On November 14, 2013, in Sandpointe Apartments, LLC v. Eighth Judicial District Court, 129 Nev. Adv. Op. 87 (Nov. 14, 2013), and in Branch Banking and Trust Co. v. Neilson, (Nov. 14, 2013) (unpublished), the Nevada Supreme Court interpreted a recent Nevada statute enacted in 2011 which significantly affects creditors’ deficiency rights.
On June 10, 2011, Nevada enacted Assembly Bill 273 (“AB 273”), codified as NRS 40.459(1)(c), which limits the ability of a creditor who purchases a loan secured by Nevada real estate to recover a deficiency. Prior to AB 273, a lender could obtain a deficiency judgment equal to either: (a) the difference between the amount owed to the lender and the amount bid at the foreclosure sale; or (b) the difference between the amount owed to the lender and the market value of the property, whichever results in the smallest deficiency. AB 273 modified this rule in cases where the note had been sold by basing the deficiency calculation on what the lender paid for the loan rather than the amount owed on the loan. Since this statute became effective, countless borrowers and guarantors have asserted that AB 273 limits or even eliminates their liability on loans that were sold prior to the enactment of AB 273.
In the recent decisions, the Nevada Supreme Court held that NRS 40.459(1)(c) did not apply retroactively to loans that had been transferred if a foreclosure sale of the loan collateral occurred before June 10, 2011, the effective date of AB 273. In those cases, the Nevada Supreme Court concluded that the purchaser of the loan was entitled to recover a deficiency judgment in the amount authorized before the enactment of AB 273 because AB 273 was not intended to be applied retroactively. The Nevada Supreme Court also reasoned that a foreclosure sale of the encumbered property is the event that vests the lender’s right to deficiency.
Applying the reasoning of these decisions, the Nevada courts are likely to hold (subject to other issues discussed below) that if any loan secured by real property in Nevada has been sold, and the foreclosure sale occurred after the June 10, 2011, the effective date of AB 273, the amount of the deficiency is limited to the amount paid for the loan rather than the unpaid balance of the loan (less the foreclosure bid or value of the property). Counsel for borrowers and guarantors may argue that deficiencies are limited to the amount paid for the loan if the loan was made or sold before AB 273 was enacted, but the collateral was foreclosed upon afterwards.
Sandpointe, however, expressly left open other challenges to AB 273. In footnote 4 of the opinion, the Nevada Supreme Court stated that the statute presented several potential constitutional and procedural issues, such as whether AB 273 violates the Contracts Clause and is pre-empted by the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”). The Court did not reach these issues since it ruled that AB 273 was inapplicable because of the foreclosure sale date.
Such additional challenges to AB 273 could include:
- Whether AB 273 violates the Contracts Clauses of the Nevada and U.S. Constitution in cases where the loan was sold before the effective date of AB 273, but the foreclosure sale occurred afterwards. In such cases, the loan purchaser would likely allege that it expected to be able to recover the full amount owed on the loan when it purchased the loan and that collection right was impaired by AB 273.
- Whether AB 273 violates the Contracts Clauses of the Nevada and U.S. Constitution in cases where the loan was made before the effective date of AB 273 because it impairs the lender’s ability to sell the loan and reduces the value of the loan. The lower court in Sandpointe seemed persuaded by this point and held that AB 273 applied only to loans made after June 10, 2011, whereas the lower court in Neilson reached the opposite conclusion.
- Whether AB 273 is pre-empted in all cases involving the FDIC because it is a federal entity.
- Whether AB 273 applies to the FDIC because it is not a “person” under NRS 0.039 and Nevada’s anti-deficiency statutes only purport to limit the recovery of “persons.”
- Whether AB 273 applies to loans that were transferred to special purpose entities or SPEs owned and controlled by the lender prior to the foreclosure sale.
- Whether AB 273 applies to loans secured by real property outside of Nevada where the parties have chosen Nevada law as the governing law.
- Whether AB 273 applies to loans secured by Nevada real property where the parties have chosen the law of another state as the governing law.