In what the dissenting Justices insinuate is an elevation of form over substance, the Nevada Supreme Court denied a rehearing in Lavi v. Eighth Judicial District Court, 130 Nev. Adv. Op. 38, 2014 WL 2428749 (May 29, 2014), and held that the Plaintiff, a financial institution, was barred from pursuing a deficiency against the Guarantor even though the Plaintiff had sued the Guarantor on the debt prior to the expiration of time for filing deficiency actions. In making that determination, the Court held that a complaint filed against a guarantor four months prior to a foreclosure sale could not be considered an “application” for a deficiency, which NRS 40.455 requires a party to file “within 6 months after the date of the foreclosure sale or the trustee’s sale [emphasis added].” Since the financial institution in Lavi did not seek partial summary judgment until nearly a year after the foreclosure sale and had not amended its complaint, the Court determined that an “application” for a deficiency had not been filed within the statutory six month period. The Court held that this was true, even though the guarantor had waived the application of the one-action rule (NRS 40.430) and the financial institution had proceeded under NRS 40.495(2).
The Lavi majority opinion referred frequently to Walters v. Eighth Judicial District Court, 263 P.3d 231 (2011), in reaching its conclusion. In Walters, the guarantor commenced a declaratory relief action prior to the foreclosure of the property. The lender, before foreclosure, answered and filed counterclaims alleging a breach of guaranty. Four months after the foreclosure, the lender filed an answer and counterclaims in response to the guarantor’s amended complaint, and also filed a motion for summary judgment. The Walters Court determined, relying on NRCP 7(b)(1), that the motion for summary judgment was an “application” within the meaning of NRS 40.455, which had been filed within the six month deficiency period.
The dissenting Justices in Lavi expressed great concern over the use of a procedural limitation to exonerate a guarantor from his contractual obligations where the lender was diligent in pursuing its rights. The dissent would have held that the Complaint constituted an “application” under NRS 40.455. In fact, the guarantor conceded that the complaint would constitute an “application” under NRS 40.455 if it had been filed after the foreclosure. The dissent also believed that NRS 40.455 was irrelevant since, given the guarantor’s waiver of the one-action rule, the lender was permitted by NRS 40.495(2) to pursue him “separately and independently.” Finally, the dissent would have held that NRS 40.495(4) made NRS 40.455 and NRS 40.459 inapplicable in cases where the complaint was filed before foreclosure, as evidenced by the inconsistency in the applicable date of the fair market value determination under the two statutes (i.e., the date of foreclosure (NRS 40.457) or the date of the commencement of the action (NRS 40.495(4)).
The dissent in Lavi seems to have the better end of the argument. A guaranty action and a deficiency action have the same goal – to collect the debt from the guarantor. The only conceivable difference between the two actions is that the amount of the judgment is further limited in a deficiency action. However, that difference is illusory after the passage of NRS 40.495(4), which limits a guarantor’s liability by giving her credit for the fair market value of the real property even if there has been no foreclosure.
The take-away from Lavi is that any lender that sues a guarantor of a loan secured by real estate should immediately take steps to make sure that the guaranty action is converted to a deficiency action following the foreclosure sale.