Weeping Hollow Avenue Trust v. Ashley Spencer

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

WEEPING HOLLOW No. 13-16060
AVENUE TRUST,
Plaintiff-Appellant, D.C. No.
2:13-cv-00544-JCM-VCF
v.

ASHLEY B. SPENCER, an OPINION
individual; WELLS FARGO
BANK, NA,
Defendants-Appellees.

Appeal from the United States District Court
for the District of Nevada
James C. Mahan, District Judge, Presiding

Argued and Submitted June 13, 2016
San Francisco, California

August 2, 2016

Before: J. Clifford Wallace, Dorothy W. Nelson,
and John B. Owens, Circuit Judges.

Opinion by Judge Wallace
2 WEEPING HOLLOW AVENUE TRUST V. SPENCER

SUMMARY*

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

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 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.

COUNSEL

Jacqueline A. Gilbert (argued), Kim Gilbert Ebron, Las
Vegas, Nevada; Kerry P. Faughnan, Law Offices of Kerry P.
Faughnan, North Las Vegas, Nevada; for Plaintiff-Appellant.

Andrew M. Jacobs (argued), Snell & Wilmer LLP, Tucson,
Arizona; Kelly H. Dove, Snell & Wilmer, LLP, Las Vegas,
Nevada; for Defendant-Appellee Wells Fargo Bank, N.A.

No appearance for Defendant-Appellee Ashley B. Spencer.

OPINION

WALLACE, Senior Circuit Judge:

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) (2012). This
statute has engendered substantial litigation in both state and
federal courts. See, e.g., Freedom Mortg. Corp. v. Las Vegas
Dev. Grp., LLC, 106 F. Supp. 3d 1174 (D. Nev. 2015); SFR
4 WEEPING HOLLOW AVENUE TRUST V. SPENCER

Invs. Pool 1, LLC v. U.S. Bank, N.A., 334 P.3d 408 (Nev.
2014). In this case, Wells Fargo Bank, NA (Wells Fargo) asks
us to invalidate the statute on constitutional grounds, arguing
that it violates due process and the Takings Clause. We
decline to reach those arguments, however, because the
district court improperly exercised diversity jurisdiction.
Thus, we reverse the district court’s judgment and remand the
case to the district court with instructions that the court
remand the case to state court.

I.

This case concerns a dispute between the parties over who
has priority ownership of property located in Las Vegas,
Nevada. In late 2008, Ashley Spencer bought the property
using a $166,961 loan she obtained from PrimeLending.
PrimeLending recorded the deed of trust it received from
Spencer as security for the loan, placing it in first priority
position over the property. Almost four years later,
PrimeLending assigned its interest in the property to Wells
Fargo.

Soon after buying the property, Spencer fell behind on
both her mortgage and homeowners’ association (HOA) fees.
After not receiving Spencer’s HOA fees, the HOA filed a lien
on Spencer’s property. A few months later, the HOA
foreclosed on the property under its lien. It then held a
foreclosure sale on October 5, 2012, resulting in Plaintiff-
Appellant Weeping Hollow Avenue Trust (Weeping Hollow)
purchasing the property for $3,004.

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 then filed an action in
 WEEPING HOLLOW AVENUE TRUST V. SPENCER 5

state court against Spencer, Wells Fargo, and a title insurance
company, seeking to quiet title and obtain declaratory relief.
Wells Fargo removed the case to federal court. It did so even
though Weeping Hollow and Spencer are both citizens of
Nevada, thus appearing to have foreclosed the federal district
court from exercising diversity jurisdiction. Caterpillar Inc.
v. Lewis, 519 U.S. 61, 68 (1996) (“The current general-
diversity statute . . . applies only to cases in which the
citizenship of each plaintiff is diverse from the citizenship of
each defendant”). The federal district court concluded it
nonetheless could exercise diversity jurisdiction over the case
because Weeping Hollow had fraudulently joined Spencer as
a defendant. The district court then granted Wells Fargo’s
motion to dismiss Weeping Hollow’s complaint. In so doing,
it concluded that the 2012 HOA foreclosure sale did not
extinguish Wells Fargo’s 2008 deed of trust. Central to this
conclusion was the district court’s interpretation of section
116.3116(2)(c) (2012) of the Nevada Revised Statutes.1 That
section makes HOA liens superior “to all security interests
. . . to the extent of any charges incurred by the [HOA].” The
district court refused to interpret this section so that
foreclosure of an HOA lien would extinguish an earlier-
recorded security interest (such as Wells Fargo’s in this case).
Rather, the district court concluded that the section “creates
a limited super priority lien for 9 months of HOA assessments

1
In 2013 and 2015, Nevada’s legislature amended the HOA statute. See
2015 Nev. Laws Ch. 266 (S.B. 306); 2013 Nevada Laws Ch. 552 (S.B.
280). But we apply the statute in its 2012 form because that was the
version under which the parties operated. See Landgraf v. USI Film
Prods., 511 U.S. 244, 265 (1994) (observing that “‘the legal effect of
conduct should ordinarily be assessed under the law that existed when the
conduct took place’” (quoting Kaiser Aluminum & Chem. Corp. v.
Bonjorno, 494 U.S. 827, 855 (1990) (Scalia, J., concurring)).
6 WEEPING HOLLOW AVENUE TRUST V. SPENCER

leading up to the foreclosure of the first mortgage, but it does
not eliminate the first security interest.”

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. SFR Invs. Pool 1,
LLC v. U.S. Bank, N.A., 334 P.3d 408, 414 (Nev. 2014).

II.

Weeping Hollow now appeals from the district court’s
ruling dismissing its claims. It argues that the Nevada
Supreme Court’s opinion in SFR Investments requires us to
reverse the district court’s ruling. It further argues that the
district court erred in holding that Spencer was fraudulently
joined as a defendant.

Wells Fargo, for its part, does not defend the district
court’s ruling since there is no doubt the Nevada Supreme
Court abrogated the court’s analysis. But it argues we should
affirm on three alternative grounds: (1) the HOA statute
violates due process, (2) the HOA statute violates the Takings
Clause, and (3) the HOA foreclosure sale is void because it
was commercially unreasonable.

As always, before resolving any of the merits arguments,
we must first “assure ourselves that we have jurisdiction.”
Timbisha Shoshone Tribe v. U.S. Dept. of Interior, 2016 WL
3034671, at *3 (9th Cir. May 27, 2016). This case made it
into federal court because Wells Fargo removed it from state
court by arguing that the federal district court could exercise
 WEEPING HOLLOW AVENUE TRUST V. SPENCER 7

diversity jurisdiction. See 28 U.S.C. § 1441(a), (b). The
diversity statute grants federal courts jurisdiction in cases
between “citizens of different States.” 28 U.S.C.
§ 1332(a)(1). Since the earliest days of our Republic, the
Supreme Court has interpreted this provision to require
complete diversity of citizenship. Strawbridge v. Curtiss,
3 Cranch 267, 267 (1806). The Court has “adhered to that
statutory interpretation ever since.” Caterpillar Inc. v. Lewis,
519 U.S. 61, 68 (1996). The upshot is that a federal court may
exercise diversity jurisdiction “only if there is no plaintiff and
no defendant who are citizens of the same State.” Wisconsin
Dept. of Corr. v. Schacht, 524 U.S. 381, 388 (1998).

If all that were at issue in this case was the complete
diversity rule, we could easily conclude the district court
lacked jurisdiction because Weeping Hollow and Spencer are
not diverse: both are citizens of Nevada. But there is more. In
the early 1900s, the Supreme Court created the fraudulent-
joinder doctrine as a gloss on the complete-diversity rule.
Alabama Great S. Ry. Co. v. Thompson, 200 U.S. 206, 218
(1906) (“Federal courts may and should take such action as
will defeat attempts to wrongfully deprive parties entitled to
sue in the Federal courts of the protection of their rights in
those tribunals”). The Court has not often revisited the
doctrine since, however, and so the lower courts have been
tasked with deciphering the doctrine’s boundaries. See E.
Farish Percy, Making a Federal Case of it: Removing Civil
Cases to Federal Court Based on Fraudulent Joinder,
91 IOWA L. REV. 189, 206 (2005).

Our court has explained that under the fraudulent-joinder
doctrine, “[j]oinder of a non-diverse defendant is deemed
fraudulent, and the defendant’s presence in the lawsuit is
ignored for purposes of determining diversity, ‘[i]f the
8 WEEPING HOLLOW AVENUE TRUST V. SPENCER

plaintiff fails to state a cause of action against a resident
defendant, and the failure is obvious according to the settled
rules of the state.’” Morris v. Princess Cruises, Inc., 236 F.3d
1061, 1067 (9th Cir. 2001) (quoting McCabe v. Gen. Foods
Corp., 811 F.2d 1336, 1339 (9th Cir. 1987)). Thus, while a
showing of actual fraud would be sufficient to invoke the
doctrine, the term “fraudulent joinder” is somewhat of a
“misnomer,” since in most cases the focus will be on whether
the plaintiff can “state a reasonable or colorable claim for
relief under the applicable substantive law against the party
whose presence in the action would destroy the district
court’s subject matter jurisdiction.” 13F C. WRIGHT & A.
MILLER ET AL., FED. PRAC. & PROC. JURIS. § 3641.1 (3d ed.).
In any event, we have made it clear that the party invoking
federal court jurisdiction on the basis of fraudulent joinder
bears a “heavy burden” since there is a “general presumption
against fraudulent joinder.” Hunter v. Philip Morris USA,
582 F.3d 1039, 1046 (9th Cir. 2009).

Here, Wells Fargo invoked the doctrine of fraudulent
joinder, and it therefore bears the heavy burden of showing
that Weeping Hollow obviously failed to state a cause of
action against Spencer. To determine if Wells Fargo has
carried its heavy burden, we must examine Nevada state law.
See Allen v. Boeing Co., 784 F.3d 625, 634 (9th Cir. 2015).

Section 40.010 of the Nevada Revised Statutes governs
quiet title actions in Nevada. Chapman v. Deutsche Bank
Nat’l Trust Co., 302 P.3d 1103, 1106 (Nev. 2013). It provides
that “[a]n action may be brought by any person against
another who claims an estate or interest in real property,
adverse to the person bringing the action, for the purpose of
determining such adverse claim.” NEV. REV. STAT. § 40.010.
The Nevada Supreme Court has held that a quiet title action
 WEEPING HOLLOW AVENUE TRUST V. SPENCER 9

under section 40.010 is “an in rem or quasi in rem
proceeding” because “its essential purpose is to establish
superiority of title in property.” Chapman, 302 P.3d at 1106.
Accordingly, “[a] plea to quiet title does not require any
particular elements, but each party must plead and prove his
or her own claim to the property in question and a plaintiff’s
right to relief therefore depends on superiority of title.” Id.
(internal quotation marks and citation omitted). Therefore, for
Weeping Hollow to succeed on its quiet title action, it needed
to show that its claim to the property was superior to all
others.

Given that Weeping Hollow needed to show it had
superior claim to all others, it was reasonable for it to join
Spencer as a defendant in this action. While the district court
correctly pointed out that Weeping Hollow’s purchase of the
property at the foreclosure sale extinguished Spencer’s
property rights, see NEV. REV. STAT. § 116.31166(3), Spencer
nonetheless could have challenged the foreclosure sale from
which Weeping Hollow gained title on grounds “of fraud,
unfairness or oppression.” Long v. Towne, 639 P.2d 528, 530
(Nev. 1982). In fact, just earlier this year, the Nevada
Supreme Court reaffirmed Long, holding that “in an
appropriate case, a court can grant equitable relief from a
defective HOA lien foreclosure sale.” Shadow Wood HOA v.
N.Y. Cmty. Bancorp., 366 P.3d 1105, 1107 (Nev. 2016).
Under Nevada law, Spencer could have brought claims
challenging the HOA foreclosure sale within five years of the
sale. NEV. REV. STAT. § 11.070. Faced with the possibility
that Spencer may later assert a claim to the property by
arguing that the HOA foreclosure sale should be set aside on
equitable grounds, Weeping Hollow reasonably chose to join
her as a defendant in its action for quiet title and declaratory
relief.
10 WEEPING HOLLOW AVENUE TRUST V. SPENCER

Wells Fargo argues that Weeping Hollow’s failure to
serve Spencer with process demonstrates that she was
fraudulently joined. But Wells Fargo fails to recognize that
the time limit for serving Spencer had not elapsed when the
district court issued its order dismissing the case. Under Rule
4(I) of the Nevada Rules of Civil Procedure, Weeping Hollow
had 120 days to serve Spencer with a summons. Weeping
Hollow’s failure to serve Spencer by the time the district
court issued its ruling cannot be held against it since the time
for doing so had not elapsed.

Wells Fargo also argues that there is no possibility that
Spencer could have made any claim to the property since
Nevada’s HOA statute provides that the homeowner has no
right of redemption. NEV. REV. STAT. § 116.31166(3). But
while there is no statutory right to redemption, the Nevada
Supreme Court has explained that “a plaintiff not in
possession still may seek to quiet title by invoking the court’s
inherent equitable jurisdiction to settle title disputes.” Shadow
Wood HOA, 366 P.3d at 1111. Thus, although Spencer had no
statutory right to redemption, she could still assert an interest
in the property by challenging the HOA foreclosure sale on
equitable grounds.

We do not, and need not, hold that Spencer would
succeed in challenging the HOA foreclosure sale on equitable
grounds. Indeed, we are unaware of any “fraud, unfairness or
oppression” that might have infected the sale. Long, 639 P.2d
at 530. But that is not the issue before us. The question before
us is whether Wells Fargo met its heavy burden of showing
that Weeping Hollow could not sustain its quiet title claim
against Spencer. Given the Nevada Supreme Court’s holding
that a former homeowner may challenge an HOA foreclosure
sale on equitable grounds, we conclude that it was entirely
 WEEPING HOLLOW AVENUE TRUST V. SPENCER 11

reasonable for Weeping Hollow to join Spencer as a
defendant to avoid potential disputes over who had title to the
property. We therefore hold 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, we have no reason to address Wells Fargo’s
constitutional and state-law arguments.

REVERSED AND RE MANDED WI TH
INSTRUCTIONS TO REMAND TO STATE COURT.