LARRY R. HICKS, District Judge.
Before the Court is Plaintiff Branch Banking and Trust Company's ("Branch Banking") Motion for Summary Judgment as to Liability and Application for Deficiency Judgment Hearing. Doc. # 53.
Also before the Court is Defendants' Motion for Summary Judgment. Doc. # 52. Branch Banking filed a Response (Doc. # 60), to which Defendants replied (Doc. # 67). Defendants also filed a Motion to Certify Questions of Law to the Nevada Supreme Court. Doc. # 71. Branch Banking filed a Response (Doc. # 75), to which Defendants replied (Doc. # 76).
This action arises out of Defendants' alleged breach of a secured loan agreement. Following a judicial foreclosure sale on the real property securing the loan, Branch Banking filed the present action to obtain a deficiency judgment against Defendants. Doc. # 1. The undisputed facts are as follows. On September 20, 2007, Borrower Eloy Business Park, LLC ("Borrower") executed and delivered a Promissory Note Secured by Deed of Trust to Colonial Bank, N.A. ("Colonial Bank"), in the original amount of $6,300,000.00 (the "Note"). Doc. # 52, Ex. 1; Doc. # 53, Ex. 2. The Note was secured by a Deed of Trust and Security Agreement with Assignment of Rents and Fixture Filing ("Deed of Trust"), dated September 20, 2007, encumbering certain real property in Pinal County, Arizona (the "Property").
On August 14, 2009, Colonial Bank was closed by the State Banking Department of the State of Alabama and the Federal Deposit Insurance Corporation ("FDIC") was named receiver in order to liquidate and distribute the assets of Colonial Bank. Doc. # 52, Ex. 4; Doc. # 53, Ex. 5. On September 28, 2011, the FDIC executed an Assignment of Security Instruments, Notes and Other Loan Documents (the "Assignment"), to be deemed effective as of August 14, 2009. Id. Pursuant to the terms of the Assignment, the FDIC assigned all rights, title, and interest in the Note, the Deed of Trust, and the Guarantee to Branch Banking. Id. The Assignment was recorded in Pinal County, Arizona on November 4, 2011. Id.
Branch Banking alleges that the Borrower failed to pay the outstanding principal balance of the loan due under the Note on September 24, 2009.
On September 24, 2012, Branch Banking filed a Complaint before this Court, alleging claims for deficiency, breach of guarantee, and breach of the covenant of good faith and fair dealing. Doc. # 1. Branch Banking claims that there is an unpaid principal balance of $3,472,779.60 as of July 19, 2012. See id. at ¶ 28.
Summary judgment is appropriate only when the pleadings, depositions, answers to interrogatories, affidavits or declarations, stipulations, admissions, and other materials in the record show that "there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). In assessing a motion for summary judgment, the evidence, together with all inferences that can reasonably be drawn therefrom, must be read in the light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Cnty. of Tuolumne v. Sonora Cmty. Hosp., 236 F.3d 1148, 1154 (9th Cir.2001).
The moving party bears the initial burden of informing the court of the basis for its motion, along with evidence showing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). On those issues for which it bears the burden of proof, the moving party must make a showing that is "sufficient for the court to hold that no reasonable trier of fact could find other than for the moving party." Calderone v. United States, 799 F.2d 254, 259 (6th Cir.1986); see also Idema v. Dreamworks, Inc., 162 F.Supp.2d 1129, 1141 (C.D.Cal.2001). On an issue as to which the non-moving party has the burden of proof, however, the moving party can prevail merely by demonstrating that there is an absence of evidence to support an essential element of the non-moving party's case. Celotex, 477 U.S. at 323, 106 S.Ct. 2548.
To successfully rebut a motion for summary judgment, the non-moving party must point to facts supported by the record which demonstrate a genuine issue of material fact. Reese v. Jefferson Sch. Dist. No. 14J, 208 F.3d 736 (9th Cir.2000). A "material fact" is a fact "that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Where reasonable minds could differ on the material facts at issue, summary judgment is not appropriate. See v. Durang, 711 F.2d 141, 143 (9th Cir.1983). A dispute regarding a material fact is considered genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Liberty Lobby, 477 U.S. at 248, 106 S.Ct. 2505. The mere existence of a scintilla of evidence in support of the party's position is insufficient to establish a genuine dispute; there must be evidence on which a jury could reasonably find for the party. See id. at 252, 106 S.Ct. 2505. Finally, whereas here, both sides have moved for summary judgment, the court must consider evidence submitted in support of both motions before ruling on either motion. See Fair Housing Council of Riverside Cnty., Inc. v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir.2001).
Pursuant to Nevada Rule of Appellate Procedure ("NRAP") 5:
Branch Banking contends that this is a straightforward breach of contract case, in which the Borrower and the Guarantors failed to repay their loan obligations under the Note and the Guarantee, thereby entitling Branch Banking to summary judgment as to liability against Defendants. The Court agrees. In a breach of contract action, Nevada law requires that the plaintiff establish (1) the existence of a valid contract, (2) performance by the plaintiff, (3) breach by the defendant, and (3) damage as a result of the breach. See Saini v. Int'l Game Tech., 434 F.Supp.2d 913, 919-20 (D.Nev.2006) (citing Richardson v. Jones, 1 Nev. 405, 405 (Nev.1865)); see also Anahuac Mgmt. v. Mazer, No. 2:09-cv-01590-RLH-PAL, 2012 WL 1142714, at *3 (citing Calloway v. City of Reno, 116 Nev. 250, 993 P.2d 1259, 1263 (2000)). In addition, Nevada law provides that a guarantor is "liable on his own obligation, which is absolute and independent of the note itself." Randono v. Turk, 86 Nev. 123, 466 P.2d 218, 223 (1970).
Here, it is undisputed that the Loan documents (i.e., the Note, the Deed of Trust, and the Guarantee) are valid and enforceable contracts.
Defendants' oppose judgment in favor of Branch Banking on the following grounds: (1) Branch Banking's judicial foreclosure complaint did not request a monetary judgment as required by Arizona law, thereby extinguishing Branch Banking's right to pursue a deficiency against the Borrower; (2) Branch Banking destroyed the Guarantors' subrogation rights against the Borrower, thereby extinguishing Branch Banking's right to pursue recovery against the Guarantors; (3) Branch Banking did not carry its burden of establishing the "consideration paid" element for a deficiency action under NRS 40.459(1)(c); (4) Defendants should receive an off-set for the amounts paid by the FDIC to Branch Banking pursuant to the loss sharing agreement. See Doc. # 52; Doc. # 59. The Court will address each of Defendants' arguments in turn.
Defendants contend that Branch Banking is barred from recovering a deficiency on the debt from the Borrower because Branch Banking did not obtain a monetary judgment for the entire amount owed on the Note in the judicial foreclosure action in accordance with Arizona law.
In Sievers v. Diversified Mortgage Investors, 95 Nev. 811, 603 P.2d 270, 273 (1979), the Nevada Supreme Court confirmed the general proposition that parties to a contract may chose the law applicable in the construction of their contract so long as the parties act in good faith and without the intent to evade the law of the situs. Moreover, in Key Bank of Alaska v. Donnels, 106 Nev. 49, 787 P.2d 382, 384 (Nev.1990), the Nevada Supreme Court confirmed that, in the absence of evidence or argument regarding bad faith or evasion of Nevada law, a provision in the note that it was to be governed by Alaska law was valid and enforceable even though the deed of trust on Nevada real property securing the note provided that the foreclosure was to be governed by Nevada law. Here, there is no indication that the parties acted in bad faith or with an intention to evade Arizona law in selecting Nevada law to govern the Note. Accordingly, the Court finds that the Note contains a valid and enforceable agreement between the parties that Nevada law is to govern the debt and, thus, any action to recover a deficiency. The fact that the Note references the Deed of Trust does not change the Court's conclusion in this regard.
Indeed, the distinction between a borrower's debt and any security which secures that debt obligation is well established under both Nevada and Arizona law. Nevada law provides that an action on a debt arises out of the promissory note itself, not any security interest that secures the debt obligation, such as a deed of trust. See Key Bank of Alaska v. Donnels, 106 Nev. 49, 787 P.2d 382, 384 (1990) ("[A]n action for a deficiency after partial satisfaction through sale of the security is an action on the debt"); Behringer Harvard Lake Tahoe, LLC v. Bank of Am., N.A., No. 3:13-cv-00057-MMD-PAL, 2013 WL 4006867, at *4 (D.Nev. Aug. 5, 2013). Similarly, Arizona courts recognize that "the source of a borrower's debt is the promissory note, not the trustee's sale: `the foreclosure or trustee's sale is ancillary to the collection of the debt, not the other way around.'" Morgan AZ Fin., L.L.C. v. Gotses, 235 Ariz. 21, 326 P.3d 288, 291 (Ariz.App. 2014) (quoting Nat'l Bank of Ariz. v. Schwartz, 230 Ariz. 310, 283 P.3d 41, 44 (App.2012)). In Schwartz, the court recognized that "the contractual debt is foremost with any foreclosure or sale being secondary and merely a means of recovery on the original debt." 283 P.3d at 44. As such, Branch Banking's contractual right to pursue recovery on the debt is separate and distinct from its right to pursue recovery on the property securing that debt.
Applying Nevada law related to deficiency judgments, the Court finds that Branch Banking is not precluded from bringing a second action on the Note to recover a deficiency. Nevada deficiency legislation provides that:
NRS 40.455(1).
Here, it appears that if the judicial foreclosure had taken place in Nevada, as opposed to Arizona, the one-action rule would indeed bar a second action to recover a deficiency under the Note. However, as Branch Banking correctly avers, Section 6(c) explicitly exempts from the one-action rule any act or proceeding "[t]o enforce a mortgage or other lien upon any real or personal collateral located outside of the state which does not, except as required under the laws of that jurisdiction, result in a personal judgment against the debtor." NRS 40.430(6)(c). Here, the judicial foreclosure judgment in Arizona did not result in a personal judgment against the Borrower. In fact, the judgment explicitly provided that the court's finding that the Borrower owed Branch Banking $3,472,779.60 "does not create a monetary judgment in favor of [Branch Banking]. Should [Branch Banking] desire to seek a monetary judgment, it can seek a judgment in separate proceedings." See Doc. # 52, Ex. 7 at 3. Accordingly, the Court finds that the aforementioned exception applies to exempt Branch Banking from Nevada's one-action rule.
Defendants cite Arizona Revised Statute ("ARS") § 33-725(A), which provides that in a judicial foreclosure action, "[w]hen a mortgage or deed of trust is foreclosed, the court shall give judgment for the entire amount determined due, and shall direct the mortgaged property, or as much thereof as is necessary to satisfy the judgment, to be sold." ARS § 33-727(A) further provides that "if the mortgaged property does not sell for an amount sufficient to satisfy the judgment, an execution may be issued for the balance against the mortgager where there has been personal service, or the defendant has appeared in the action." Indeed, Arizona courts have stated:
Faber v. Althoff, 168 Ariz. 213, 812 P.2d 1031, 1037 (App.1990) (quoting Bank of Douglas v. Neel, 30 Ariz. 375, 247 P. 132, 134 (1926)) (emphasis in original). Arizona courts have "construed these two provisions to conclude: first, that a foreclosure judgment must specifically provide for the contingency of a deficiency, and that, in the absence of that provision, a deficiency judgment will not be read into the judgment; and second, if the complaint requests such a deficiency provision and the judgment fails to include it, then the matter is in effect litigated and decided adversely to the plaintiff whether or not the record supports such a ruling." Id. at 1035 (citing Greater Ariz. Sav. & Loan Ass'n v. Gleeson, 5 Ariz.App. 577, 429 P.2d 464, 466 (1967)) (emphasis added). Read together, Section 33-725 and Section 33-727 provide that "if there is to be a deficiency, it shall be provided for in the judgment of foreclosure." Gleeson, 429 P.2d at 466.
Recognizing that Arizona law mandates that, in order to obtain a deficiency in Arizona, the judgment in a foreclosure action must "render a defendant liable for the full amount of the debt, not just that portion of the debt that will be satisfied from the proceeds of the sale of the property," the Court is nevertheless unpersuaded that Branch Banking is barred from seeking a deficiency judgment pursuant to Nevada law. While Arizona law envisions a singular enforcement process on the underlying note, Nevada specifically exempts from the one-action rule out-of-state foreclosure actions that do not result
Defendants next contend that because Branch Banking did not obtain a deficiency judgment against the Borrower in the Arizona judicial foreclosure, thereby barring any further action on the debt against the Borrower, Branch Banking has destroyed the Guarantors' subrogation rights. As the Court determined that Branch Banking's failure to obtain a deficiency judgment in the Arizona judicial foreclosure does not bar the present action against the Borrower for a deficiency, Defendants' argument is without merit. Accordingly, the Court finds that Branch Banking is not barred from seeking to recover against the Guarantors in the present action for breach of guarantee.
Defendants contend that Branch Banking is barred from recovering a deficiency because it failed to present any evidence that consideration was in fact paid for the Loan. Defendants' argument in this regard is premised upon the assumption that NRS 40.459(1)(c) applies to limit the amount of any deficiency judgment. AB 273, codified as NRS 40.459(1)(c), was signed into law on June 10, 2011. It provides that:
NRS 40.459(1)(c). Defendants urge that, because Branch Banking acquired the right to obtain a judgment in this action from the FDIC, any deficiency cannot exceed the "amount of consideration paid."
In Sandpointe Apartments, LLC, et al. v. The Eighth Judicial District Court, et al., ___ Nev. ___, 129 Nev. Adv. Op. 87, 313 P.3d 849, 853-59 (2013), the Nevada Supreme Court held that NRS 40.459(1)(c) does not apply to cases where the foreclosure sale occurred before June 10, 2011, because the Nevada Legislature did not intend the statute to be retroactive.
The Court agrees with the reasoning set forth in these decisions. In Kiley Ranch, Judge Robert Jones determined that NRS 40.459(1)(c) cannot constitutionally apply to assignments made before the statute's effective date. 5 F.Supp.3d at 1245-46. In a lengthy and thorough analysis addressing whether application of the statute to pre-enactment assignments would violate the Contract Clause of the United States Constitution
Id., at 1258.
On August 5, 2014, another court in this district applied the NRS 40.459(1)(c) limitation in a case involving an assignment of interest from Branch Banking to plaintiff Eagle SPE NV 1, Inc. because the assignment occurred after the 2011 NRS 40.459(1)(c) amendment became effective. Eagle SPE NV 1, Inc. v. S. Highlands Dev. Corp., 36 F.Supp.3d 981, 986 (D.Nev. 2014). The court held that the statute was "facially applicable" because the assignment from Branch Banking to Eagle occurred on November 8, 2011, after the statute's effective date. Id. at 987. The court noted the following: "[F]or this analysis, the transaction in question is not the assignment from the FDIC to [Branch Banking]; rather, the transaction at issue is the assignment from [Branch Banking] to Eagle, which occurred after Subsection (1)(c) became effective."
Defendants argue that the Court should follow the reasoning in Southern Highlands rather than Kiley Ranch. Doc. # 52 at 23. However, Southern Highlands is easily distinguished from this case because it involved an assignment that occurred after the amendment to NRS 40.459 became effective on June 10, 2011. Importantly, the court explicitly stated that its analysis was based on the assignment from Branch Banking to Eagle SPE NV 1, rather than the earlier assignment from the FDIC to Branch Banking. Id. By contrast, the only assignment at issue here is the assignment from the FDIC to Branch Banking, which the Court found occurred on August 14, 2009, long before NRS 40.459(1)(c)'s June 10, 2011 effective date.
As the Court agrees in full with the reasoning and conclusions set forth in Kiley Ranch, the Court shall adopt those sections of Kiley Ranch related to the retroactive application of NRS 40.459(1)(c) to assignments occurring prior to the statute's effective date. See Kiley Ranch, 5 F.Supp.3d at 1241-58. Here, the FDIC assigned all rights, title, and interest in the
NRS 40.459(2) limits the amount a creditor can recover in a deficiency judgment by providing that:
Defendants assert that the Loss Sharing Agreement
Under the Loss Sharing Agreement, the FDIC is obligated to reimburse Branch Banking for a percentage of any losses Branch Banking declares on the Loan. The Loss Sharing Agreement requires Branch Banking to use "commercially reasonable best efforts to maximize the collection of amounts due for the loss share assets." Doc. # 60, Ex. 1 (Hicks Affidavit), ¶ 16. Moreover, Branch Banking is obligated "to continue to pursue the obligors and guarantors of the note even if [Branch Banking] has been reimbursed by the FDIC for a loss on any given asset." Id., ¶ 19. Finally, in the event Branch Banking obtains any recovery from the borrowers or guarantors, "it has an obligation under the [Loss Sharing] Agreement to pay a portion of those recoveries to the FDIC based upon the reimbursements that were previously made to [Branch Banking] by the FDIC. The net effect of this is that if [Branch Banking] receives full payment from a borrower and/or guarantor, [Branch Banking] would not receive any reimbursement from the FDIC." Id.
In Branch Banking & Trust Co. v. Frank, et al., No. 2:11-cv-01366-JCM-CWH, 2013 WL 5428112, at *6-7 (D.Nev. Sept. 26, 2013), Judge James Mahan confronted precisely the same issue. The court noted that "the statutory scheme regarding deficiency judgment, as a whole, is understood as being built to prevent unjustified windfalls." Id. at *6 (referencing the "one-action rule," codified at NRS 40.430, which seeks to prevent creditors from obtaining a double recovery, and the statutory scheme, which prevents creditors from acquiring secured property at an artificially low price in order to increase the
Id. at *7. Thereafter, in an order reconsidering these findings, Judge Mahan considered the exact Assembly Committee statement to which Defendants refer in support of their argument that the Nevada Legislature contemplated that the FDIC loss sharing arrangements would fall within the purview of NRS 40.459(2). Branch Banking & Trust Co. v. Frank, et al., No. 2:10-cv-01366-JCM-CWH, 2013 WL 6669100, at *10-11 (D.Nev. Dec. 17, 2013). The court found that the statement "merely reaffirms the conclusion made in the court's prior order" that the loss-sharing agreement in that case did not fall within the purview of NRS 40.459(2). See id. (citing Assemblyman Conklin's final clarifying remark that this provision was intended to "prevent a lender from profiting from a judgment").
Here, the Court agrees with Judge Mahan's reasoning and conclusion that the FDIC's loss sharing provisions do not serve to limit a plaintiff's recovery under NRS 40.459(2). The Loss Sharing Agreement at issue is identical in all material respects to the one at issue in Frank. Most significantly, in the event Branch Banking recovers anything from Defendants on the Loan, the FDIC will be entitled to a refund based on any reimbursements that were previously made to Branch Banking. As such, there is no possibility that Branch Banking will receive a double recovery. Because there is no possibility of double recovery by Branch Banking, and because a contrary conclusion would leave Defendants with an unjustified windfall, the Court concludes that the Loss Sharing Agreement at issue is categorically different from the type of "insurance policy" contemplated in NRS 40.459(2), and thus does not serve to limit Branch Banking's recovery.
Finally, Defendants argue that, because the FDIC and Defendants are co-obligors to the Loan, they are entitled to an offset of any amounts paid by the FDIC pursuant to NRS 101.040. NRS 101.040 provides that:
Without accepting Defendants' suggestion that the FDIC is a co-obligor under NRS 101.040, the Court rejects their argument for the same reasons set forth above. Because there is no possibility that Branch Banking will recover more than the amount to which it is entitled, NRS 101.040 does not serve to limit the amount of any deficiency judgment Branch Banking may obtain.
Defendants move the Court to certify the following questions of law to the Nevada Supreme Court:
Doc. # 71 at 3.
Certification is not mandatory, and "when a federal court confronts an issue of state law which the state's highest court has not addressed, the federal court's task typically is to predict how the state's highest court would decide the issue." Carolina Cas. Ins. Co. v. McGhan, 572 F.Supp.2d 1222, 1225 (D.Nev.2008). As discussed above, the Court finds that NRS 40.459(1)(c) is not applicable to the instant assignment. The Court also finds that the one-action rule is not applicable to Plaintiff's judicial foreclosure action. Accordingly, the "amount of consideration paid" is not at issue and certification as to both questions is unnecessary. See Nev. R.App. P. 5(a) (providing that the Nevada Supreme Court may answer questions certified to it by United States district courts if the issues of state law "may be determinative of the cause then pending in the certifying court").
In sum, the Court rejects Defendants' argument that summary judgment is not appropriate in this case. Because there are no disputed issues of material fact, the Court concludes that Branch Banking is entitled to summary judgment on liability as to claim one for deficiency and claim two for breach of guarantee.
IT IS THEREFORE ORDERED that Branch Banking's Motion for Summary Judgment as to Liability and Application for Deficiency Judgment Hearing (Doc. # 53) is GRANTED.
IT IS FURTHER ORDERED that Defendants' Motion to Certify Question to the Nevada Supreme Court (Doc. # 71) is DENIED.
IT IS FURTHER ORDERED that judgment shall be entered in favor of Branch Banking and against Defendants as to claim one for deficiency and claim two for breach of guarantee.
IT IS FURTHER ORDERED that Branch Banking's Motion for a Deficiency Judgment Hearing (Doc. # 54) is GRANTED. The parties shall have thirty (30) days from the issuance of this Order to file opening briefs not to exceed twenty (20) pages concerning the amount of indebtedness on the Loan and the fair market value of the Property at the time of the foreclosure sale. The parties shall then have ten (10) days thereafter to file response briefs not to exceed ten (10) pages. Thereafter, the Court will set a deficiency hearing pursuant to NRS 40.457(1).
IT IS FURTHER ORDERED that if Branch Banking elects to proceed on claim three for breach of the covenant of good faith and fair dealing, it shall submit a proposed joint pre-trial order pursuant to Local Rules within thirty (30) days of the issuance of this Order.
IT IS SO ORDERED.
To the extent that Defendants challenge the admissibility of the loan documents, their objection is overruled. Specifically, Defendants challenge Peter Nugent's Declaration as a means to authenticate the loan documents. See Doc. # 59 at 17. Defendants aver that Nugent has no personal knowledge of the documents because they were issued by Colonial Bank, not Branch Banking, and there is no evidence that Nugent ever worked for Colonial Bank or otherwise has personal knowledge of its business records. See id. The Court rejects Defendants' argument and finds that Nugent is competent to lay the foundation for each exhibit in Branch Banking's Motion for Summary Judgment. Defendants have independently authenticated the loan documents. Ronnie Schwartz, Defendants' Person Most Knowledgeable, acknowledged and authenticated each of the loan documents at issue and testified that there is no writing evidencing any alleged oral loan modification. See Doc. # 53, Ex. 10.
Defendants also challenge the admissibility of Branch Banking's evidence regarding the interest and principal owing and due on the Loan. However, as Branch Banking correctly avers, their Motion for Summary Judgment is limited to the issue of liability. Nevada law requires an evidentiary hearing to establish damages in deficiency judgment cases. See NRS 40.455 et seq. As such, the Court declines to rule on the admissibility of any evidence purporting to calculate the interest and principal owing and due on the Loan at this juncture.
Additionally, the Court rejects Defendants' argument that summary judgment on liability is not appropriate because Branch Banking has not proven with competent evidence the exact principal and interest owed on the Loan at the time of the foreclosure sale (i.e., "amount of the indebtedness which was secured"). Defendants' argument regarding admissibility of evidence to prove damages is not a necessary element of Branch Banking's Motion for Summary Judgment on liability.
