LAS VEGAS-Credit unions are being cautioned to double-check the non-judicial foreclosure statutes in the states in which they do mortgages for notice requirements in the wake of a closely watched Nevada state court ruling.
The case-U.S. Bank National Association v. Palmilla Development-is currently specific to Nevada, but all it would take to expand this decision into other jurisdictions is a "well-represented" debtor latching on to the ruling, according to Abran Vigil, an attorney with the Las Vegas office of Ballard Spahr.
Vigil, who is not involved with this case, told Credit Union Journal that the decision involves an appeal from an Eighth Judicial District ruling issued last August in which the court ruled a private sale of property through receivership must include notices required in a non-judicial foreclosure. A lack of such notices precluded a recovery against the guarantor. The court also found that, because a receivership sale is a "foreclosure sale," the trustee was precluded from recovering a deficiency.
Several Results Possible
According to Vigil, as is the case with many other Western states, Nevada allows for non-judicial foreclosure of property upon a borrower's default. He said if the Nevada Supreme Court affirms the lower court's all-inclusive definition of a "foreclosure sale," a special servicer or lender may have to initiate a non-judicial foreclosure and serve the accompanying statutory notices even if proceeding with a receivership sale or in a judicial foreclosure.
Another possible result is, by opting for a private sale through receivership, the special servicer or lender may be electing to forgo any deficiency-regardless of whether the guaranty is limited or full recourse.
"There could be a lot of uncertainty if a defaulting borrower's deficiency balance can disappear if someone at the credit union does not track the notices properly," Vigil explained. "To avoid the uncertainty of which procedure to follow, credit unions must engage in duplicative loan-enforcement procedures. In this case there was a private sale through receivership. There was no trustee sale, and the court found the private sale will be defined as a foreclosure sale, which triggered notice requirements."
Because the lender in Palmilla had "no idea" of the notices required, Vigil said the "most prudent" course is to serve all notices required under a non-judicial foreclosure, even if the lender not pursuing a non-judicial foreclosure.
