First Interstate Bank of Nevada v. Shields

• Decision Date: 23 December 1986
• Docket Number: No. 16679,16679
• Citation: 730 P.2d 429,102 Nev. 616
• Parties: FIRST INTERSTATE BANK OF NEVADA, a national banking corporation, Appellant, v. Allan D. SHIELDS and Fern Shields, Respondents.
• Court: Nevada Supreme Court

Page 429

730 P.2d 429

102 Nev. 616

FIRST INTERSTATE BANK OF NEVADA, a national banking corporation, Appellant, v. Allan D. SHIELDS and Fern Shields, Respondents.

No. 16679.

Supreme Court of Nevada.

Dec. 23, 1986.

[102 Nev. 617] Hale, Lane, Peek, Dennison & Howard and Donald A. Lattin, and Gregg Zive, Reno, for appellant.

Diehl, Evans & Associates, Fallon, for respondents.

OPINION

PER CURIAM:

Respondent Allan D. Shields and Robert Boucher formed a partnership under the name of Farmhouse Properties. Farmhouse Properties borrowed $88,000 from appellant First Interstate Bank (FIB). The loan was evidenced by a promissory note secured by a deed of trust on realty. Allan Shields, respondent Fern Shields and Boucher personally guaranteed the payment of the note. Allan Shields thereafter sold his interest in the partnership. The purchaser of his interest and Boucher agreed to indemnify Allan Shields for all partnership debts, including the obligation at issue. Farmhouse Properties defaulted on the note. FIB purchased the realty for $70,000 at the ensuing trustee's sale.

FIB thereafter sought by its complaint to recover the deficiency judgment for the amount by which the total remaining indebtedness exceeded the amount bid on the realty by FIB at the trustee's sale. ¹ The Shields moved for summary judgment on the ground they were protected by the deficiency judgment statutes (NRS 40.451 through 40.459, inclusive). The district court granted respondent's summary judgment and this appeal followed. ²

FIB primarily argues that Fern Shields, as a guarantor and the spouse of a partner, is not protected by the deficiency judgment legislation. We disagree.

Although we have previously held that the protection of the deficiency judgment legislation is inapplicable to an action on a guaranty contract (Component Systems Corp. v. District Court, 101 Nev. 76, 692 P.2d 1296 (1985); Manufacturers & Traders Trust v. Dist. Ct., 94 Nev. 551, 583 P.2d 444 (1978); Thomas v. Valley Bank of Nevada, 97 Nev. 320, 629 P.2d 1205 (1981)), we are now convinced that it is unsound to deny guarantors the benefits of such legislation. For reasons hereafter expressed, we hereby disapprove and overrule our opinions in Manufacturers & Traders Trust and Thomas to the extent they are inconsistent with our ruling in this case.

Nevada's deficiency legislation is designed to achieve fairness to all parties to a transaction secured in whole or in part by realty. To the creditor-obligee, fairness is provided by a recovery methodology that will make the creditor whole if the components for debt satisfaction exist under the panoply of assets peculiar to a given transaction. Conversely, fairness is accorded obligors by permitting creditors who have sought to satisfy an indebtedness through sale of a trustor's or mortgagor's realty, to secure a deficiency judgment only to the extent any alleged deficiency exceeds the fair market value of the sold realty. In other words, obligors are assured that creditors in Nevada may not reap a windfall at an obligor's expense by acquiring the secured realty at a bid price unrelated to the fair market value of the property and thereafter proceeding against available obligors for the difference between such a deflated price and the balance of the debt. It is irrefutably clear that the salutary purposes of the legislative scheme for recovering legitimate deficiencies would be attenuated, if not entirely circumvented in specific instances, by denying guarantors, or any other form of obligor, the protection provided by the deficiency statutes. A lender in Nevada is not privileged to manipulate sources of recovery in order to realize debt satisfaction in amounts substantially greater than the balance of the debt due.

Contrary to our earlier pronouncements, our instant ruling does not constitute an expansion of statutory scope regarding deficiency entitlements. Indeed, NRS 40.457 requires a hearing and the taking of evidence concerning the fair market value of the property sold and notice of the hearing to all defendants against whom a deficiency judgment is sought. The purpose for such a hearing together with its notice requirement is evident. Since a creditor is entitled to a single satisfaction of an outstanding debt irrespective of the value of its security and the number and financial strength of primary obligors, sureties or guarantors, the threshold issue under the legislative scheme is to determine whether, in fact, a deficiency in debt satisfaction remains after the creditor has sold the real property securing the debt. If the trial court determines that the fair market value of the property at the time of sale exceeded the amount due the creditor, no deficiency exists and no party, guarantor included, may be held liable to the creditor. This, of course, explains why all parties against whom the creditor may seek a deficiency judgment, must be given notice of the hearing.

If we were to accede to FIB's proposition that a guarantor is denied the protection afforded by the deficiency legislation, we would thereby detach lenders from the deficiency standard imposed by the legislature and subject guarantors to the vagaries of a lender's scruples in any given transaction. The way would thus be paved for an unscrupulous lender to bid an insignificant price for real property of a true and sufficient value to satisfy the debt it secured, and then pursue a second essentially full satisfaction from a financially responsible guarantor. Any less extreme variant from the preceding hypothetical would still unfairly enrich the lender at the expense of the guarantor. We are convinced that the Legislature never intended to facilitate such scenarios. To the contrary, it is apparent to us that the Legislature fully anticipated that its work product would require lenders seeking deficiency judgments against any potentially liable defendants, NRS 40.459, to prove the actual existence of a deficiency in accordance with the statutory scheme.

Today's holding is consistent with general principles of guaranty law. As a general rule, the payment or other satisfaction or extinguishment of the principal debt or obligation by the principal or by anyone for him discharges the guarantor. 38 C.J.S. Guaranty § 77 (1943). See generally Bledsoe v. Cargill, Inc., 452 So.2d 1334 (Ala.Ct.App.1984); Shur-Gain Feed Div. v....