The Supreme Court of Nevada issued a decision of interest on November 22, 2017, while most of us were preparing for a Thanksgiving weekend. Although the Court specifically held that the issues before it were not subject to the UCC, it applied UCC standards making a decision of interest to us.
It appears that parties to this case were previously before the Court resulting in a prior decision that the homeowners association (HOA) had a lien on a homeowner’s home for unpaid monthly assessments which lien was split into super-priority and sub-priority pieces and upon foreclosure the super-priority piece extinguished the first deed of trust. In that earlier case the Court held that that inadequacy of price alone “is not enough to set aside a sale; there must also be a showing of fraud, unfairness, or oppression.”
This later appeal to set aside a foreclosure sale addressed the mortgagee’s claim that in Nevada a court is “[g]enerally” justified in setting aside a foreclosure sale when the sale price is less than 20 percent of the property’s fair market value. The mortgagee argued that the HOA foreclosure sale should be set aside based on commercial unreasonableness or based solely on low sale price. The Nevada Supreme Court seized the opportunity to provide further clarification on these issues.
As to the commercial reasonableness standard, which derives from Article 9 of the Uniform Commercial Code, the court held that it has no applicability in the context of an HOA foreclosure involving the sale of real property. As to the 20–percent standard, it clarified its longstanding rule that inadequacy of price, however gross, is not in itself a sufficient ground for setting aside a trustee’s sale absent additional proof of some element of fraud, unfairness, or oppression as accounts for and brings about the inadequacy of price.
That does not mean, however, that sale price is wholly irrelevant. In this respect the Court adhered to its prior observation that where the inadequacy of the price is great, a court may grant relief based on slight evidence of fraud, unfairness, or oppression. It held, however, that the appellant failed to establish any of these criteria.
Because a wide array of personal property may be used as collateral, Article 9 does not provide detailed requirements by which a creditor must dispose of the collateral, but instead provides generally that the creditor’s disposition of the collateral must be done in a commercially reasonable manner. The Court recognized that Article 9’s procedures governing disposition are “deliberately flexible” because “[t]he drafters hoped that Article 9 dispositions would produce higher prices than those typically obtained in real estate foreclosures”. However, the Court noted that the majority rule appears to be that the secured party has the burden of pleading and proving that any given disposition of collateral was commercially reasonable.
Under Nevada Law before an HOA can foreclose, it must mail, record, and post various notices at specific times and containing specific information. In a condominium or planned community, the association’s lien must be foreclosed in like manner as a mortgage on real estate. In a cooperative whose unit owners’ interests in the units are real estate, the association’s lien must be foreclosed in like manner as a mortgage on real estate; or where in a cooperative whose unit owners’ interests in the units are personal property, the association’s lien must be foreclosed in like manner as a security interest under Article 9. Although the court determined that the HOA needed to foreclose as if it held a mortgage, it applied a standard of commercial reasonableness under the UCC. Thus, the price obtained would not determine reasonableness – the process which followed would. And absent establishing fraud, oppression or unfairness, the sale was affirmed.
The take away for UCC practioners is that the process followed in liquidating collateral is paramount – not the price obtained. The caveat, however, is that those who are in the business of loan to own need to follow the process if their ownership interest is to be affirmed.
Nationstar Mortgage, LLC v Saticoy Bay LLC Series 2227 Shadow Canyon. 2017 WL 5633293