Tag: Foreclosure

What is the effect on a foreclosure when a promissory note and deed of trust are split?

Posted on by Jeff Jaeger

In re Montierth (Nev. Supreme Ct. – July 30, 2015)

The United States Bankruptcy Court for the District of Nevada certified two questions of law to the Nevada Supreme Court concerning the legal effect on a foreclosure when the promissory note and the deed of trust are split at the time of foreclosure. The bankruptcy court asked what occurs when the promissory note and the deed of trust remain split at the time of the foreclosure and whether recordation of an assignment of a deed of trust is a purely ministerial act that would not violate the automatic stay.

In June 2005, the Montierths signed a promissory note in favor of 1st National Lending Services for $170,400. The note provided that the lender may transfer the note. The note was subsequently transferred to Deutsche Bank.

The note was secured by a deed of trust on the Montierths’ property in Logandale, Nevada. The beneficiary of the deed of trust was Mortgage Electronic Registration Systems, Inc. (MERS), solely as nominee for lender and lender’s successors and assigns. Additionally, the deed of trust provided:

MERS holds only legal title to the interests granted by Borrower in this Security Instrument; but, if necessary. . . , MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.

The Montierths’ last payment on the note was made in June 2009. Deutsche Bank recorded a notice of default and initiated foreclosure. The Montierths opted into Nevada’s Foreclosure Mediation Program (FMP), but the first two mediation attempts were unsuccessful. The Montierths petitioned for judicial review of the attempted mediation, and the district court found that Deutsche Bank failed to participate in the mediation in good faith.

Deutsche Bank then filed another notice of default, and the Montierths again elected to mediate. Less than two weeks before the scheduled mediation, the Montierths filed for bankruptcy. At the time the Montierths filed for bankruptcy, the note and the deed of trust were separate—Deutsche Bank held the note and MERS was the beneficiary of the deed of trust.

After the Montierths filed for bankruptcy, MERS assigned its interest in the deed of trust to Deutsche Bank on November 25, 2011, but the assignment was not recorded until December 23, 2011. Prior to the recordation of the assignment, Deutsche Bank filed a proof of claim in the Montierths’ bankruptcy, claiming that it was a secured creditor.

On September 5, 2012, Deutsche Bank filed a motion for relief from the automatic bankruptcy stay so that it could foreclose on the Montierths’ property. The Montierths objected to Deutsche Bank’s standing to bring the motion. The Montierths also objected to Deutsche Bank’s proof of claim insofar as it alleged secured creditor status. Both objections were premised on the argument that Deutsche Bank was not a secured creditor because it did not have a unified note and deed of trust when the bankruptcy petition was filed and the automatic stay precluded the reunification of the instruments.

Continue reading “What is the effect on a foreclosure when a promissory note and deed of trust are split?” →

Does federal law preempt Nevada’s law limiting deficiency judgments?

Posted on by Jeff Jaeger

Munoz v. Branch Banking (Nev. Supreme Ct. – Apr. 30, 2015)

In 2007, the Mr. and Mrs. Munoz borrowed money from Colonial Bank and granted Colonial Bank a security interest in their real property. In 2009, the FDIC placed Colonial into receivership and assigned the Munozes’ loan to Branch Banking and Trust Company, Inc. (BB&T).

In 2011, NRS 40.459(1)(c), which implements certain limitations on the amount of a deficiency judgment that can be recovered by an assignee creditor, became effective. In 2012, after the Munozes had defaulted on their loan, BB&T instituted an action for a judicial foreclosure of the secured property, which the Munozes did not oppose. The property was sold for less than the value of the outstanding loan at a sheriff’s sale in 2013. BB&T then filed a motion seeking a deficiency judgment against the Munozes for the remaining balance of the loan.

Reasoning that NRS 40.459(1)(c) did not apply retroactively to the Munozes’ loan, which was originated and assigned before the statute’s effective date, the district court awarded a deficiency judgment to BB&T for the full deficiency amount sought. In its order, the district court did not address whether NRS 40.459(1)(c)’s present application was preempted by federal law. The Munozes appealed.

The issue is whether NRS 40.459(1)(c)’s limitation on the amount of a deficiency judgment that a successor creditor can recover conflicts with the federal Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)’s purpose of facilitating the transfer of the assets of failed banks to other institutions.

The Munozes argued that NRS 40.459(1)(c) was not preempted by a conflict with federal law because it did not impair the Federal Deposit Insurance Corporation (FDIC)’s ability to act as the receiver for a failed bank or to transfer a failed bank’s assets. BB&T argued that the application of NRS 40.459(1)(c) to loans acquired from the FDIC was preempted by FIRREA because NRS 40.459(1)(c) interfered with the FDIC’s ability to assume and dispose of a failed bank’s assets.

Congress enacted FIRREA to enable the federal government to respond swiftly and effectively to the declining financial condition of the nation’s banks and savings institutions. Under FIRREA, when the FDIC is appointed receiver of a failed financial institution, it immediately becomes the receiver of all of that institution’s assets, including promissory notes that are in default. To assist the FDIC in carrying out this duty, federal law provides special status to the FDIC’s assignees so as to maintain the value of the assets they receive from the FDIC. The Nevada Supreme Court explained that if a state statute limits the market for assets transferred by the FDIC, it conflicts with FIRREA because it would have a deleterious effect on the FDIC’s ability to protect the assets of failed banks. Thus, state laws that limit the private market for assets of failed banks held by the FDIC conflict with FIRREA and are preempted.

The Court reasoned that since the statute limits a successor creditor’s recovery to no more than it paid for a loan, NRS 40.459(1)(c) prevents a creditor from realizing a profit on its purchase of a debt from an assignor creditor. This statute makes it less likely that a rational creditor would purchase such a loan. Therefore, NRS 40.459(1)(c)’s application to failed banks’ assets held by the FDIC would limit the private market for such assets by making it more difficult for the FDIC to dispose of these assets. Thus, the application of NRS 40.459(1)(c) to assets transferred by the FDIC would frustrate the purpose of FIRREA and directly conflict with this federal statutory scheme. Therefore, the Court held that NRS 40.459(1)(c) is preempted by FIRREA as to assets transferred by the FDIC.

Although the district court found that NRS 40.459(1)(c) did not apply to BB&T’s application for a deficiency judgment for a different reason, the Court noted that it reached the correct result in concluding that NRS 40.459(1)(c) did not shield the Munozes from deficiency judgment liability. The Court affirmed the district court’s order on the grounds that conflict preemption prevents NRS 40.459(1)(c)’s application in this case.

Does Nevada allow deficiency judgments when a nonjudicial foreclosure sale is conducted pursuant to the laws of another state?

Posted on by Jeff Jaeger

Branch Banking v. Windhaven & Tollway, LLC (Nev. Supreme Ct. – Apr. 30, 2015)

NRS 40.455(1) permits a creditor or deed-of-trust beneficiary who is unable to fully recover its investment through foreclosure to bring an action for a deficiency judgment after the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively.

The issue is 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 2007, Windhaven & Tollway, LLC, borrowed nearly $17 million from Branch Banking and Trust Company’s predecessor-in-interest. The loan was secured by various assets, including real property located in Texas. The parties agreed that Nevada law would govern the note and that the courts in Clark County, Nevada, and Collin County, Texas, would have jurisdiction over future disputes. The remaining guarantors (collectively referred to as the Guarantors) entered into a guaranty agreement to pay any debt remaining if Windhaven defaulted.

Windhaven defaulted on the loan, and Branch Banking sent it and the Guarantors a demand letter requesting repayment. Four months later, Branch Banking mailed Windhaven and the Guarantors a notice of trustee’s sale, stating that it would foreclose on the Texas property if payment was not received. Windhaven and the Guarantors failed to remit payment and the property was sold at a nonjudicial foreclosure sale under Texas law for $14,080,000. At that time, the total indebtedness remaining on the loan was $16,675,218.61. Branch Banking then sought a deficiency judgment against Windhaven and the Guarantors under Nevada law, asserting claims for breach of guaranty and breach of the implied covenant of good faith and fair dealing.

Following discovery, Branch Banking moved for summary judgment, but before the district court could rule on the motion, Windhaven and the Guarantors also moved for summary judgment, on the ground that Branch Banking’s deficiency action was precluded by NRS 40.455(1) because that statute requires all nonjudicial trustee’s sales to be conducted pursuant to NRS 107.080. The district court granted summary judgment in favor of Windhaven and the Guarantors, finding that Branch Banking’s nonjudicial foreclosure in Texas did not comply with the terms of NRS 107.080 because Branch Banking did not record a notice of breach and election to sell or provide notice in accordance with NRS 107.080. The district court also concluded that Branch Banking could have sought a deficiency judgment in Texas or conducted the Texas trustee’s sale in a manner that complied with NRS 107.080. Further, the district court ruled that because NRS 40.455(1) prohibited Branch Banking from seeking a deficiency award against Windhaven, Branch Banking could not seek a deficiency judgment against the Guarantors. Branch Banking appealed.

The parties disputed whether NRS 40.455(1)’s phrase “trustee’s sale held pursuant to NRS 107.080” permits a deficiency judgment in Nevada when a nonjudicial foreclosure takes place in another state and the beneficiary of the deed of trust does not comply with the requirements of NRS 107.080. Windhaven argued that the clause requires that a trustee’s sale comply with Nevada law before the beneficiary of the deed of trust may seek a deficiency judgment. Branch Banking argued that the clause is merely illustrative, that the statutory scheme does not support Windhaven’s interpretation, and that to interpret the statute to require out-of-state nonjudicial foreclosures to comply with NRS 107.080 would lead to absurd results.

The Nevada Supreme Court explained that NRS 40.455 governs applications for deficiency judgments by “the judgment creditor or the beneficiary of the deed of trust,” made within six months ”after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively.” Because “foreclosure sale” is specifically tied to “judgment creditor,” the foreclosure sale described in the statute is a judicial foreclosure.

However, the Court did not agree that the statute limits deficiency judgments to judicial foreclosures and trustee’s sales held in accordance with NRS 107.080. NRS 40.455(1) has no such limiting language. While it clearly governs deficiencies arising from judicial foreclosures and those trustee’s sales that are held pursuant to NRS 107.080, it does not indicate that it precludes deficiency judgments arising from nonjudicial foreclosure sales held in another state.

Furthermore, common law allows a lienholder to seek a deficiency judgment against the person(s) liable on the lien, and the Court declined to interpret NRS 40.455 in such a way that would interfere with this common-law right, when the statute does not expressly limit deficiency suits arising from nonjudicial foreclosures conducted pursuant to the laws of another state.

Because NRS 40.455 does not prohibit deficiency judgment actions from being brought in Nevada when the nonjudicial foreclosure in another state did not comply with NRS 107.080, the Court concluded that the district court erred in precluding Branch Banking from pursuing a deficiency judgment against Windhaven and the Guarantors.