Court-managed foreclosure program may violate Nevada Constitution

Foreclosure mediation program uses ‘powers of the Executive Branch,’ could force recusal of state Supreme Court justices

Is the statewide home-foreclosure modification program run by the Nevada Supreme Court actually unconstitutional?

Nevada Second District Judge Patrick Flanagan wants to know. And since it’s a real question that could seriously impact the State of Nevada in multiple, powerful ways, he’s joined the state, represented by the Nevada attorney general, and the program’s administrator to a case being heard this afternoon in Washoe County.

The Foreclosure Mediation Program (FMP) was passed by the 2009 Nevada Legislature — unanimously in the Assembly and 17-4 in the Senate — as Assembly Bill 149. Becoming law as NRS 107.086, the act allows delinquent borrowers threatened with foreclosure to request and receive third-party mediation with their lenders (whether or not the lenders actually want mediation) — and possibly receive modification of their loans.

AB 149 put the entire program under the administration of the Nevada Supreme Court, which not only assigns the mediators but also oversees the Mediation Administration that governs the program.

That’s the basic problem, argues the legal brief submitted by plaintiff Deutsche Bank: AB 149 unconstitutionally “authorizes” the judicial branch to exercise executive branch powers — violating the Nevada Constitution’s separation-of-powers clause, Article III.

Because of multiple and substantive activities by the Supreme Court that “are properly in the province of the Executive Branch,” writes plaintiff’s attorney Michael Brooks, high court justices are at serious risk of violating several different judicial canons, including Canon 2.2, regarding impartiality and fairness, and Canon 2.9, against one-party communications.

According to Brooks’ supplemental brief, those substantive activities include “rulemaking not incident to a judicial proceeding; hiring of an FMP Administrator; and the hiring and training of mediators, just to name a few….”

Moreover, since any district court decision would most likely be followed by appeals to the Nevada Supreme Court, the high court would itself most likely be in a quandary: Since the justices themselves formed and now administer the mediation program, aren’t they all irretrievably compromised and necessarily required to recuse themselves from hearing the case?

Nevada thus could face the bizarre prospect of an entirely empty Supreme Court bench.

“This would be a big question for the Court and really put them on the spot,” said Thomas McAffee, law professor at UNLV’s Boyd School of Law. “There’s no particular precedent for this type of case and there doesn’t appear to be room for the federal court to jump in.”

McAffee thinks the FMP should be ruled unconstitutional but was doubtful the courts would rule against it.

“Acts of legislation receive a presumption of constitutionality in the courts,” McAffee said. “The courts could be pretty dismissive of [the case] and just drag it out.”

The defendant-borrower in the case, John D. Truex, of Reno, is represented by Carson City-based attorney Wayne Pressel, who argues that because “a foreclosure is a legal dispute at its core,” the Foreclosure Mediation Program is constitutional. Moreover, because state lawmakers passed AB 149, “it is the homeowner’s right to require a mediation.”

Pressel also argues that banks have “no significant rights at risk in the mediation,” other than the risk of being sanctioned by the courts on grounds of bad faith and non-compliance with their mediation agreements.

But the issue of the constitutionality of the State of Nevada Foreclosure Mediation Program is much bigger than the dispute between Truex and Deutsche Bank.

Flanagan, in his order joining the State of Nevada to the case, wrote:

[Because] this case raises substantial constitutional issues that impacts (sic) the Foreclosure Mediation Program as a whole … the State should be provided the opportunity to weigh in. If this Court were to ultimately agree with Petitioner's argument, it would effectively shut down the Foreclosure Mediation Program, at least temporarily, and call into question the validity of prior mediations. It would impair the State's interest in performing a Legislative mandate, would impede the Legislature's intentions in enacting NRS 107.086 and could lead to liability by the State without providing the State the ability to defend itself if it is found that the Administrator of the Foreclosure Mediation Program has acted unconstitutionally and wrongfully prevented financial institutions from exercising their statutory rights under NRS 107.080.

 Flanagan is the sole judge in Northern Nevada assigned to hear foreclosure mediation cases. His counterpart in Southern Nevada, Donald Mosley, has repeatedly appeared in news reports involving the issue of the mediation program’s constitutionality.

According to an October 2010 Las Vegas Review-Journal report, “Mosley said that shortly after he and Washoe County District Judge Patrick Flanagan were chosen to hear foreclosure matters they determined the Legislature's approach was unconstitutional.

“You can't take people's property without due process,” the Review-Journal reports Mosley saying. “The Legislature gave us authority, but we judges determined it was not constitutional. You can't just wave a magic wand and start taking money from people.”

Advancing the argument that the Supreme Court’s activity in the program is primarily administrative, attorney Brooks cited Kuhl vs. Carrington Mortgage, a Deutsche Bank case heard in the district court in January. In it, the court recognized the Foreclosure Mediation Program as an “Administrative Agency,” which, wrote Brooks, “demonstrates the constitutional dilemma that the FMP has created, as such an agency should be administered by the executive branch of the government.”

Should the Second District Court rule in Deutsche Bank’s favor, the foreclosure-modification program would immediately become unconstitutional in Washoe County.

When former Assembly speaker Barbara Buckley, who introduced the program’s enabling legislation in 2009, responded to Nevada Journal’s requests for comment, she did not defend the program’s constitutionality.

Rather, she emphasized that “the legislation was approved by a landslide vote by both parties of the Nevada Legislature,” noting, “We are ground zero in the foreclosure crisis with the highest foreclosure rate in the nation.”

After two years, the mediation program’s success remains questionable. During the 2009 session, then-speaker Buckley stated, “It will be hard to estimate how many homeowners will take advantage of this mediation.”

However, she told Nevada Journal that “The good news” is that “out of 10,439 mediations, 52 percent resulted in agreements. This is an incredible result — and a real tribute to the lenders and homeowners in those cases.”

In 2009, Buckley used the “best guestimate” from the Center for Responsible Lending, which “guestimated” the program would save 17,700 homes and $1.6 billion.

After the program’s first year, the program reported 3,860 mediation sessions, in which a third of the lenders didn’t show during the sessions. No financial reports were released.

In July, the Reno Gazette-Journal filed numerous public-records requests with the program to review its effectiveness but discovered “incomplete data and a far-reaching confidentiality policy that encompasses nearly all of its records.”

Citing attorney-client privilege and confidentiality, the Supreme Court’s administrator for the program honored only three of the RGJ’s 16 records requests.

Keith Tierney, a Reno lawyer and former mediator, has since become one of the program's most vocal critics. The Gazette-Journal quotes him as saying, “For a program designed to get more accountability from lenders, the lack of accountability is appalling.

“They say they have all these statistics and information and when you ask them to release it, they say most of it is confidential,” said Tierney. “That's what the program is set up to do. So, why are they hiding all this?”

During the 2009 session, NPRI policy analyst Geoffrey Lawrence criticized Buckley’s legislation soon after its introduction.

“Mortgage companies, who would be forced to assume all of the home buyer's risk under the Buckley plan [AB 149], would likely respond to this change in the incentive structure by refusing to make new loans,” Lawrence wrote. “This means that the Buckley plan would push interest rates on home loans up to unprecedented levels.”

The Foreclosure Mediation Program isn’t the first Nevada-related mortgage program taken to court. Earlier this year, the Reno-based law firm Hager and Hearne challenged MERS, the Mortgage Electronic Registration System, in a California court for “robo-signing” thousands of bank notes without proper authorization.

If the District Court doesn’t rule today, it’s likely the court will issue an extended briefing for a later date or move the matter under submission, according to UNLV’s McAffee.

 

Steven Miller is the managing editor and Kyle Gillis is an investigative reporter on Nevada Journal, a publication of the Nevada Policy Research Institute. For more in-depth reporting, visit http://nevadajournal.com/ and http://npri.org/.

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