Editor’s Note #1: This post first appeared last week on Bank Bryan Cave, a top blog on regulatory, M&A, and litigation issues for those in the banking world, located at http://www.bankbryancave.com/. Given the close relationship of this post’s topic to the world of distress, we are cross-posting it here.

Editor’s Note #2: For prior posts of interest to those involved in guarantor litigation, see Ninth Circuit Decides Issue of First Impression, Protects Insider Guarantor from Preference Liability, located at http://bankruptcycave.com/ninth-circuit-decides-issue-of-first-impression-protects-insider-guarantor-from-preference-liability/.

Can a guarantor waive his right to a confirmation proceeding under Georgia law, after a non-judicial foreclosure results in a deficiency still owing? Yes.  Last week, in case closely watched by Georgia commercial real estate lenders, borrowers, and guarantors, the Supreme Court of Georgia issued its opinion in PNC Bank, N.A.  v. Smith, 2016 Ga. LEXIS 169 (Ga. Sup. Court Feb. 22, 2016). The case was before the Georgia Supreme Court on two certified questions from the United States District Court for the Northern District of Georgia.  The two Certified Questions were: (1) Is a lender’s compliance with the requirements contained in O.C.G.A. § 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?; and (2) If so, can borrowers or guarantors waive the condition precedent requirements of such statute by virtue of waiver clauses in the loan documents?

In answering the first question in the affirmative, the Georgia Supreme Court upheld its reasoning in First Nat. Bank & Trust Co. v. Kunes, 230 Ga. 888, 890-91 (1973).  The Georgia Supreme Court echoed the reasoning in Kunes by stating “that notice to both sureties and guarantors is necessary to satisfy the purpose of the confirmation statute— ‘to limit and abate deficiency judgments in suits and foreclosure proceedings on debts’ and to enable sureties and guarantors ‘an opportunity to contest the approval of the [foreclosure] sales.”

The Court’s analysis of the critical second question focused on the Georgia Court of Appeals’ ruling in HWA Properties, Inc. v. Cmty. & S. Bank, 322 Ga. App. 877 (2013), holding that a lender is entitled to pursue a guarantor for any deficiency remaining on a debt after a foreclosure, regardless of whether the lender has confirmed the foreclosure sale, if the guaranty included language waiving all defenses to collection of the debt.  As set forth in Bryan Cave’s amicus curiae brief filed on behalf of the Georgia Bankers Association,[1] a ruling by the Georgia Supreme Court upholding HWA and its progeny, Cmty. & S. Bank v. DCB Investments, LLC, 328 Ga. App. 605 (2014), will do much to correct the current abuse of Georgia’s foreclosure confirmation statute, O.C.G.A. § 44-14-16, which some commercial borrowers and guarantors have used to draw out foreclosure proceedings and prevent collection of any deficiency.  In support of this argument, Bryan Cave’s amicus brief focused on Georgia’s long standing recognition of the freedom to contract, and more specifically, the ability of a party to waive certain defenses.

Justice Melton, writing for the majority in the PNC Bank case, agreed with the reasoning in HWA and DCB Investments reiterating that “a guarantor retains the contractual ability to waive the condition precedent requirement.”  In fact, the PNC Bankopinion explicitly states “[t]his result creates an appropriate balance between the statutory protections of the confirmation statute and the freedom of a guarantor to enter contracts deemed beneficial.”  Accordingly, the Georgia Supreme Court’s opinion upholds HWA and DCB Investments by affirming that guarantors may waive compliance with the confirmation statute.

In a concurrence, Chief Justice Nahmias expressed concerns with the consequences of the decision and suggested that the legislature may wish to examine the issue. We will continue to watch both legislative and judicial activity on this issue and keep readers apprised of any further developments.