On April 17, 2017, the Supreme Court of Georgia made yet another critical decision in a line of cases which together, create the framework for a guarantor’s liability for a deficiency after a foreclosure has been conducted. The case styled York et al. v. Res-GA LJY, LLC came before the Supreme Court in consideration of the questions of (i) the extent and limitations of guarantor waiver of rights under O.C.G.A. §44-14-161; and (ii)  whether a creditor may pursue a guarantor for a deficiency after judicial denial of confirmation of a foreclosure sale.

In York et al., the lender sought to confirm the foreclosure sale of real property located in three different counties in Georgia, which properties were used to secure five promissory notes evidencing loans made to several entities and guaranteed by individual guarantors affiliated with such entities. The court in each of the three counties denied the confirmation of the respective sale citing as the basis for such denial, the lender’s failure to prove that the sale garnered fair market value, as is required under O.C.G.A. § 44-14-161. Despite its lack of success at the confirmation proceedings, the lender pursued deficiency actions against the guarantors. The trial court in awarding judgment against the guarantors, concluded that the waiver provisions of the guaranties executed by the guarantors served to waive any defense that the guarantors may have had as a result of lender’s failure to successfully seek confirmation. On appeal, the trial court’s judgment against the guarantors was affirmed.

In Georgia, to pursue a borrower for a deficiency after a foreclosure, a lender is required to file a confirmation action within thirty (30) days after foreclosure and present (i) evidence that the successful bidder at the foreclosure sale bid at least the “true market value” for the property and (ii) evidence regarding the legality of the notice and advertisement and regularity of the sale.  See O.C.G.A. § 44-14-161.

The Georgia Court of Appeals issued its decision in HWA Properties, Inc. v. Community & Southern Bank, 322 Ga. App. 877 (746 SE2d 609) (2013) in July of 2013, finding that a creditor’s failure to obtain a valid confirmation of a foreclosure sale did not impair its authority to obtain a deficiency judgment against the loan’s personal guarantor if the guarantor waived the defenses otherwise available to the guarantor under O.C.G.A. § 44-14-161.  In 2016, the Georgia Supreme Court addressed two questions regarding this issue certified to it by the United States District Court for the Northern District of Georgia and agreed with the Court of Appeals in its reasoning, holding that Georgia’s confirmation statute “is a condition precedent to the lender’s ability to pursue a guarantor for a deficiency after foreclosure has been conducted, but a guarantor retains the contractual ability to waive the condition precedent requirement”.  See PNC Bank National Ass’n v. Smith, 298 Ga. 818, 824 (758 SE2d 505) (2016).

In York, in addressing the first question certified to it, the Supreme Court based its argument on the foundation set forth in PNC Bank, that guarantors are permitted to contractually waive their rights under O.C.G.A. § 44-14-161. The Court expressed its concurrence with the guarantors’ assertion that the rights waived in the executed guaranties were limited to “rights or defenses based on suretyship or impairment of collateral”, and determined that absent evidence to the contrary, inclusion in the waiver provision of a general all-inclusive clause is to be construed as encompassing additional items of the same class of the items listed with specificity. However, the court held in favor of the creditor, ruling, in part, that (i) “there is no distinction between sureties and guarantors relevant to this case”, as the defense provided by O.C.G.A. § 44-14-161 is one established in suretyship and the guarantor’s position as a guarantor, and (ii) the statute falls within the meaning of an “anti-deficiency” statute, a term specifically referenced in the waiver provision. The Court rejected the guarantors’ argument that the creditor’s decision to seek confirmation was indicative of the creditor’s interpretation of the waiver provision as not being inclusive of the waiver of any rights under O.C.G.A. § 44-14-161. In doing so, the Court stated that the creditor’s decision to safeguard its position by seeking confirmation was not very relevant to the analysis of the guaranty agreements.

The Court’s inquiry into the pivotal question regarding the power of a creditor to pursue a guarantor following an unsuccessful confirmation proceeding also relied on PNC Bank. The Court maintained that the denial of judicial confirmation was irrelevant to the current action in light of the guarantor’s waiver of their rights under the confirmation statute. The Court further emphasized that, consistent with PNC Bank, despite the creditor’s failure to meet the requirements for judicial confirmation under O.C.G.A. § 44-14-161, “the condition precedent to a deficiency action against a borrower or guarantor established by the confirmation statute is in the nature of an element of [a deficiency] claim, which if not pled and proved may result in the lender losing the lawsuit but which may normally be waived” [emphasis added]. PNC Bank, 298 Ga. at 820, n.6.

Undoubtedly, lenders will continue to watch as this line of judicial rulings advances to define the boundaries of guarantor liability and shape the laws around mortgage lending.