Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-16060/USCOURTS-ca9-13-16060-0/pdf.json

Nature of Suit Code: 290
Nature of Suit: Other Real Property Actions
Cause of Action: 

---

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

WEEPING HOLLOW

AVENUE TRUST,

Plaintiff-Appellant,

v.

ASHLEY B. SPENCER, an

individual; WELLS FARGO

BANK, NA,

Defendants-Appellees.

No. 13-16060

D.C. No.

2:13-cv-00544-JCM-VCF

OPINION

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

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 1 of 11
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.

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 2 of 11
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

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 3 of 11
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 PlaintiffAppellant 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

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 4 of 11
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 generaldiversity 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 earlierrecorded 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)).

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 5 of 11
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

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 6 of 11
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 fraudulentjoinder 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

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 7 of 11
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.

MILLERETAL., 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

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 8 of 11
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

propertyrights, seeNEV.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.

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 9 of 11
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, WeepingHollow

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

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 10 of 11
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 REMANDED WITH

INSTRUCTIONS TO REMAND TO STATE COURT.

 Case: 13-16060, 08/02/2016, ID: 10071839, DktEntry: 62-1, Page 11 of 11