ROBERT C. JONES, District Judge.
This case arises out of the default of four commercial loans. Pending before the Court is a Motion to Dismiss Counterclaim and Defense (ECF No. 52). For the reasons given herein, the Court grants the motion.
Between April 2007 and February 2008, non-party Colonial Bank gave Defendant Kiley Ranch Communities ("Kiley Ranch") four loans totaling $45 million (the "Loans") in order to build Kiley Ranch North (the "Development") in Sparks, Nevada. (See Am. Compl. ¶ 14, June 7, 2012, ECF No. 5). Each of the Loans was made via its own promissory note and was secured by a Common Deed of Trust (the "CDOT") against the Development. (Id. ¶ 15). The Loans were further secured by separate guaranties (the "Guaranties"), all of which were signed by Defendants Matthew N. Kiley, individually and as trustee of the Matthew N. Kiley Trust; Megan L. Kiley, individually and as trustee of the Megan L. Kiley Trust; L. David Kiley, as trustee of the Matthew N. Kiley Trust and as trustee of the Megan L. Kiley Trust; and Michael and Kellee Kiley, both individually and as trustees of the Michael P. Kiley and Kellee Kiley Living Trust Instrument (collectively, "Guarantors"). (See id. ¶¶ 4-9, 16).
Repayment on each of the Loans was originally due within one year, but Colonial Bank granted Kiley Ranch three extensions on the $20 million, $2 million, and $13 million loans and one extension on the $10 million loan via separate Loan Modifications. (Id. ¶ 17).
On August 14, 2009, the FDIC put Colonial Bank into receivership after the State Banking Department of the State of Alabama closed it. (Id. ¶ 2 1). The FDIC transferred the rights to the Loans to non-party BB & T the same day, recording an "Assignment of Security Instruments, Notes and Other Loan Documents" (the "FDIC Assignment") in Washoe County. (Id. ¶ 22).
Plaintiff sued Defendants in this Court on three causes of action: (1) Deficiency (against Kiley Ranch); (2) Breach of Guaranty (against Guarantors); and (3) Breach of the Implied Covenant of Good Faith and Fair Dealing (against Guarantors). Defendants included with their Answer a Counterclaim listing four causes of action: (1) Breach of Contract; (2) Breach of the Implied Covenant of Good Faith and Fair Dealing; (3) Intentional Interference with Prospective Economic Advantage; and (4) Declaratory Judgment.
Plaintiff moved to dismiss certain counterclaims and affirmative defenses as precluded by a previous state court action. Plaintiff also moved to dismiss Defendants' affirmative defense and counterclaim under NRS section 40.459(1)(c), arguing that it did not apply retroactively to the Loans. Defendants asked the Court to certify the latter issue to the Nevada Supreme Court or at least stay the case until the Nevada Supreme Court ruled in two pending consolidated appeals, Sandpointe Apartments, LLC v. Dist. Ct., No. 59507 and Nielsen v. Dist. Ct., No. 59823, that were expected to determine the issue or at least inform a resolution. The Court denied the motions to dismiss, without prejudice, and granted the motion to stay. The Nevada Supreme Court has now ruled on the merits in Sandpointe and denied the writ petition in Nielsen, and Plaintiff has filed a new motion to dismiss the counterclaim and strike the related defense under NRS section 40.459(1)(c).
Federal Rule of Civil Procedure 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief" in order to "give the defendant fair notice of what the ... claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Federal Rule of
"Generally, a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion. However, material which is properly submitted as part of the complaint may be considered on a motion to dismiss." Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1990) (citation omitted). Similarly, "documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss" without converting the motion to dismiss into a motion for summary judgment. Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir.1994). Moreover, under Federal Rule of Evidence 201, a court may take judicial notice of "matters of public record." Mack v. S. Bay Beer Distribs., Inc., 798 F.2d 1279, 1282 (9th Cir.1986). Otherwise, if the district court considers materials outside of the pleadings, the motion to dismiss is converted into a motion for summary judgment. See Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 925 (9th Cir.2001).
The Court will first address the applicability of NRS section 40.459(1)(c) to the present case. That section was added to the NRS by § 5 of Assembly Bill 273 ("AB 273"). Prior to AB 273, the statute read:
Nev.Rev.Stat. § 40.459(1)-(2) (1993). AB 273 amended the statute, in relevant part, to read:
Nev.Rev.Stat. § 40.459(1)(a)-(c) (2011). In other words, before the June 10, 2011 effective date of AB 273, a deficiency upon foreclosure was limited to the lesser of debt minus fair market value ("fair debt deficiency") and debt minus sale price ("actual debt deficiency"), but as of June 10, 2011, wherever a debt has been assigned, the deficiency is limited to the least of fair debt deficiency, actual debt deficiency, price of assignment minus fair market value ("fair assignee loss"), and price of assignment minus sale price ("actual assignee loss").
Defendants argue that subsection (1)(c) applies to limit the deficiency that can be obtained in the present case, because Plaintiff obtained the Loans from BB & T (who in turn had obtained them from Colonial Bank via the FDIC's receivership). Defendants also seek a declaratory judgment to that effect. The application of the amendment would appear to limit any deficiency judgment Plaintiff could receive in the present case to the lesser of: (1) the price Plaintiff paid BB & T for the Loans minus the fair market value of the Development on the sale date ($10.5 million); and (2) the price Plaintiff paid BB & T for the Loans minus the sale price ($9.8 million).
The Court briefly analyzed subsection (1)(c) in a previous order, noting that it appeared the Nevada Legislature had determined that an assignee of a loan secured by real property could not fairly be said to have any "deficiency" beyond his own losses. The lender may take a great loss when it sells a defaulted or troubled loan, but the assignee itself suffers no loss so long as a debtor (or guarantor) makes good the difference between the price obtained at the trustee's sale and the amount the subsequent beneficiary actually paid for the loan. The Court noted that the potential retroactivity of the legislation was controversial because assignees rely upon the historical right to obtain a deficiency based upon the amount of the original loan when deciding whether to purchase a defaulted loan. Most such assignees purchase many defaulted loans knowing that collection of a deficiency
The Court previously noted that although it is clear that retroactive application of the statute's new limitation could prejudice purchasers of defaulted loans who relied on their previous right to a "full" deficiency when calculating the value of their purchases, the question was whether and how the Legislature intended to make AB 273 retroactive as to the deficiency provision. Because a ruling upon those issues in the Nevada Supreme Court could have been dispositive to the pending claims and counterclaims, the Court denied the previous motions to dismiss without prejudice and stayed the case pending the Nevada Supreme Court's opinion. The Court noted that although the resolution of the retroactivity issue before the Nevada Supreme Court would not necessarily be dispositive of all issues in the present case, the Court preferred to have those rulings before proceeding.
The Nevada Supreme Court has now ruled that NRS section 40.459(1)(c) does not apply to cases where the foreclosure sale occurred before June 10, 2011, and it implied in dicta that the application of the amended statute in all other cases may not constitute retroactive application of the law, because the right to a deficiency judgment vests only upon the determination of the amount of deficiency. See Sandpointe Apts. v. Eighth Judicial Dist. Court, ___ Nev. ___, 313 P.3d 849, 853-59 (2013). The Court reasoned that the amount of a deficiency is crystallized at the point of sale, and the right to the deficiency in that amount therefore vests at that time. See id. at 856. Applying NRS section 40.459(1)(c) to trustee's sales occurring before the effective date of the statute would therefore constitute retroactive application, id., and the Legislature did not intend the statute to be retroactive, id. at 858-59. In the present case, the trustee's sale occurred on November 8, 2011, and NRS section 40.459(1)(c) could therefore apply without directly contradicting Sandpointe. But neither does Sandpointe mandate the statute's application here. The Sandpointe Court did not need to determine, and therefore did not address, whether the statute applies under the present circumstances, because it was not faced with a pre-enactment assignment and a post-enactment sale. Plaintiff has again asked the Court to dismiss Defendants' declaratory judgment counterclaim that NRS section 40.459(1)(c) limits the available recovery in this case and to strike Defendants' related affirmative defense. Plaintiff makes four main arguments.
First, Plaintiff argues that the statute does not on its own terms apply to assignees of debt who acquire the assignment before a foreclosure sale. Plaintiff argues that it did not "acquire[] the right to obtain the judgment from a person who previously held that right" under the statute, because Plaintiff obtained the debt before the trustee's sale, at which point, and not before, according to the Sandpointe Court, the right to the deficiency vested. The Court rejects this argument.
Moreover, the statute speaks to the time that an assignee acquires the right to obtain a deficiency judgment, not the time that an assignee actually obtains the deficiency judgment itself. The "right" referred to in the statute, i.e., the right "acquired" by the assignee, is the contingent right to obtain a deficiency judgment upon foreclosure, because it is a right "to obtain the judgment" in the future. This reading is further supported by the fact that the statute notes that the assignee obtains this right "from a person who previously held that right," i.e., the assignor. And the statute clearly does not contemplate that the assignor already had a deficiency judgment, because the statute begins, "If the person seeking the judgment acquired the right to obtain the judgment from a person who previously held that right."the right to obtain the judgment from a person who previously held that right judgment, the amount by which the amount of the consideration paid for that right judgment exceeds the fair market value of the property...." The statute does not so read.
Second, Plaintiff argues that the application of NRS section 40.459(1)(c) to the "administrative transfer" between BB & T and Eagle represents an absurd result not contemplated by the Legislature. The Court rejects this argument. The statute makes no such distinction. It does not matter whether the transfer is between a parent company and its wholly owned subsidiary, as Plaintiff argues is the case here. Parent companies and their subsidiaries are separate legal entities with distinct rights and responsibilities — a fact that companies in such relationships are not shy to point out when arguing against personal jurisdiction, for example — and the Nevada Legislature chose not to include any exception to the statute for parent — subsidiary assignments.
The third argument presents a much weightier consideration. Plaintiff argues that application of the statute to mortgages that had been assigned before the effective date would violate the Contract Clause of the U.S. Constitution, regardless of when the foreclosure sale occurs. If that is true, the Court must then closely examine the Nevada Supreme Court's ruling in Sandpointe to see if it can still, in light of
"No State shall ... pass any ... Law impairing the Obligation of Contracts...." U.S. Const. art. I, § 10, cl. 1. "It long has been established that the Contract Clause limits the power of the States to modify their own contracts as well as to regulate those between private parties. Yet the Contract Clause does not prohibit the States from repealing or amending statutes generally, or from enacting legislation with retroactive effects." U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 17, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977). The Contract Clause is no barrier to otherwise legitimate legislation concerning the public welfare that incidentally abrogates private contracts, so long as the "[l]egislation adjusting the rights and responsibilities of contracting parties [is] upon reasonable conditions and of a character appropriate to the public purpose justifying its adoption." Id. at 21-23, 97 S.Ct. 1505. The Court of Appeals has stated the test as follows:
RUI One Corp. v. City of Berkeley, 371 F.3d 1137, 1147 (9th Cir.2004) (citations and internal quotation marks omitted) (alterations in original). This Court has opined on the potential constitutional problem with the retroactive application of the present statute in another case that involved a sister statute:
Wells Fargo Bank N.A. v. Elefante, No. 2:12-cv-1521, 2013 WL 4506002, at *3 (D.Nev. Aug. 21, 2013) (Jones, C.J.).
Second, the amendment had a legitimate public purpose behind it, i.e., the remedying of a broad and general social and economic problem. For several years prior to the enactment of the statute, widespread real estate foreclosures were one of the State of Nevada's most significant economic problems. At the same time, the State via this law did provide a benefit to special interests. The statute was explicitly designed to reduce foreclosures in favor of alternatives by eliminating the ability of a third party to profit by purchasing real estate debt at a discount and foreclosing at full price. Because a third party can no longer profit by purchasing a defaulted or troubled mortgage, banks have no buyers for such mortgages and must either foreclose themselves or offer the mortgagor alternatives. The amended statute, if retroactively applied to assignments made before the effective date, provides a windfall to a particular class (mortgagors) that could not have been reasonably expected under the mortgage and assignment when made, to the detriment of another distinct class (mortgage assignees). The Supreme Court has approved the impairment of contracts where reasonably necessary to prevent unexpected windfalls "to `restrict a party to those gains reasonably to be expected from the contract' when it was adopted." U.S. Trust Co. of N.Y., 431 U.S. at 31, 97 S.Ct. 1505 (quoting City of El Paso v. Simmons, 379 U.S. 497, 515, 85 S.Ct. 577, 13 L.Ed.2d 446 (1965)). Here, by contrast, the State's impairment of the contracts creates an unexpected windfall as opposed to avoiding one. That is, the impairment of the contract here thwarts the reasonable expectations of mortgage assignees and provides a windfall to mortgagors that could not have been reasonably expected from the contract under the law existing when the contract was made. The law is therefore more in the character of a special interests benefit than a neutral exercise of the police power.
Third, even if the law could be characterized as an interest-neutral exercise of police power, the adjustment of the rights and responsibilities of the contracting parties is not based upon reasonable conditions. This case is not like Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413 (1934), where the U.S. Supreme Court upheld as reasonable a temporary Minnesota statute postponing foreclosure sales and extending redemption periods for residential homeowners, during which time the defaulted homeowner was required to pay rental value to the mortgagee:
Id. at 445, 54 S.Ct. 231 (emphases added). The statute's adjustment of the rights and remedies of an assignee in the present case is not nearly so reasonable. In Blaisdell, the mortgage debt was not impaired at all, whereas here, the mortgage debt is necessarily impaired. In Blaisdell, the ability to recover a deficiency judgment based upon the value of the mortgage debt was not impaired at all, whereas here, that ability is totally impaired. The above-quoted passage from Blaisdell reads as if the Blaisdell Court were distinguishing the case before it from the present case.
The Supreme Court has since noted that the emergency situation in Minnesota at the time, the temporary nature of the challenged statute, and the narrow tailoring and reasonable terms of the statute were critical to its survival under the Contract Clause. See Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 242-43, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978) ("The Blaisdell opinion thus clearly implied that if the Minnesota moratorium legislation had not possessed the characteristics attributed to it by the Court, it would have been invalid under the Contract Clause of the Constitution."). The Spannaus Court then recounted three interceding cases in which it had struck down state laws under the Contract Clause. See id. at 243, 98 S.Ct. 2716.
The first case cited was W.B. Worthen Co. v. Thomas, 292 U.S. 426, 54 S.Ct. 816, 78 L.Ed. 1344 (1934). The Court in that case had ruled that the retroactive application of an Arkansas law preventing execution by a judgment creditor upon life insurance benefits violated the Contract Clause because future, contingent obligations under contracts fall within the Clause just as obligations pre-existing under a contract when a law is passed, and the law at issue was not limited to any particular emergency. See id. at 432-33, 54 S.Ct. 816 (citing Sturges v. Crowninshield, 17 U.S. 122, 4 Wheat. 122, 4 L.Ed. 529 (1819) (Marshall, C.J.) ("In the instant case, the relief sought to be afforded is neither temporary nor conditional. In placing insurance moneys beyond the reach of existing creditors, the Act contains no limitations as to time, amount, circumstances, or need. We find the legislation, as here applied, to be a clear violation of the constitutional restriction.")); Spannaus, 438 U.S. at 250, 98 S.Ct. 2716 (indicating in 1978 that the temporary nature of a contractual impairment is important). But see Veix v. Sixth Ward Bldg. & Loan Ass'n of Newark, 310 U.S. 32, 39-40, 60 S.Ct. 792, 84 L.Ed. 1061 (1940) (noting that the requirement of an emergency or temporary solution may not be totally inflexible). Here, as in Thomas, the future, contingent right to a deficiency judgment is cognizable under the Contract Clause and subject to the same protection against unreasonable state impairment.
Second, the Spannaus Court cited to W.B. Worthen Co. v. Kavanaugh, 295 U.S. 56, 55 S.Ct. 555, 79 L.Ed. 1298 (1935). The Kavanaugh Court ruled that three Arkansas laws diluting the rights and remedies of bondholder mortgagees by, inter alia, extending the time for payment upon demand, reducing a lateness penalty, extending the time to answer, increasing the statutory redemption period, and removing the ability of a purchaser to possess the property during the redemption period without paying rents violated the Contract Clause. See id. at 59, 55 S.Ct. 555. The Court held the laws unconstitutional as applied retroactively to existing mortgages, because the limitation upon available remedies effectively impaired the rights under the contract as they existed when
Edwards, 96 U.S. at 599-601. However characterized, it is the value of a contract that is ultimately to be protected against retroactive legislation under the Contract Clause. Therefore, even if the present statute were viewed as constituting an impairment "only" of a remedy and not of a right, the statute's ultimate impairment of the expected pre-enactment value of the contract based upon the face value of the debt and not based upon the price of any subsequent assignment simply cannot withstand scrutiny under the case law.
Third, the Spannaus Court cited to United States Trust Co. of New York, which case is cited, supra, for general propositions of Contract Clause law. In that case, the State of New Jersey was a party to the contract at issue, so the Court applied a heightened scrutiny that is inapplicable here.
The Spannaus Court then noted that the Minnesota statute at issue there, which required certain companies who terminated pension plans (or who closed Minnesota offices with employees covered by such plans) to pay a "pension funding charge" to the State for every ten-year employee covered by the plan, regardless of whether the employee had vested pension rights under the private plan, see Spannaus, 438 U.S. at 239, 98 S.Ct. 2716, imposed "severe" obligations upon the company in contradiction to its bargained-for pension agreements with its employees, see id. at 245-46, 98 S.Ct. 2716.
Likewise, here, an assignee's reliance upon the ability to collect the full amount owed under the mortgage is vital. An assignee who purchases a defaulted mortgage under the amended statute can only profit thereby if the value of the security is greater than the price of the assignment plus the costs of foreclosure.
Finally, the law in Spannaus "did not effect simply a temporary alteration of the contractual relationships of those within its coverage, but worked a severe, permanent, and immediate change in those relationships — irrevocably and retroactively." Id. at 250, 98 S.Ct. 2716. The same is true here.
There are less strict alternatives that serve the purposes of the law. The Nevada Legislature could simply have prohibited outright the assignment of defaulted mortgages on Nevada real property, or permitted them only for a fixed percentage of the amount due on the loan. In either case, no assignee would face the unexpected, retroactive destruction of the value of his contract that Plaintiff faces here, because the law affecting any assignment contract would be known at the time of assignment, and not only afterwards. That option would also have prevented the sale of mortgages at discount rates. Similarly,
Moreover, the application of the statute to pre-enactment assignments does nothing to further the purposes of encouraging negotiation between mortgagees and mortgagors, because pre-enactment assignees had no reason to think that the value of their contracts would be limited when they purchased mortgages before the law took effect. Striking down the statute as applied to pre-enactment assignments would not in any way frustrate the legitimate statutory purpose of encouraging foreclosure-alternative negotiation and discouraging the assignment of defaulted mortgages, just as applying the statute to pre-enactment assignments would not in any way further the statute's purpose.
In opposition, Defendants rely upon Gelfert v. National City Bank, 313 U.S. 221, 61 S.Ct. 898, 85 L.Ed. 1299 (1941). But that case provides no support for Defendants' argument. In Gelfert, the homeowner had given the bank a mortgage in 1932 at a time when New York's laws provided for a full deficiency judgment after a foreclosure sale. See id. at 227, 61 S.Ct. 898. In 1938, the bank obtained a judgment of foreclosure for $18,401.25, and the bank's own nominee purchased the property at the foreclosure sale for a mere $4000. See id. The referee calculated a deficiency of $16,162.12 after taxes, fees, and expenses. See id. The bank moved for a deficiency judgment in that amount, and the homeowner asked the court to redetermine the deficiency based upon the fair market value of the property because the price obtained at the foreclosure sale was "wholly inequitable and unconscionable," i.e., commercially unreasonable. See id. at 227-28, 61 S.Ct. 898. An amendment to the relevant New York statute, which had become effective after the mortgage was given but before the judgment of foreclosure was obtained, provided that, upon motion, the amount of the deficiency judgment should be determined based upon the "fair and reasonable market value of the mortgaged premises," and that the deficiency should be based upon the higher of the amount received at the foreclosure sale or the fair market value of the property at the time of sale. See id. at 228, 61 S.Ct. 898. The trial court gave the bank a full deficiency judgment, and the appellate division reversed because the bank had not moved under the new statute. See id. at 229, 61 S.Ct. 898. The New York Court of Appeals reversed, ruling that the retroactive application of the amended statute would violate the Contract Clause. See id. The Supreme Court reversed because a mortgagee could not be heard to complain of an intervening law limiting his recovery to the true value of his contract, i.e., with any deficiency calculated
Other cases of that era are in accord and simply stand for the proposition that a state may enact laws preventing one contracting party from obtaining more than he was reasonably entitled to under the contract when it was made without violating the Contract Clause, but none of these cases permitted substantial impairment of the reasonably expected value of the contract at the time the contract was made. See Richmond Mortgage & Loan Corp. v. Wachovia Bank & Trust Co., 300 U.S. 124, 128, 57 S.Ct. 338, 81 L.Ed. 552 (1937) (upholding a North Carolina statute limiting deficiency judgments in non judicial foreclosure sales, where the lender itself purchased the property, to the amount that would have resulted if the property were sold at the fair market value) ("The Legislature may modify, limit, or alter the remedy for enforcement of a contract without impairing its obligation, but in so doing, it may not deny all remedy or so circumscribe the existing remedy with conditions and restrictions as seriously to impair the value of the right." (emphasis added)); Honeyman, 306 U.S. at 542-43, 59 S.Ct. 702 (holding that the New York law at issue in Gelfert did not impair the value of the mortgage and therefore did not violate the Contract Clause simply because it resulted in no deficiency judgment where the property sold at foreclosure was worth more than the secured debt) ("The question is whether in the instant case the denial of a deficiency judgment substantially impaired appellant's contract right. The bond provided for the payment to him of $15,000 with the stipulated interest. The mortgage was executed to secure payment of that indebtedness. The contract contemplated that the mortgagee should make himself whole, if necessary, out of the security but not that he should be enriched at the expense of the debtor or realize more than what would repay the debt with the costs and expenses of the suit. Having a total debt of $15,771.17, with expenses, etc., of $1,319.03, appellant has obtained through his foreclosure suit the property of the debtor found without question to be worth over $25,000. He has that in hand. We know of no principle which entitles him to receive anything more." (emphasis added)).
Here, unlike in Gelfert, Plaintiff does not challenge any putative retroactive application of a fair-market-value-based deficiency calculation. Nor could it. The Nevada statute providing for a deficiency to be so calculated had been in place for almost forty years before the Loans and CDOT were given in 2007 and 2008. See Nev. Rev.Stat. § 40.459 (1969) ("After the hearing... the court may award a money judgment against the defendant or defendants personally liable for the debt. The court shall not render judgment for more than the amount by which the amount of indebtedness which was secured by the mortgage, deed of trust or other lien at the time of the foreclosure sale or trustee's sale, as the case may be, exceeded the fair market value of the property sold at the time of such sale, with interest from the date of such sale. In no event shall the court award such judgment, exclusive of interest after the date of such sale, in an amount exceeding the difference between the amount for which the property was actually sold at the foreclosure sale or trustee's sale and the amount of indebtedness which was secured by the mortgage, deed of trust or other lien at the time of such sale."). That is, the limitation on recovery under the mortgage approved by the Gelfert Court applies without controversy
Defendants read Gelfert so as to imply a broad rule under which any law should survive Contract Clause scrutiny so long as the law is directed to preventing a party from realizing a profit in some endeavor as a general matter. There is no such rule. The Gelfert Court held that it did not frustrate the goal of protecting parties' reasonable contractual expectations underlying the Contract Clause to limit a contracting party to his expected benefit under the contract. The bank in Gelfert was held to be entitled to the proper benefit of its bargain: the debt balance, plus interest and fees, minus the fair value of the collateral sold at auction. That is all an assignee-mortgagee seeks to obtain: the benefit reasonably expected under the mortgage contract purchased. Of course, an assignee seeks to obtain more under the mortgage than he paid to obtain the mortgage, but that is quite a different matter from seeking more under the mortgage than he is entitled to thereunder. The assignee seeks neither more than he was entitled to under his assignment contract (the right to enforce the mortgage instruments) nor more than the mortgagee was fairly entitled to under those documents, i.e., the fair value of the mortgage contract. If the assignor is willing to part with the mortgage for less than face value, that is a matter between the assignor and the assignee that has nothing to do with the assignee's rights under the assigned mortgage. Assuming a proper assignment, an assignee of a note and deed of trust has the same right to enforce those instruments as the original beneficiary had. See, e.g., Einhorn v. BAC Home Loans Servicing, LP, ___ Nev. ___, 290 P.3d 249, 252-53 (2012) (citing Nev.Rev.Stat. § 104.3301; Edelstein v. Bank of N.Y. Mellon, ___ Nev. ___, 286 P.3d 249, 260-62 (2012)).
If an assignee could not expect to realize the fair value of an assigned mortgage, there would be no benefit from purchasing a mortgage at a discount, just as there would be no benefit to a lender in giving a loan in the first instance if he could not recover interest or fees upon repayment. A lender under such a regime could only hope to break even (minus his time and labor), just as a mortgage assignee under NRS section 40.459(1)(c) can only hope to break even, such that no rational actor would enter into those respective activities. Could anyone honestly maintain that the Contract Clause, and perhaps even the Due Process Clause, would not be violated by an intervening statute limiting (not temporarily, but permanently) mortgage repayment on existing mortgages to the principal loan amount, and with no refund or other offsetting benefit from the state, because, after all, the mortgagee cannot be heard to complain that he is getting his money back and no more? The question is not whether a party to a contract gets his money back but whether he gets the expected benefit of his bargain, i.e., whether the value destroyed by the intervening statute is part of the value the party reasonably expected to obtain under the contract according to the law as it existed when the contract was made. That is
The potential for "oppression" perceived by the Gelfert Court arose out of the fact that a bank could obtain more than is equitable from a homeowner by way of a deficiency judgment where such a judgment were calculated based upon a foreclosure sale at below fair market value. See id. at 232, 61 S.Ct. 898. The Supreme Court's Depression-era adoption of this "exception" to the Contract Clause was not really an exception at all but a straightforward application of the "fair dealing" principal — a contract principal — that one party to a contract must not only adhere to the letter of the contract but also must not inequitably alter the conditions under which a contract is performed such that the letter of the contract benefits him in a way not contemplated by the parties:
Morris v. Bank of Am. Nev., 110 Nev. 1274, 886 P.2d 454, 457 n. 2 (1994) (citations and internal quotation marks omitted). That is to say, a bank's sale of a foreclosed property for less than the fair market value (especially if sold to the bank's own agent, as in Gelfert) is an act of bad faith that violates the spirit of the contract even if not the letter. Limiting a deficiency to the amount based on the fair market value does nothing but hold the bank to its reasonable expectations under the purpose and spirit of the contract. In any case, the potential that this kind of shenanigans in foreclosure sales might lead to an inequitably inflated deficiency judgment has not existed in Nevada since at least 1969. The fact that an assignee-mortgagee may profit from foreclosure after purchasing the debt and security at a discount is simply not relevant to whether a mortgagor has been oppressed. The mortgagor is no worse off than if the lender had proceeded against him. Both NRS section 40.459(1)(a)-(b) and the common law rule requiring commercial reasonableness in foreclosure sales, see Levers v. Rio King Land & Inv. Co., 93 Nev. 95, 560 P.2d 917, 919-20 (1977), protect a mortgagor from the kind of oppression at issue in Gelfert, whether the foreclosing party is the original mortgagee or an assignee. If anything, under a retroactive application of NRS section 40.459(1)(c), it is mortgagors who stand to obtain more than the fair value of their contracts. See Gelfert, 313 U.S. at 234, 61 S.Ct. 898. The mortgagor, after all, has received all consideration due under the mortgage by having received the loan proceeds, but would then seek via the retroactive application of the statute to avoid giving full consideration under the contract in return.
Fourth, Plaintiff argues that application of the statute in the present case would violate the Supremacy Clause by interfering with the FDIC's ability to operate as the receiver of a failed bank. That is, the FDIC is obligated to make good 80% of the receiver's losses. Here, the receiver is
In summary, the Court cannot reconcile the application of the statute to assignments made before its effective date with the Contract Clause. The application of the statute to pre-enactment assignments would severely impair the value of such assignments and the rights and obligations under the mortgages thereby assigned and would destroy the reasonable expectations of the assignee.
The Sandpointe Court ruled that "the statute may not apply retroactively." 313 P.3d at 859. The Court noted that the Legislature's statement that the statute "`become[s] effective upon passage and approval' ... does not even begin to approach the type of express legislative command necessary to rebut the presumption against retroactivity." Id. at 858 (quoting 2011 Nev. Stat., ch. 311, § 7, at 1748). The Sandpointe Court ruled that the statute could not apply to foreclosure sales occurring before the effective date of the statute, see id. at 856, but it did not decide (because the question was not presented) whether the statute necessarily applied to all foreclosure sales occurring after the effective date of the statute. Defendants' conclusion that "[c]onsequently, ... [the statute] applies to all deficiency judgments where the sale ... occurred on or after the effective date...." does not follow. (See Opp'n 4:27-5:1, Feb. 21, 2014, ECF No. 59).
The Sandpointe Court did not have occasion to consider the facts in the present case, where the assignment occurred prior to the statute's effective date, but where the sale occurred afterwards, and any language that could be read to imply that the law applies in such circumstances is therefore dicta. The Nevada Supreme Court could therefore interpret the statute to apply only to assignments occurring after the effective date without contradicting Sandpointe. That is, this Court could find that Sandpointe simply means that because the statute is not retroactive, it cannot apply to foreclosure sales occurring before the statute's effective date, leaving open the question of whether the statute can apply to post-enactment foreclosure sales by parties with pre-enactment assignments, which is an additional aspect of retroactive effect under the statute that the Nevada Supreme Court would have to consider in an appropriate case.
The Court might therefore maintain the present stay, deny the present motion, without prejudice, and certify to the Nevada Supreme Court the following question: "Does Nevada Revised Statutes section 40.459(1)(c) (2011) apply to assignees who obtained the relevant mortgage before the effective date of the statute but who did
Because certification is not appropriate under the circumstances,
313 P.3d at 858-59 (citations omitted). The Sandpointe Court noted that the statute did not clearly manifest any legislative intent for retroactive application but only that it was to become effective upon passage and approval. See id. at 858.
The Court finds that just as the statute does not indicate a clear intent that it apply to cases where the foreclosure sale occurs before the effective date, it likewise indicates no clear intent that it apply to cases where the assignment occurs before the effective date. As the Court has noted, supra, the Sandpointe Court did not have occasion to address the latter issue. Although a plain reading of the statute does not indicate that application to pre-enactment assignments is excepted, the date of assignment is clearly relevant to whether an application of the law would be retroactive, because a pre-enactment assignee's rights and/or remedies under the law are severely altered by the amendment regardless of whether the assignee had already completed a foreclosure sale by the amendment's effective date, and the Court must therefore find a clear intent or
There is no clearly expressed intent for retroactive application to pre-enactment assignments, and it is not "imperative[]" that the statute apply to pre-enactment assignments in order to carry out the intent of the Nevada Legislature. On the contrary, as noted, supra, one intent of the statute — to discourage the assignment of defaulted mortgages at discount rates — is necessarily not furthered by applying it to pre-enactment assignments, because it is impossible for the law to have influenced a pre-enactment decision to sell or purchase a defaulted mortgage. Nor does the application of the law to pre-enactment assignments further the law's other purpose — to prevent assignees from aggressively pursuing foreclosure — because an assignee who must foreclose and seek a deficiency judgment simply to break even under the statute as amended has just as strong a motivation to foreclose as an assignee who stands to make a profit by seeking a deficiency. He will not profit as he initially expected, of course, but his motivation to foreclose and thereby mitigate his losses presumably remains powerful. Also, as the Sandpointe Court noted, even when one analyzes the effect of the statute divorced form considerations of intent, the prospective application of the statute will reach the vast majority of the loans the statute is intended to affect, see id. at 859, such that it cannot be said that retroactive application is necessary to vindicate the purposes of the statute. Likewise here, excluding pre-enactment assignments from the statute's scope would not destroy, or even meaningfully diminish, the statute's overall effectiveness.
Finally, the Sandpointe Court noted that the subjective legislative history makes clear that the statute was not meant to affect existing contracts. See id. ("Any lingering doubt regarding whether the Legislature intended NRS 40.459(1)(c) to apply retroactively is quickly put to rest by reference to its legislative history. Although the language of the enactment provision is clear and unambiguous, and reference to legislative history is therefore generally not needed ... in this case it simply clarifies that there was no intent that NRS 40.459(1)(c) was meant to apply retroactively. Throughout the various committee hearings, Assemblyman Conklin, the sponsor of Assembly Bill 273, stated that the provisions could not be applied retroactively." (citation omitted)). As Plaintiff notes, Assemblyman Conklin specifically disavowed any intent for retroactive application of the law when questioned about it in committee, citing precisely those concerns that underlie the Contract Clause:
Assemblyman Segerblom: Is this bill retroactive?
(Mins. of the Meeting of the Assembly Committee on Commerce and Labor, 2011 Leg., 76th Sess. 1-13, Mar. 28, 2011, (Nev. 2011), ECF No. 31-2) (emphases added). It therefore appears the Nevada Legislature intended that the law would have no retroactive effect that would frustrate the expectations of contracting parties under the state of the law at the time their contracts were made. Cf. Edwards, 96 U.S. at 601 ("It is also the settled doctrine of this court, that the laws which subsist at the time and place of making a contract enter into and form a part of it, as if they were expressly referred to or incorporated in its terms.").
The Court therefore rules that NRS section 40.459(1)(c) applies only where the assignment at issue occurred on or after the effective date of that statute. A contrary application would violate the Contract Clause. And the Court need not concoct any improbable interpretation of the statute to save it from constitutional infirmity. The Court's interpretation of the statute follows easily from the lack of any objectively retroactive language, the lack of any objective necessity for retroactive effect to carry out the statute's purposes, and the clearly expressed subjective intent of the Nevada Legislature.
IT IS HEREBY ORDERED that the STAY is LIFTED.
IT IS FURTHER ORDERED that the Motion to Dismiss Counterclaim and Defense (ECF No. 52) is GRANTED.
IT IS FURTHER ORDERED that the Motion to Certify (ECF No. 61) is DENIED.
IT IS SO ORDERED.
