In a landmark decision, the Georgia Court of Appeals recently ruled that a guarantor may waive the right to require the holder of a secured debt to confirm a forceclosure sale prior to seeking a deficiency judgment. In HWA Properties, Inc. v. C&S Bank, 2013 WL 3498088 (Ga. App. July 15, 2013), the Court of Appeals was asked to consider whether a guarantor could be liable for a loan deficiency where there had not been a valid confirmation pursuant to O.C.G.A. § 44-14-161 and the borrower had been discharged. The Court of Appeals held that a confirmation following a foreclosure sale is no longer a prerequisite to suing the guarantor for a deficiency when the guaranty waives such a confirmation.
The Georgia confirmation statute, which has been on the books in Georgia since the Great Depression, requires a secured creditor to show that it bid the fair market value of the property securing the note before it can collect a deficiency. Prior to this decision, neither the Court of Appeals nor the Georgia Supreme Court had addressed the issue of whether a guarantor could contractually waive its right to require confirmation of the foreclosure sale.
While the guaranty at issue in HWA Properties did not specifically mention waiver of the provisions of the confirmation statute, the Court was persuaded by three key provisions in the guaranty to find such a waiver existed. First, the guaranty contained broad catchall waiver language, which included a waiver of, “any and all defenses, claims and discharges of Borrower, or any other obligor, pertaining to the Indebtedness, except the defense of discharge by payment in full.” The Court emphasized in its holding that the guaranty contained, “an express and comprehensive wavier of any and all defenses to his liability on the entire balance due on the note.”
Second, the guaranty expressly provided that proceeds from any collateral sold to satisfy the debt, “shall not reduce, affect or impair the liability of [the guarantor].” A literal application of this provision in the typical scenario, where the property is worth less than the balance of the debt, would seem to require that the guarantor’s liability not be lessened through the collateral liquidation process. However, because Georgia maintains a “one satisfaction” rule whereby a lender may only collect enough to make itself whole, it is unclear from the text of the decision why this language was pivotal to the Court. One possibility is that the Court considered this provision further evidence of the parties’ intent to contract out of the confirmation statute.
Lastly, the Court was persuaded by the guaranty’s language that the guarantor would remain liable for the debt, “whether or not the liability of Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision . . ..” The Court’s emphasis on this particular provision is noteworthy because it acknowledges the Court’s willingness to not only allow a waiver of the provisions of the confirmation statute, but also any judicial ruling made pursuant to the confirmation statute.
The decision could forever change the dynamic in Georgia between lenders and guarantors because HWA Properties has provided a new path by which a guarantor can remain liable for a debt even after the borrower is judicially discharged. The impact of this decision on similar waivers written into other debt instruments also will be interesting to follow as the case law in this area develops. The HWA Properties case is now on petition for certiorari to the Georgia Supreme Court. Two “borrower’s bar” amicus briefs encouraging the Georgia Supreme Court to take the case have already been filed. A decision on the petition is not expected for several months.