Nevada Appeals Court To Consider ‘Foreclosure Sale’ Definition

by Ballard Spahr LLP
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Special servicers and lenders who have loans secured by real property in Nevada should be aware of a case that is on appeal in that state. Briefing is about to begin on what could be an important win, or loss, for the lending industry. The appeal involves an Eighth Judicial District ruling issued in August 2012, in which the court found that a private sale of property through receivership must include notices required in a non-judicial foreclosure. A lack of such notices precluded a recovery against the guarantor. The court also found that, because a receivership sale is a “foreclosure sale,” the trustee was precluded from recovering a deficiency.

Like many other western states, Nevada allows for non-judicial foreclosure of property upon a borrower’s default. If the Nevada Supreme Court affirms the lower court’s all-inclusive definition of a “foreclosure sale,” a special servicer or lender may have to initiate a non-judicial foreclosure and serve the accompanying statutory notices even if proceeding with a receivership sale or even in a judicial foreclosure. Another possible result is that, by opting for a private sale through receivership, the special servicer or lender may be electing to forgo any deficiency—regardless of whether the guaranty is limited or full recourse.

In U.S. Bank National Association as Trustee for the Registered Holders of ML-CFC Commercial Mortgage Trust 2007-7 Commercial Mortgage Pass-Through Certificates Series 2007-7 v. Palmilla Development, the special servicer sought the appointment of a receiver over property securing a $20 million-plus loan. The special servicer was the party directing actions and managing the loan in the trust for which U.S. Bank was the CMBS trustee (the Trustee), and the loan was secured by a personal guaranty. An Eighth Judicial District judge appointed a receiver, and later, the court granted the Trustee’s motion to sell the property through the receivership. The motion to sell was unopposed. Ultimately, the property sold for $9.5 million, leaving a deficiency for the special servicer to pursue on behalf of the trust and in the name of the Trustee.

The Trustee amended its complaint to seek a deficiency against both the borrower and the guarantor (the Defendants). Three defenses were raised:

  • Because a private sale is not a foreclosure, there is no statutory basis to pursue a deficiency.
  • The claims against the guarantor were precluded by Trustee’s failure to provide certain statutory notices.
  • The claims were time barred by Trustee’s failure to file a deficiency claim within six months, which is the deadline to file for a deficiency after the date of a foreclosure sale.

The Trustee argued that, because of the private sale, there was no “garden variety” foreclosure, and that the statutory defenses were inapplicable because the claim was one for a “straight case of contract damages,” as opposed to a deficiency as governed by statute.

In lengthy analysis, the court pointed to several statutes that stand for the proposition that a “foreclosure sale” means the sale of real property to enforce an obligation secured by a mortgage or lien on the property. This includes the exercise of a trustee’s power of sale under Nevada Revised Statutes (NRS) 107.080. Notably, this language does not limit the definition of foreclosure sale, but it does expressly include a trustee’s sale as provided by Nevada’s non-judicial foreclosure statute.

This non-judicial foreclosure statute grants to a trustee under a deed of trust the power to sell the property if the statutory process is followed. The statute is silent on whether someone who is not the trustee under a deed of trust (here, a receiver) must follow the statute, and the statute does not say it is the exclusive means of conducting a foreclosure sale. This statutory process implies that there are other “foreclosure sales” that are distinct from the non-judicial process. The interpretation that there are “foreclosure sales” outside the context of a trustee’s sale in the non-judicial foreclosure context is reinforced by Nevada’s deficiency statute, which refers separately to foreclosure sales and trustee’s sales.

Nonetheless, the district court found that the notice requirements for a trustee’s sale must be followed in any sale that can be defined as a foreclosure, including a private sale through receivership, even though a receiver is not a trustee under a deed of trust and even though NRS 107.080 applies only to such trustees.

There are already several lessons from this Eighth Judicial District decision. First, a special servicer or lender should make sure that its counsel understands, complies with, and is capable of dual tracking remedies arising under Nevada’s non-judicial foreclosure, receivership, and deficiency statutes. Second, if there is any chance that a deficiency may be pursued, the special servicer or lender should make sure to initiate a non-judicial foreclosure (and serve all appropriate notices), even if the goal is to sell via receivership sale.

For more information, please contact Abran Vigil at 702.868.7523 or vigila@ballardspahr.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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