Supreme Court hears arguments over bill on deficiency claims

June 10, 2011, could be a pivotal date for thousands of home and commercial real estate owners who could not ride out the recession.

That’s the date Gov. Brian Sandoval signed into law the Assembly Bill 273, designed to cap how much nonoriginating lenders could collect on a deficiency claim – the difference between how much was owed on a mortgage and what the property was worth at the time of foreclosure.

On Monday, the Nevada Supreme Court heard arguments on a pair of cases to decide whether all deficiency claims confirmed by a judge after that date qualified for the limit, or whether lenders could collect more in some instances.

Under the law, an entity or person who bought a loan at a discount may collect a deficiency based on the reduced price, but not the full amount due. The claim must be paid by former owners who lost their homes in foreclosure or individuals who guaranteed commercial loans.

Lenders who wrote a loan and kept it the entire time would not fall under AB 273.

Hundreds of deficiency cases have reached state court dockets since the real estate market began unraveling five years ago. A ruling on the case may not come out until next year, but the stakes are high. One group of investors that assumed assets from failed Nevada banks said it holds 341 loans with a total balance due of
$1.1 billion, although potential deficiency claims would be much less.

Attorneys for the former owners of two commercial properties that went into foreclosure argued that any court orders after June 10, 2011, that set the size of deficiency claims needed to follow AB 273 regardless of when the loan changed hands or entered foreclosure.

“It is the legislative intent that this is to apply to the crisis Nevada is facing right now,” attorney J. Michael Oakes said. “It is not intended to apply to a future crisis.”

In supporting this position, the Legislative Counsel said the relief provided by AB 273 was supposed to be immediate.

“During the 2011 session, the Legislature determined that one of the obstacles to Nevada’s economic recovery included inordinate deficiency judgments being awarded to successor-creditors that paid pennies on the dollar” for mortgages, according to court papers. That had led to “excessive and unreasonable profiteering.”

By contrast, the different lenders and groups contended that more events had to occur in a transaction after June 10. The Nevada Bankers Association advocated exempting any loans transferred by the Federal Deposit Insurance Corp. after seizing a failed bank or before June 10.

Others said any loans that changed hands before June 10 escaped AB 273.

To retroactively change the potential deficiency rules after investors bought bad loans would give them less than they thought they were buying, attorneys said.

The more expansive view of AB 273 pushed by former property owners facing deficiencies, the bankers association wrote in court papers, “will create a credit desert in Nevada as credit will dry up and Nevada will see fewer loans and less economic activity. Nevada’s lending industry will suffer greatly, if not be destroyed.”

But other states had adopted even tougher restrictions on deficiency windfalls without creating disruptions, said Frank Flansburg III, an attorney for the former property owners in one case.

Contact reporter Tim O’Reiley at
toreiley@reviewjournal.com or 702-387-5290.