Property Fight Didn’t Belong in Fed Court, 9th Cir. Rules

     SAN FRANSCISCO (CN) — A federal judge didn’t have jurisdiction to hear a property dispute because a Nevada trust properly joined a homeowner as a defendant to avoid disputes over the property’s title, the Ninth Circuit ruled Tuesday.
     The panel determined that U.S. District Judge James C. Mahan improperly exercised diversity jurisdiction in the matter, which challenges the constitutionality of Nevada law automatically granting priority lien status to homeowners’ association liens over all other claims for up to nine months’ worth of unpaid fees.
     “This case should never have made it into federal court,” Judge J. Clifford Wallace wrote in the unanimous Ninth Circuit decision.
     Plaintiff Weeping Hollow Avenue Trust, via a 2012 foreclosure sale, bought a home formerly owned by defendant Ashley Spencer. Spencer had bought the home in 2008 with a $166,961 loan from PrimeLending, which assigned the deed of trust to Wells Fargo nearly four years later.
     Like many who bought homes in Las Vegas in 2008, Spencer became incapable of making her mortgage payments and homeowners’ association, or HOA, fees.
     The HOA filed a lien against the property and, in October 2012, conducted a foreclosure sale, which resulted in the home selling for $3,004 to Weeping Hollow.
     Wells Fargo filed its own foreclosure action two months after the HOA’s foreclosure sale, prompting Weeping Hollow to file a quiet title action against Spencer, Wells Fargo and a title insurance company.
     Despite Weeping Hollow being a Nevada company and Spencer a Nevada resident, Judge Mahan declared diversity jurisdiction over the matter.
     Diversity jurisdiction, however, only applies when the “citizenship of each plaintiff is different from the citizenship of each defendant,” Judge Wallace wrote in Tuesday’s 11-page ruling.
     Yet Mahan ruled Weeping Hollow illegally joined Spencer as a defendant, and applied diversity jurisdiction, according to Wallace.
     Mahan then ruled the HOA foreclosure sale did not extinguish Wells Fargo’s deed of trust and dismissed Weeping Hollow’s complaint against Wells Fargo.
     After the district court’s ruling, Wallace said the Nevada Supreme Court issued an opinion saying an HOA lien foreclosure extinguishes even a prior existing security interest.
     In light of the Nevada Supreme Court ruling, Weeping Hollow filed an appeal, saying Mahan’s ruling should be reversed because he erred in ruling Spencer improperly was joined as a defendant.
     Wells Fargo argued the Nevada HOA statute violates due process and the Fifth Amendment’s Takings Clause. Wells Fargo said the HOA sale was “commercially unreasonable” and should be voided.
     In the Ninth Circuit opinion, Wallace said the term fraudulent joinder is a “misnomer,” and the focus is on whether the plaintiff can state a claim that would “destroy the district court’s subject matter jurisdiction.”
     To successfully argue fraudulent joinder, Wallace said Wells Fargo “bears a heavy burden” to show Weeping Hollow did not state a cause of action against Spencer, but the bank did not meet that burden.
     Spencer also could challenge Weeping Hollow’s purchase via the foreclosure sale as “fraud, unfairness or oppression,” Wallace added.
     Also impacting the panel’s decision was a ruling by the Nevada Supreme Court earlier this year, which reaffirmed that a “court can grant equitable relief from a defective HOA lien foreclosure sale,” Wallace wrote.
     Wallace said that means Spencer has five years from the date of the foreclosure sale to challenge it on equitable grounds.
     Because Weeping Hollow had to show a superior lien claim, and Spencer might challenge the foreclosure sale, the panel ruled it was “reasonable” for Weeping Hollow to join Spencer as a defendant, and the federal court never should have heard the case, Wallace said.
     In light of the recent Nevada Supreme Court ruling and the Ninth Circuit panel’s finding of no fraudulent joinder, the panel ordered the case remanded to district court, which it instructed to remand back to state court.
     The panel of Wallace and Judges Dorothy W. Nelson and John B. Owens heard oral arguments in the case on June 13.

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