The Nevada Supreme Court recently sent shockwaves through the mortgage lending industry when it issued its opinion in SFR Investments Pool 1, LLC v. U.S. Bank, N.A., holding that the foreclosure of an HOA lien could extinguish a prior-recorded first deed of trust. As addressed in our prior blog posts, those shockwaves continue to reverberate through the industry as both HOAs and lenders alike attempt to grasp the extent of the Nevada Supreme Court’s controversial ruling.

The Nevada Legislature took immediate action to minimize the extent of the Nevada Supreme Court’s ruling. On May 28, 2015, Nevada Gov. Brian Sandoval signed into law Senate Bill 306, which clarified Nevada Revised Statute 116.3116, the Nevada super priority statute, and added certain safety measures to protect the property interests of lenders (See our posts on Lenders’ New Right to Redeem after Nevada HOA Foreclosure Sales; Notice Me: The New Notice Requirements for HOA Lien Foreclosures in Nevada; and Nevada Passes HOA Super Priority Lien Fix). Senate Bill 306 took effect October 1, 2015, but uncertainty still lingers regarding the retroactive application of SFR Investments Pool 1, LLC. In Christina Trust v. K&P Homes, et al., Judge Robert C. Jones of the U.S. District Court for the District of Nevada took a first step into calming the irritated nerve of the lending industry.

In Christina Trust, the plaintiff, which was the first lien holder, sued the defendant, which was the record title owner of the property that had been purchased at an HOA foreclosure sale. The plaintiff sought a declaration that the first deed of trust properly encumbered the property because the sale had not been in accordance with state law, the HOA did not provide the first lien holder an opportunity to cure the default, the sale was not commercially reasonable, and the sale did not comport with due process. In response, the defendant counterclaimed, seeking a declaration that upheld its title and extinguished the plaintiff’s first deed of trust. The plaintiff filed a motion to dismiss the defendant’s counterclaim on five grounds: (1) NRS 116.3116 et seq. is unconstitutional under the Due Process Clause for lack of notice; (2) NRS 116.3116 is unconstitutional under the Takings Clause; (3) NRS 116.3116 is unconstitutional under the substantive component of the Due Process Clause of the federal and state constitutions; (4) the Nevada Supreme Court’s interpretation of NRS 116.3116 is contrary to public policy; and (5) SFR Investments Pool 1, LLC should be applied only to foreclosures occurring after the announcement of the Nevada Supreme Court’s ruling.

The Court granted the plaintiff’s motion to dismiss, focusing on the plaintiff’s arguments concerning substantive due process and the prospective application of SFR Investments Pool 1, LLC. The Court reserved judgment on the substantive due process issue and determined the plaintiff’s motion under Chevron Oil v. Huson, a U.S. Supreme Court ruling that recognizes limits on the retroactive application of judicial rulings as a matter of common law equity.

In Huson, the U.S. Supreme Court set forth three factors for courts to consider when determining whether a ruling should be applied prospectively: the ruling must (1) establish a new principle of law . . . deciding an issue of first impression whose resolution was not clearly foreshadowed; (2) weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation; and (3) weigh the inequity imposed by retroactive application. In issuing its ruling, the Court found that the three-factor test weighed against retroactive application of SFR Investments Pool 1, LLC. First, the Court determined that state and federal courts were divided on whether NRS 116.3116 established a true priority lien such that the Nevada Supreme Court’s ruling could not have been clearly foreshadowed. The Court next found that the retroactive application of the ruling would not further the purpose of NRS 116.3116, which is simply to ensure that HOAs are made whole on the super-priority portion of their liens. Lastly, the Court concluded that it would be inequitable to extinguish a first deed of trust upon the foreclosure of a “lien worth a tiny fraction of that mortgage” in situations where notice to the lenders were “not robust enough to satisfy basic principles of due process.”

Christina Trust is yet another ruling from Nevada state and federal courts that seeks to clarify the extent of the Nevada Supreme Court’s ruling in SFR Investments Pool 1, LLC. Many more rulings will be forthcoming, but for the time being, it provides some reassurance to first lien holders that SFR Investments Pool 1, LLC may be more limited in scope than initially believed.