By amending a statute that limits deficiency judgment amounts in certain cases, Nevada lawmakers have attempted to restore balance as the law applies to commercial properties. The amendments follow a recent wave of litigation over the statute, including a Nevada Supreme Court ruling earlier this year. However, the amendments do not apply to older loans, and litigation is expected to continue until the state Supreme Court addresses the unresolved issues.  

The disputes stem from the Nevada Legislature’s adoption of Assembly Bill (A.B.) 273, which imposed certain limitations on a lender or note-holder’s ability to pursue a deficiency judgment. The bill, adopted in 2011, amended state law (NRS 40.459) to limit the potential deficiency judgment available to any lender who “acquired the right to obtain the judgment from a person who previously held that right...” Under the amendment, a deficiency judgment of an assignee of an originating lender is limited to:

The amount by which the amount of consideration paid for that right exceeds the fair market value of the property sold at the time of the sale or the amount for which the property was actually sold, whichever is greater, with interest from the date of sale and reasonable costs. (NRS 40.459(1)(c)).

Nevada courts have been backlogged with litigation over A.B. 273 since its enactment. For example:

In Sandpointe Apartments, LLC and Stacy Yahraus-Lewis v. The Eighth Judicial District Court of the State of Nevada, 313 P.3d 849 (November 14, 2013) (Sandpointe Apartments) the Nevada Supreme Court ruled that NRS 40.459(1)(c) does not apply retroactively. Although at first glance the holding seems to be favorable to lenders, the Court considers the statute to be prospectively applied as long as the foreclosure sale occurs on or after June 10, 2011, the date that NRS 40.459 was amended by A.B. 273. 

After Sandpointe Apartments, litigation continued over whether applying NRS 40.459(1)(c) to a loan entered into prior to June 10, 2011, would violate the Contracts Clause of the U.S. Constitution. Another unresolved issue is whether NRS 40.459(1)(c) applies in the commercial mortgage backed securities context. And numerous other issues continue to be litigated.

In Munoz v. Branch Banking and Trust Company, Inc., 348 P.3d 689 (April 30, 2015) the Nevada Supreme Court held that NRS 40.459(1)(c) is preempted by federal law in certain circumstances, specifically, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). 

At issue in Munoz—in which the plaintiffs’ loan was assigned to a successor creditor after the original bank was placed into Federal Deposit Insurance Corporation (FDIC) receivership—was whether this deficiency judgment limit conflicts with FIRREA’s purpose: to facilitate transfer of failed-bank assets to healthier institutions in order to reduce losses, with the FDIC as receiver. 

The Nevada Supreme Court held that the state law interferes with the FDIC’s ability to assume and dispose of a failed bank’s assets, so that its application in the case frustrates the purpose of FIRREA. Citing the Supremacy Clause of the U.S. Constitution, the Court found that the Nevada law is preempted to the extent it “limits deficiency judgments that may be obtained from loans transferred by the FDIC.”

The Nevada Legislature adopted Assembly Bill 195, which amended NRS 40.459 on May 25, 2015. It removes the assignee limitation from the calculation of a deficiency judgment except in circumstances where the debt is secured by property upon which the debtor, guarantor or surety maintains his or her principal residence, there is not more than one residential structure, and not more than four families reside. However, A.B. 195 does not apply to any loans that were entered into before July 1, 2011. Specifically, Section 3 of A.B. 195 states:

The amendatory provisions of:

1. Section 1 of this act apply to a judgment awarded pursuant to NRS 40.459, as amended by Section 1 of this act, on or after the effective date of this act, if the promissory note or guaranty evidencing the debt is fully executed on or after July 1, 2011.

Accordingly, while the Legislature attempted to restore the balance Nevada had in its deficiency laws prior to 2011 for commercial properties, the changes do not apply to loans that were entered into before July 1, 2011. Only new commercial loans that were entered into after A.B. 273 was enacted will not be impacted by its provisions. While this seems to be counter-intuitive, it is exactly what the Legislature intended.

For any loans dated before July 1, 2011, A.B. 273 and its assignee limitations still apply. Thus, we will continue to see litigation over A.B. 273’s provisions in Nevada until the Nevada Supreme Court clarifies the outstanding issues. One of the most significant issues is whether applying NRS 40.459(1)(c) to a loan entered into prior to June 10, 2011, violates the Contracts Clause of the U.S. Constitution.