Investors in delinquent loans of a failed Nevada bank have been hit with charges they’ve been suing borrowers in the wrong court.
The allegation, if sustained by a federal judge, could turn into an expensive problem for the investors.
That’s because the statute of limitations may expire on their claims, preventing them from re-filing their suits in the correct court and collecting millions of dollars of deficiency judgments against borrowers.
The charge was raised Thursday in a federal lawsuit in Las Vegas pitting an entity called "RES-NV CLARK LLC" against borrowers in a delinquent $2 million loan issued by Silver State Bank in 2007, before Silver State failed in 2008.
The borrower was Codi Investments LLC, which intended to use the money to finance the construction of homes in Las Vegas.
The Federal Deposit Insurance Corp., which had taken over Silver State, formed an entity along with investors called Multibank 2009-1 RES-ADC Venture LLC.
The FDIC then assigned the Codi loan to Multibank.
Multibank later assigned the loan to RES-NV CLARK.
RES-NV CLARK charged in a federal lawsuit motion for summary judgment that after it foreclosed on property backing the loan in November 2010, and purchased the property with a credit bid, the property was worth $680,000.
Since some $2.18 million was due on the loan at the time of the foreclosure auction, RES-NV CLARK demanded in its motion a deficiency judgment of $1.53 million against Codi Investments and two guarantors of the loan
Shawn Mangano, a Las Vegas attorney for Codi Investments, filed a response in the case Thursday asking that the suit be dismissed and that RES-NV CLARK LLC receive nothing except a requirement it pay Codi Investments’ legal fees.
The problem with the lawsuit, Mangano argued, is that the federal court has no subject matter jurisdiction in the case.
That’s because the FDIC is an owner of Multibank, which was initially the plaintiff in the suit.
"Federal courts cannot exercise diversity jurisdiction over federally-chartered corporations, such as the FDIC, because such organizations have no state citizenship," Mangano wrote in his filing. "Diversity jurisdiction requires complete diversity between the parties, which means that no plaintiff may be the citizen of a state of which any defendant is also a citizen."
The FDIC can properly be a party in federal court based on federal question subject matter jurisdiction, Mangano said.
But in the Silver State loan case, where the FDIC owns 50 percent or less of an entity, there is no basis for federal jurisdiction, he said.
Mangano pointed out a federal judge in Colorado -- and even Multibank attorneys in other cases in other states -- have made the same arguments he made Thursday.
Those arguments are that state courts, not federal courts, are the appropriate forum for the Multibank lawsuits.
"Federal courts do not have diversity jurisdiction over federally-chartered corporations such as the FDIC because such corporations have no state citizenship," U.S. District Judge Philip Brimmer in Denver ruled last year as he transferred a Multibank case from his court to state court.
Mangano charged in his filing Thursday that Multibank or related entities have "improperly invoked subject matter on this basis" in at least four other federal lawsuits filed in 2010 over Silver State loans.
"This case should be found to have been commenced with bad faith or upon circumstances that are tantamount to bad faith," Mangano wrote in his filing. "Multibank filed this action with knowledge that subject matter jurisdiction could not be asserted on diversity of citizenship grounds.
"To date, plaintiff has not provided any substantive basis upon which they believe diversity jurisdiction exists over this case – or the numerous other cases filed in this district based on diversity of citizenship grounds. Rather, plaintiffs have attempted to strong-arm defendants into accepting patently unreasonable stipulated dismissal terms," he argued.
"It will likely continue to prosecute cases and secure judgment against defendants in this district despite the defendants’ efforts to get it to take corrective action by withdrawing the motion (for summary judgment) and seeking to voluntarily dismiss this case," Mangano’s filing said. "These circumstances clearly support a finding of bad faith conduct or, at a minimum, conduct tantamount to bad faith on behalf of plaintiff and/or Multibank.
"Accordingly, the court should award sanctions under its inherent power in the form of defendants’ attorney’s fees and costs incurred in defending this action," Mangano’s filing said.
A request for comment was placed with RES-NV CLARK’s attorney at the Las Vegas office of the law firm Lionel Sawyer & Collins.
After Mangano raised the jurisdiction issue, the attorney for Lionel Sawyer & Collins on Aug. 25 sent Mangano a stipulation and draft order in which the parties would agree the case would be voluntarily dismissed.
That draft order said: " Plaintiff believes that there is subject matter jurisdiction based on diversity" and the law establishing the FDIC.
"However, the parties agree that there is a bona fide disagreement and dispute as to whether the FDIC's ownership in Multibank prevents complete diversity in the case," said the draft, which proposed that the lawsuit be dismissed and transferred to state court and that the state statute of limitations on collecting the deficiency judgment be waived.
Mangano found that stipulation and draft order for voluntary dismissal "unacceptable" and filed his own brief Thursday asking U.S. District Judge Roger Hunt to dismiss the case outright.
Mangano is hoping for a dismissal with prejudice, which would prevent re-filing of the lawsuit.
If the suit is re-filed in state court, the plaintiff may face the six-month statute of limitations (dating from the foreclosure sale) problem as well as restrictions on the amount of the deficiency judgment it could collect under a new Nevada law aimed at cutting deficiency awards where the debt was purchased at a discount, he said.