On April 17, 2017, the Supreme Court of Georgia found that defendant guarantors had waived the statutory protections under the Georgia foreclosure confirmation statute, and the lender could pursue a deficiency judgment against the guarantors, even after the lender had sought, and was denied, judicial confirmation of its foreclosure sale. York et al v. RES-GA LJY, LLC, 2017 WL 1375107.

Background

York and Drillot (the Guarantors) executed guaranties of loans secured by properties located in three different counties in Georgia. The guaranties each included a waiver which provided that the Guarantors “waive[d] any and all rights or defense based on suretyship or impairment of collateral . . . or any ‘one action’ or ‘anti-deficiency’ law…” The borrowers defaulted on their loans, and RES-GA LJY, LLC (the Lender) acquired the properties at the non-judicial foreclosure sale.

O.C.G.A. § 44-14-161 prohibits a foreclosing lender from obtaining a deficiency judgment against the borrower, or a guarantor, where the foreclosure sale has not been confirmed by the superior court. In York, the amount realized at the foreclosure did not satisfy the outstanding debt, and the Lender promptly commenced confirmation actions in the three counties in which the properties securing the loan were located in anticipation of a deficiency action against the Guarantors. In each of the three counties, however, the respective superior court denied confirmation of the Lender’s foreclosure sale, and refused to order a resale of the properties. Shortly after the Lender’s confirmation of its foreclosure was denied, the Georgia Court of Appeals issued its decision in HWA Properties, Inc. v. Community & Southern Bank, 322 Ga. App. 877 (446 SE.2d 609) (Ga. Ct. App. 2013), which held that a creditor’s failure to obtain a valid confirmation did not prevent the creditor from obtaining a deficiency judgment from the guarantor. The Lender then filed a deficiency action against the Guarantors. The trial court granted summary judgment in favor of the Lender, finding that the Guarantors had waived any defense based on the Lender’s failure to confirm the sales. The Court of Appeals affirmed, finding that the waiver of defenses based on suretyship found in the guaranties was sufficient to waive the confirmation requirement.1

Supreme Court Opinion

The Georgia Supreme Court granted the Guarantors’ petition for certiorari to address the following two questions: (1) whether the Court of Appeals erred in finding that the Guarantors waived their rights under the confirmation statute, and (2) whether the Lender retained the power to pursue a deficiency judgment against the Guarantors after the Lender sought, and was denied, judicial confirmation. 2

The Georgia Supreme Court affirmed the Court of Appeals decisions and found that (1) the Guarantors had validly waived any defense based on the Lender’s failure to confirm the foreclosure sale, and (2) the Lender did retain the power to pursue a deficiency judgment against the Guarantors, even after the Lender’s confirmation actions had been denied.

On the first issue, the Guarantors had argued that the Georgia confirmation statute was not a “suretyship” defense, and thus was not covered by the waiver because it is applicable to both borrowers and guarantors. The court disagreed and concluded that the defense extended to guarantors in O.C.G.A. § 44-14-161 is a defense based on suretyship, and the Guarantors had validly waived their rights and defenses based on suretyship. Furthermore, the court noted that the inclusion of language in the guaranties, which waived any rights and defenses of the Guarantors under “one action” and “anti-deficiency” laws, included any defenses the Guarantors might have under O.C.G.A. § 44-14-161.3

On the second question, the court rejected the collateral estoppel argument made by the Guarantors and held that the Lender was not precluded from seeking a judgement against the Guarantors, even though the Lender’s previous confirmation action had been denied. The court determined that the prior orders denying confirmation of the foreclosures were not relevant to the case, since the court had found the Guarantors had validly waived any defense based on the Lender’s failure to obtain confirmation.4 Finally the court noted that “there is nothing inconsistent about the remedy sought by [Lender] in the confirmation proceedings and the remedy sought here; in both cases the remedy ultimately sought is to obtain a deficiency judgment against the Guarantors.”5

Key Takeaways

Both the York case and Wells Fargo Bank, Nat’l Ass’n v. Baggett6, a recent case in federal court, have shown the continuing trend of the courts in Georgia to broadly construe waiver language in guaranties, rather than reading it narrowly, so as to find the language sufficient to waive the confirmation requirement of O.C.G.A. § 44-14-161.

An action on a guaranty where no confirmation was sought by the lender, or where the confirmation action was denied, raises the question of how the amount of the deficiency claim should be calculated. If the lender is the successful bidder and only bid $1 at the foreclosure sale, is the lender then entitled to the full amount of the debt, minus $1, without any consideration of the actual fair market value of the property? It was noted that at the Lender’s “suggestion,” the trial court in York calculated the Lender’s damages (deficiency) as the difference between the amount due on the notes and the higher value of the property proposed by the Guarantors’ appraiser in the confirmation hearing.7 Although the Georgia Supreme Court in York noted that the issue was outside the two questions presented in the certiorari petition, the issue of fair market value of the properties at the time of the foreclosure sale “may be relevant to the amount of damages that [Lender] may secure.”8 Given the ever-increasing number of lenders that insist on including waivers of confirmation in guaranties, it is likely that the courts will wrestle with the issue of the appropriate formula for determining a lender’s damages in deficiency actions.

As Justice David Nahmias noted in his concurrence in an earlier Georgia Supreme Court case confirming that a guarantor may contractually waive the statutory protections under the Georgia foreclosure confirmation statute, “…if the General Assembly still considers judicial confirmation of non-judicial foreclosure sales to be necessary to protect borrowers…it should avoid any uncertainty by amending the Code….”9 Presumably in response to HWA Properties, Inc. and its progeny, Senate Bill 86 was introduced by Sen. Jesse Stone (R-Waynesboro) in the 2017 session, which would have amended O.C.G.A. § 44-14-161 to provide that the requirement of confirmation of a foreclosure is not waivable by a borrower or guarantor. However, SB 86 never made it out of the Senate committee where it was assigned.

Finally, it is noted that the decision in York may open the door for lenders where a confirmation action was previously denied, but the guaranty contained a valid waiver of confirmation, and the action is not yet barred by the statute of limitations.