Can a lender seek a deficiency judgment when the property foreclosed upon is in another state?

Deficiency Judgment

Mardian v. Greenberg Family Trust (Nev. Supreme Ct. – Sep. 24, 2015)

The issue is whether NRS 40.455(1) permits deficiency judgments in Nevada when the property foreclosed upon was in another state.

In September 2007, Joshua Tree, LLC, executed a promissory note in the amount of $1,100,000 in favor of the Greenberg Family Trust (Greenberg). The note was secured by a deed of trust encumbering 280 acres of undeveloped real property located in Arizona, and also by personal guaranties, each for the full amount of the note, from the Mardians. Both guaranties stated that they were governed by Nevada law and waived the one-action rule found in NRS 40.430.

The parties agree that Joshua Tree defaulted on the loan and the guaranties were not upheld. In March 2009, Greenberg filed a complaint against the Mardians for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. Greenberg then initiated foreclosure proceedings. A month later, Greenberg purchased the property at auction for $37,617. The property was then relisted for sale at $2,520,000. The price was subsequently reduced and, at the time this appeal was filed, the property had not yet sold.

In December 2009, the Mardians moved the district court to dismiss the underlying complaint for the entire amount due under the promissory note or, alternatively, for summary judgment because a deficiency application for the balance due on the loan was time-barred. Greenberg opposed the motion. At a hearing, the district court determined that it would not apply the limitations period in NRS 40.455 because the property was located in Arizona and sold pursuant to Arizona law, not Nevada law. Therefore, the district court indicated, neither Arizona’s nor Nevada’s limitations period applied. The court later entered an order denying the Mardians’ motion.

The Mardians again moved for summary judgment in January 2012, which Greenberg opposed. At the hearing on that motion, a different district court judge stated that “the problem I have here is that we do have law of the case and we don’t know why [the prior judge] ruled the way that she ruled, but it’s her ruling.” The district court then entered an order denying summary judgment, concluding that the motion for summary judgment was based on the same issues as the Mardians’ previously denied motion.

Following a bench trial, the district court found that the Mardians owed $1,279,224 under the promissory note and that the fair market value of the property at the time of its sale was $350,000.1 Thus, the court determined that adding interest to the default amount while reducing it by the fair market value of the property resulted in a deficiency totaling $929,224. Judgment was entered in Greenberg’s favor for that amount. The Mardians appealed.

Choice of law provision

The Supreme Court of Nevada explained that while the arguments made by the parties focused on Nevada law, the issue of whether the Arizona law should have been applied must also be addressed. In this regard, Greenberg asserted that it would not have been appropriate for the district court to apply the Arizona limitation period for foreclosures to the personal action commenced in Nevada because the guaranties specify that they are governed by Nevada law. The Court agreed and concluded that because of the choice-of-law provision, Nevada law—particularly Nevada’s limitations period applied in this case.

Application of NRS 40.455(1)

Here, the Mardians were the guarantors of Joshua Tree’s promissory note, which was held by Greenberg and which was secured by the Arizona real property. Although Greenberg sued the Mardians on their guaranties, in First Interstate Bank of Nev. v. Shields, 102 Nev. 616, 621, 730 P.2d 429, 432 (1986), the Supreme Court of Nevada has previously held that Nevada’s deficiency judgment statutes are applicable to actions on guaranty contracts when the underlying note is secured by real property. Thus, in order to proceed against the Mardians on their guaranties, Greenberg was required to comply with Nevada’s deficiency statutes.

The Court in the Mardian’s case first considered the parties’ contentions regarding whether NRS 40.455(1) permitted deficiency judgments in Nevada when the property foreclosed upon was in another state. NRS 40.455(1) provides:

Except as otherwise provided in subsection 3, upon application of the judgment creditor or the beneficiary of the deed of trust within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively, and after the required hearing, the court shall award a deficiency judgment to the judgment creditor or the beneficiary of the deed of trust. . . .

In Branch Banking v. Windhaven & Tollway, LLC, 131 Nev., Adv. Op. 20, 347 P.3d 1038 (2015), the Supreme Court of Nevada considered whether NRS 40.455(1) precludes a deficiency judgment when the beneficiary nonjudicially forecloses upon property located in another state and the foreclosure is conducted pursuant to that state’s laws instead of NRS 107.080. In that case, a note with a Nevada choice-of-law provision was secured by real property in Texas. After default, the lender sold the property at a Texas nonjudicial foreclosure sale and then sought a deficiency judgment in Nevada. The Branch court concluded that NRS 40.455(1) does not preclude deficiency judgments arising from nonjudicial foreclosure sales held in another state.

The Court in the Mardian’s case noted it was unclear whether Greenberg proceeded via a judicial or nonjudicial foreclosure sale against the Arizona property. However, the Court believed the distinction was irrelevant, noting that the court held in Branch Banking that a lender who had proceeded via nonjudicial foreclosure in another state could seek a deficiency judgment in Nevada under NRS 40.455(1). The Branch court also held that the foreclosure sale described [in NRS 40.455(1)] is a judicial foreclosure, and that, as in the nonjudicial context, NRS 40.455(1) does not contain limiting language precluding deficiency judgments arising from judicial foreclosure sales held in another state. Accordingly, the Court held that NRS 40.455(1) is not a bar to Greenberg seeking a deficiency judgment from the Mardians solely because Greenberg foreclosed on real property in Arizona.

The Court next considered the Mardians’ contention that NRS 40.455(1) required Greenberg to file an application for a deficiency judgment within 6 months after the date of the foreclosure sale.

The Court explained that in Walters v. Eighth Judicial District Court, 127 Nev., Adv. Op. 66, 263 P.3d 231 (2011), the court considered the requisite form of a deficiency judgment application under NRS 40.455(1) and held that the motion for summary judgment constituted such an application because it was made in writing, set forth in particularity the grounds for the application, and set forth the relief sought in accordance with NRCP 7(b)(1). Because the lender filed its motion for summary judgment within six months of the foreclosure, the Walters court held that the lender was not time-barred from seeking a deficiency.

In Lavi v. Eighth Judicial District Court, 130 Nev., Adv. Op. 38, 325 P.3d 1265 (2014), a lender filed suit against the guarantor after the borrower defaulted on the loan. Almost one year after the foreclosure sale, the lender filed a motion for summary judgment to recover the deficiency. The guarantor responded by filing a countermotion for summary judgment, arguing that NRS 40.455 precluded the lender from any recovery because the lender did not apply for a deficiency judgment within six months of the foreclosure sale. The district court concluded that the lender was not barred from seeking a deficiency judgment because the lender sufficiently notified the guarantor of its intent to pursue a judgment. On appeal, the Supreme Court of Nevada concluded that when the guarantor waived the one-action rule, the lender was allowed to bring an action against the guarantor prior to completing the foreclosure on the secured property, but that waiver did not terminate the procedural requirements for asserting that separate action within six months of the foreclosure sale.

The Court in the Mardian’s case found that the promissory note was governed by Nevada law, despite the location of the collateral property, so Greenberg was required to make its application pursuant to NRS 40.455(1). The Court concluded that it failed to comply with NRS 40.455(1) because it did not apply for a deficiency judgment within six months of the foreclosure sale. Therefore, the Court believed that the district court erred when it denied the Mardians’ motion for summary judgment, and reversed both the district court’s judgment in favor of Greenberg and the district court’s order denying the Mardian’s motion for summary judgment

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