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.