The Nevada Supreme Court recently issued two significant opinions that impact deficiency judgment actions in Nevada, and is preparing to issue a third.

In Munoz v. Branch Banking and Trust Company, Inc., the Court held that Nevada’s law limiting deficiency judgment amounts in certain cases (NRS 40.459(1)(c)) is preempted by federal law, specifically, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). The Court affirmed a lower court ruling that state law does not shield the plaintiffs from deficiency judgment liability.

In Branch Banking and Trust Company v. Windhaven & Tollway, LLC, the Court held that a different statutory section, NRS 40.455(1), which sets procedural requirements for foreclosure or trustee’s sales in order for a deficiency judgment to be entered, does not prohibit deficiency judgments in Nevada even when the requirements are not met—if the foreclosure or trustee’s sale occurs in another state and is non-judicial. The Supreme Court found that a lower court erred in precluding a successor-creditor bank from pursuing a deficiency judgment.

Munoz v. Branch Banking and Trust Company, Inc. Decided: April 30, 2015

In 2011, Nevada adopted Assembly Bill 273, generally to impose certain limitations on a lender or note-holder’s ability to pursue deficiency judgments. Significant litigation has ensued over the past four years.

A.B. 273 amended state law (NRS 40.459) to limit the potential deficiency judgment available to any lender who “acquired the right to obtain the judgment from a person who previously held that right…” Under the amended version, a deficiency judgment of an assignee of an originating lender is limited to:

the amount by which the amount of the consideration paid for that right exceeds the fair market value of the property sold at the time of sale or the amount for which the property was actually sold, whichever is greater, with interest from the date of sale and reasonable costs. (NRS 40.459(1)(c)). 

At issue in Munoz—in which the plaintiffs’ loan was assigned to a successor creditor after the original bank was placed into Federal Deposit Insurance Corporation (FDIC) receivership—was whether this deficiency judgment limit conflicts with FIRREA’s purpose: to facilitate transfer of failed-bank assets to healthier institutions in order to reduce losses, with the FDIC as receiver. 

The Nevada Supreme Court held that the state law interferes with the FDIC’s ability to assume and dispose of a failed bank’s assets, so that its application in the case frustrates the purpose of FIRREA. Citing the Supremacy Clause of the U.S. Constitution, the Court found that the Nevada law is preempted to the extent it “limits deficiency judgments that may be obtained from loans transferred by the FDIC.”

Branch Banking and Trust Company v. Windhaven & Tollway, LLC. Decided: April 30, 2015

In Windhaven & Tollway, the Nevada Supreme Court weighed whether state law (NRS 40.455(1)) precludes a deficiency judgment in Nevada when the beneficiary of a deed of trust non-judicially forecloses upon property in another state and the foreclosure is conducted pursuant to that state’s laws instead of Nevada’s sale (NRS 107.080). 

NRS 40.455(1) provides:

upon application of the judgment creditor or the beneficiary of the deed of trust within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively, and after the required hearing, the court shall award a deficiency judgment to the judgment creditor or the beneficiary of the deed of trust if it appears from the sheriff’s return or the recital of consideration in the trustee’s deed that there is a deficiency of the proceeds of the sale and a balance remaining due to the judgment creditor or the beneficiary of the deed of trust, respectively.

The Nevada Supreme Court held that while NRS 40.455(1) clearly governs deficiencies arising from judicial foreclosures and those trustee’s sales that are held pursuant to NRS 107.080, “we disagree that the statute limits deficiency judgments to judicial foreclosures and trustee’s sales in accordance with 107.080. NRS 40.455(1) has no such limiting language.”

Accordingly, the Court held that a deficiency judgment action is permitted in Nevada when a non-judicial foreclosure occurs in another state and does not comply with NRS 107.080.

Sexton v. LSREF2 Apex Trust 2012, Case No. 63132

Finally, on May 4, 2015, oral argument was heard on yet another case which impacts deficiency actions in Nevada, Sexton v. LSREF2 Apex Trust 2012. In Sexton, the Nevada Supreme Court is poised to address several issues impacting deficiency judgments:

First, whether a foreclosure sale is required to trigger the provisions of NRS 40.495(3) (a pre-foreclosure statute) such that a guarantor can claim the fair value defenses from NRS 40.459(1).

Second, whether the fair value defense codified at NRS 40.459(4) applies to a breach of guaranty suit filed hours before that provision became effective.

And last, whether the fair value defenses in NRS 40.459(1) violate the Contracts Clause of the U.S. Constitution. An update on this case will be forthcoming as soon as an opinion is issued.

With offices throughout the United States, Ballard Spahr understands each area’s regional issues, local laws, political climate, and distinct market characteristics. That perspective, combined with our vast experience in real estate, finance, taxation, litigation, receivership matters, and bankruptcy, gives us the skills and insight needed to help clients in all facets of loan servicing and administration. We advise clients on loan assumptions; modifications, releases, and defeasances; workout, restructuring, and enforcement matters; and real estate owned transactions. Working as needed with our nationally recognized Consumer Financial Services Group, the practice combines broad regulatory experience with formidable skill in litigation and depth in enforcement actions and transactions. Additionally, the firm’s Real Estate Finance and Capital Markets Group advises clients in structuring, documenting, closing, servicing, and restructuring real estate debt and equity transactions.

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