Ninth Circuit Finds Bank Can Cancel HOA Sale Made During Bankruptcy – Insolvency / Bankruptcy / Restructuring

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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 the first deed of the holder of the trust lien, could challenge the sale of an association of owners (“HOA”) a property as a violation of an automatic stay of bankruptcy, giving the bank superior title. See Bank of New York Mellon as Tr. For Certificate Holders of CWALT, Inc., Alternative Loan Tr. 2005-54CB, Pass-Through Mortgage Certificates Series 2005-54CB v. Enchantment at Sunset Bay Condo. Ass’n, 2 F.4e 1229 (9th Cir. 2021). In this case, Harold Hill (“Hill”) purchased property at 732 Hardy Way, Mesquite, Nevada. The Bank was a holder of an initial trust deed. In January 2014, Hill fell behind in his HOA dues, and the HOA registered an overdue notice of assessment lien in February 2014. In April 2014, Hill filed for Chapter 13 bankruptcy and an automatic stay entered. in force. On July 15, 2014, while Hill’s bankruptcy case was pending, the HOA registered a foreclosure sale notice and sold the property to 732 Hardy Way Trust (the “Trust”). The Bank sued for title and for a declaratory judgment on the grounds that the foreclosure sale was void because it violated the stay of bankruptcy, among other remedies.

The Bank and the Trust each sought summary judgment. The Trust argued that it had superior title because the HOA foreclosure sale extinguished the bank’s trust deed. The Bank argued that the HOA foreclosure sale did not extinguish its lien because the sale violated the automatic stay of bankruptcy and was therefore void under Nevada and Ninth Circuit precedent, or alternatively, the law of Nevada’s HOA foreclosure violated due process. The district court issued summary judgment in favor of the trust and dismissed the remaining claims against the HOA, ruling that “the foreclosure sale extinguished the [Bank’s] deed of trust on [P]property and that [the Trust] bought free property and left the deed of trust. The Bank appealed.

The Ninth Circuit has reversed. First, he ruled that the Bank, as a creditor, had standing to argue that the HOA foreclosure sale had taken place in violation of the automatic stay and was void. Second, the court found that, according to the Nevada precedent, an HOA foreclosure sale “conducted during an automatic stay of bankruptcy proceedings is invalid.” The Court then found that the Bank’s interest was greater than the Trust’s interest because Hill listed the property on his bankruptcy lists in March 2014 and the property was auctioned off on September 19, 2014, then that the suspension was in effect. Thus, the sale was void, and not just 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]The bank wants the foreclosure sale declared void to preserve its right of retention on the property in question. . . [and] neither advance nor preserve the bankruptcy estate[.]Thus, since the Bank was only pursuing its own interest rather than that of the estate, it argued that it should not have standing to seek the annulment of the sale. “While the Bank’s claim to silent title is unrelated to its role as’ creditor ‘and the purposes for which the automatic stay was enacted, I would reject the’ Bank’s dishonest attempt to use the Code of bankruptcy [for its own] advantage.'”

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