Nevada’s Supreme Court and the Ninth Circuit are at Odds on Fundamental Questions of Federalism.
Recently, the Nevada Supreme Court and United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) reached opposing conclusions on the same issue of Nevada law. As has been noted in the past, Nevada’s Supreme Court does not hesitate to distinguish itself from other federal courts and their holdings. The latest major juncture in this dispute finds the Nevada Supreme Court disagreeing with the Ninth Circuit in a manner that could raise profound constitutional issues and require the United States Supreme Court’s intervention to resolve.
For real estate litigation cognoscenti, it is no surprise that the crux of this problem arises from the super-priority liens created by NRS 116.3116 et seq., which historically gave homeowners associations (“HOA’s”) a super-priority interest in the most recent nine months’ worth of HOA dues. Following the economic turmoil of 2008 through 2009, HOA’s sold these liens to the highest bidders, who in turn would commence non-judicial foreclosing proceedings based on possessing a super-priority interest in the property by purchasing the interest created by the overdue HOA dues. Investors savvy to this process were able to purchase single family homes—frequently in highly desirable areas—for thousands of dollars.
Litigation ensued. Banks, incredulous that NRS 116.3116 and its super-priority extinguished its much larger deed of trust interests on the houses, took to the courts arguing that the super-priority lien did not operate as it was being applied. To the banks, the super-priority liens created, at best, an equitable entitlement to first satisfy the delinquent HOA dues from the proceeds of a foreclosure sale performed by the holder of a first deed of trust—it did not extinguish the deed of trust entirely. The Nevada Supreme Court, however, saw it otherwise. In 2014, the Nevada Supreme Court ruled in SFR Investments Pool 1 LLC v. U.S. Bank N.A. that the plain language of NRS 116.3116 did create a true super-priority lien in the overdue HOA dues, and one that would extinguish even a bank’s deed of trust in the property.
More litigation ensued. In late 2016, a permutation of the super-priority lien issue made its way before the Ninth Circuit. Rather than address the operation and true intent of NRS 116.3116, which the Nevada Supreme Court had spoken to in SFR and its lineage of related cases, the Ninth Circuit took a different approach. The appeals court found NRS 116.3116(2) to be facially unconstitutional, constituting an impermissible state action requiring lenders to protect themselves against loss—despite holding deeds of trust—by requesting notice from HOA’s of their intended foreclosure on their super-priority liens. As a result, Nevada’s super-priority scheme resulted in a violation of the lender’s due process rights. For a moment, at least in federal court, the super-priority was dead.
This death of the super-priority lien was short-lived. In January of 2017, the Nevada Supreme Court directly addressed the Bourne Valley decision in Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortgage, and expressly “declin[ed] to follow” the Ninth Circuit’s holding. The Nevada Supreme Court’s position, and interpretation of state law, undermined the premise of the Ninth Circuit’s opinion: That non-judicial foreclosure of an HOA lien involves state action and implicates the due process clause of the United States Constitution. “[D]ue process is not implicated in an HOA’s nonjudicial foreclosure,” wrote the Nevada Supreme Court, going on to explain in detail why the super-priority lien’s extinguishment of subordinate interests, including deeds of trust held by national banks, did not constitute a government taking.
The tension between the Ninth Circuit and Nevada Supreme Court creates a potential mess of federalism. Under the Erie doctrine, federal courts that have based their jurisdiction on diversity (i.e., the amount in controversy and differing citizenship of the parties, rather than purely federal questions such as patent infringement or qui tam actions under the federal false claims act) are compelled to follow state law. Ultimately, states have the final determination of what their law actually is, whether through the judiciary or the legislature. On questions of federal law, though, federal courts have the final say, for reasons traced directly back to the Supremacy Clause of the United States Constitution.
The latest phase of the super-priority lien fight is less of a fight about the law’s meaning than whether or not it implicates rights arising under the United States Constitution. The Ninth Circuit’s opinion in Bourne Valley contends that it does, and the statute on its very face violates the due process clause of the Fourteenth Amendment. Nevada’s Supreme Court, arguably making the dispute a matter wholly of state law and therefore beyond the United States Supreme Court’s reach, reasoned that super-priority foreclosures did not implicate the due process clauses of either the United States or Nevada Constitutions.
The Nevada Supreme Court’s self-differentiation from other federal courts is not some quirk of local law. Despite the ever-broadening sweep of federal law, the United States Supreme Court recognized within the last 100 years that it was “one of the happy incidents of the federal system” that a single state may “serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” As seen in the ongoing super-priority lien battles, and the Nevada Supreme Court’s general support for enforcing the Nevada statute as written in prior decisions, its distinctiveness can have far-reaching implications and set the stage for larger battles. While the likelihood of any particular case being heard by the United States Supreme Court is slim, the question of whether a state can determine whether or not its own laws implicate constitutional rights is one that the justices may select for review.
 See Daubert or Not Daubert: Does it Make a Difference? A Brief Discussion of Expert Testimony & Opinion Admissibility, Vegas Legal Magazine (Dec. 2016); Nevada Supreme Court Extends the FDIC Extender Statute, jaydevoy.com (May 2015).
 This statutory regime was amended by the Nevada legislature in its 2015 session.
 334 P.3d 408 (Nev. 2014).
 Bourne Valley Court Trust v. Wells Fargo Bank, N.A., 832 F.3d 1154 (9th Cir. 2016), reh’g. denied (petition to U.S. Supreme Court for writ of certiorari filed Apr. 3, 2017).
 Bourne Valley, 832 F.3d at 1158.
 Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortgage, 388 P.3d 970, 974 at n. 5 (Nev. 2017).
 Id. at 974-75.
 Federal courts are, however, allowed to make certain predictions regarding how state courts would rule on issues where there is no direct precedent; federal courts also have the option to certify questions of state law to the Nevada Supreme Court for its consideration under Nevada Rule of Appellate Procedure 5.
 Bourne Valley, 832 F.3d at 1160.
 Saticoy Bay, 388 P.3d at 975.
 See, e.g., Harvey Silvergate, Three Felonies a Day (2011).
 New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (noting, ironically, that the court may strike down laws and “prevent” such experiments where statutes violate the due process clause.)