foreclosure bank ownedDid the Georgia Supreme Court effectively repeal the foreclosure confirmation statute by affirming the rights of lenders to include waivers in their standard loan documents for both borrowers and guarantors?  That appears to be the case.  In PNC Bank, NA v. Smith, No. S15Q1445, 2016 WL 690406 (GA 2016) (download .pdf), the U.S. District Court for the Northern District of Georgia asked the Georgia Supreme Court to answer two questions regarding the Georgia foreclosure confirmation statute (O.C.G.A. §44-14-161):

(1) Is a lender’s compliance with the requirements contained in OCGA § 44–14–161 a condition precedent to the lender’s ability to pursue a borrower and/or guarantor for a deficiency after a foreclosure has been conducted?

(2) If so, can borrowers or guarantors waive the condition precedent requirement of such statute by virtue of waiver clauses in the loan documents?

(emphasis added).  The Court answered both questions in the affirmative and, at least for the second question, this should definitely be a cause for concern for both borrowers and guarantors in foreclosure.

The confirmation statute, in general, adds a layer of protection for borrowers after their property has been foreclosed.  In order for the lender (or assignee) to pursue a deficiency claim against the borrower or guarantor the lender has to “confirm” the foreclosure sale by filing an action in the superior court within 30 days of the foreclosure date.  The lender is required to present evidence that the property was sold for its true market value at the foreclosure sale.  See § 44–14–161.  In practice, courts confirm virtually all sales as bringing the “true market value” if the sale was properly conducted, but it was the 30 day requirement that provided the greatest protection.  Miss that and the lender was forever barred from pursuing a deficiency judgment.  Thus, it is no surprise that the Georgia Supreme Court affirmed this in their answer to the first question.

The answer to the second question is far more important going forward, and likely will have the effect of writing out the confirmation statute by contract.  In the PNC case, the basic facts are:

In the separate guaranties, each of the guarantors pledged to remain unconditionally liable on the indebtedness, irrespective of Hoschton’s [the primary borrower’s] own liability or ultimate discharge. In addition, the guarantors waived their legal and equitable defenses, other than payment of the indebtedness. The guarantors waived “any and all rights or defenses … based on any ‘one action’ or ‘antideficiency’ law or any law which prevents [PNC] from bringing any action, including claim for deficiency against [the guarantors], before or after [PNC’s] completion of any foreclosure action….” The guarantors also acknowledged PNC’s right of foreclosure and agreed to remain liable for the indebtedness even if post-foreclosure confirmation did not occur.

After foreclosure of the real property, PNC did not file a confirmation action but did pursue deficiency claims against the guarantors based on the waiver. The guarantors defended on the grounds that PNC did not comply with the confirmation statute.  The Georgia Supreme Court sided with the lender.  With a fairly short analysis, the Court cited two cases from the Georgia Court of Appeals: HWA Properties, Inc. v. Community & Southern Bank, 322 Ga.App. 877, 887, 746 S.E.2d 609 (2013) and Community & Southern Bank v. DCB Investments, LLC, 328 Ga.App. 605, 760 S.E.2d 210 (2014).  In both cases, the Court of Appeals upheld waivers in guaranty contracts.  The Supreme Court found:

In doing so, the the Court of Appeals noted that the result is in line with the fundamental principle that the freedom of contract is sacrosanct, and that freedom should not be limited absent some important public policy reason. Id. at 610(2), 760 S.E.2d 210. We agree. This result creates an appropriate balance between the statutory protections of the confirmation statute and the freedom of a guarantor to enter contracts deemed beneficial. See, e.g., Redman Industries v. Tower Properties, 517 F.Supp. 144 (N.D.Ga.1981).

Therefore, for all of the reasons set forth above, we find that a lender’s compliance with the requirements contained in OCGA § 44–14–161 is a condition precedent to the lender’s ability to pursue a guarantor for a deficiency after a foreclosure has been conducted, but a guarantor retains the contractual ability to waive the condition precedent requirement.

Thus, freedom of contract prevails.  Note that while this case and the two Court of Appeals cases involve personal guaranties, the question certified by the District Court expressly includes borrowers and guarantors.

Justice Nahmias concurred in the outcome, but expressed concern:

I also agree with the Court’s conclusion today that, under current law, a guarantor may, through clear and explicit contractual language, waive the confirmation protection afforded by OCGA § 44–14–161. Given Kunes’s [First National Bank & Trust Co. v. Kunes, 230 Ga. 888, 199 S.E.2d 776 (1973)] equation of guarantors, sureties, and borrowers, it would seem to follow that borrowers too may waive the protections the confirmation statute affords them. 1 And if that is the case, then it may well be—given the imbalance in bargaining power between most lenders and most borrowers—that before long, virtually every security deed in Georgia will include such a waiver, and the confirmation requirement of § 44–14–161 could become a dead letter. It may be that the General Assembly no longer considers judicial confirmation of nonjudicial foreclosure sales necessary to protect borrowers from deficiency judgments, but if borrowers are to be so protected, the legislature should consider regulating or prohibiting such contractual waivers by borrowers (and perhaps guarantors as well).

I am quite sure Justice Nahmais is correct.

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