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.