Ninth Circuit Finds Bank May Set Aside HOA Sale Conducted During Bankruptcy As Void

In a split decision, the United States Court of Appeals for the Ninth Circuit recently determined that the Bank of New York Mellon (the “Bank”), as first deed of trust lienholder, could challenge a homeowner’s association’s (“HOA”) sale of a property as a violation of an automatic bankruptcy stay, giving the Bank superior title. See Bank of New York Mellon as Tr. for Certificateholders of CWALT, Inc., Alternative Loan Tr. 2005-54CB, Mortg. Pass-Through Certificates Series 2005-54CB v. Enchantment at Sunset Bay Condo. Ass’n, 2 F.4th 1229 (9th Cir. 2021). In the case, Harold Hill (“Hill”) purchased property at 732 Hardy Way, Mesquite, Nevada. The Bank was a first deed of trust lienholder. In January 2014, Hill fell behind in his HOA dues, and the HOA recorded a notice of delinquent assessment lien in February 2014. In April 2014, Hill filed for Chapter 13 bankruptcy, and an automatic stay went into effect. On July 15, 2014, while Hill’s bankruptcy case was pending, the HOA recorded a notice of foreclosure sale, and sold the property to the 732 Hardy Way Trust (the “Trust”).  The Bank sued to quiet title and for declaratory relief on the basis that the foreclosure sale was void because it violated the bankruptcy stay, among other relief.

The Bank and the Trust each moved for summary judgment. The Trust argued it had superior title because the HOA foreclosure sale extinguished the Bank’s deed of trust. The Bank argued that the HOA foreclosure sale did not extinguish its lien because the sale violated the automatic bankruptcy stay and thus was void under Nevada and Ninth Circuit precedent, or alternatively, Nevada’s HOA foreclosure statute violated due process. The District Court granted summary judgment in favor of the Trust and dismissed the remaining claims against the HOA, holding that  “the foreclosure sale extinguished the [Bank’s] deed of trust on the [P]roperty and that [the Trust] purchased the property free and clear of the deed of trust.” The Bank appealed.

The Ninth Circuit reversed.  First, it held that the Bank, as a creditor, had standing to make the argument that the HOA foreclosure sale occurred in violation of the automatic stay and was void.  Second, the Court found that, under Nevada precedent, an HOA foreclosure sale “conducted during an automatic stay in bankruptcy proceedings is invalid.”  The Court then concluded that the Bank’s interest was superior to the Trust’s interest because Hill listed the property in his bankruptcy schedules in March 2014 and the property was auctioned off on September 19, 2014, while the stay was in effect.  Thus, the sale was void, and not merely voidable, under Nevada law. 

In dissent, Judge Forrest argued that the Bank did not have standing to challenge the sale under the Bankruptcy Code, because “[t]he Bank wants the foreclosure sale declared void to preserve its lien interest in the subject property . . . [and] does not advance or preserve the bankruptcy estate[.]”  Thus, because the Bank was only pursuing its own interest, rather than that of the estate, she argued it should not have standing to seek to void the sale.  “Whereas the Bank’s quiet-title claim is unrelated to its role as a ‘creditor’ and the purposes for which the automatic stay was enacted, I would reject the Bank’s ‘disingenuous attempt to use the Bankruptcy Code [for its own] advantage.’”

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