The Supreme Court of Nevada heard the issue of whether, after a homeowner association’s (HOA’s) super-priority lien is foreclosed upon, a first lien holder may recover its loss by making a claim on its title insurance policy.
The case is Deutsche Bank National Trust Co., as trustee, in trust for the registered holders of Morgan Stanley ABS Capital Trust I 2004-HE8, Mortgage Pass-Through Certificates, Series 2004-HE8 v. Fidelity National Title Insurance Co. (Supreme Court of Nevada, No. 84161).
Deutsche Bank National Trust Co. obtained a deed of trust to the subject property by assignment from New Century Mortgage Corp. The deed of trust served as security for a mortgage provided by New Century to James and Sharon Lutkin in May 2004. New Century obtained a title insurance policy from Fidelity National Title Insurance Co.
The Lutkins’ property was part of Mira Vista Homeowners Association, which was established in 1995. The Lutkins became delinquent on their HOA assessments in 2011 and Mira Vista HOA proceeded with a nonjudicial foreclosure in 2012. G&P Investments Enterprises LLC purchased the property at that time. G&P then sold the property to TRP Fund VI LLC in July 2016.
Before TRP obtained title to the property, Deutsche Bank sued G&P, seeking a declaratory judgment that its deed of trust survived the foreclosure. After it was added as a party, TRP counterclaimed for quiet title. It argued the nonjudicial foreclosure of Mira Vista HOA’s assessment lien extinguished Deutsche Bank’s interest in the property. The title was quieted in TRP’s favor and Deutsche Bank reconveyed the deed of trust in a settlement.
During the TRP litigation, Deutsche Bank submitted a claim under its title policy with Fidelity. It sought defense and indemnification of the TRP litigation. Fidelity denied Deutsche Bank’s claim, maintaining Mira Vista HOA did not record the assessment lien against the property until more than seven years after the date of the policy. It further argued that because the events that resulted in the extinguishment of Deutsche Bank’s interest occurred after the date of policy, the claim fell within the exclusion of the policy.
When Fidelity didn’t respond to Deutsche Bank’s request for reconsideration, Deutsche Bank filed suit against Fidelity in state trial court, asserting claims for declaratory judgment, breach of contract, breach of the covenant of good faith and fair dealing, deceptive trade practices, and unfair claims practices. It alleged California Land Title Association (CLTA) 100 and 115.2 cover the losses it suffered by the foreclosure of Mira Vista HOA’s assessment lien because that lien and its superpriority status were created before the policy date by NRS 116.3116. It also argued Fidelity violated the Nevada Deceptive Trade Practices Act (NDTPA) by denying Deutsche Bank’s claim under CLTA 100 and 115.2.
Fidelity moved to dismiss the claims, which the trial court granted. The court found no coverage existed under the policy because NRS 116.3116 provided that the Mira Vista HOA assessment lien arose when it because delinquent in 2011, and was therefore a post-policy lien outside the scope of coverage. It also concluded neither endorsement provided coverage.
The Supreme Court of Nevada affirmed the dismissal of Deutsche Bank’s claims.
“As the district court reasoned, an HOA does not have an existing, enforceable lien for assessment obligations until the assessment obligation becomes due, but here the superpriority HOA assessment lien that extinguished the insured’s deed of trust arose post-policy, and the losses resulting from the enforcement of that post-policy superpriority assessment lien do not fall within the coverage provided under the title-insurance policy that the insured relies on in its complaint,” the court stated. “Because we conclude that the insured’s losses resulted from the enforcement of a superpriority lien, governed exclusively by NRS 116.3116, the fact that the HOA’s covenants, conditions, and restrictions (CC&Rs) established the assessment obligation that later became delinquent and enforceable by a lien on the property does not create coverage under the policy. Accordingly, we affirm the dismissal of the insured’s claims.”
It first found the claims for declaratory judgment, breach of contract, and breach of the covenant of good faith and fair dealing were property dismissed, looking at the CLTA 115.2, CLTA 100(1)(a), and CLTA 100(2)(a) individually.
“Based on NRS 116.3116’s plain language and interpreting its sections in harmony with the statute as a whole, while considering official comments of the UCIOA in tandem with the version of the statute in effect in Nevada, we conclude that the assessment lien arises when the assessment obligation becomes due, i.e., is levied and owed. We acknowledge, as does Fidelity, that the HOA has a perfected inchoate lien from the time it records the CC&Rs,” the court stated. “However, the inchoate lien does not become an existing, enforceable lien against a particular unit until assessments are due and unpaid. Our conclusion is based on interpretation of this particular statutory scheme, and we thus offer no opinion regarding when liens arise in other contexts and potential title-insurance coverage for such liens.
“Here, Mira Vista HOA began the enforcement of its assessment lien in December 2011, meaning that the assessment obligation likely arose in the preceding month,” the court continued. “The superpriority piece included only the preceding nine months of assessment obligations. Thus, the assessment lien that ultimately extinguished Deutsche Bank’s deed of trust did not exist until roughly seven years after the date of the policy, and by consequence, those losses do not fall within the scope of CLTA 115.2(2).
“Even assuming CLTA 115.2(2) requires only that the assessment lien’s priority status exist at the date of the policy, the outcome remains the same,” the court stated. “The relevant ‘priority’ in CLTA 115.2 refers to the superpriority piece of an assessment lien that may jeopardize the first security interest on the property. True, under NRS 116.3116(9), the assessment lien, once created, is automatically deemed recorded and perfected as of the date the declaration of CC&Rs was recorded. However, its priority over a first deed of trust is an entirely different matter. As we explained in SFR Investments, NRS 116.3116 divides the assessment lien into superpriority and subpriority pieces. 130 Nev. at 745, 334 P.3d at 411 . The superpriority piece that threatens the first security interest on the property exists only for the unpaid assessments for the nine months preceding the recording of a notice of default. By contrast, the subpriority piece exists for all other unpaid assessments. Indeed, the starting point is that the assessment lien is junior to a first security interest.
“Applying this understanding of NRS 116.3116, Mira Vista HOA’s assessment lien attained superpriority status only when the lien arose in 2011 and a notice of default was recorded,” the court continued. “Because the priority of Mira Vista HOA’s assessment ben that caused the losses claimed by Deutsche Bank arose roughly seven years after the policy date, CLTA 115.2 would not apply to insure Deutsche Bank’s losses even if it was interpreted to depend on the priority of the lien – rather than the existence of the lien – at the date of the policy. Accordingly, there is no coverage for Deutsche Bank under CLTA 115.2(2).”
It noted the CLTA 100(1)(a) provides coverage for losses sustained by reason of the existence of any CC&Rs under which a lien can be cut off, subordinated, or otherwise impaired. Deutsche Bank argued the enforcement of the superpriority piece of Mira Vista HOA’s assessment lien caused its losses.
“However, NRS 116.3116 created the superpriority piece, as well as the ability to enforce that piece and extinguish a first security interest,” the court stated. “Without the statute, an HOA’s assessment lien, if foreclosed upon, does not precede and extinguish a first security interest. This interpretation finds support in our characterization of NRS Chapter 116 as ‘creating statutory liens,’ the enforcement of which remains ‘governed by statute.’ In so stating, we cited with approval secondary authority explaining that statutory liens are ‘limited in operation, extent, and effect by the terms’ of the statute and are enforceable ‘only in the circumstances provided for in the legislation.’ Because the superpriority assessment lien here constitutes a statutory lien, only NRS 116.3116 governs its creation and effect. It follows that the precise injury Deutsche Bank sustained arose not by the existence of a Mira Vista HOA CC&R, but by the existence of NRS 116.3116. Accordingly, CLTA 100(1)(a) did not cover Deutsche Bank’s losses here because there was not a CC&R that cut off, impaired, or subordinated Deutsche Bank’s deed of trust, and the superpriority assessment lien that ultimately extinguished Deutsche Bank’s deed of trust was a product of NRS 116.3116.”
Turning to CLTA 100(2)(a), the court found the endorsement did not provide coverage because the losses did not arise from a violation of a CC&R.
The court then turned to Deutsche Bank’s claim for unfair claims practices, finding it too was properly dismissed. It noted NRS 686A.310 prohibits insurers from engaging in unfair practices in handling its insureds’ claim.
“Although nothing in the statute limits its application to an affirmative finding of coverage under the policy, Deutsche Bank’s allegations draw on the internal manuals to argue that Fidelity misrepresented coverage under the policy and wrongfully denied coverage,” the court stated. “For example, Deutsche Bank alleges that Fidelity’s denial of coverage violated NRS 686A.310(1)(a), (1)(c), and (1)(e), under which insurers are prohibited from misrepresenting facts related to coverage, failing to promptly investigate and process claims, and failing to settle claims when the insurer’s liability has become reasonably clear, respectively. But Fidelity did not improperly deny coverage under the policy, and the internal manuals do not show that Fidelity made prior representations, let alone misrepresentations, of the existence of coverage.
“Additionally, Deutsche Bank ignores pertinent language in the statute,” the court continued. “For instance, in stating that Fidelity’s coverage denial by itself failed to effectuate a prompt, fair, and equitable settlement of the claim, Deutsche Bank ignores the qualifying language ‘in which liability of the insurer has become reasonably dear [sic].’ But Fidelity’s liability did not become reasonably clear because the policy did not cover Deutsche Bank’s losses. As another example, Deutsche Bank’s allegations that Fidelity violated subsection (1)(c) hinge simply on the denial of coverage without any connection to the standards used in the ‘investigation’ and ‘processing’ of the claim. Deutsche Bank does not even suggest that Fidelity failed to properly investigate or process the claim; it only disputes the outcome of that investigation and process. Yet another example is Deutsche Bank’s claim that Fidelity improperly required it to bring this litigation by denying coverage in violation of subsection (1)(f), as Deutsche Bank fails to explain how the subsection even applies where the insurer never ‘offer[ed] substantially less than the amounts ultimately recovered in actions brought by such insured[ ], when the insured[ has] made claims for amounts reasonably similar to the amounts ultimately recovered.’
“Finally, Deutsche Bank contends that Fidelity’s failure to respond to its request for reconsideration of the claim denial violated subsections (1)(d), (1)(e), and (1)(n) of NRS 686A.310,” the court stated. “However, Deutsche Bank cites no authority that these subsections pertain to an internal appeal of a claim denial or require an insurer to entertain a request for reconsideration. Nothing in their plain language indicates that these subsections apply, requiring instead prompt denial or affirmance of the claim, a reasonable explanation of such denial or affirmance, and fair processes in the settlement of the claim. There is no suggestion that Fidelity’s first denial did not comply with these requirements. Thus, even assuming NRS 686A.310 applies regardless of any affirmative coverage under the policy, and even accepting the allegations in Deutsche Bank’s complaint as true, it failed to state a claim for relief under NRS 686A.310. Accordingly, we affirm the district court’s dismissal of the claim.”