A recent decision by the Georgia Court of Appeals potentially could invalidate thousands of Georgia foreclosures. Georgia has the third highest foreclosure rate in the country, behind only Nevada and Arizona.

Georgia’s foreclosure notice statute, which was amended in 2008, requires that written notice of the foreclosure sale be given to the debtor “by the secured creditor” and that the notice “shall include the name, address and telephone number of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.” The Georgia Court of Appeals has now added an additional requirement: when the notice of foreclosure is sent by an agent or servicer of the secured creditor, the notice must identify the secured creditor.

In Reese v. Provident Funding Associates, LLP, Case No. A12A0619, the plaintiffs alleged that the notice of foreclosure sent by Provident Funding did not comply with Georgia law. The notice identified Provident as the “lender” and stated that Provident was authorized to negotiate, amend, and modify the mortgage. However, Provident admitted that it did not hold the note evidencing the mortgage loan. After funding the loan, Provident sold and transferred the note to another company, and Provident continued to service the loan on behalf of the new note holder. In response, Provident argued that that the foreclosure notice was proper because, as the servicer of the loan, Provident could properly send notice on behalf of the secured creditor.

In a 4-3 decision, the Court of Appeals found that the notice of foreclosure contained material misrepresentations because it falsely identified Provident as the secured creditor and failed to identify the third-party note holder as the true secured creditor. As a result, the Court held that the foreclosure sale was invalid. In reaching this decision, the Court relied on a February 2012 decision from the District Court for the Northern District of Georgia, Stubbs v. Bank of America, 1:11-CV-1367-AT (N.D. Ga. Feb. 16, 2012) (applying Georgia law).

Although the requirement that a notice of foreclosure identify the “secured creditor” is not particularly burdensome, this requirement does not appear in the plain language of the statute. Accordingly, the Court’s decision likely will make thousands of foreclosures susceptible to challenge.

Moreover, the Court of Appeals’ decision may have a significant, and possibly unintended, impact on loans owed by Freddie Mac or Fannie Mae. When describing who the secured creditor was in Reese, the Court stated that the third-party purchaser of the note “was the secured creditor, i.e., owner of the loan.” By defining the secured creditor as the “owner” of the loan instead of the “holder” of the promissory note, the Court appears to deviate from a long-recognized distinction between holders and owners of promissory notes.

Georgia law, which has adopted the Uniform Commercial Code, explicitly provides that the holder of a note, i.e. the party entitled to enforce it, is not necessarily the owner of the note. This distinction is critical for a significant number of Georgia foreclosures because while loan servicers and lenders often hold the note (and therefore, are the secured creditors under the Georgia Commercial Code), entities such as Freddie Mac and Fannie Mae “own” the note. Although the Court likely did not intend this outcome – the Court never discusses or cites to the Commercial Code – the possible inconsistency between the Georgia Commercial Code and the Court’s discussion in Reese could be exploited by debtors to challenge otherwise valid foreclosures.

Given the potential impact of this decision on thousands of completed foreclosures and the clear import to future foreclosures, especially those involving loans owned by Freddie Mac or Fannie Mae, Reese is an important decision for every loan servicer doing business in Georgia. We will be closely watching this case in the event Provident appeals to the Georgia Supreme Court.