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.