The
properties were then sold to Westland Liberty Village, LLC, and Westland Village
Square, LLC. Westland assumed responsibility for payment of both loans. Meanwhile,
the loans were sold to Federal National Mortgage Association (Fannie Mae).
The
loan agreements contain covenants obligating the borrowers to pay maintenance
expenses and repair the properties. The borrowers authorize lender to inspect,
and if lender determines that the properties have deteriorated then lender may obtain
a new property condition assessment (PCA) at borrowers’ expense.
Additionally
and subject to appropriate advance notice, lender may obligate borrowers to
make additional deposits to the replacement reserve account or the repair
escrow account. As well, lender has the right to require further repairs and
replacements, then use borrowers’ funds to pay those expenses.
Generally,
lender has the discretion to demand such additional repairs and additional
deposits without obtaining borrowers’ approval. Failure of borrowers to repair,
replace, and fund, is an automatic event of default in the loan agreement.
If
an event of default occurs in the loan agreement, then lender may accelerate the
loan balance, demand payment in full, and foreclose. Further, if borrowers
trigger an event of default in the deed of trust, then lender may cause a
receiver to be appointed by the court.
Although
unstated, presumably the deed of trust contains a provision stating that a default
in the loan agreement is also an event of default in the deed of trust.
After
Westland closed the two deals, Fannie Mae observed a substantial decrease in
occupancy rates and became concerned that the decline resulted from
deterioration in the condition of the properties. Fannie Mae inspected and
engaged a third party to prepare a PCA. The inspector determined that Village
Square was in substandard condition while Liberty Village was in fair to poor
condition.
Village
required repairs and replacements of $1.09 million; Liberty needed $1.75
million. Fannie Mae’s servicing agent sent Westland demand notices requiring an
aggregate deposit of $2.8 million in escrow accounts. Westland resisted.
Fannie
Mae then petitioned the district court for the appointment of a receiver.
Westland opposed.
The
district court found that Fannie Mae did not show that Westland ceased
payments. And as a consequence, a receiver was not warranted.
Fannie
Mae appealed.
On
appeal, Fannie Mae argued that Westland defaulted in the loan covenants by failing
to provide additional deposits, failing to maintain the properties, and refusing
to allow Fannie Mae to inspect. And, that no default in the payment of
principal and interest or escrow is required in order for Fannie Mae to successfully
petition the court to appoint a receiver, due to the nature of the other
defaults and Westland’s contractual agreement that receivership is an
appropriate remedy.
It
did not take long for the appellate court to determine that the district court was
entirely wrong. Fannie Mae had the right to inspect. Fannie Mae had the right
to obtain a new PCA. Fannie Mae had the right to require repairs, replacements,
and escrow deposits.
When
Westland refused to repair, replace, increase escrow, and allow inspections,
Westland defaulted. One of Fannie Mae’s default remedies, as stated in the
contracts and agreed to by Westland, is the appointment of a receiver.
The
district court abused its discretion in denying Fannie Mae’s request for a
receiver, and the order declining to appoint a receiver is reversed. See Federal
National Mortgage Association v. Westland Liberty Village, LLC and Westland Village
Square, LLC; Supreme Court of Nevada; Case No. 82174; August 11, 2022: https://scholar.google.com/scholar_case?case=2734121237971392065&q=federal+national+mortgage+association+v.+westland&hl=en&as_sdt=6,44&as_vis=1.
Question:
- Why did this Nevada district court ignore the
plain language of the loan documents? Answer: That was rhetorical;
I have no idea why FNMA was on the receiving end of a wrong decision and
was forced to appeal. If any of my readers know this answer, please share.
Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
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