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Matt is a Partner in Balch & Bingham’s Atlanta, GA office.  He specializes in resolving business disputes and represents clients in a wide array of cases in state and federal courts. Matthew is an experienced trial lawyer whose practice includes all facets of business litigation. His specific areas of focus are financial services litigation, intellectual property, and shareholder disputes.

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.

On July 11, 2014, the Georgia Court of Appeals issued an important decision relating to foreclosure confirmations, cross-collateralization, and guaranties, Community Southern Bank v. DCB Investments, Inc., 2014 WL 3377172 (Ga. App. 2014).  While the decision included some potentially troubling language arguably expanding the “inextricably intertwined” doctrine, the Court ultimately found for the lender allowing pursuit of guaranties because of certain waiver language in the guarantees.  The decision bears close analysis, particularly for drafting of loan documents.  The underlying dispute deals with three loans secured by three deeds on two properties, one of which is in Douglas County and the other of which is in Carroll County.  The opinion is silent on whether the properties were intended to comprise one large development or two separate ones (Carroll and Douglas are contiguous but there is no mention of whether the subject properties themselves are contiguous).  There was language in the note relating to the Douglas County property indicating that it was “crossed” with the other two notes (no discussion of whether that means “cross-defaulted” or “cross-collateralized” or both), and language in the two notes secured by the Carroll County property that they were “cross-defaulted” with the Douglas County loan and the other Carroll County loan.  There was also language in each of the security deeds that the property pledged thereby was intended to secure the other two notes.  After the borrower defaulted on the Douglas County loan, the lender foreclosed the Douglas County property but did not confirm that sale.  Nearly six months later, the bank failed and Community & Southern Bank (CSB) took over the loan.  About a year after taking over the loan, CSB foreclosed the Carroll County property and successfully confirmed that sale.

Less than a week after confirming the Carroll County foreclosure, CSB sued the borrower and guarantors on the deficiency remaining as to all three notes.  The parties each filed motions for summary judgment and the court ruled for the obligors, finding that the failure to confirm the Douglas County foreclosure barred the bank from seeking the deficiency because the loans were inextricably intertwined.  The court also barred the bank from pursuing the guarantors under the same reasoning.  CSB appealed and the Court of Appeals affirmed in part and reversed in part.

The Court of Appeals found that the loans were indeed inextricably intertwined and that the failure to confirm one of the foreclosures barred the bank from pursuing the deficiency on any of the loans.  The Court of Appeals reasoned that

although there were three separate promissory notes that were secured by two separate parcels of property, all three notes were executed on the same date by [the guarantors, who were the initial borrowers – they subsequently substituted their entity as borrower] and the same creditor and were executed for the same purpose of developing the properties at issue.  In addition, each note contained cross-default language that specifically referenced the other two notes. Furthermore, as previously noted, to unequivocally ensure that all three notes were subject to cross-default and cross-collateralized, on the same day that the notes were executed, the parties also executed the two modification agreements, which explicitly stated that both the Douglas and Carroll County properties secured all three notes. Given these circumstances, we conclude that the three notes were indeed inextricably intertwined.

This first part of the above analysis may be read to suggest that if two loans are closed on the same day with the same borrower and the same lender with same general purpose (e.g., development), the loans could be construed as “inextricably intertwined” even though they relate to otherwise-unrelated projects on separate properties.  In other words, this may be an expansion of the doctrine of “inextricably intertwined” loans that could have far reaching implications for lenders seeking to resolve bad loans secured by property.  The Court of Appeals could have relied on clear language in the loan documents linking the loans and their collateral.  The parties intertwined the loans by contract, and therefore a detailed analysis of whether the loans were inextricably intertwined was unnecessary.

The good news for lenders: the Court then followed the HWA v. Community & Southern Bank decision in holding that the Bank could pursue the guarantors due to waiver language in the Guarantor’s respective guaranties.  The Court seemed to rely more on the specific waiver of any defenses to liability on the notes rather than the broad waiver language present in most guaranties used by Georgia banks, including the guaranties in this dispute.  This is consistent with HWA and generally good for banks, though it could lead some courts to narrow the scope of these decisions by requiring specific confirmation waivers rather than allowing the broad waiver language to carry the day.

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.