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The Legislative Intent regarding Assembly Bill 273, NRS 40.459

Posted by: on Wed, Oct 24, 2012

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STATEMENT OF INTENT CONCERNING AB 273

By: Assembly Majority Leader Marcus Conklin

Purpose of Statement.

It has come to my attention that there is some disagreement on the Legislature’s intent with respect to AB 273. AB 273 was one of a number of bills that the Legislature passed in 2011 to address and alleviate the economic hardships that continue to impact Nevada citizens and businesses. I have issued this statement because it is critical that AB 273 be interpreted and applied as we intended.

AB 273 was introduced and enacted in response to uncertainties and practices that have been discovered as a result of today’s recession. AB 273 was not intended to avoid future economic difficulties. The purpose of AB 273 was to introduce legislation that would level the playing field between banks (and other creditors) and the related borrowers and guarantors. In the current environment, banks and creditors have multiple curative options where the loan is secured by real property. The lender may foreclose, short sale the property, elect a deed in lieu, modify, and collect from insurance policies. On the other hand, the borrower only has the hope that the lender, will entertain settlement dialogue. AB 273 was meant to encourage those conversations. Since the adoption of AB 273, I have learned that our legislative intent concerning the amendatory provisions of certain sections of AB 273 has been called into question. Namely, Section 5 of AB 273 (which was effective upon passage and approval and clarifies the remedy of deficiency calculations in NRS 40.459) has been a central point of discussion. It is my hope and intention that through this statement. I can help clarify the Legislature’s intentions related to Section 5 of AB 273.

I am uniquely qualified to do so. I was the primary sponsor of AB 273. I was the only legislator to testify and answer questions during the proceedings, and I coordinated meetings with interested parties to develop each of the proposed amendments.

Section 5 of AB 273 is Intended to be Prospective.

As AB 273 evolved through committee discussion, the effective dates were an area of revision. After many variations, the final revision to the effective date was made on May 19, 2011, in the committee of the Senate Judiciary. In conversations with the Senate Judiciary committee members and Legislative Counsel, we determined that to make Section 5 of AB 273 effective immediately (which was consistent with existing Nevada law embodied in NRS 40.451), Section 6 of the bill would need to be changed from the version passed by the Assembly, which read:

“The amendatory provisions of this act apply only to an obligation secured by a mortgage, deed of trust or other encumbrance upon real property on or after the effective date of this act.”

I therefore introduced an amendment in committee to replace the above language with language that made it clear that Section 5 was immediately effective on passage and approval. Thus, it became clear from that amendment, from every other version of the bill, and from the Legislative Counsel’s digest explaining the bill, that Section 5 of AB 273 would be immediately effective upon passage and approval.

By making Section 5 of AB 273 immediately effective upon passage and approval, it was the Legislature’s intent that the law apply upon its adoption. When AB 273 was passed and approved into law on June 10, 2011, it was our understanding that the law would apply prospectively to all pending cases in which a deficiency judgment had not yet been obtained. Put differently, the law was not intended to reverse any existing deficiency judgments awarded before June 10,2011; it is only intended to apply to those cases that were pending or not yet filed in which a deficiency judgment was sought and not yet awarded.

It is not now nor has it ever been the intent of AB 273 to reach back into contracts and unwind previously negotiated rights. To the contrary, by adopting AB 273, it was our intent to clarify the manner in which the remedy of a deficiency judgment may be calculated. Section 5 of AB 273 simply confirms the formula by which the Courts determine the amount of the deficiency. Taken together, Section 5 of AB 273 should be prospectively applied to all pending cases in which a deficiency judgment had not yet been obtained at the time of its effective date.

Section 5 of AB 273 is Consistent With Existing Nevada Law.

It has always beenNevadalaw that when a creditor is seeking a deficiency judgment, the creditor’s total maximum recovery is limited to the amount of consideration paid for the right to seek that deficiency. NRS 40.459 confirms the existing statutory limitation on the amount of monetary judgment by fixing the method and formulas for calculation of a deficiency from an existing indebtedness.

The indebtedness for which there could be a deficiency is specifically defined in NRS 40.451. Pursuant to NRS 40.451, the maximum amount of indebtedness is limited to the amount of consideration paid by the lien holder. The definition of indebtedness for NRS 40.451 is specifically identified as a deficiency defense to be used when determining the maximum potential recovery available to a creditor. By limiting the maximum amount of indebtedness to the amount of consideration paid by the lien holder, it has always been the law that deficiency judgments are not meant to be profit centers. Because of what was transpiring in our economy with the enforcement of deficiency judgments, it was best to clarify our existing statutes, confirming the limits of a deficiency remedy.

In fact there was a competing bill moving through the State legislature that would have reversed the existing deficiency law. SB 402 was introduced addressing statutes unrelated to deficiency defenses. Tucked within SB 402, however, was a proposed revision to NRS 40.451 to expand the amount of indebtedness to include the amount of consideration paid by the current lien holder or the “predecessor of the lien holder.” Because SB 402 directly conflicted with AB 273 and also conflicted with the existing law in the limitation of deficiencies, the proposed revision to NRS 40.451 was removed by way of amendment; and, the bill was never enrolled and passed into law.

The Scope and Application of AB 273.

When discussing a proposed bill in committee, it is impossible to discuss every single potential variant or application of the bill. To that end, there are certainly topics that are emphasized more than others, just as there are other sections within the bill that are emphasized more than others. Nevertheless, there should be no doubt (and it is clear from the legislative history and my talking points which I used to discuss AB 273) that the application of Section 5 of AB 273 was never limited to only collection agencies attempting to enforce a judgment. Instead, the language in Section 5 of AB 273 was always designed to apply to any creditor who obtained the right to seek a deficiency from someone else who previously held that right. Put differently, Section 5 of AB 273 was intended to confirm the existing limitation of creditors’ maximum recovery to what they paid.

Moreover, while homeowners have been most affected by our current economic recession, homeowners were not our sole focus. By making the revision to the limitation of the amount of monetary judgment in NRS 40.459, it was intended to apply to any borrower and any guarantor who had the right to assert those defenses. Neither the existing deficiency legislation nor AB 273 distinguishes between residential and commercial deficiency remedies.

Similarly, we were fully aware of the fact that many banks had failed resulting in loans being acquired by the FDIC receivership and sold to third parties. We further understood that in those transactions, the loan would be insured by the FDIC and would be sold at a discount to third parties for enforcement. In making the amendatory provisions to NRS 40.459, it was fully our intent to limit creditors to the amount of consideration they paid for the right to seek a deficiency as well as to compel them to exhaust instruments of insurance when seeking deficiency. The instruments of insurance were intended to address whatever indemnity or coverage that a note purchaser may have whether through purchase mortgage insurance, loss share agreement with the FDIC, or other agreement with the FDIC through a loan pool or structured sale.

The Purpose of AB 273.

AB 273 assures that lenders get no more than payment in full. Creditors, whether banks, lenders, collection agencies, or other note purchasers, were using deficiency judgments as a profit center for their business. For example, there are some note purchasers who have formed entire business enterprises with the intent of profiting from deficiency judgments. Such a use of deficiency judgments was never the intent. Creditors who advanced no money for the original loan should be limited to what they paid for the opportunity to seek a deficiency judgment. This clarification aims to protect Nevada’s methods for calculating a deficiency from being misused as a profit center.

As a whole, AB 273 was intended to clarify and strengthen existing legal protections for borrowers and guarantors. For example, Section 5.5 of AB 273 closed a loophole from prior amendments, making sure that creditors always look to the secured collateral first and can no longer run an end around of the deficiency protections. AB 273 clarified existing law by expressly providing that the same judicial determination of the fair market value of the real property is required if the lender proceeds against the guarantor regardless whether it is pre-or post foreclosure. AB 273 was never intended to take away any existing protections; rather, the goal was to clarify laws that needed clarification and close loopholes used to manipulate sources of recovery.

Conclusion.

AB 273 reinforces the intent of existing Nevada law and public policy and aides Nevada’s recovery in the current recession. If AB 273 is not enforced as we intended, our small businesses and entrepreneurial class may disappear. We cannot permit the destruction of our entrepreneurial class, they are the engine of our economy.

Thus, AB 273, particularly Section 5, was made to apply prospectively to all pending cases in the judicial system in which a deficiency judgment had yet to be obtained at the time AB 273 took effect. It is not our intent to reach back and unwind all of the previously negotiated and settled judgments. However, we were interested in, and did intend to, clarify and make the calculation by which the Courts determine the amount of the deficiency in any pending suit currently in the system on a prospective application in which a judgment has not been obtained by a bank or a creditor consistent with the definition of indebtedness in NRS 40.451 which has long been in effect. It is my sincere hope that with the passage of AB 273, our business owners and entrepreneurs and, just as importantly, homeowners in our state will not fall victim to unscrupulous creditors who manipulate sources of recovery and use deficiency judgments as a profit center.

January 5, 2012

See the complete letter at: http://marcusconklin.com/wp-content/uploads/2012/02/Statement-of-Intent-Concerning-AB-273_M.-Conklin.pdf