With this glut of foreclosed properties comes the subsequent and inevitable fall out of deficiency judgment litigation by the lender against the borrower. A deficiency judgment is a money judgment that a lender obtains against a borrower when a foreclosure sale did not generate enough money to pay the underlying loan in full. A deficiency award in Nevada is controlled by statute, and as of June 2011 with the enactment of Assembly Bill 273, the Nevada legislature has tightened the screw on lenders who attempt to obtain deficiency judgments against their foreclosed upon borrowers.
Before AB 273 was enacted, a deficiency award on a loan secured by real property under NRS 40.459 was determined to be the lesser of:
1. The amount by which the amount of the debt exceeds the fair market value of the property sold at the time of the sale, with interest from the date of the sale; or
2. The amount which is the difference between the amount for which the property was actually sold and the amount of the debt, with interest from the date of sale.
AB 273 amended this law to add a third factor which is:
3. 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.
While on its face, the new law may not mean very much to a borrower, in these tough economic times where loans are bought and sold between financial institutions on an everyday basis, or where a failed bank's assets are sold off by the FDIC at substantial discounts, this new law could make all the difference to a borrower.
For example, a borrower could have borrowed $16,000,000 from a Bank A to develop a commercial property. Bank A may have failed and been taken over by the FDIC. During its liquidation process, the FDIC could have sold borrower's loan to Bank B for $10,000,000. Due to economic reasons, the borrower's property is sold at a foreclosure for the fair market value price of $9,000,000.
Under the old law, Bank B could pursue a $7,000,000 deficiency judgment against the borrower. Now, under the new law, Bank B can only pursue borrower for $1,000,000; effectively reducing borrower's liability exposure by $6,000,000! This new law now stops someone from paying pennies on the dollar for a loan and then trying to collect in full from the borrower should a foreclosure occur.
Every property owner should know their rights when dealing with their lender. The attorneys at Flangas McMillan Law Group can consult with you to provide the legal advice, guidance and expertise necessary to assist you with these issues, and many others.
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