Loan Guaranties and Deficiency Judgments

By George Bobo

Key Point. A loan guarantor may waive a deficiency action under Georgia law in which case the lender may sue the guarantor without confirming the foreclosure and years after the foreclosure takes place.

When a lender receives proceeds of from a foreclosure sale less than the indebtedness owed it is said to create a deficiency.

Most states [1] have some form of “anti-deficiency” law which restricts personal judgment for a deficiency and / or governs the fairness of the foreclosure process and the way collateral is valued at the sale.

In the depression of the 1930’s value of real estate had drastically fallen. It was the frequent practice of lenders to bid in the real estate collateral at the foreclosure sale for a small part of the total debt, recover the collateral (there were often no bidders but the lender), and still hold the borrower liable for the remainder of the debt.

Georgia’s Deficiency Statute

In 1935 the Georgia Legislature passes Georgia’s “anti-deficiency” law which is embodied in Official Code of Georgia Annotated (“OCGA”) §44-14-161 and states that:

“(a) 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 proceedings 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.

(b) The court shall require evidence to show the true market value of the property sold under the powers and shall not confirm the sale unless it is satisfied that the property so sold brought its true market value on such foreclosure sale.

(c) The court shall direct that a notice of the hearing shall be given to the debtor at least five days prior thereto; and at the hearing the court shall also pass upon the legality of the notice, advertisement, and regularity of the sale. The court may order a resale of the property for good cause shown.”

Thus, if the true market value of the property at sale is insufficient to pay the full debt secured, a lender may not seek a deficiency unless a lender first has the foreclosure confirmed. The confirmation action must be begun within 30 days of the foreclosure sale. The court must find that the evidence proved that the property brought its true market value at foreclosure sale, and the sale was regularly conducted pursuant to Georgia law (legally required notice to borrower, advertisement of sale, and procedure at the public auction). “True market value” is often referred to in case law as fair market value, and is usually established at the confirmation hearing by testimony of a lender’s appraiser, rebutted in a properly prepared defense by testimony from the borrower’s appraiser. Establishment of fair market value in the time of a recession such as what transpired beginning in 2007 can prove difficult, and lenders often fail to confirm the sale as a result. Without a confirmation, a lender cannot seek a deficiency.

The statute protects both borrower and loan guarantor unless the guarantor has waived the requirement that the foreclosure be confirmed. Loan guaranties often contain waiver language of some kind.

A Guarantor May Waive Deficiency Action

In 2013 in the landmark case of HWA Properties, Inc. v Community & Southern Bank, 322 Ga. App. 877 (“HWA”), the Georgia Court of Appeals held that a guarantor can contractually waive its right to require the lender to confirm a foreclosure sale as a pre-condition to pursuing a deficiency judgment. The guaranty executed by the guarantor in that case contained the following statement: “[Albright] 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, whether or not the liability of Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. [Albright] shall remain obligated, to the fullest extent permitted by law, to pay such amounts as though the Borrower’s obligations had not been discharged.”

In the HWA case, the lender had unsuccessfully tried to confirm the foreclosure sale, but had also filed suit against the guarantor on his guaranty agreement. The court concluded that “lender’s failure to obtain a valid confirmation of the foreclosure sale pursuant to OCGA §44-14-161does not impair its authority to collect the difference between the amount due on the note and the foreclosure sale proceeds from [the loan guarantor] based on his personal guaranty.”

In 2016 the Georgia Supreme Court (Georgia’s highest appeals court) affirmed the decision in HWA and confirmed that a guarantor may contractually waive the statutory protections under the Georgia foreclosure statute that would otherwise require the lender to confirm a deficiency judgment against guarantors. (PNC Bank, N. A. v. Smith, 2016 Ga LEXIS 169).

Why Is A Guarantor Waiver Important To A Lender?

If the lender has to sue the guarantor to get a judgment, before collecting the deficiency, why not simply comply with OCGA §44-4-161, confirm the sale and get a deficiency judgment?

The answer lies in what must be done to establish a lender’s claim for the amount of the deficiency. To confirm the foreclosure sale under OCGA §44-14-161, the lender must prove that: (a) the property brought its fair market value at the foreclosure sale; and (b) that the sale was properly conducted. The value of real estate is rarely static, and proving fair market value is often difficult in a changing market. Many confirmation actions fail for lack of adequate proof of fair market value. Because of that, confirmation is unpopular with lenders.

In Certusbank, N. A. v Miller, [2] the court held that the lender was entitled to collect the deficiency following application of the actual proceeds from the foreclosure sale [not the fair market value] to the outstanding debt. The facts were that the lender foreclosed, the proceeds of sale were $728,700.00, and the Superior Court denied lender’s petition after finding that the “fair market value” of the property was $846,180.50. The lender then filed an action in United States District Court for the Middle District of Georgia against the guarantor for the deficiency calculated as the difference between the total debt and the proceeds of sale from the foreclosure. The court granted judgment to the lender based on lender’s calculation of the deficiency using the total debt guaranteed less the actual proceeds from the foreclosure sale rather fair market value of the property sold. The guaranty agreement provided that guarantor agreed to be “unconditionally liable” regardless of whether or not lender pursued any of its remedies against borrower and contained extensive waivers by guarantor. The court was unpersuaded by guarantor’s argument that the covenant of good faith and fair dealings required lender to credit guarantor’s indebtedness with the Superior Court’s determination of the fair market value of the property, rather than the amount the lender actually received at the foreclosure sale.

By removing the requirement that the property brings its fair market value at foreclosure a lender is relieved of one troublesome obstacle to collecting a deficiency from a guarantor, but the guarantor is unprotected by the fair hearing on value provided by of OCGA 44-14-161. Lenders have revised guaranty agreements to load them with extensive waivers, and are often unyielding in negotiating softer terms than what is included in their standard guaranty. Since many loans are made to limited liability companies holding only the real estate that is foreclosed on, confirmation actions may become obsolete against single asset LLC’s.

It should be noted that in Centusbank, the successful bidder was an entity unrelated to the lender so the amount bid at foreclosure was arms-length. However, in many cases, particularly those involving high loan amounts, there is no bidder at the foreclosure sale other than the lender. Can the lender now bid a dollar and hold the guarantor liable for the remainder?

Wait For The Guarantor To Recover Financially

An additional reason for a lender to include a waiver of a confirmation action in a guaranty agreement is that with the waiver the lender may sue the guarantor long after the foreclosure takes place. OCGA §44-14-161(a) requires that the confirmation action be brought within 30 days of the foreclosure, and is barred thereafter. That is often when the guarantor is broke and least likely to pay if the lender is successful in having the court grant a confirmation and deficiency judgment against the guarantor – so why sue a broke guarantor. With a waiver, the guarantor can be sued prior to expiration of the much longer statute of limitations when he has financially recovered, has assets to pay, and can’t easily file bankruptcy.

Other Remedies

Keep in mind that Georgia also allows for judicial foreclosure, and for a suit on the note and /or the guaranty prior to foreclosure, but those methods are not often followed. Filing suit on the note and/or guaranty agreement puts the matter into court with usual discovery, motions and other delays of litigation while the collateral property remains in the hands of the borrower, whereas non-judicial foreclosure under the terms of the deed to secure debt can be done within about 30 days.

Footnotes:

[1] For an excellent article see https://law.emory.edu/elj/content/volume-67/issue-6/comments/kicked-deficiency-judgments-great-recession.html

[2]Certusbank, N.A. v. Miller, CIVIL ACTION NO. 5:14-CV-63(MTT) (M.D. Ga. May. 5, 2015) UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF GEORGIA MACON DIVISION