Nevada Supreme Court protects Deutsche Bank’s deed in HOA foreclosure ruling

The homeowner did not direct Aliante on how to apply his payments. Aliante applied the payments to the lien debt as a whole rather than to the oldest assessments first. This left $19 of the superpriority lien debt outstanding when Aliante proceeded to foreclosure.

Collegium Fund LLC Series 16 purchased the property at the foreclosure sale and subsequently filed suit to quiet title. Collegium argued that Aliante properly foreclosed its superpriority lien and that the sale extinguished Deutsche Bank’s deed of trust, since a superpriority lien is senior to a first deed of trust. Deutsche Bank countered that the homeowner’s payments were sufficient to satisfy the superpriority portion of Aliante’s lien, leaving only a subpriority lien to foreclose. Since a subpriority lien is junior to a first deed of trust, Deutsche Bank maintained its deed of trust survived the foreclosure sale.

After a three-day bench trial, the district court ruled in favor of Collegium Fund. The court found that Aliante had discretion to apply the homeowner’s payments to the past-due assessments as a whole rather than to older assessments comprising the superpriority lien first.

The district court also relied on an alternative ground, determining that both HOA superpriority liens needed to be paid off before the sale for it to convert to a subpriority-lien-only sale. Since no evidence showed payments were made to Autumn Ridge, the district court concluded the sale proceeded as a superpriority lien foreclosure that extinguished Deutsche Bank’s first deed of trust.

The Nevada Supreme Court reversed on appeal. The court held that the district court failed to recognize a critical principle from the recent Swaggerty decision: in the absence of express allocation by the debtor, an HOA may not direct payments in a way that preserves the superpriority lien to the detriment of the homeowner and bank, whose interest lies in protecting the first deed of trust by paying off the superpriority lien.