Preserving Deficiency Rights in Nevada Where Deed in Lieu of Foreclosure Is Accepted by the Lender

By: Richard F. Holley, Esq.[1] and Andrea M. Gandara, Esq.[2]

Introduction

Lenders in commercial transactions secured by deeds of trust on real property frequently experience borrower defaults and requests to forebear and amend existing loan documents, rather than foreclosing on real property collateral. Borrower requests often involve the extension of the maturity date and modifications to payment terms. Under these circumstances it is not unusual for a lender to consider as a condition of forbearance, accepting a deed in lieu of foreclosure to be executed by the parties, but held pending a future default and failure to cure. The benefits of accepting a deed in lieu of foreclosure include being able to recover real property collateral without initiating the lengthier foreclosure process. In considering this option, however, commercial lenders often question whether accepting and subsequently recording a deed in lieu of foreclosure precludes pursuing the borrower and guarantors for any unpaid balance owing under a promissory note. This article will address this issue.

Analysis

A deed in lieu of foreclosure is defined by Black’s Law Dictionary as “a deed by which a borrower conveys fee-simple title to a lender in satisfaction of a mortgage debt and as a substitute for foreclosure.” Deed in Lieu of Foreclosure, Black’s Law Dictionary (10th ed. 2014). “This deed is often referred to simply as a ‘deed in lieu.’” Id. Although the typical deed in lieu scenario contemplates satisfaction of a mortgage debt in its entirety, it need not do so. A commercial lender may wish to preserve its rights to pursue the unpaid balance exceeding the value of the collateral through a deficiency action.

Nevada Revised Statutes, Chapter 40

Chapter 40 of the Nevada Revised Statutes provides the framework for pursuing a deficiency judgment. First, the creditor or beneficiary of the deed of trust must submit an “application”[1] for a deficiency within six months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080. See NRS 40.455(1), amended by Nev. Rev. Stat. Ann. § SB 453, § 5 (West). Second, there are limitations on the amount of money a court may award as a deficiency judgment. A court may not award a judgment for more than: (i) the difference between the amount of the indebtedness and the fair market value of the property at the time of the sale, with interest from the date of sale; (i) the difference between the amount for which the property was actually sold and the amount of the indebtedness, with interest from the date of sale; or (iii) if the person seeking the judgment acquired the right to obtain the judgment from a person who previously held that right, the amount by which the amount of the consideration paid for that right exceeds the fair market value of the property sold at the time of sale, or the amount for which the property was actually sold, whichever is greater, with interest from the date of sale and reasonable costs. NRS 40.459.[2]

Each of these statutory conditions has a common denominator: a foreclosure or trustee’s sale. The occurrence of a foreclosure or trustee’s sale establishes the bar date by which a deficiency action must be pursued. See NRS 40.455(1). Similarly, the date of the foreclosure or trustee’s sale is the date for establishing the value of the property being foreclosed upon and the amount of the deficiency that may be awarded by a court. See NRS 40.459(referring to “date of sale”). Chapter 40 does not address whether a deficiency judgment may be pursued and obtained where no foreclosure or trustee’s sale occurs such as when a deed in lieu of foreclosure is utilized by a lender to transfer ownership of a commercial property upon an event of default.[3]

Persuasive Authority

Case law from Nevada state court likewise provides no guidance on the subject of deficiency judgments resulting from deeds in lieu of foreclosure. However, two federal court opinions may provide some assistance.

In FH Partners, LLC v. Leany, FH Partners, a successor-in-interest to the FDIC, pursued a deficiency action against guarantors. No. 2:11-CV-0796-LRH-NJK, 2014 WL 3853806, at *1 (D. Nev. Aug. 6, 2014). FH Partners had apparently accepted a deed in lieu of foreclosure from the borrower instead of conducting a foreclosure sale. Id. At issue was the fair market value determination pursuant to NRS 40.457. Id. at *2. In order to make the fair market value determination the court first had to determine the “date of sale” pursuant to NRS 40.459.[4] Id. The court stated “[f]or purposes of determining the fair market value of the property, the date a deed in lieu of foreclosure is recorded may be used as the operative valuation date because a deed in lieu is the functional equivalent of a duly noticed foreclosure sale.”[5] Id. (emphasis added). The court then proceeded to value the property, determine the deficiency amount and ultimately award a judgment in favor of FH Partners. Id. at *3.

Mann v. Glens Falls Ins. Co. was an insurance case; however, the ultimate holding turned on a mortgagee accepting a deed in lieu of foreclosure upon the default by the mortgagor. 541 F.2d 819, 823 (9th Cir. 1976). The property at issue was a residential property. Id. at 820. The deed in lieu of foreclosure expressly stated that the mortgagee was accepting the deed in lieu in “full satisfaction of all obligations secured by the Deed of Trust.” Id. at 823 n.12. Seemingly based on the “full satisfaction” language in the deed in lieu, the Ninth Circuit concluded that by accepting the deed in lieu of foreclosure, the mortgagee discharged the mortgagors of their debt and at the same time wiped out her insurable interest. Id. at 823 and n.12. The Mann opinion arguably stands for the proposition that deficiency rights are preserved where the deed in lieu of foreclosure expressly provides that the deed in lieu is only in partial, as opposed to full, satisfaction of an outstanding indebtedness.

Together, these federal cases addressing Nevada law indicate that (1) a deed in lieu of foreclosure is the functional equivalent of a foreclosure sale for purposes of valuation of collateral and pursing a deficiency; (2) the relevant date for purposes of valuation of collateral’s fair market value in a deed in lieu scenario is the date the deed in lieu is recorded; and (3) a lender preserves its deficiency judgment rights if the deed in lieu of foreclosure does not expressly state that it is in full satisfaction of indebtedness.

Other Jurisdictions

Jurisdictions outside of Nevada have relied upon contract principals when analyzing deeds in lieu of foreclosure and preserving deficiency judgments.

For example, in Nash Finch Co. v. Corey Dev., Ltd., 669 N.W.2d 546, 550 (Iowa 2003), the Iowa Supreme Court held that “a party may pursue further remedies after filing a deed in lieu of foreclosure in partial satisfaction of a debt” including obtaining a deficiency judgment. The action arose when a borrower breached a secured promissory note by conveying the mortgaged property without prior consent and failing to make payments. Id. at 547. The parties negotiated a forbearance agreement that required the debtor to provide a deed in lieu of foreclosure in partial satisfaction of the promissory note. Id. When the debtor defaulted under the forbearance agreement, the lender recorded the deed in lieu and then filed suit for failure to pay pursuant to the forbearance agreement and for conduct that diminished the collateral’s value. Id. The borrower argued that by recording the deed in lieu of foreclosure, the lender waived its right to a deficiency judgment. Id. at 548. The Iowa Supreme Court concluded that the parties’ forbearance agreement controlled the outcome as to whether the lender was permitted to pursue the portion of debt that was not satisfied by the deed in lieu. Id. at 549. In reviewing the agreement, the Court was persuaded that the operative language reflected the parties’ intent to leave the lender with remedies in addition to the deed in lieu of foreclosure, such as pursuit of satisfaction of the original note. Id. This language included express statements that the forbearance agreement was in “partial satisfaction of the note” and that the lender “reserve[d] its rights to exercise its right under the note and/or mortgage in the event any of the terms and conditions of the forbearance agreement [we]re not fully satisfied.” Id. (emphasis and original alteration omitted). Because the parties’ agreement preserved the lender’s right to pursue remedies in addition to recording a deed in lieu of foreclosure, and there was no Iowa law prohibiting such an agreement, the Court overruled the borrower’s argument. Id. at 550.

A federal bankruptcy court in Virginia similarly overruled an argument made by debtors that they had been released of their liability by executing a deed in lieu of foreclosure in partial satisfaction of a promissory note secured by a deed of trust against real property. In re Wilkinson, 175 B.R. 627, 628 (Bankr. E.D. Va. 1994). The court concluded that the debtors’ personal liability for a deficiency remained even though they executed a deed in lieu of foreclosure because they were not released of all of their liability by the terms of the parties’ settlement agreement or by the deed in lieu. Id. at 629. In reaching this conclusion, the court considered Va. Code Ann. § 55–66.4, which allows for partial satisfaction of liens upon proper recording. Id. at 628.

Finally, in Myler v. Blackstone Fin. Grp. Bus. Trust, 333 P.3d 1251, 1254 (Utah Ct. App. 2014), the appellate court found that a guarantor remained liable under a guarantee even though the lender took a deed in lieu of foreclosure. The court found it significant that the guarantee stated the guarantor would be liable for any deficiency remaining after foreclosure regardless of whether the borrower received a discharge and that the guarantee “could be affected by nothing ‘except full payment and discharge of the [i]ndebtedeness.’” Id. In addition, the parties’ settlement agreement contained language reflecting that a release of the borrower did not affect the outstanding indebtedness as to the guarantor. Id.

Conclusion: Preserving Deficiency Rights

Although preserving deficiency rights in Nevada is unsettled where a commercial lender accepts and records a deed in lieu of foreclosure upon an event of default, there are steps a lender can take to preserve deficiency rights when accepting a deed in lieu of foreclosure.

First, it is critical to include proper language in any forbearance agreement that expressly preserves the lender’s right to pursue a deficiency upon an event of default, which right survives recording of the deed in lieu of foreclosure. For example, the forbearance agreement should contain an express acknowledgement by the borrower and guarantors that the lender’s deficiency rights are not extinguished based on the agreement. Such language may include, “nothing in this Forbearance Agreement, including, but not limited to, the execution and/or recording of a deed in lieu of foreclosure, shall be deemed to impair the priority of, or to extinguish or otherwise impair, either the indebtedness secured by the Deed of Trust or the liens of the Deed of Trust.” It is also beneficial to include a provision in the forbearance regarding how a deficiency will be determined in the event the lender accepts and then records the deed in lieu of foreclosure.

Second, appropriate language should be included in the deed in lieu of foreclosure to preserve deficiency rights. Importantly, the deed in lieu of foreclosure should contain an express acknowledgment by the borrower and guarantors that the deed in lieu is only a partial satisfaction of debt and does not extinguish the underlying indebtedness. Such language may read as follows: “The acceptance of this Deed in Lieu of Foreclosure shall not prejudice, limit, restrict, or affect claims of priority under the loan documents over any other liens, charges, claims, or encumbrances of any kind whatsoever, or the validity and enforceability of the loan documents except as set forth herein. This conveyance is made in lieu of foreclosure and in partial forgiveness of a debt.”

Third, in Nevada before a lender may record a deed in lieu of foreclosure, a Declaration of Value Form as prescribed by the Nevada Tax Commission must be completed by the lender and reviewed and approved by an auditor at the Office of the County Recorder. See NRS 375.060(1); http://www.clarkcountynv.gov/recorder/Documents/DV_Packet.pdf. Lenders must include documentation to support the value declared and/or exemption claimed at the time of recording. Failure to provide the supporting documentation may result in the document being returned unrecorded. The Declaration of Value Form is used to determine the amount of real property transfer tax that must be paid by the recording party. One must be careful when completing the Form particularly given the instructions that accompany the Form. When completing section 3(a), which asks for the total value/sales price of the subject property, the Instructions direct the recording party to insert the amount of the unpaid debt where a deed in lieu of foreclosure is the operative document. This instruction is potentially problematic where the deed in lieu expressly provides that “the conveyance is made in lieu of foreclosure and in partial forgiveness of a debt.” Rather than inserting the full amount of the outstanding indebtedness, one may instead insert the estimated fair market value of the property as of the approximate date the deed in lieu was recorded and documentation such as a real property appraisal to support the value. By so doing, a lender can avoid the argument that it tacitly agreed that the deed in lieu was accepted and recorded in full satisfaction of the outstanding indebtedness where the deed in lieu expressly provides to the contrary.

[1] Mr. Holley is a named partner with the law firm of Holley Driggs Walch Fine Wray Puzey & Thompson and has practiced law for nearly 29 years in the areas of bankruptcy and commercial litigation.

[2] Ms. Gandara is an associate with Holley Driggs Walch Fine Wray Puzey & Thompson, primarily practicing in the areas of bankruptcy and commercial litigation.

[3] In Lavi v. Eighth Jud. Dist. Ct., the Nevada Supreme Court stated that “a party seeking a deficiency judgment must file the application particularizing the reasons for the requested judgment within six months after selling the property at a trustee’s sale . . . .” 130 Nev. Adv. Op. 38, 325 P.3d 1265, 1267 (2014); see also Guinn v. Fed. Deposit Ins. Corp., No. 60888, 2014 WL 2957258, at *1 (Nev. June 26, 2014) (stating “in Lavi v. Eighth Judicial District Court, 130 Nev. ––––, ––– P.3d –––– (Nev.Adv.Op.38, May 29, 2014), we addressed when and how an application for a deficiency judgment must be made.”)

[4] See Branch Banking & Trust Co. v. Pahrump 194, LLC, 51 F. Supp. 3d 993, 996 (D. Nev. 2014) (discussing three alternative calculations under NRS (1)).

[5] This is distinguished from the situation where a lender accepts a deed in lieu of foreclosure for a single family residence. In that instance, the lender is prohibited from recovering a deficiency from the borrower and guarantors. See NRS 40.458 and amended by Nev. Rev. Stat. Ann. § SB 453, § 5 (West) (amending Chapter 40 of the Nevada Revised Statutes to define “Sale in lieu of foreclosure sale” to include a deed in lieu of foreclosure sale).

[6] FH Partners incorrectly references NRS 40.469 instead of NRS 40.459.

[7] Cf. 1971 Nev. Op. Atty. Gen. No. 45 (Oct. 7, 1971) (answering the question “Is a deed in lieu of foreclosure subject to tax, and if so, how is the value, for purposes of tax, to be computed.” and stating that “The value attributable to that deed [in lieu of foreclosure] is that which his grantee (the original seller) gives in exchange for the deed in lieu of foreclosure. In substance, what the grantee (the original seller) gives up by avoiding the foreclosure proceeding and accepting the deed in lieu of foreclosure in full satisfaction, is the right to a deficiency judgment against his defaulting buyer.”). FH Partners, which was decided more than 40 years after the Nevada Attorney General’s Opinion regarding taxation of conveyances by deeds in lieu of foreclosure and valuation of collateral subject to deeds in lieu, makes no reference to 1971 Nev. Op. Atty. Gen. No. 45 (Oct. 7, 1971).

 

 

 

 

 

 

 

 

 

 

 

 

Rachel E. Donn named Partner at HDW

Rachel E. Donn was recently named as partner in the law firm on Holley, Driggs, Walch, Fine, Wray, Puzey & Thompson.

Ms. Donn’s practice areas include commercial litigation, real estate, mortgage banking, title insurance defense, lien/priority litigation, employment law, family law, and appellate law.

Ogonna M. Brown named 2015 Pro Bono Attorney of the Year

Ogonna M. Brown, shareholder at Holley, Driggs, Walch, Fine, Wray, Puzey and Thompson, has been honored as the 2015 Pro Bono Attorney of the Year for her extraordinary commitment and dedication to helping individuals in need.

Her tireless efforts on behalf of so many individuals and her leadership in inspiring other lawyers to become involved in pro bono were recognized at the 2015 Legal Aid Center of Southern Nevada annual benefit luncheon.

“We are very proud of Ogonna and her work with the Legal Aid Center of Southern Nevada,” said Ron Thompson, HDWFW&T managing partner. “It was great to see her recognized for her hard work and efforts. We could not be more pleased.”

Sean Story and Hannah Goodwin join HDW

Holley Driggs Walch Fine Wray Puzey & Thompson has hired Sean E. Story and Hannah S. Goodwin as associates in their Las Vegas office. Sean Story, a graduate of the University of Arizona James E. Rogers College of Law, will practice primarily in the firm’s Commercial Litigation department. While in law school, Mr. Story was a writer for the Arizona Journal of International and Comparative Law and a recipient of the Dorothy H. and Lewis Rosenstiel Scholarship. Hannah Goodwin, a graduate of Emory University College of Law, will practice in the firm’s Natural Resources and Commercial Litigation departments.

HDW welcomes Kimberly P. Stein

Kimberly P. Stein has joined Holley Driggs Walch Fine Wray Puzey & Thompson as a shareholder in the firm’s Las Vegas office. Ms. Stein concentrates her practice on securities law, gaming law, intellectual property, civil litigation, and corporate law.  Ms. Stein’s experience in the gaming industry, which spans over 15 years, began prior to her becoming a lawyer. Over the course of her career, Ms. Stein has worked for various companies, including Mikohn Gaming, Sun International Resorts, Casino Data Systems, Alliance Bally Gaming and First Interstate Bank of Nevada. Ms. Stein’s experience in banking, securities, finance, operations and law has provided her a strong business background to assist with her clients on a business and legal level.  Ms. Stein is active in the community as a member of the UNLV Foundation’s Annual Giving Council, an Advisory Board Member of Nevada H.A.N.D., and a Regional Trustee of Olive Crest, Las Vegas Chapter.

2016 Best Lawyers®

Five HDW attorneys have been selected to The Best Lawyers in America© for 2016: Richard F. Holley (Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization Law; Litigation – Bankruptcy); Dennis R. Haney and William J. Wray (Construction Law); Glenn F. Meier (Litigation – Real Estate and Construction Law); and J. Douglas Driggs, Jr. (Real Estate Law).

As noted on the Best Lawyers® website, Best Lawyers® is the oldest and most respected peer-review publication in the legal profession.  Their lists of outstanding attorneys are compiled by conducting exhaustive peer-review surveys in which tens of thousands of leading lawyers confidentially evaluate their professional peers. If the votes for an attorney are positive enough for inclusion in Best Lawyers®, that attorney must maintain those votes in subsequent polls to remain on the list for each edition. Lawyers are not permitted to pay any fee to participate in or be included on our lists.

Holley Driggs Walch Corporate Sponsor for Local Chapter of Medals4Mettle

M4MHDWThe Las Vegas chapter of Medals 4 Mettle (M4M) proudly announces their partnership with the Children’s Specialty Center of Southern Nevada as well as their corporate sponsor, the full-service law firm of Holley Driggs Walch Fine Wray Puzey & Thompson (HDW). M4M is honored to participate in The Children’s Specialty Center of Nevada’s “No More Chemo Parties,” a celebration for children who have recently completed the final chemotherapy session in their cancer treatment. The Children’s Specialty Center of Nevada is the state’s only nonprofit pediatric cancer outpatient treatment center. The clinic is a program of Cure 4 The Kids Foundation.

M4M is an international non-profit organization that facilitates the giving of race medals (half, full finisher medals as well as triathlon medals) to children and adults that are undergoing serious or debilitating illnesses. The local chapter of M4M collects donated medals from athletes, repurposes the medal with a new ribbon, and awards them to patients at the Children’s Specialty Center through the Cure 4 the Kids Foundation. Recognition of the “mettle” these children have shown is part of M4M’s overall vision: no one is alone on their journey.

HDW’s participation in the M4M local chapter will provide the necessary ribbons and materials needed for repurposing the medals. Their support is critical to the success of the chapter. “The Firm has a long history of contributing to organizations that focus on children and their needs, so we are particularly pleased to help give medals to such courageous children, ” said Ron Thompson, managing partner at HDW.

“There is a cost to the ribbons,” says M4M’s chapter coordinator Kimberly Boschee. “Seeing the look on the children’s face when they are given a real race medal – which nowadays are huge, heavy and shiny – is awesome. It’s a very cool moment. HDW’s generous contribution will allow us to make sure we are able to keep kids in medals for the rest of the year.”

If you’d like to donate or participate in M4M’s local chapter, please contact Kimberly Boschee at Kimberly.boschee@medals4mettle.org.

About Medals 4 Mettle

In 2005, Dr. Steven Isenberg, a head and neck surgeon from Indianapolis, created M4M as a vehicle to collect runner’s medals to donate to those battling serious illness or debilitating conditions. Medals4Mettle seeks to celebrate our collective human courage and our innate desire to support each other. In the past ten years, Medals4Mettle has awarded over 18,000 medals to recipients all over the world. Medals have been awarded by Indy 500 race car drivers, Olympic athletes, and individuals who want to experience the incredible joy of giving their hard-earned finisher medals to courageous human beings. Run far. Run fast. Run for the greater good.

About Holley Driggs Walch Fine Wray Puzey & Thompson

HDW, with offices in Las Vegas and Reno, Nevada, is a general practice law firm with a strong corporate and business clientele. Although the firm maintains a general law practice, its shareholders practice primarily in the areas of commercial litigation, business, real estate, natural resources, eminent domain, bankruptcy, construction, and technology and intellectual property. The firm also has broad experience in administrative law, estate planning, probate, and tax law. The firm is committed to public service and community involvement in Nevada and nationally, as evidenced by the political and charitable activities and professional associations of its shareholders.

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Eleven Holley, Driggs, Walch, Fine Wray Puzey  & Thompson attorneys have been ranked by Super Lawyers Magazine among the best in the Mountain States  (Nevada, Utah, Montana, Idaho, and Wyoming) in its 2015 Edition and Ogonna M. Atamoh was recognized as one of the Top 50 Women in the Mountain States.

The Super Lawyers selection process is a rigorous, multiphase process involving peer nominations, evaluations, and third party research. Each candidate is evaluated on 12 indicators of peer recognition and professional achievement. No more than five percent of the total lawyers in the state are selected for inclusion in Super Lawyers.

HDW shareholders receiving recognition as Super Lawyers in their practice areas were Dennis R. Haney (construction litigation), J. Douglas Driggs, Jr. (real estate), Gregory J. Walch (environmental), Richard F. Holley (bankruptcy/business litigation), Brian W. Boschee (business litigation), Ogonna M. Atamoh (bankruptcy/business litigation), James W. Puzey (business litigation) and Bryce K. Earl (Intellectual Property). In addition, shareholders F. Thomas Edwards (business litigation) and Cami M. Perkins (business/corporate) were named in the publication’s “Rising Star” list, along with attorney William N. Miller (business litigation).

Meier Fine & Wray and Holley Driggs Walch Puzey & Thompson merge to form Holley Driggs Walch Fine Wray Puzey & Thompson (HDW).

HDW is pleased to announce that Glenn F. Meier, Marilyn Fine, and William J. Wray, Shareholders, along with Rachel E. Donn and Donna DiMaggio, merged with Holley Driggs Walch Puzey & Thompson on April 1, 2015.   The merger has strengthened HDW’s business law, construction law, and litigation practices, adding the expertise of Glenn F. Meier and Marilyn Fine in corporate law, real estate, banking, creditor bankruptcy, business litigation, contracts, title insurance defense, and insurance law. William J. Wray has unique experience in domestic and international construction and development, including expertise in construction contracting practices used in the international marketplace and related international dispute resolution mechanisms and processes. Mr. Wray has special multicultural and multi-language skills that further bolster his international practice. Rachel E. Donn and Donna DiMaggio are seasoned litigators with experience in all aspects of the civil litigation process. HDW is proud to be associated with these exceptional attorneys .

Cami M. Perkins joins Holley, Driggs, Walch, Puzey & Thompson

Cami M. Perkins joins Holley, Driggs, Walch, Puzey & Thompson. Cami M. Perkins has joined Holley, Driggs, Walch, Puzey & Thompson as a shareholder in its Las Vegas office. Ms. Perkins practices in corporate and real estate transactions and business commercial litigation with a broad array of experience in general business and licensing needs, employment contract negotiations, franchise law, and complex business disputes, including contractual obligations, fiduciary duties, business interference, non-competition allegations, and more. Ms. Perkins has been honored multiple times by various business and professional publications, including Nevada Business Magazine’s Elite and 20 Best Up & Coming Attorneys, and Super Lawyers Magazine in the Mountain States.