The Nevada Supreme Court issued a ruling Dec. 4 that will essentially shut down mass tort class action lawsuits against homeowners associations by real estate investors trying to capitalize on the dispute over super-priority liens in Nevada.
The Court ruled in favor of Holland & Hart client Nevada Association Services, Inc. (NAS), which was involved in a two-year class action suit involving 524 properties. Real estate “flippers” had purchased properties at lender foreclosure sales and had paid Peccole Ranch Homeowners Association to remove the remaining association liens so they could quickly resell the properties at huge profits. Years later, many of these real estate “flippers” have sued homeowners associations, claiming they had “overpaid” to remove those liens. The Court found that the voluntary payment doctrine is valid in Nevada and prevents those who make payments voluntarily from recovering those funds, even if they were under no legal obligation to make the payment.
In September 2014, the Court ruled that a foreclosure by a homeowners association extinguishes a first deed of trust. However, the long-standing debate over whether collection fees and costs survive as part of the association’s super-priority lien, remains unanswered. The Court’s decision yesterday prohibits purchasers in almost all cases from seeking refunds for overpayments years after the fact.
Some attorneys had already begun organizing class action claims seeking recovery of prior payments on behalf of the buyers of foreclosed homes. The Nevada Association Services, Inc., and Peccole Ranch Community Association case was just one of many pending in the state and the first to receive a published court decision, according to Patrick Reilly, a Holland & Hart commercial litigation attorney and lead counsel on the case.
“There have been tens of thousands of foreclosures in Nevada, and this is just one HOA, so the ramifications of the decision are significant,” he said. “HOAs and the homeowners who pay their bills on time every month were potentially at risk for tens of millions of dollars in damages that might have been awarded to class action lawyers and real estate flippers who have already profited to the tune of millions of dollars on the real estate crash. This decision puts an end to that nonsense.”
THE RULING AND CASE BACKGROUND
At a foreclosure auction, Elsinore, LLC, purchased a property in the Peccole Ranch planned community that was subject to a lien for unpaid community association dues. After receiving a demand for payment from Peccole Ranch, Elsinore initially disputed the validity and amount of the dues, but eventually paid the dues to remove the lien and facilitate a quick and profitable sale of the property.
Three years after it sold the property, Elsinore filed a complaint with the Nevada Real Estate Division, and then later a claim for damages against Peccole Ranch, contending demands for payment by Peccole Ranch and its collecting agent, NAS, violated state statutes.
Elsinore initially persuaded the District Court that its payment was not truly voluntary because it made the payment under duress to save its property from an association foreclosure.
Peccole Ranch and NAS applied to the Supreme Court for the extraordinary relief of writ of mandamus to clarify the unsettled legal questions regarding the voluntary payment doctrine and its limited exceptions.
In finding for NAS and Peccole Ranch, the Supreme Court held the voluntary payment doctrine “remains good law” in Nevada and is a valid defense by an HOA to a claim seeking recovery of past payments.
Elsinore argued that it made the payment out of “business necessity.”. The Court found Elsinore had a reasonable alternative to payment – it could have pursued mediation through the NRED before paying. The Court also rejected Elsinore’s contention that it paid the outstanding fees in defense of its property, another exception. Unlike a property owner who risked losing its property interest in imminent foreclosure proceedings, Elsinore paid the outstanding fees to release a lien and facilitate a future sale of its property.
In conjunction with the Court’s ruling earlier this fall, this decision means Elsinore and other class members are effectively barred from pursuing claims to recover any previous payments made to HOAs like Peccole Ranch.