In U.S. Bank, N.A. v. Palmilla Development, Co., Inc., the Nevada Supreme Court recently confirmed that a receiver’s sale is a form of foreclosure sale that triggers a secured party’s right to a deficiency judgment. This ruling addresses the definition of a foreclosure sale in the context of a private sale via receivership. It will be of importance to loan originators, loan servicers, receivers, and anyone enforcing loan rights in real property.
We previously discussed this case in a June 3, 2013, e-alert. The takeaways from the decision are:
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The court implicitly recognized the validity of a private sale via receivership, which had previously been an unresolved question in Nevada.
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A private sale out of receivership equates to a form of judicial foreclosure.
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As a form of foreclosure, the statute of limitations for filing suit for a deficiency is triggered upon the close of escrow of the private sale.
The case stems from loan repayment difficulties encountered by Palmilla Development Co., which borrowed approximately $20 million that was secured by a deed of trust on a townhouse development and personally guaranteed by Palmilla’s president. The company defaulted, and its president failed to fulfill his guarantee obligation, prompting a lawsuit by U.S. Bank. The court ultimately appointed a receiver, who later entered into a purchase and sale agreement to sell the secured property to a third-party purchaser for $9.5 million. On March 26, 2010, the district court approved the sale. On June 7, 2010, the purchaser paid the contract price and obtained the deed to the property.
On November 24, 2010, U.S. Bank filed an amended complaint seeking to recover the remaining balance of Palmilla’s indebtedness. Palmilla moved for summary judgment, arguing that:
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A receiver sale was not a “foreclosure sale or trustee’s sale held under Nevada Revised Statutes (NRS) 107.080,” the only two types of sales that could permit a deficiency judgment under NRS 40.455(1).
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Even if a receiver sale did permit a deficiency judgment under NRS 40.455(1), NRS 40.455(1)’s six-month filing deadline barred U.S. Bank’s deficiency claim.
The district court agreed with the statute of limitations argument. It concluded that the NRS 40.455(1)’s six-month time frame to seek a judgment started when the court approved the receiver’s purchase and sale agreement on March 26, 2010.
On appeal, the Nevada Supreme Court reversed and remanded. On the first issue, the court held that “[a] receiver sale of real property securing a loan is a ‘foreclosure sale’ with the meaning of NRS 40.455(1).” Stressing the receiver’s role as “a court’s proxy” to facilitate the sale of collateral and applying the definition of “foreclosure” provided in the subchapter concerning “Foreclosure Sales and Deficiency Judgments,” the court concluded that a receiver sale is a form of judicial foreclosure.
On the second issue, the court held that, under NRS 40.455(1), a secured party must apply for a deficiency judgment within six months of “the actual exchange of money, the close of escrow,” not the dates on which the receiver enters into a sale contract or a court approves the transaction. The court reasoned that, until the close of escrow, “the mortgagee has no certainty as to whether that sale will come to fruition and thus cannot be sure of the existence of any deficiency resulting therefrom.”
