9th Cir. Holds Nevada Deficiency Limitation Preempted as to Transferees of FDIC

The U.S. Court of Appeals for the Ninth Circuit recently affirmed final judgments against corporate borrowers and guarantors in three separate cases, holding that:

(a)  the Nevada statute limiting the amount of the deficiency recoverable in a foreclosure action was preempted by federal law as applied to transferees of the Federal Deposit Insurance Corporation (FDIC);

(b)  the plaintiff bank had standing to enforce the loans it acquired from the FDIC;

(c)  the bank was not issue-precluded from showing that the subject loans had been transferred to it;

(d)  the bank did not breach the implied covenant of good faith and fair dealing by suing instead of giving the borrowers more time to restructure the loans because the alleged oral promise of more time lacked consideration and without a binding contract the implied covenant did not apply, the loan documents provided that any modification must be in writing, and defendants had entered into written agreements acknowledging that the bank reserved its right to enforce the loans;

(e)  the bank was not estopped and did not waive its right to enforce the loans because the defendants at all times knew the loan documents could only be modified in writing and the written acknowledgments reserved the bank’s right to enforce the loans;

(f)  the doctrine of laches did not bar the bank’s right to foreclose on two of the loans because the bank sued within the statute of limitations and no exceptional circumstances were shown to justify application of laches;

(g)  the bank did not fail to mitigate its damages because it owed no duty to time its foreclosure proceedings so as to minimize any deficiency;

(h)  the trial court did not abuse its discretion by refusing to extend the deadline to amend the pleadings to allow the defendant to add four new defenses and a counterclaim based on the alleged work-out agreement because they showed neither good cause nor excusable neglect for seeking to amend after the pretrial deadline had already passed;

(i)  the defendant debtors were not entitled to a jury trial on the fair market value of the property in two of the cases; and

(j)  the bank did not violate the Nevada statute requiring notice to beneficiaries of the family trusts that guaranteed the debts.

A copy of the opinion in Branch Banking & Trust v. D.M.S.I. is available at:  Link to Opinion.

In 2004 and 2005, three limited liability companies received loans from a bank. The loans were guaranteed by the companies’ principals in their capacity as trustees for family trusts. The borrowers failed to repay the loans.

The bank was succeeded by an Alabama bank of the same name, which in turn failed in 2009 and was placed in receivership by the FDIC.

The FDIC sold the failed bank’s assets, including the subject loans, to a North Carolina bank. The sale was evidenced by a purchase and assumption agreement, a loss sharing agreement and an assignment.

The acquiring bank entered into negotiations with the borrowers about restructuring the loans and during this process the borrowers signed an acknowledgment providing that such negotiations were without prejudice to the lender’s enforcement rights and specifically reserving the bank’s right to enforce the loan documents.

In November 2011, the acquiring bank sued to collect one of the loans, raising claims for breach of the promissory note, guaranty and breach of the covenant of good faith and fair dealing. The parties moved for summary judgment and the district court granted the acquiring bank’s motion and entered judgment for $7.1 million against the defendant debtors, from which they appealed.

In February 2012, the properties securing the other two loans were sold at non-judicial sales and in March 2012 the acquiring bank filed separate lawsuits against the borrowers and guarantors alleging breach of the promissory note, guaranty and breach of the covenant of good faith and fair dealing. The district courts granted summary judgment in the acquiring bank’s favor in both actions, entering judgment for approximately $1.9 million and $630,000 respectively against the defendant debtors, from which they appealed.

On appeal, the debtors argued that the acquiring bank lacked standing to enforce the loans when the complaints were filed. The Ninth Circuit rejected this argument, reasoning first that the purchase and assumption agreement, loss sharing agreement, assignment and deeds of trust securing two of the loans sufficiently described and encompassed the subject loans and thus the acquiring bank had the right to enforce them.

Next, the Ninth Circuit rejected the debtors’ argument that the acquiring bank was issue-precluded by a 2013 Nevada Supreme Court ruling that held that the same bank could not rely on the purchase and assumption agreement to prove that the loan involved in that case had been assigned.

The Court reasoned that the case cited by the debtors did not involve the same loans and the Nevada Supreme Court’s decision was not based on lack of standing, but instead on the acquiring bank’s failure to “produce schedules to the [purchase and assumption agreement] listing assets excluded from the transfer. There was thus no evidence that the loan at issue there was not excluded from the [agreement] by one of those schedules.” In the case at bar, by contrast, the acquiring bank “produced not only the [purchase and assumption agreement], but also the attendant schedules showing the loans at issue were not excluded from the terms of the [agreement].”

The Ninth Circuit then turned to analyze the debtors’ argument that the acquiring bank “failed to prove each element of its deficiency action” because it did not prove the amount that it paid for the assignment of the subject loans and a Nevada statute limits the amount of the deficiency to the greater of the amount by which the amount paid for the loan “exceeds the fair market value of the property sold at the time of sale or the amount for which the property was actually sold….”

The Court rejected this argument, agreeing with the acquiring bank that the Nevada statute is unconstitutional and preempted by federal law. The Court relied upon a 2015 Nevada Supreme Court case which held that the statute at issue is preempted by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) “to the extent that it would limit recovery on loans transferred by the FDIC.”

The Ninth Circuit noted that “[i]t would be more difficult for the FDIC to dispose of the assets of failed banks if the transferee could not turn a profit on those assets.” Thus, the Court adopted the Nevada Supreme Court’s reasoning and held that the Nevada statute “is preempted by federal law as applied to transferees of the FDIC.”

Next, the Court rejected the debtors’ argument that the trial court erred in granting summary judgment because the acquiring bank breached the implied covenant of good faith and fair dealing by not honoring its oral promise to give the borrowers time to restructure the loans. It reasoned that the alleged work-out agreement was not an enforceable contract because it lacked consideration and, “[a]bsent a contract, there can be no implied covenant of good faith and fair dealing.”

In addition, the Court noted that the loan documents provided that any modification must be in writing, such that the alleged oral modification was unenforceable.  Moreover, the Ninth Circuit noted, during the loan work-out negotiations, the debtors had entered into written agreements acknowledging that the acquiring bank reserved its right to enforce the loans.

The Ninth Circuit also rejected the debtors’ argument that the acquiring bank was estopped or, alternatively, waived its right to enforce the loans, reasoning that even though “[e]stoppel can apply to a promise for which there was no consideration paid [and,] [i]n such a case, reliance is a substitute for consideration[,]” the third element of estoppel, “the party asserting estoppel must be ignorant of the true state of facts[,]” was missing.

The Court explained that the debtors at all times knew the loan documents could only be modified in writing and the written acknowledgments reserved the acquiring bank’s right to enforce the loans. The waiver argument failed for the same reasons.

The Ninth Circuit next rejected the debtors’ argument that laches barred the acquiring bank’s right to foreclose on two of the loans because it waited to sue until the market value of the collateral had fallen, reasoning that “[e]specially strong circumstances must exist … to sustain a defense of laches when the statute of limitations has not run.” No such circumstances were shown and the two lawsuits at issue were filed within the statute of limitations.

The debtors also argued that the acquiring bank failed to mitigate its damages because it “strung [them] along with promises of a work-out agreement, all the while intending to foreclose on the properties when the market bottomed out.” The Court first noted that the debtors cited no precedent showing that by doing this the acquiring bank “thereby breached a duty to them.” The Court relied upon and found persuasive the Texas Supreme Court’s holding in a 1990 case that “held that there is no duty for a secured creditor to time a foreclosure sale so as to minimize a deficiency.”

The Ninth Circuit next rejected the debtors’ argument that the trial court erred by refusing to allow them to amend their answer to “add four new defenses and a counterclaim based on the alleged work-out agreement” after the pretrial deadline had passed, reasoning that they did not show good cause or excusable neglect as required because “[t]he defenses and counterclaim they sought to add were based on the work-out agreement, which [they] knew about long before the deadline to amend had passed.” The Court noted that this showed a lack of diligence, and the debtors could not show excusable neglect because they offered no explanation for the delay in seeking to amend.

In addition, the debtors argued that the trial court erred in two of the cases by deciding to “determine the fair market value of the … properties itself rather than submitting the issue to a jury … [thereby violating] their Seventh Amendment right to a jury trial….”

The Ninth Circuit rejected this argument, reasoning that “[u]nder the Seventh Amendment, the right to a jury trial exists in ‘Suits at common law.’” “Nevada law appears to contemplate that fair market value in deficiency actions will be determined by the court, not by a jury. … Thus while the nature of the action may be legal, the nature of the remedy calculated based on fair market value is equitable. As the nature of remedy is the more important consideration under the Seventh Amendment, [the debtors] were not entitled to a jury trial on the fair market value of the property.”

Finally, the Court rejected the debtors’ argument that the bank violated Nevada’s statute requiring that the foreclosing mortgagee give notice to known trust beneficiaries at least 30 days before obtaining a judgment, because the statute expressly provides that the notice may be given within such time as the court may fix, and the trial court “in these cases determined that the notice requirement was met by the service of the complaint and by a letter of August 29, 2013.”  Because “[j]udgment in the cases was not entered until approximately two years after this letter, well before the 30-day limit in the statute[,]” the Ninth Circuit held that the acquiring bank did not violate the statute.

Accordingly, the judgments of the trial court in all three actions were affirmed.

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Hector Lora has substantial experience in all phases of complex commercial litigation, including motion practice, written discovery, depositions, mediations, bench and jury trials, and appellate practice. For more than a decade, his practice has focused extensively on the defense of civil enforcement actions filed by the FTC, as well as real estate litigation, and contested mortgage and condominium lien foreclosures and foreclosure of security interests under UCC Article 9. Hector also has substantial experience in advising a variety of types of businesses regarding their compliance with applicable federal and state laws, including the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, the Controlling the Assault of Nonsolicited Pornography and Marketing Act of 2003, and Florida laws governing telephone solicitation and communication. Hector received his Juris Doctor from the Georgetown University Law Center, and his undergraduate degree with honors from the University of Florida.