearing
November 18, 2016 - Superior Court Memorandum and Order on Defendants' Motions to Dismiss
July 8, 2016 - Superior Court Memorandum and Order on Defendants' Motions to Dismiss
CAI Amicus Review Committee: Mr. Robert Diamond, Esq., Chair of Amicus Committee, Mr. Gary Kessler, Esq. (CA), Mr. Steven Sugarman, Esq. (PA)
Brief Authors: Mr. Henry Goodman, Esq. and Ms. Ellen Shapiro, Esq.