If Receiver’s Sales Aren’t Foreclosures, What Are They?

By:  Ben Reeves & Bob Olson

When no statute specifically authorizes a court-appointed receiver to sell real property, what type of sale is it?  The Supreme Court of Nevada recently addressed this question, holding that “a receiver sale of real property that secures a loan is a form of judicial foreclosure.”  U.S. Bank v. Palmilla Dev. Co., 131 Nev. Adv. Op. 9 (2015).

Facts

In U.S. Bank v. Palmilla, U.S. Bank made a $20.15 million loan to Palmilla Development Company secured by a development of townhomes.  Palmilla defaulted, and U.S. Bank applied for, and obtained, the appointment of a receiver over its real property collateral.

The receiver listed the property for sale, and eventually filed a motion to sell the property to a third-party purchaser for $9.5 million.  The court granted that motion on March 26, 2010, and the sale closed on June 7, 2010.  Five and a half months after the closing, U.S. Bank filed an amended complaint seeking a deficiency judgment against Palmilla as the proceeds from the sale did not satisfy the loan.

Palmilla objected, arguing that the lender could not recover a deficiency judgment, because:  (i) no statute authorized a deficiency after a receiver’s sale; and (ii) even if Nevada’s deficiency statute applied, the deficiency action was untimely.  Nevada law requires a deficiency action to be initiated within six months of a foreclosure sale.  See N.R.S. § 40.455(1).  Since the court approved the sale in March but U.S. Bank did not file the deficiency action until November, Palmilla argued that the action was time-barred.  The trial court held that the statute applied, but dismissed U.S. Bank’s action as untimely.  U.S. Bank appealed.

Legal Issues

On appeal, the Nevada Supreme Court had to determine whether in the absence of any statute specifically authorizing a receiver sale, Nevada’s deficiency statute nevertheless applies.

The deficiency statute at issue, N.R.S. § 40.455(1), provides that a judgment creditor may obtain a deficiency judgment if the action is brought “within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to N.R.S. § 107.080”.  Ostensibly, a receiver’s sale is neither a “foreclosure sale” or “trustee’s sale authorized by N.R.S. § 107.080.”  Thus, Palmilla argued that no deficiency was allowed under this statute.

Both the trial court and Supreme Court, however, disagreed.  The Supreme Court held that a foreclosure sale is defined as “‘[t]he sale of mortgaged property, authorized by a court decree or a power-of-sale clause, to satisfy the debt.’”  U.S. Bank, 131 Nev. Adv. Op. 9 (quoting Black’s Law Dictionary 1455 (9th ed. 2009)).  This broad definition clearly included a receiver’s sale of mortgaged property approved by the court.  Thus, a receiver’s sale is, for all intents and purposes, a “foreclosure sale” for the purposes of N.R.S. § 40.455(1).

As for the timeliness argument, the Nevada Supreme Court concluded that notwithstanding the date the court approved the sale, the sale did not occur until the transaction actually closed.  Therefore, since the sale closed in June, the deficiency action was timely filed in November.

Implications

U.S. Bank might be considered a win for commercial mortgage lenders.  Nevada does not have a specific statute authorizing receiver’s sales, but the decision makes it clear that courts nevertheless may authorize a receiver sale as “a form of judicial foreclosure” and allow lenders to obtain a deficiency judgment.  This holding is consistent with general receivership law on receiver sales, see 16 Fletcher Cyc. Corp. § 7876 (“In the absence of a specific statute governing sales by receivers, such sales are governed by statutes or court rules regulating court ordered sales”), and recognizes the practicality of receivers sales as an effective tool in the commercial lender’s arsenal.

It is worth noting that U.S. Bank filed an amended complaint seeking a deficiency judgment and not an independent deficiency action.  Lenders in similar situations may consider following U.S. Bank’s example and file an amended complaint in the receivership action rather than commencing a new action for a deficiency.

Author: Ben Reeves | 1 Comment Tagged , , , ,

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