By: Nathan Kanute
For several years, Nevada Courts have considered a myriad of issues related to how Nevada law applies to loans made by banks that are later take over by the FDIC. In the past eight months, the Nevada Supreme Court has addressed two of those issues. See Munoz v. Branch Banking and Trust Company, Inc., 131 Nev., Adv. Op. 23 (Apr. 30, 2015) and Federal Deposit Insurance Corp. v. Rhodes, 130 Nev., Adv. Op. 88 (Oct. 30, 2014). In both cases, the Court held that the Supremacy Clause of the United States Constitution precluded application of the applicable Nevada statutes.
In FDIC v. Rhodes, the issue was whether the six-month statute of limitations for deficiency actions provided by NRS 40.455(1) applied, rather than the six-year period of limitations under 12 U.S.C. § 1821(d)(2)(A) for contract claims asserted by the FDIC in its capacity as receiver or conservator. The FDIC, in Rhodes, took over Community Bank, as receiver. The FDIC conducted a trustee’s sale of the property pledged as collateral for the loan. About 16 months after the trustee’s sale, the FDIC filed a deficiency action against the guarantor. The trial court dismissed the FDIC’s complaint on the grounds that NRS 40.455 was a statute of repose, and the complaint had been filed outside of the six month period.
The Court first determined that the preemption issue, which is rooted in the Supremacy Clause, had been raised in the Court below, although without express reference to preemption. The Court then went on to hold that NRS 40.455 was expressly preempted by 12 U.S.C. § 1821(d)(2)(A). The Court walked through an analysis of case law regarding preemption of statutes of repose (statutes that terminate a cause of action) and statute of limitations (statutes that set a time period for bringing a cause of action). Ultimately, the Court concluded that it did not matter whether NRS 40.455 was a statute of repose or statute of limitations. The Court determined that, by using the phrase “period applicable under State law” in the federal statute of limitations, Congress meant to preempt either type of statute. Accordingly, the Court reversed the trial court’s dismissal of the matter based on the failure to bring the deficiency action within six months.
In Munoz v. Branch Banking and Trust, the Nevada Supreme Court addressed one of the issues left open under the Court’s AB 273 line of cases. Specifically, the Court was asked to address whether NRS 40.459(1)(c), which limits the recovery on a deficiency judgment, was preempted by the federal policy expressed in the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).
After the loan to Munoz, the FDIC took over the bank that made the loan, and Munoz’s loan was assigned to Branch Banking and Trust. The bank then proceeded with a judicial foreclosure and sought a deficiency against the borrower. The trial court entered judgment in favor of Branch Banking and Trust on the grounds that NRS 40.459(1)(c) could not be applied to a loan that had been assigned before the statute went into effect, but it did not address the preemption issue.
The Court started out the discussion of preemption by noting that a state law is preempted where it frustrates the purpose of federal law or the actions of federal agencies. The purpose of FIRREA was, in part, to allow the FDIC to convert the assets of failed banks into cash to avoid a loss to depositors. To fulfill that purpose, assignees of the FDIC enjoy a special status that permits the assets they obtain to maintain their value. Accordingly, the Court said, if a state law has the effect of limiting the market for assets transferred by the FDIC, it conflicts with FIRREA and would be preempted. Because NRS 40.459(1)(c) limits the recovery an assignor can obtain to no more than it paid for the loan, that limits the amount an assignee would pay for the asset and frustrates the FDIC’s ability to maximize the recovery from the assets of failed banks. Therefore, NRS 40.459(1)(c) frustrates the purpose of FIRREA and cannot be applied to assets transferred by the FDIC.
These two cases signal an understanding by the Court of the special issues raised by the FDIC’s takeover of failed banks and the need to protect the federal programs that ultimately protect depositors in our nation’s banks. Given the broad language used in Munoz, there could be any number of state laws that are determined to be preempted because of a conflict with the purpose of a federal program.