Atlanta litigators Matthew Ames, Walt Jones, and Jamie Cohen recently received a favorable decision from the Georgia Supreme Court, which confirmed the rule that a secured creditor cannot be forced to accept possession of the collateral in satisfaction of an indebtedness when the creditor did not, in fact, seek this relief.  In Hamilton State Bank v. Nelson, et al., S14A1892, (Ga. Feb. 16, 2015), the Georgia Supreme Court held that, under Georgia law, the mere tender of possession of collateral by a debtor to a creditor does not transfer possession unless and until possession is accepted by the transferee.  In support of its holding, the Georgia Supreme Court referenced several landlord-tenant cases holding that a tenant’s abandonment of possession of the leased premises does not in and of itself operate as a “surrender” of the premises, unless and until the landlord accepts the surrender, as well.  In Nelson, the trial court directed the borrowers to tender possession of the property to the Bank, which the Supreme Court held was not tantamount to effectively transferring possession of the property unless the creditor accepted the tender.  While this makes practical sense (since a tenant or mortgagor cannot simply hand over his keys to a landlord or lender and effectively transfer possession of the leased or mortgaged property), it is helpful for lenders to see this position solidified by the Georgia Supreme Court.

In Raysoni v. Payless Auto Deals, LLC, et al., No. S13G1826 (Ga., November 17, 2014), a purchaser of a used vehicle alleged that Payless Auto Deals, LLC (“Payless”) and its salesman orally misrepresented that the vehicle had not been in an accident, when, in fact, it had previously sustained significant frame damage.  Before purchasing the vehicle, the purchaser had been told by a salesperson that nothing was wrong with the vehicle and was also presented with an inaccurate Carfax report which stated the same.  In the underlying action, Payless moved for judgment on the pleadings, contending that the terms of the written contract rendered any such reliance unreasonable as a matter of law, in part because of certain disclaimers in the contract, which read, in fine capitalized print: “NO SALESMAN VERBAL REPRESENTATION IS BINDING ON THE COMPANY;”  and “WE STRONGLY RECOMMEND CUSTOMERS SHOULD GET VEHICLE INSPECTED BY A MECHANIC OF THEIR CHOICE BEFORE MAKING THE PURCHASE.”

The trial court awarded, and the Court of Appeals affirmed, judgment on the pleadings in favor of Payless.  However, the Georgia Supreme Court reversed this ruling and held that the purchaser was entitled to move forward with his fraud claim.  The Georgia Supreme Court noted that the disclaimers contained in the sales contract amounted to a partial merger clause and could only prevent reliance on verbal representations.   However, the purchaser relied not only on verbal representations that the car was accident-free, but on a faulty Carfax report, as well.  The Supreme Court found that the contract disclaimers are not absolute or unequivocal enough to warrant judgment on the pleadings, particularly because the purchaser relied on both written and verbal misrepresentations. 

In a footnote, Justice Blackwell noted that although the contract disclaimer language was capitalized, it also appears in extremely fine print (which plaintiffs estimate at 5.6 points), making it difficult to read.  Moreover, the Court noted, the capitalized disclaimers are mixed with a “hodgepodge” of other seemingly unrelated, boilerplate contractual provisions – all of which are capitalized and in the same font. 

 As lenders frequently rely on waiver language, merger clauses, and other boilerplate contract disclaimer language when enforcing promissory notes and guaranties, it is interesting to consider how this ruling might potentially expand to impact these sorts of contract terms.  Although the Georgia Supreme Court did not specifically hold that the fine-print disclaimer language is unreasonable or renders the contract or these terms unenforceable, it did note that the language was difficult even for the “author of this opinion” to read.  The Court’s disfavor towards this sort of fine-print warranty is clear.  Georgia Lenders might want to avoid fine print disclaimers, and be sure to clearly label and express such contractual provisions in order to ensure they will be enforced.

In BAC Home Loans Servicing, L.P. v. Wedereit 328 Ga. App. 566 (2014), the Georgia Court of Appeals affirmed a trial court’s sua sponte granting of summary judgment for breach of contract based upon the lender’s failure to give proper notice prior to accelerating the loan at issue.  The borrower filed suit for wrongful foreclosure, based upon allegations that the lender did not own the note and had failed to give proper notice of the foreclosure sale.  The borrower also brought claims for breach of contract, based upon the lender’s failure to modify the terms of the mortgage.  The borrower did not specifically allege that the lender breached the deed at issue by failing to give pre-acceleration notice to cure. 

On appeal, the Court of Appeals first held that the trial court was permitted to make this sua sponte finding, as the lender was given the opportunity to respond to borrower’s allegation of lack of notice, generally, in its complaint.  Since the construction of a deed presents a question of law which the Court of Appeals must review de novo, the Court of Appeals specifically examined the Deed at issue and found that it listed several very specific notice requirements, including a 30-day cure period during which the borrower may cure the default prior to acceleration of the amounts due and owing under the note.  While BAC’s counsel had sent two default letters to the borrower, neither letter gave the borrower notice of the action required to cure the default, the date by which to cure, that failure to cure would result in acceleration, or that the borrower had a right to reinstate after acceleration, and accordingly, these letters did not comply with the Deed’s notice provisions.   

The Court rejected the lender’s argument that a premature demand for accelerated payment can constitute sufficient notice if the debtor is given adequate time to cure the default and fails to do so, noting that here, the Deed required the lender to send out a very specific notice giving the borrower the opportunity to cure prior to acceleration.  In upholding summary judgment on this claim, the Court noted that the borrower still has to show his damages resulting from the lender’s failure to give pre-acceleration notice in order to prevail on its claim for breach of contract.   The Court also granted the borrower leave to amend the Complaint to state a claim for wrongful foreclosure based on the lack of pre-acceleration notice.

Lenders should always pay careful attention to the language of the operative Deed when foreclosing, particularly to any specific default or notice to cure provisions, as these can differ among loan documents.   A lender’s failure to specifically comply with the default or notice provisions in a Deed may give rise to a wrongful foreclosure claim – whether the borrower specifically makes this allegation or not.

In Bates v. JP Morgan Chase Bank, N.A., No. 13-15340 (11th Cir. Sept. 30, 2014), the Eleventh Circuit ultimately affirmed summary judgment against the borrower, but noted that a lender’s failure to strictly comply with the regulations issued by the Department of Housing and Urban Development while foreclosing on an FHA-insured mortgage could constitute breach of contract.

The borrower filed suit in district court, to stop an imminent foreclosure, alleging violations of RESPA, conversion, wrongful attempted foreclosure, and trespass, and breach of contract for failure to comply with HUD regulations. The district court granted summary judgment against the borrower as to all claims.

On appeal, the Eleventh Circuit noted that neither Georgia courts nor the Eleventh Circuit have directly addressed the question of whether a mortgagor has a cause of action under state law for breach of contract where the deed expressly conditions non-judicial foreclosure on compliance with HUD regulations:

In view of Georgia’s general rule that powers of sale in deeds are to be construed strictly, see Ga. Code Ann. § 23-2-114, we believe Georgia courts would hold that HUD regulations clearly referenced in a deed as conditions precedent to the power to accelerate and the power of sale could form the basis of a breach of contract action.

The Court rejected the lender’s argument that the preexisting duty rule bars the breach of contract, noting that the preexisting duty to comply with HUD regulations was owed to the government, not to the borrower. Moreover, a promise to perform a preexisting duty owed to a third person who is not a party to the contract can give rise to an enforceable obligation. Ultimately, because the borrower failed to put forth any evidence of damages caused by the purported breach of these contract terms, the Court upheld summary judgment.

Although the lender ultimately prevailed here, lenders doing business in Georgia should ensure that they have processes in place to comply with all applicable HUD regulations prior to foreclosure.

A surprising ruling by the Georgia Court of Appeals may relax Georgia law’s requirement that foreclosure sales must be confirmed by the courts before the lender can pursue a deficiency against a guarantor of the debt.  O.C.G.A. § 44-14-161 provides, in part, that:

When any real estate is sold on foreclosure, without legal process, and under powers contained in security deeds, mortgages, or other lien contracts and at the sale the real estate does not bring the amount of the debt secured by the deed, mortgage, or contract, no action may be taken to obtain a deficiency judgment unless the person instituting the foreclosure proceeding shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.

O.C.G.A. §44-14-161(a).  This provision has long been construed to require a court to confirm a foreclosure sale price before a financial institution could obtain a deficiency judgment against either the borrower or the guarantor.  See United States v. Yates, 774 F.Supp. 1368 (M.D. Ga. 1991).

 This rule was reexamined in HWA Properties, Inc., et al. v. Community & Southern Bank, 322 Ga. App. 877 (2013).  In HWA, the bank first filed suit in Georgia state court to collect on a promissory note from a borrower and guarantor (the “Deficiency Action”).  Shortly after that suit was filed and while it was still pending, the bank conducted a non-judicial foreclosure on the real property securing the bank’s loan and then filed a separate action to confirm that foreclosure (the “Confirmation Action”) to perfect its right to pursue the deficiency.   The trial court then confirmed the foreclosure sale, and the borrower and guarantor immediately appealed.  While that appeal was pending, the trial court granted summary judgment for the bank in the first-filed Deficiency Action, which the borrower and guarantor also appealed.

The Court of Appeals then reversed the lower court’s decision in the Confirmation Proceeding, holding that the trial court had relied on inadmissible evidence in confirming the sale.  The Borrower and Guarantor then filed a supplemental brief in the Deficiency Action appeal, arguing that the invalidation of the Confirmation Proceeding decision necessarily invalidated the trial court’s summary judgment for the bank in the Deficiency Action pursuant to O.C.G.A. §44-14-161(a).

The Court of Appeals agreed that the borrower could not be deemed liable for a deficiency judgment under Section 44-14-161 because the judicial confirmation had been reversed.  However, the Court of Appeals found that the guarantor could, in fact, be held liable for the deficiency, and that a confirmation of the foreclosure sale of any collateral secured by the note was not necessarily required in order to obtain a judgment against the guarantor.

 The court’s holding hinged on the language of the guaranty agreement, which contained a broad waiver of the guarantor’s defenses.  Among other things, the Guaranty provided that: “no act or thing, except full payment and discharge of all indebtedness, shall in any way exonerate [guarantor] or modify, reduce, limit or release the liability of [guarantor].”  Most importantly, the guaranty agreement stated that “[guarantor] expressly agrees that [he] shall be and remain liable, to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure of any mortgage or security interest securing Indebtedness,” and that the liability of the guarantor should not be affected by any of Lender’s actions, specifically, by any enforcement of collateral security, any foreclosure of any collateral security, or any acceptance of collateral security for any or all of the indebtedness.

It remains to be determined just how dramatically HWA will change Georgia’s confirmation requirements, as this case certainly raises a question as to how specific a ‘waiver of defenses’ must be in order for a Lender to be able to bypass the confirmation statute entirely.  Judges might be hesitant to completely ignore the confirmation statute’s well-known process, particularly if it means granting a judgment against the guarantor – which is typically an individual – without the added protections it affords.  However, the ruling is clear.  At the very least, the Court of Appeals has indicated that a guarantor’s waiver of defenses is enforceable.  Lenders who are active in Georgia might consider reviewing the language of their unconditional guaranties to ensure that they contain language similar to that used in HWA.  It may save the lender from unnecessary litigation expense.