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.