Source: https://houmandlaw.com/status-deficiency-judgments-nevada/
Timestamp: 2019-04-25 19:54:29+00:00

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The Nevada Supreme Court recently clarified the scope and meaning Assembly Bill 273, which was intended to act as an additional limitation on a creditor’s ability to obtain a deficiency judgment under Nevada law. The article below examines the current state of law on deficiency judgments in Nevada following the Supreme Court’s decision in Sandpointe Apartments, LLC.
During the 2008 financial crisis, nearly half of all homeowners in Nevada were underwater on their mortgage, or owed more than their homes were worth. In an attempt to thwart a growing number of foreclosures and correct a perception that a number of financial firms were profiting from buying secured debt on the secondary market at a significant discount and seeking to collect the full amount that was owed by the property owner, the Nevada Legislature enacted Assembly Bill 273 (“AB 273”). The language of AB 273 sought to limit the recovery of purchasers of debt on the secondary debt to the “consideration,” or the amount that was actually paid for the obligation.
Although well-intentioned, AB 273 was misguided and poorly written, resulting in a question of whether the Nevada legislature intended for the law to be applied retroactively, thereby affecting millions of loans that had already been purchased by financial companies on the secondary debt market following the collapse of a number of Nevada banks. If AB 273 was applied retroactively, it would have the effect of nullifying all of the purchases of debt by financial institutions on the secondary debt market because they would be limited to only recovering the value that they actually paid for the debt, thereby prohibiting the financial companies from realizing any profit based on these purchases. Not surprisingly, the argument as to whether AB 273 should be applied retroactively resulted in a significant amount of litigation that ultimately came before the Nevada Supreme Court in the case titled Sandpointe Apartments, LLC v. the Eighth Judicial District Court of the State of Nevada, 313 P.3d 849 (2013).
On November 14, 2013, the Nevada Supreme Court rendered its decision in Sandpointe, which held that the limitations on deficiency judgments found in AB 273 only applies to trustee’s sales conducted on or about June 10, 2011, the effective date of the statute. The Nevada Supreme Court reasoned that the trustee’s sale marks the first point in time that an action for deficiency can be maintained and begins the applicable six months limitation period for commencing an action for deficiency judgment under Nevada law. Accordingly, applying AB 273 to deficiencies arising from sales that took place before that provision was enacted would affect vested rights. The practical effect of the Nevada Supreme Court’s ruling in Sandpointe was to apply the limitations under AB 273 to trustee sales conducted after June 10, 2011.
Following the Nevada Supreme Court’s decision in Sandpointe, it is appropriate to evaluate how the holding affects the existing legal framework on deficiency judgments in Nevada. Such an analysis is particularly relevant given the significant number of homeowners in Nevada that are still “underwater” on their mortgages.
Chapter 40 of the Nevada Revised Statutes (“N.R.S.”) addresses the issue of deficiency judgments. The laws governing deficiency judgments can be separated into two categories. The first category provides situations in which a judgment creditor is precluded from obtaining a deficiency judgment. The second category applies when a judgment creditor is permitted to obtain a deficiency judgment, but sets forth several limitations on the amount of the deficiency judgment. Both categories of law pertaining to deficiency judgments and how they specifically affect a judgment creditor’s ability to obtain a deficiency judgment will be addressed below.
N.R.S. Chapter 40 precludes a judgment creditor from obtaining a deficiency judgment in the following three situations: (1) a judgment creditor cannot obtain a deficiency judgment if the application for deficiency judgment is not filed within six months from the date of the foreclosure sale or trustee’s sale of real property; (2) a deficiency judgment cannot be obtained against a loan that is used to purchase a single family dwelling used as the borrower’s primary residence after October 1, 2009; and (3) a judgment creditor cannot obtain a deficiency judgment if the judgment creditor has entered into an agreement with the borrower to sell the real property to a third party for less than the indebtedness owed under the loan.
The first prohibition on a judgment creditor’s ability to obtain a deficiency judgment is commonly known as the “six month application rule.” N.R.S. § 40.455(1) requires a judgment creditor to file an application for a deficiency judgment no later than 6 months after a foreclosure sale or trustee’s sale of the property subject to the deed of trust. N.R.S. § 40.455(2) clarifies the six month application rule by providing that if the indebtedness is secured by more than one parcel of real property, the six month period does not begin to run until the date of the foreclosure sale or trustee’s sale of the last parcel or interest in real property securing the indebtedness. The Nevada Supreme Court has strictly construed the language of Section 40.455 and treats the six month application rule as a statute of repose. As a result, a judgment creditor cannot obtain a deficiency judgment if it files an application for deficiency judgment one hundred and eight one (181) days after a foreclosure or trustee sale.
The Nevada Supreme Court recently addressed the six month application rule in Walters v. Eighth Judicial District Court of Nevada, 263 P.3d 231 (Oct. 13, 2011). In Walters the court analyzed whether a judgment creditor’s counterclaim and motion for summary judgment in a lawsuit brought by the borrower for the breach of the implied covenant of good faith and fair dealing satisfied the six month application requirement under N.R.S. 40.455. While the court ultimately held that the counterclaim and motion for summary judgment satisfied the six month application requirement under N.R.S. 40.455, the decision underscores the importance of ensuring that a separate application for deficiency judgment is filed within six months of a foreclosure or trustee sale.
The third prohibition against a deficiency judgment under Nevada law arises when the judgment creditor and borrower enter into an agreement commonly referred to as a short-sale agreement, whereby the parties agree to sell the real property at issue to a third party for an amount less than the indebtedness owed under the loan.
The most important aspect of the prohibition against deficiency judgments in the context of a short sale is that any agreement to sell the real property to a third party for less than the indebtedness owed under the loan is that the agreement must specifically state that the “banking or other financial institution has waived its right to recover the amount owed by the debtor or grantor and which sets forth the amount of recovery that is being waived.” See N.R.S. § 40.458(1)(e)(2). Unless the agreement contains such language, the judgment creditor can obtain a deficiency judgment.
Even if a judgment creditor is permitted to obtain a deficiency judgment, N.R.S. Chapter 40 sets forth two limitations on the amount of the deficiency judgment: (1) a deficiency judgment cannot exceed the lesser of the difference between the amount owed under the loan and either the sale price of the real property at the foreclosure sale or the fair market value of the property; and (2) if the judgment creditor is not the original lender, a deficiency judgment cannot exceed the difference between the consideration paid for the loan and either the sale price of the real property at the foreclosure sale or the fair market value of the property for loans that were entered into after June 10, 2011.
In order to determine the fair market value of the real property at the time of the foreclosure sale or trustee’s sale, N.R.S. § 40.457(1) requires the court to “hold a hearing and  take evidence presented by either party concerning the fair market value of the property sold as of the date of foreclosure sale or trustee’s sale.” The fair market value of the real property as of the date of the foreclosure sale or trustee’s sale will be determined by procuring an appraisal of the real property and permitting testimony of an appraiser.
(c) If the person seeking the judgment acquired the right to obtain the judgment from a person who previously held that right, the amount by which the amount of the consideration paid for that right exceeds the fair market value of the property sold at the time of sale or the amount for which the property was actually sold, whichever is greater, with interest from the date of sale and reasonable costs, whichever is the lesser amount.
N.R.S. § 40.459(2) defines the “amount of the indebtedness” as not including “any amount received by, or payable to, the judgment creditor or beneficiary of the deed of trust pursuant to an insurance policy to compensate the judgment creditor or beneficiary for any loss incurred with respect to the property or the default on the debt.” The limitation under N.R.S. § 40.459(c) essentially provides that a financial institution can only receive a deficiency judgment that is the difference between the lesser of the amount the judgment creditor paid for the right to receive the loan, and either sale price at the foreclosure sale or trustee’s sale or the fair market value of the property. As set forth above, this limitation only applies to those cases where the judgment creditor purchased the loan at issue on the secondary debt market and where a trustee’s sale takes place after June 10, 2011, the effective date of AB 273.
 Victoria L. Nelson, Esq. spearheaded the drafting of the Appellate Brief that was filed on behalf of CML-NV Sandpointe, LLC, the creditor that obtained a deficiency judgment following the foreclosure of the real property owned by Sandpointe Apartments, LLC.
 7.5 Million Homeowners ‘Underwater’: Nearly A Fifth of U.S. Borrowers Owe More On Their Mortgages Than Their Homes Are Currently Worth – and That Number Is Growing, CNN Money, Les Christie, October 31, 2008.
 AB 273 was codified in N.R.S. § 40.459.
 The enactment of AB 273 has also had a negative impact on the real estate market in Nevada by increasing the costs of obtaining loans secured by real property, particularly when there is a fear that the creditor may face uncertainty in obtaining a deficiency judgment.
 See § N.R.S. § 40.455(3).
 See § N.R.S. § 40.458.
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