My clients here in Los Angeles have been actively buying discounted notes and providing junior secured financing for short sales from lenders in Las Vegas. Recent developments in the Nevada legislature and judiciary have been creating a borrower and contractor protective environment. So before proceeding on any such transactions, consider the potential effect of the following recent and pending Nevada law limiting refinance lenders' and note purchasers' rights. Nevada law is very protective of contractor's lien rights over those of lenders (and owners) as well as those of borrowers/guarantors over discount note purchasers seeking to collect "phantom" deficiency judgments (i.e. in excess of what they paid for the note):

Mechanic's Lien Priority: In re Fontainebleau Las Vegas Holdings, LLC (10/25/12)

Fontainebleau Las Vegas Holdings, LLC filed for Ch. 11 bankruptcy after Bank of America stopped loaning for the construction of this $2.8 billion hotel-casino resort. The case converted to a Ch. 7 liquidation and $100M remains in the bankruptcy estate to pay lenders owed $1.85B and more than 100 contractors who claimed about $350 million in unpaid bills. The Nevada Supreme Court decided in favor of the contractors on two key legal questions: the viability of the legal principle of "equitable subrogation" and the enforceability of "contractual subordination" against mechanic's lien claimants under Nevada's mechanic's and materialman's lien statutes. Six justices ruled unanimously that mechanic's liens stand in the repayment line ahead of lenders who replaced original lenders. In addition, the court said mechanic's lien claimants can't waive their positions prospectively. So in Nevada, (1) the doctrine of equitable subrogation does not apply against mechanic's lien claimants, such that a mortgage incurred after the commencement of work on a project will not succeed to the senior priority position of a preexisting lien satisfied by the mortgagee (i.e. the loan it paid off) if intervening mechanics' liens exist; and (2) prospective contractual subordination agreements are not enforceable (i.e. those signed by contractors in advance of commencing work and in exchange for no payment and, in this case, in favor of lenders prior to loans being funded). I spoke with an attorney involved in the case today (we're working on an unrelated matter) and he told me that the latter part of this ruling clears up a silence in the statute relating to mechanic's lien waivers and that in this environment most judges he is in front of in Las Vegas bankruptcy cases will go out of their way to protect local businesses and the perceived "little guy."  

Nevada Assembly Bill 273: Limits on Deficiency Judgments to Discount Note Buyers

In June 2011 Nevada Governor Brian Sandoval signed AB 273, a law which places limits on how much a lender can collect in a "deficiency judgment" after suing to collect a debt. In particular, it focuses on lenders that acquire these debts from other lenders at a discount. Such sales are usually made at a steep discount, and the new lender often buys the debt in order to foreclose on the real estate that's been put up as collateral. For example, a note buyer pays $1 million for a mortgage loan with an outstanding balance of $5 million. If the new lender forecloses on property valued at $700,000, under AB 273 it can seek a deficiency judgment of only $300,000, the difference between what was paid for the loan and the collateral's value. Prior to AB273 the lender could have collected up to $4.3 million, the difference between the loan's outstanding balance and the value of the property, in this case $4.3M. But what about a loan originated prior to enactment of AB 273 in June 2011 but acquired by the foreclosing noteholder after June 2011? AB 273 is silent as to retroactive application. And a trio of cases (involving lenders who acquired loan portfolios from the FDIC receiverships following the spectacular failures of Silver State Bank and Colonial Bank) are in the course of being decided by the Nevada Supreme Court on this very issue after two judges in Clark County District Court, coincidentally on the same day in October 2011, issued differing opinions on AB 273 and whether it can be applied retroactively. The Supreme Court is expected to issue its decisions in about six months. I think a fair ruling by the court would be dependent on date of note purchase: if the foreclosing noteholder acquired the loan after AB273 was enacted then the deficiency limitation should apply without regard to when the loan was closed since the note purchaser had notice of the statute. In the meantime I am advising that note buyers assume that they will not be able to obtain a deficiency judgment in excess of the difference between property value and amount they pay for the note.