The Nevada U.S. District Court Narrowly Interprets Sandpointe Apartments when Ruling in Favor of Entity that Acquired Loan Before Effective Date of AB 273

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On June 10, 2011, Nevada enacted Assembly Bill 273 (AB 273). As codified at NRS 40.459(1)(c), AB 273 limits the ability of a loan purchaser to collect a deficiency on the note and guarantees by basing the deficiency calculation on what the loan purchaser paid for the loan rather than the amount owed on the loan. On November 14, 2013, the Nevada Supreme Court held in Sandpointe Apartments v. Eighth Judicial District Court, 129 Nev. Adv. Op. 87 that NRS 40.459(1)(c) did not apply retroactively if the foreclosure sale on the property securing the loan occurred before June 10, 2011, even if the deficiency action was not brought until after that date.[1]

Following on the heels of the Sandpointe opinion, the United States District Court for the District of Nevada had the opportunity to decide one of the challenges to AB 273 that the Sandpointe Court left unresolved. It did so in an Order dated March 24, 2014 in Eagle SPE NV I, Inc. v. Kiley Ranch Comms. et al (3:12-cv-00245-RCJ-WGC).

The Eagle litigation arose out of the default on four commercial loans and the associated guarantees. The loans were transferred to the Plaintiff’s parent company by the FDIC in August of 2009.  In August 2010, prior to the June 10, 2011 effective date of AB 273, the Plaintiff’s parent company transferred the loans to the Plaintiff. The trustee’s sale, however, did not occur until November 8, 2011, after the effective date of AB 273.  

In Sandpointe, the Nevada Supreme Court stated that the foreclosure sale is the relevant action that vests the right to a deficiency in the lender. Because the foreclosure sale in Eagle occurred after the effective date, the Eagle Court could have followed Sandpointe and applied NRS 40.459(1)(c) to limit the Plaintiff’s recovery. The Eagle Court determined, however, that Sandpointe did not mandate the application of NRS 40.459(1)(c) to the loans which had been transferred prior to the effective date of AB 273 even though the foreclosure sales occurred afterwards. Sandpointe involved a loan that had been assigned and foreclosed prior to AB 273’s effective date. The Sandpointe Court, therefore, was not required to decide whether NRS 40.459(1)(c) could be applied  to a loan assigned before the statute’s effective date, but not foreclosed until after the effective date. On the contrary, the Eagle Court was squarely faced with this question.

In arriving at its conclusion that NRS 40.459 did not limit the amount of the Plaintiff’s deficiency, the Eagle Court applied the three-part Contract Clause test set forth by the Ninth Circuit. The Eagle Court first determined that NRS 40.459(1)(c) substantially impairs the contractual relationship in a pre-AB 273 assignment because it limited the recovery on the purchased debt in a way that would not have been contemplated at the time of purchase. Second, the Eagle Court determined that AB 273 would provide a windfall to mortgagors if applied retroactively and, therefore, was more akin to special interest legislation than a neutral exercise of the state’s police power. Finally, the Eagle Court held that AB 273 was not based upon reasonable conditions and was not appropriate to meet the public purpose it was meant to serve because its application would significantly impair the value of pre-enactment assignments and there were less restrictive alternatives.

Based on the forgoing, the Eagle Court determined that the statute would violate the Contract Clause of the U.S. Constitution if applied retroactively to loans that were assigned prior to the law’s effective date. The Eagle Court then had to determine whether the statute could be read to avoid the constitutional infirmity. Relying on Sandpointe and the legislative history of AB 273, the Eagle Court determined that the statute could be read to apply only to assignments after June 10, 2011, thereby avoiding the Constitutional issue.

One small section of the Eagle Court decision is of particular concern for lenders in Nevada. In a four sentence section, the Court stated that a transfer from a parent to a subsidiary would fall within the limitations of NRS 40.459(1)(c).  The Court based its conclusion on the separate legal status of the parent and subsidiary and the fact that the legislature did not provide an exception for parent-subsidiary assignments. However, this portion of the decision appears to be dicta because the Court did not need to decide this issue since the assignment occurred prior to the statute’s effective date. Additionally, it does not appear that the Court had before it the following arguments:

  1. The amount of consideration given in a parent-subsidiary transaction is equivalent to the full amount of the debt. In a parent-subsidiary assignment, the parent entity still retains the equitable interest in the asset because it owns all of the equity of the subsidiary, which would include the full amount of the loan.
  2. The legislative history of AB 273 is focused on encouraging lenders to negotiate with borrowers rather than sell the debt at a discount. Nothing in the legislative history of AB 273 addresses assignments by a parent to a subsidiary – essentially a nominee – that is formed for the purpose of holding distressed assets.

Although the Nevada Supreme Court has not weighed in on this matter, it seems inevitable that it will be asked to do so soon. In the meantime, lenders should carefully structure assignments to subsidiaries with this ruling in mind.

Topics:  Debt Buyers, Loans

Published In: Civil Procedure Updates, General Business Updates, Constitutional Law Updates, Finance & Banking Updates, Residential Real Estate Updates

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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