Weeping Hollow Ave. Trust v. Spencer, No. 13-16060 (9th Cir. 2016)
Annotate this CaseThis case concerns a dispute between the parties over who has priority ownership of property located in Las Vegas. Nevada has a statute that gives a homeowners’ association lien priority over “all other liens and encumbrances” (subject to some limited exceptions) for up to nine months of unpaid HOA fees. NEV. REV. STAT. 116.3116(2)–(3). After the HOA foreclosed on property that Ashley Spencer bought, Weeping Hollow purchased the property at the foreclosure sale. Just over two months after the HOA foreclosure sale, Wells Fargo attempted to foreclose on the property under its 2008 deed of trust. Weeping Hollow filed suit in state court against Spencer, Wells Fargo, and a title insurance company. Wells Fargo removed to federal court. The district court then granted Wells Fargo’s motion to dismiss Weeping Hollow’s complaint. After the district court issued its ruling, the Nevada Supreme Court issued an opinion that expressly abrogates the district court’s interpretation of the HOA statute. Under the Nevada Supreme Court’s holding, a foreclosure on an HOA lien extinguishes an earlier-recorded security interest even though the HOA lien was recorded later. The court held that the district court erred in applying the fraudulent-joinder doctrine to this case. Because Spencer was not shown to be fraudulently joined, her presence in the action divests the district court of diversity jurisdiction and the district court must remand the case to state court. Since this case should never have made it into federal court, the court has no reason to address Wells Fargo’s constitutional and state-law arguments.
Court Description: Foreclosure / Diversity Jurisdiction. The panel reversed the district court’s judgment because the district court improperly exercised diversity jurisdiction, and remanded with instructions that the district court remand to state court a case that challenged the constitutionality of Nev. Rev. Stat. § 116.3116(2)-(3)(2012), which gives a homeowners’ association (“HOA”) lien priority over “all other liens and encumbrances” for up to nine months of unpaid HOA fees. At an HOA foreclosure sale of Ashely Spencer’s real property, Weeping Hollow Avenue Trust purchased the property. Two months after the HOA foreclosure sale, Wells Fargo Bank, NA attempted to foreclose on the property under its deed of trust. Weeping Hollow filed a quiet title action in Nevada state court, and Wells Fargo removed the case to federal court based on diversity jurisdiction. Although Weeping Hollow and Spencer were both citizens of Nevada, the district court concluded it could nonetheless exercise diversity jurisdiction because Weeping Hollow had fraudulently joined Spencer as a defendant. The panel held that the district court erred in applying the fraudulent-joinder doctrine to this case. Specifically, the panel held that Wells Fargo had not met its heavy burden of showing that Weeping Hollow could not sustain its quiet title claim under Nevada state law against Spencer. Given the WEEPING HOLLOW AVENUE TRUST V. SPENCER 3 Nevada Supreme Court’s holding that a former homeowner may challenge an HOA foreclosure sale on equitable grounds, the panel concluded that it was entirely reasonable for Weeping Hollow to join Spencer as a defendant to avoid potential disputes over who had title to the property. The panel held that because Spencer was not shown to be fraudulently joined, her presence in the action divested the district court of diversity jurisdiction.
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