Holland & Hart obtained a seminal decision from a federal court in Nevada on a recent controversial deficiency law. Nevada Revised Statute 40.459(1)(c) applies to creditors who did not originate a mortgage. This law purports to reduce an assignee-mortgage holder’s ability to obtain a deficiency judgment to the “consideration” it paid to obtain the loan. As a result of Holland & Hart’s efforts, a Nevada federal court has ruled that this provision violates the Contract Clause of the U.S. Constitution when it is applied to mortgages that were assigned before the law’s enactment in 2011.

The case (Eagle SPE NV I, Inc. v. Kiley Ranch Communities) involves a set of four loans that passed from a failed bank through the FDIC to Branch Banking & Trust Co., who then transferred the loans to its wholly owned subsidiary, Eagle, in 2010.  After foreclosing, Eagle filed suit for a $35 million deficiency judgment in 2012. The defendants claimed under NRS 40.459(1)(c)’s “consideration” restriction that Eagle could recover nothing. In turn, Eagle filed a motion to dismiss this defense, which Judge Robert Jones granted in the attached 32-page decision.  Download Kiley Ranch Decision

The most important point from the Kiley Ranch decision is that NRS 40.459(1)(c) violates the Contract Clause where it is applied to a mortgage assigned before NRS 40.459(1)(c)’s enactment on June 10, 2011. Judge Jones held in the alternative that, even in the absence of the Contract Clause, NRS 40.459(1)(c) does not apply retroactively to a case involving a pre-enactment assignment and post enactment foreclosure.

In reaching his decision, Judge Jones narrowly construed the Nevada Supreme Court’s recent decision in Sandpointe Apartments, LLC v. District Court. He explained that any suggestion in Sandpointe that NRS 40.459(1)(c) applies to a case involving a pre-enactment assignment and post-enactment foreclosure—as is the case in Kiley Ranch—was dicta. In contrast to Sandpointe, Judge Jones’s retroactivity and Contract Clause analysis focuses on the assignment of a mortgage (rather than the date of foreclosure).

Judge Jones’s constitutional determination is not binding on Nevada state courts. Nevertheless, the Kiley Ranch opinion is the first federal opinion to directly address NRS 40.459(1)(c)’s constitutionality and represents a step toward clarity after NRS 40.459(1)(c)’s first couple muddled years of existence.