Federal District Court Limits Nevada Anti-Deficiency Protections (AB273)

  • May 13, 2015

This article was originally published in the April 2014 edition of Incline Law Group’s printed newsletter, Currents. 

In my last Currents column, I discussed the Nevada Supreme Court’s November, 2013, decision in Sandpointe.

Sandpointe concerned the application of Nevada’s 2011 AB273, which expanded anti-deficiency protections afforded to borrowers and guarantors whose loans are secured to Nevada real estate.

AB273 essentially limits a deficiency judgment after foreclosure to the amount paid for the assigned loan. Sandpointe determined that AB273 was not applicable in the case before it because both the loan assignment and the foreclosure sale occurred before enactment of AB273.  Sandpointe thus left the weightier constitutional issue of possible impairment of contract rights to future cases.

Within the past  month, one such case decision arrived on the scene –  Eagle SPE NV I, Inc. v. Kiley Ranch Communities, United States District Court, D. Nevada, March 24, 2014, 2014 WL 1199595 (“Eagle SPE”).  Eagle SPE  involved the assignment prior to enactment of AB 273 of four defaulted loans totaling $45 Million, with loan foreclosure sales occurring after the enactment.  Chief Judge Robert Jones of the U.S. District Court of Nevada delved headlong into the constitutional questions avoided by the Nevada Supreme Court and concluded that AB273 cannot be constitutionally applied to loans where the assignment to the foreclosing creditor occurred prior to the statute’s effective date in June, 2011. This decision is not currently binding on other Nevada courts, but it may portend the future legal landscape in Nevada. An appeal to the U.S. Ninth Circuit Court of Appeals and thereafter to the Supreme Court of the United States (“SCOTUS”) is certain to follow.

While the popular view is that laws simply cannot impair any vested contract rights, the decisions of the SCOTUS and federal appeals courts have established a much more subtle balancing test that allows some significant interference with contracts.

Judge Jones’ decision stated: “The amended statute, if retroactively applied to assignments made before the effective date, provides a windfall to a particular class (mortgagors) that could not have been reasonably expected under the mortgage and assignment when made, to the detriment of another distinct class (mortgage assignees). …”

Judge Jones concluded that parts 1 and 2 of the above test were satisfied – i.e., that AB273 indeed impairs contract rights when it is applied to a loan assignment made prior to AB273 enactment, and that there was a legitimate public purpose for the Nevada state legislature enacting the law to address a state-wide real estate crisis.

Judge Jones also concluded that any impairment of the assignee’s expectancy interest – its benefit of the bargain – cannot be limited.  He found that AB273 essentially destroys an assignee’s upside or benefit of its bargain, but completely protects the assignee’s out-of pocket losses from the contract impairment.  Judge Jones concluded this is a windfall to the borrower, and does so without discussing the particular borrower’s circumstances (rather he discusses all borrowers collectively and abstractly).  Nor does Judge Jones consider the probability that in essentially all deficiency judgment actions after foreclosure, the borrower has not enjoyed any windfall at all – it is not walking away with a pile of money in its pocket, it has no remaining interest in the property, and has probably lost its entire equity capital investment and perhaps years of sweat equity.

In this light, Judge Jones’ conclusion that every foreclosed borrower has enjoyed a windfall and is impermissibly receiving special protection is neither supported by the facts of the case nor economic reality.  Moreover, the decision fails to address the fact that a potential windfall is accruing to the party who acquired the loan at a discount, in a voluntary transaction between the foreclosing holder of the loan and the prior holder or loan originator.  The foregoing aspects of Judge Jones’ analysis may prove to be crucial in appellate litigation that is certain to follow – after all, the case concerns a deficiency of $35.7 Million.

My prediction is that the case will proceed to the U.S. Ninth Circuit Court of Appeals and eventually to the SCOTUS, and the argumentation will focus on whether AB273 in fact accords a windfall to borrowers, whether all Nevada borrowers with assigned mortgages are an improperly defined special interest group, and whether AB273’s protection of the loan assignee’s out-of-pocket losses, while entirely destroying its benefit of bargain (the right to enforce the assigned loans at face value when acquired at less than face value, when the devaluation of the collateral is already known or obvious) is permissible under the Contracts Clause.  The Ninth Circuit will make an interesting appellate forum for these issues.  If Judge Jones’ decision is upheld, it will have the effect of gutting the consideration-paid limitations imposed by AB273, in regard to all loan assignments made before AB273 took effect in June, 2011.

NV Supreme Court Addresses AB273 – Anti-deficiency Protections

  • May 13, 2015

This article was originally published in the January 2014 edition of Incline Law Group’s printed newsletter, Currents. 

In 2011 the Nevada legislature enacted Assembly Bill 273, and in doing so expanded the anti-deficiency protections available to borrowers and guarantors in Nevada.  An anti-deficiency law is one that limits the amount of money which a lender or its assignee may obtain from a borrower or guarantor in excess of the value of the real property or other collateral given to secure the loan.  Of particular importance, AB273 limits the amount that an assignee may recover through a deficiency judgment to the amount of consideration it paid for the assignment of the note and deed of trust, minus  (1) the amount paid for the property at the foreclosure sale, or (2) the fair value of the property on the date of foreclosure, whichever is greater.

Within a few months after AB 273 was enacted, trial courts in Nevada began to issue conflicting rulings regarding application of the new law.  In particular, on one day in late 2011, two different judges from the Eighth Judicial District Court in Clark County issued rulings with opposite conclusions about the effect of the law.  The two cases, Sandpointe and Nielsen, were then appealed to the Nevada Supreme Court.  Since then, attorneys and judges handling collection cases and the banking industry in general have been waiting for rulings on these cases.

In November, 2013, after a two-year wait, the Nevada Supreme Court issued its rulings in Sandpointe and Nielsen.  Depending on who you ask, there are differing opinions regarding what was decided and not decided by SandpointeThe following is this attorney’s view of the primary issues decided and not decided by Sandpointe:

First and foremost, Sandpointe determined that the AB273 anti-deficiency protections apply to any loan where the foreclosure sale (private trustee’s sale or judicial foreclosure) occurs after the effective date of the statute, which was June 10, 2011.  The court noted that a creditor’s right to a deficiency judgment vests when the foreclosure sale happens.

Some have suggested that AB273 only applies to an assignment of a right to obtain a deficiency judgment after foreclosure (i.e., a cause of action), but not to an assignment of a note and deed of trust.  In fact, Sandpointe expressly and impliedly determined that the AB273 anti-deficiency protections apply to any transfer of the right to obtain a deficiency judgment, regardless of when or how the right was transferred.

The Supreme Court also explained the practical economic effect of AB273 when it applies.  In this regard, the court stated:

Following the enactment of NRS 40.459(1)(c), a successor holder is now limited in its recovery, in a deficiency action or suit against the guarantor, to the sum by which the amount paid for the “right to obtain the judgment” exceeds the greater of the fair market value or the actual sale price. Under NRS 40.459(1)(c), no award may be made for other amounts that the successor in interest may have incurred following the acquisition of the right to obtain the judgment, such as accrued interest, costs and fees, and any advances, as provided in NRS 40.451 and NRS 40.465.

No doubt the statement that no award may be made for accrued interest, costs and fees will produce additional controversy.

The Court did not rule on the applicability of AB273 to loans transferred to a FDIC takeover.  AB273 refers to “persons” — in particular, a “person” assigning and a “person” receiving assignment.   Successor banks that hold assets received through the FDIC argue that the FDIC is not a “person” within the definition of statute and, therefore, that successor banks acquiring loans from FDIC are not limited in what they can recover.  This issue will undoubtedly be addressed in a future appellate court decision.

Sandpointe and Nielsen have answered some important questions following the enactment of the AB273.  Several crucial issues regarding this important law still remain to be decided, and will undoubtedly be the subject of future appellate decisions and/or legislative changes.