Nevada’s highest court today examined a law that limits how much money real estate investors can collect from troubled mortgage borrowers and their backers.
Attorneys presented oral arguments before the state Supreme Court in a trio of cases dealing with Assembly Bill 273. The lawyers focused on the law’s intent and whether it could apply retroactively to foreclosures and loan defaults that took place before Gov. Brian Sandoval signed the bill in June 2011.
The law places limits on how much a lender can collect in a “deficiency judgment” after suing to collect a debt. In particular, it focuses on lenders that acquire these debts from other lenders.
Such sales are usually made at a steep discount, and the new lender often buys the debt in order to foreclose on the real estate that’s been put up as collateral.
For instance, a company pays $1 million for a mortgage loan with an outstanding balance of $5 million. If the new lender forecloses on property valued at $700,000, under AB 273 it can seek a deficiency judgment of just $300,000 — the difference between the loan’s price tag and the collateral’s value.
Before the law was signed, the lender could collect up to $4.3 million — the difference between the loan’s outstanding balance and the value of the property.
Attorney Frank M. Flansburg III, representing borrowers and guarantors, presented arguments in two of the cases. He said the Legislature enacted the bill amid Nevada’s wrenching foreclosure crisis, with lawmakers intending to give borrowers immediate relief. He argued that intent “does not need to be expressly stated” in the bill itself, and the bill should be “enforced as it was intended.”
Moreover, J. Michael Oakes, another lawyer for borrowers, told the Supreme Court the bill “absolutely extends to commercial loans” and should not be limited in scope to home mortgage borrowers.
Attorney Daniel F. Polsenberg, representing lenders, presented arguments in one case, saying state lawmakers did not intend for the bill to apply retroactively to foreclosures and defaults. He also said the law will hurt business. If the Legislature can just “go and change” Nevada contract law, he asked, “who would want to do business here?”
Jeffrey R. Sylvester, also representing lenders, said the bill was meant to help homeowners, not commercial mortgage borrowers, though its overall intent is “ambiguous.”
The first of the three cases centers on a loan from the now-defunct Silver State Bank. In 2007, it issued a $5.135 million loan to Sandpointe Apartments LLC for the construction of an apartment complex. Government regulators shuttered the Henderson-based lender in September 2008 and the Federal Deposit Insurance Corp. was appointed receiver. The loan matured in 2009 and Sandpointe defaulted. The next year, the FDIC transferred ownership of the loan to an entity known as Multibank 2009-1 CML-ADC Venture LLC, which then transferred it to a subsidiary, CML-NV Sandpointe LLC.
Early last year, CML-NV foreclosed on the property that secured the loan. It sued for deficiency judgment about two weeks after Sandoval signed AB 273. However, the loan’s guarantor, Stacy Yahraus-Lewis, asked the court to apply AB 273 to the case.
The second case involves a loan that Branch Banking and Trust Co. acquired from the FDIC. The loan was issued to Tropical-Lamb LLC, and BB&T alleged that its guarantor, Frank Nielsen, was on the hook for about $13 million. After acquiring the loan, BB&T foreclosed on the property with an $8 million credit bid. It then sought a deficiency judgment. After filing the lawsuit, Sandoval signed AB 273.
In court papers, Nielsen has alleged that BB&T failed to prove what exactly it paid for the loan, as well as the property’s market value at the time of foreclosure.
The third case also involves a loan acquired by BB&T, in this instance a $6 million commercial real estate loan. After the borrowers defaulted, BB&T foreclosed on the property in February 2010. Nearly a year later, it sought to collect its debt but one of the guarantors, Simon Lavi, countersued.
The Supreme Court is expected to issue its decisions in about six months.