Branch Banking & Trust Co. v. Sossaman & Guadalupe Plaza, LLC

Citations: 47 F. Supp. 3d 1083; 2014 U.S. Dist. LEXIS 129492; 2014 WL 4636388Docket: No. 2:12-cv-01775-LRH-PAL

Court: District Court, D. Nevada; September 15, 2014; Federal District Court

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Plaintiff Branch Banking and Trust Company has filed a Motion for Summary Judgment regarding liability and sought a deficiency judgment against Defendants, which include Sossaman, Guadalupe Plaza, LLC, and others. The Defendants responded, filed an objection to evidence, and submitted their own Motion for Summary Judgment, leading to further responses and replies between the parties. 

The case stems from an alleged breach of a secured loan agreement following a judicial foreclosure sale of real property in Maricopa County, Arizona. On July 28, 2006, Sossaman, Guadalupe Plaza, LLC executed a Promissory Note for $3,826,000 with Colonial Bank, secured by a Deed of Trust on specific real property. Guarantors, including Yoel Iny and Noam Schwartz, provided a guarantee for the Borrower's indebtedness. Subsequent amendments extended the loan's maturity date, with the most recent extension on July 19, 2009.

Colonial Bank was closed on August 14, 2009, and the FDIC took over, later assigning the loan rights to Branch Banking on September 7, 2011. The assignment was recorded in November 2011. The Borrower defaulted on the payment due on August 2, 2009, and Branch Banking issued a demand letter on August 3, 2011, indicating its intent to pursue legal remedies due to non-payment from both the Borrower and Guarantors.

On December 19, 2011, Branch Banking initiated a judicial foreclosure action in the Superior Court of Maricopa County, Arizona, by filing a Verified Complaint related to a Deed of Trust. A Default Judgment for the judicial foreclosure of the Property was issued on April 23, 2012, allowing for full or partial satisfaction of the Loan through a Sheriff’s sale. The Property was sold at a public auction on June 21, 2012, for $816,000. Following this, on October 10, 2012, Branch Banking filed a Complaint in this Court, asserting claims for deficiency, breach of guarantee, and breach of the covenant of good faith and fair dealing, citing an unpaid principal balance of $1,301,845 as of the auction date.

The section on legal standards outlines the criteria for summary judgment under Federal Rule of Civil Procedure 56(a), noting that it is appropriate when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. It emphasizes that evidence must be viewed in favor of the non-moving party. The moving party must demonstrate the absence of genuine issues of material fact, while the non-moving party must show evidence supporting their claims. A "material fact" can affect the lawsuit's outcome, and if reasonable minds could differ on material facts, summary judgment is inappropriate. The evidence must be substantial enough that a reasonable jury could find for the non-moving party, as a mere scintilla of evidence is insufficient to create a genuine dispute.

Both parties have filed motions for summary judgment, necessitating the court to consider the evidence presented for both before making a ruling. Under Nevada law, a United States District Court may certify questions of law to the Nevada Supreme Court when there are relevant legal questions without controlling precedent. Branch Banking asserts that this case is a clear breach of contract, claiming the Borrower and Guarantors did not meet their loan obligations under the Note and Guarantee, thus warranting summary judgment in favor of Branch Banking. 

To establish a breach of contract under Nevada law, the plaintiff must demonstrate: (1) the existence of a valid contract, (2) plaintiff's performance, (3) defendant's breach, and (4) damages resulting from the breach. It is uncontested that the Loan documents are valid contracts and that Branch Banking is the legitimate successor-in-interest to Colonial Bank. The Borrower agreed to repay the loan by August 2, 2009, and failure to do so constitutes default. The Borrower did not repay the loan as required, breaching the Note. Additionally, the Guarantors, who guaranteed the payment of the Borrower's debt, also failed to fulfill their obligation when the Borrower defaulted. As a result, the court concludes both the Borrower and Guarantors breached their respective agreements.

Defendants oppose Branch Banking's motion for judgment, arguing: (1) Branch Banking's failure to request a monetary judgment in its Arizona judicial foreclosure complaint precludes it from pursuing a deficiency against the Borrower; (2) Branch Banking has destroyed the Guarantors’ subrogation rights, eliminating its ability to recover from them; (3) Branch Banking did not prove the 'consideration paid' element required for a deficiency action under NRS 40.459(1)(c); (4) it failed to establish any 'indebtedness' owed under NRS 40.459; and (5) Branch Banking is bound by its admission that the property's fair market value is $1,020,000. The Court will address these arguments sequentially.

Regarding the first point, the Court finds that Branch Banking is not barred from recovering a deficiency from the Borrower despite not obtaining a monetary judgment in the Arizona foreclosure action. The Note specifies that it is governed by Nevada law, which also grants the lender rights to recover under Nevada statutes. The Guarantee similarly affirms that it is governed by Nevada law. The Deed of Trust states that while foreclosure is governed by Arizona law, the underlying debt is subject to Nevada law. Citing precedents, the Court notes that parties can choose the law applicable to their contract, provided there is no indication of bad faith or intent to evade applicable laws. The Court concludes that the contractual agreement to apply Nevada law to the Note is valid and enforceable, allowing Branch Banking to pursue a deficiency claim.

The Court affirms that the presence of a Deed of Trust in the Note does not alter the legal separation between a borrower’s debt and the security for that debt under Nevada and Arizona law. In Nevada, actions on debt arise from the promissory note, not from the deed of trust securing it, as established in Key Bank of Alaska v. Donnels and Behringer Harvard Lake Tahoe, LLC v. Bank of Am. N.A. Similarly, Arizona law holds that a borrower’s debt originates from the promissory note, with foreclosure being a secondary measure for debt recovery, as articulated in Morgan AZ Fin. L.L.C. v. Gotses and Nat’l Bank of Ariz. v. Schwartz.

Branch Banking's right to pursue debt recovery is independent of its right to recover property securing that debt. Under Nevada law, Branch Banking is permitted to file a second action on the Note for a deficiency after a foreclosure sale, per NRS 40.455. However, the one-action rule (NRS 40.430) requires that all actions for recovering debts secured by a mortgage must be consolidated into a single judicial foreclosure proceeding, which aims to prevent creditors from pursuing multiple recoveries against debtors. The Nevada Supreme Court's decision in McDonald v. D.P. Alexander reinforces that creditors must first seek judicial foreclosure on the property before pursuing personal recovery from the debtor.

If a judicial foreclosure had occurred in Nevada instead of Arizona, the one-action rule would prevent a subsequent action to recover a deficiency based on the Note. However, under NRS 40.430(6)(c), any act to enforce a mortgage or lien on collateral outside of Nevada is exempt from this rule if it does not result in a personal judgment against the debtor. In this case, the Arizona foreclosure judgment did not impose a personal judgment on the Borrower; it stated that the finding of a debt of $3,447,781.11 did not constitute a monetary judgment in favor of Branch Banking. As such, Branch Banking can pursue a separate monetary judgment.

Defendants argue that the phrase "except as required under the laws of that jurisdiction" indicates that the Arizona judicial foreclosure could have resulted in a personal deficiency judgment, making the exemption inapplicable. However, the Court interprets the exception to apply since the Arizona judgment did not yield a personal judgment. Although Arizona law may require a monetary judgment in foreclosure actions, the Court remains unconvinced that this negates the exception's applicability here.

Arizona Revised Statutes ARS 33-725(A) and ARS 33-727(A) indicate that while a judgment for the entire debt must be issued, Arizona law does not recognize a formal deficiency judgment as a separate entity; instead, it views the original judgment as encompassing any potential deficiency after a sale. Arizona courts require that a foreclosure judgment explicitly address the possibility of a deficiency; failing to do so means that the issue is effectively resolved against the plaintiff, regardless of the underlying record.

Section 33-725 and Section 33-727 stipulate that any deficiency must be included in the foreclosure judgment. Arizona law requires that a judgment in foreclosure must render the defendant liable for the total debt, not just the portion covered by the sale proceeds. However, the court finds that Branch Banking is not precluded from pursuing a deficiency judgment under Nevada law, as Nevada's one-action rule does not apply to out-of-state foreclosure actions that lack a personal judgment against the debtor. Branch Banking did not seek a deficiency in Arizona, and thus, Arizona law prevents such a deficiency from being implied in the foreclosure judgment. Consequently, even though Arizona law would likely bar Branch Banking from seeking a deficiency there, it is not barred from pursuing a deficiency in Nevada.

Additionally, the court dismisses the argument that Branch Banking’s lack of a deficiency judgment against the Borrower in Arizona negates the rights of the Guarantors. Since the court has found Branch Banking is still entitled to pursue a deficiency against the Borrower, it also retains the right to seek recovery from the Guarantors for breach of guarantee.

Regarding NRS 40.459(1)(c), which limits deficiency judgments based on the consideration paid for the loan, the court concludes that this statute does not apply to the current dispute. The statute, effective June 10, 2011, was deemed non-retroactive by the Nevada Supreme Court in a prior case, meaning it does not apply to foreclosures that occurred before that date. Consequently, two district courts have similarly ruled that NRS 40.459(1)(c) cannot be applied retroactively to debt assignments predating the statute's enactment, as doing so would violate the Contract Clause.

NRS 40.459(1)(c), when applied retroactively to assignments made before its effective date, significantly undermines the value of contracts, violating the Contract Clause of the U.S. Constitution. Multiple cases, including Eagle SPE NV I, Inc. v. Kiley Ranch Cmtys. and various Branch Banking cases, support this conclusion. The court in Eagle SPE, led by Judge Robert Jones, found that the statute's retroactive application to pre-enactment assignments substantially impairs existing agreements by limiting recoveries for assignees, creating an unexpected benefit for mortgagers rather than addressing foreclosure issues. The court concluded that such an application does not serve a public purpose and fails to meet reasonable conditions for adjusting contractual rights. Therefore, it ruled that NRS 40.459(1)(c) only applies to assignments made on or after its effective date, which is June 10, 2011. In the current case, since the FDIC assigned rights related to the Note and Deed of Trust to Branch Banking on August 14, 2009, prior to the statute's effective date, NRS 40.459(1)(c) is inapplicable, rendering the Defendants' arguments about consideration and evidence moot.

The Loss Sharing Agreement between Branch Banking and the FDIC does not qualify as an insurance policy under NRS 40.459(2), which restricts the recovery amount in deficiency judgments by excluding amounts received from insurance policies that compensate creditors for property-related losses. Defendants argued that reimbursements from the FDIC would reduce Branch Banking's recovery in a deficiency judgment. However, the court found that the FDIC's reimbursement is contingent on Branch Banking’s active pursuit of collections from borrowers, even after receiving FDIC payments. If Branch Banking recovers fully from borrowers, it would not receive FDIC reimbursement, thus preventing double recovery. The court referenced a prior case, Branch Banking, Trust Co. v. Frank, where it was established that the statutory framework aims to prevent unjustified windfalls for creditors. Since Branch Banking must refund the FDIC based on its collections, there is no risk of double recovery, indicating that NRS 40.459(2) does not apply to the Loss Sharing Agreement. The court emphasized that recognizing the agreement as an insurance policy would contradict the statutory intent and potentially grant an unjustified windfall to the defendants.

In Branch Banking, Trust Co. v. Frank, the court reaffirmed that the loss-sharing agreement did not fall under the limitations of NRS 40.459(2), which is intended to prevent lenders from profiting from judgments. The court agreed with prior reasoning that the FDIC's loss-sharing provisions do not restrict Branch Banking's recovery under this statute, noting that any recovery by Branch Banking would allow the FDIC to receive refunds for previous payments made. This arrangement negates the possibility of double recovery for Branch Banking and prevents an unjust windfall for the Defendants. 

The court also addressed the Defendants' argument for an offset under NRS 101.040, which pertains to co-obligors. The court rejected this claim, emphasizing that Branch Banking's potential recovery is not greater than what it is entitled to, hence NRS 101.040 does not limit its deficiency judgment.

Regarding the fair market value of the property, the court declined to grant partial summary judgment establishing a value of $1,020,000.00 as a minimum. It cited NRS 40.457(1), which mandates a hearing to determine the fair market value based on evidence presented by either party, allowing Defendants to argue their valuation at that time.

Lastly, the Defendants moved to certify questions to the Nevada Supreme Court concerning the calculation of "the amount of consideration paid" under the new NRS 40.459(1)(c) and whether this amount should be adjusted based on subsequent reimbursements under a loss-sharing agreement.

NRS 40.459(l)(c) is deemed inapplicable to the current assignment, leading the Court to determine that the “amount of consideration paid” is not relevant, making certification unnecessary. The Court rejects the Defendants' claim that summary judgment is inappropriate, concluding that there are no disputed material facts. Consequently, Branch Banking is granted summary judgment on liability for both the deficiency claim and the breach of guarantee claim. The Court also approves Branch Banking’s Application for a Deficiency Judgment Hearing, allowing for supplemental briefing on the loan's indebtedness and the property's fair market value at the foreclosure sale. The Court's orders include granting Branch Banking’s Motion for Summary Judgment (Doc. 69), denying the Defendants’ Motion for Summary Judgment (Doc. 99), overruling their objection to evidence (Doc. 82), and denying their motion to certify a question to the Nevada Supreme Court (Doc. 114). Judgment will be entered in favor of Branch Banking for the deficiency and breach of guarantee claims. The parties are allowed 30 days to file opening briefs regarding the loan's indebtedness and property value, followed by a 10-day period for response briefs. A deficiency hearing will be scheduled in accordance with NRS 40.457(1). Should Branch Banking pursue the third claim regarding the breach of the covenant of good faith and fair dealing, a proposed joint pre-trial order must be submitted within 30 days of this Order. The Deed of Trust was recorded in Arizona, and Nevada law governs the Note, while Arizona law governs the foreclosure process. The Borrower defaulted on the principal balance of $1,252,585.90 plus accrued interest, with a default interest rate set at 5% above the stated contract rate.

The contractual rights and obligations under the Note and Loan Agreement are governed by Nevada law, while the provisions related to foreclosure in the Deed of Trust are governed by Arizona law. The Guarantee is also governed by Nevada law. The Court overrules Defendants' objections regarding the admissibility of loan documents, rejecting their argument that Dennis Harms lacks personal knowledge to authenticate them, as he is deemed competent. Additionally, Ronnie Schwartz, the Defendants’ Person Most Knowledgeable, has independently authenticated the loan documents and confirmed that no written evidence exists of any alleged oral loan modification. The Court notes that Branch Banking's Motion for Summary Judgment focuses solely on liability, and any challenges regarding the calculation of interest and principal are deferred until an evidentiary hearing on damages is required by Nevada law. The Court dismisses earlier arguments from Defendants based on previous Motions for Summary Judgment and declines to entertain them further. It has also denied Defendants’ piecemeal Motions for Summary Judgment due to procedural violations. The Court previously rejected Defendants' claims regarding a "Work-Out Agreement." Defendants do not contest Branch Banking's adherence to the Arizona foreclosure process or its timely pursuit of a deficiency judgment following the foreclosure sale on June 21, 2012.

Branch Banking initiated a deficiency action on October 10, 2012, within six months of a foreclosure sale that took place on June 21, 2012. The one-action rule, which governs mortgage-related debt, applies to guarantors and sureties as well. The Nevada Supreme Court has not addressed whether NRS 40.459(l)(c) retroactively applies to pre-enactment assignments. A three-step inquiry determines if a regulation violates the Contract Clause: assessing substantial impairment of a contractual relationship, evaluating the state’s justification for the regulation, and ensuring that adjustments to rights and responsibilities are reasonable and appropriate. Courts typically defer to legislative judgment unless the state is a party to the contract. Branch Banking contends that the defendants' interpretation of NRS 40.459(l)(c) breaches the Supremacy Clause and that this statute does not pertain to loans from the FDIC, which is not considered a "person" under Nevada law. The agreement under which Branch Banking obtained the loan from the FDIC includes a Loss Sharing Agreement. Defendants cite remarks from Assemblyman Marcus Conklin indicating that revisions to NRS 40.459 were intended to prevent lenders from recovering amounts paid under insurance policies, including loss sharing agreements with the FDIC. The court noted that Branch Banking has not sought summary judgment for its claim of breach of the covenant of good faith and fair dealing, and if it chooses to proceed, a joint pretrial order must be filed within 30 days. The court also dismissed defendants' claim that summary judgment on liability is inappropriate due to a lack of evidence regarding the exact principal and interest owed at foreclosure, indicating that this evidence is not essential for Branch Banking's Motion for Summary Judgment on liability.