If the Nevada Supreme Court affirms a lower court’s ruling that a private sale of real property by a receiver constitutes a foreclosure sale, the lending industry (e.g., lenders, special servicers and maybe borrowers) will lose the ability to seek deficiency judgments in Nevada unless the parties comply with state statutory foreclosure requirements.

Let us set the stage: In 2012, the trustee, acting by and through its special servicer, sought and was granted (U.S. Bank Nat. Ass’n as Trustee v. Palmilla Development Co., Inc., 2012 WL 5983282 (2012)) the appointment of a receiver to take possession of real property, as the borrower had defaulted on its 2007 mortgage loan in the amount of $20,150,000. The loan was secured by real property and personally guaranteed by the guarantor. The receiver filed a motion to approve the sale of the property, which was unopposed and granted by the court, and the property was sold for $9,500,000 (which is obviously substantially less than the debt). Subsequently, the trustee amended its complaint seeking damages arising from the deficiency (i.e., the difference between the amount owed under the loan and the amount received from the sale of the property). In response, the borrower filed a motion for summary judgment claiming that the trustee is not entitled to the recovery of the deficiency because (a) since the property was sold through a private sale, rather than a public auction, the trustee is statutorily precluded from seeking a deficiency, and (b) in the alternative, the claims against the guarantor are barred by NV statute because the trustee failed to comply with the statutorily prescribed notice requirements prior to the sale of the property. In response, the trustee argued that (a) it is entitled to a deficiency judgment and (b) because the property was privately sold by the receiver and not through a foreclosure, none of the NV statutes cited by the borrower applied.

The lower court ultimately ruled in favor of the borrower in part holding that the trustee could seek a deficiency judgment so long as it complies with the foreclosure statutes. In doing so, the lower court found that:

  • A sale of property by a receiver can constitute a foreclosure.
  • Under NV law, when a receiver is appointed, it must appear that the value of the property is insufficient to discharge the debt, requiring that a deficiency actually exist before a receiver may be appointed and suggesting that the NV legislature contemplated that a mortgagee could seek a deficiency following the sale of property by a receiver.
  • After reviewing relevant NV statutes and examining the definition of “foreclosure sale” (i.e., the sale of real property to enforce an obligation secured by a mortgage or lien on the property, including the exercise of a trustee’s power of sale pursuant to relevant statutes) in said statutes, the lower court held that under relevant NV law, as a matter of law, if a receiver exercises the power to sell real property encumbered by a deed of trust in order to satisfy the debt, such a sale constitutes a “foreclosure sale”. All that is required is that the sale was initiated by someone other than the borrower and it was conducted for the purpose of enforcing or satisfying an obligation secured by a mortgage (which in this case, the parties agree was the purpose of the receiver sale).
  • Since the sale of the property by the receiver constituted a “foreclosure sale”, the statutory protections applied to any action seeking a deficiency judgment after the sale, including sending a notice of default to the guarantor and filing a deficiency claim within six months after the foreclosure sale. In this case, neither requirement was met and therefore the deficiency action was barred.

Interestingly, the lower court, after rendering its decision, remarked that if the trustee’s position were adopted, mortgagees could easily circumvent the statutory protections of notice, waiver etc. by choosing to seek the appointment of a receiver, rather than attempting to foreclose by way of a trustee’s sale or sheriff’s sale. The lower court’s decision is currently on appeal in the NV Supreme Court. For a link to the appellate docket, click here. In the meantime (and possibly even after depending on how the NV Supreme Court decides this case), lenders and special servicers, when enforcing remedies in NV, may want to consider complying with NV’s non-judicial foreclosure, receivership and deficiency statutes, regardless of whether the property is sold by a receiver, trustee’s sale or sheriff’s sale.

By: Krystyna Blakeslee and Margaret Budnik