A Nevada Supreme Court foreclosure sale briefing could be an important win — or loss — for the lending industry.

According to an insider, lenders and special servicers operating in Nevada may be up for an unpleasant legal surprise if the state's higher court upholds a 2012 ruling that maintains a private sale of property through receivership is basically the same as a foreclosure sale.

If the Nevada Supreme Court affirms the lower court's all-inclusive definition of a "foreclosure sale," argues Abran Vigil, an attorney with Ballard Spahr's commercial loan servicing group, special servicers and lenders may be required to initiate a nonjudicial foreclosure and serve related statutory notices "even if proceeding with a receivership sale or even in a judicial foreclosure."

The appeal contests the Eighth Judicial District which in August 2012 ruled that failure to include notices required in a nonjudicial foreclosure during a private sale of property through receivership must preclude a recovery against the guarantor, Vigil wrote, plus the court found that because a receivership sale is "a foreclosure sale" the trustee must also be precluded from recovering a deficiency.

While Nevada allows for nonjudicial foreclosure of property if the borrower defaults on the loan, another possible result, he explains, is that 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."

In U.S. Bank National Association as Trustee for the Registered Holders of ML-CFC Commercial Mortgage Trust 2007-7 Commercial Mortgage Pass-Through Certificates Series 2007-7 v. Palmilla Development, the special servicer was directing actions and managing the loan that was secured by a personal guaranty.

Following the unopposed sale of the property for $9.5 million, the special servicer pursued a deficiency on behalf of the trust and in the name of the trustee. But because a private sale is not a foreclosure, "there is no statutory basis to pursue a deficiency."

The trustee failed to file a deficiency claim within six months after the foreclosure sale, but argued that because it was a private sale statutory defenses were inapplicable because the claim was one for a "straight case of contract damages," as opposed to a deficiency, he explains.

Apparently Nevada law does not limit the definition of foreclosure sale, but "does expressly include a trustee's sale as provided by Nevada's nonjudicial foreclosure statute that grants to a trustee under a deed of trust the power to sell the property" if process is followed.

Nevada's deficiency statute refers separately to foreclosure sales and trustee's sales, Vigil explained.

The first lesson from this Eighth Judicial District decision, he wrote, is that a special servicer or lender should make sure they comply with dual tracking requirements under Nevada's nonjudicial foreclosure, receivership and deficiency statutes.

Second, if there is any chance that a deficiency may be pursued, the special servicer or lender should initiate "a nonjudicial foreclosure and serve all appropriate notices, even if the goal is to sell via receivership sale."

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