CARSON CITY — The attorney for homeowners in the Wells Fargo v. Renslow case defended the constitutionality of Nevada’s controversial Foreclosure Mediation Program on Friday, asserting that the Legislature’s “police powers” during an emergency trump the U.S Constitution’s contract clause.
“In response to the crisis created by the down-turn in the real estate market coupled with the vast number of questionable loans made by lenders, the Nevada legislature enacted legislation modifying the requirements for a lender to use [Nevada’s] non-judicial foreclosure process,” wrote attorney Carole Pope in her response.
“A clear emergency existed that required attention to protect and promote the welfare of Nevada’s citizens as well as preserving the real estate market to some degree.”
Pope cited the 1978 U.S. Supreme Court case Allied Structural Steel v. Spannaus, which recognized a state’s residual authority under its police powers to intervene in and modify contracts:
First of all, it is to be accepted as a commonplace that the Contract Clause does not operate to obliterate the police power of the States. “It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the State from exercising such powers as are vested in it for the promotion of the common weal, or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected. This power, which in its various ramifications is known as the police power, is an exercise of the sovereign right of the Government to protect the lives, health, morals, comfort and general welfare of the people, and is paramount to any rights under contracts between individuals.”
Stating that Nevada’s real estate bubble was a “clear emergency,” Pope wrote that the Nevada Legislature was “merely exercising its police powers in a limited fashion to assure that lenders take the mediation process seriously.”
Thomas McAffee, a constitutional law professor at the University of Nevada, Las Vegas’ Boyd School of Law, said Pope, in behalf of the Renslows, presented a “plausible argument” and that police powers fall under the “general legislative powers” of the Legislature.
“The basic idea is that the Legislature can enact any law they think will promote the welfare of the people so long as it’s not prohibited by the Constitution,” said McAffee. “The difficulty is the concept of separation of powers places an implicit limitation on what can be passed.”
Pope addressed Wells Fargo’s separation-of-powers argument in her response, asserting that the mediation program presents a “justiciable controversy,” should the lender act in bad faith, and that “the judiciary is the proper branch of government to oversee a dispute resolution program designed to resolve such controversies.”
Pope gave a step-by-step argument to illustrate her point:
In this type of matter, 1) the lender claims a right to foreclose, which the homeowner contests; 2) the interest between lenders and homeowners are adverse; 3) the homeowner has a legal interest; 4) the filing of Notice of Default makes the action ripe for decision by the judiciary.
Wells Fargo originally argued the mediation program was an administrative agency, as it had been defined in a May 2011 Second District Court ruling. As such, said the bank’s attorneys, the program had been unconstitutionally located within the state’s executive branch, rather than the judiciary.
The judge who authored the definition, Patrick Flanagan, subsequently repudiated that definition in an August case brought by Deutsche Bank, which also challenged the Foreclosure Mediation Program’s constitutionality.
Flanagan’s August ruling could be seen as having alluded to government’s police power, although it did not explicitly cite it:
The Foreclosure Mediation Program is an example of all three branches of government, Legislative, Executive, and Judiciary, working to meet the needs of its citizens who face an unprecedented crisis of epic proportions.
One of the issues not addressed in the response of the Renslows’ attorney is whether Nevada Supreme Court justices are obligated to recuse themselves from hearing the case, given that they oversee the mediation program and helped craft it.
According to the Supreme Court Clerk’s office, the reply brief from Wells Fargo is due Jan. 3, 2012.
Snell and Wilmer, the law firm representing Wells Fargo, declined to comment.