By: Bob Olson and Nathan Kanute
On May 29, 2013, the Nevada Supreme Court issued two decisions that all real estate lenders need to be aware of because they have the potential to eliminate the ability of a lender to recover a deficiency judgment from a guarantor.
In Nevada it is common for lenders to commence foreclosure proceedings and, at the same time, sue all guarantors that have waived the benefit of Nevada’s one-action rule for the full amount of the debt they guaranteed. Often the foreclosure sale will occur before lender obtains a judgment against the guarantor. In Lavi v. Eighth Judicial District Court, 130 Nev. Adv. Op. 38, 2014 WL 2428749 (May 29, 2014), the Nevada Supreme Court held that such a pre-foreclosure action against a guarantor was not a deficiency action within the meaning of Nevada’s anti-deficiency statutes. The strong dissent in Lavi argued that the pre-foreclosure complaint was sufficient and implied that the majority opinion created a trap for the unwary. In any event, all lenders that sue guarantors on real estate loans before the underlying foreclosure is completed should take affirmative steps to convert the guarantor action to a deficiency action within six months following the date of the foreclosure sale or risk losing recourse against the guarantor.
In the second case, Schleining v. Cap One, Inc., 130 Nev. Adv. Op. 36 (May 29, 2014), the guarantor, who was sued to recover a deficiency, alleged that he was released of liability under the guaranty because he was not given notice of the foreclosure sale in the manner required by NRS 107.095. The lender argued that the lack of notice did not release the guarantor from liability because he had previously waived the right to receive notice of the foreclosure proceedings and had notice of the foreclosure proceedings. The Nevada Supreme Court ruled for both parties; first for the guarantor by finding that NRS 40.453 prohibited a guarantor from waiving notice of foreclosure proceedings, but then for the lender when determining that substantial compliance with the notice requirement was sufficient and that this lender had substantially complied because the guarantor had notice of the foreclosure proceedings and was not prejudiced by the lack of formal notice. The dissent disagreed, primarily because the lender did not send any notice to the guarantor; thus, there was no attempt to comply with the notice requirements, let alone substantial compliance with those notice requirements. The take away from Schleining is that a lender should provide all guarantors and obligors with all required foreclosure notices or risk releasing them from the underlying obligation.
For a more detailed analysis of Lavi and Schleining, click here: