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Bad News for Loan Guarantors

George M. Bobo

GAHBA Atlanta Builder

In the case of PNC Bank, National Association v Smith et. al. (the "PNC Casee") decided on February 22, 2016 the Supreme Court of Georgia effectively destroyed the conifmration action protection previously afforded a loan guarantor where a guarantor waives the requirement that the lender confirm the foreclosure sale.

Borrowers and loan guarantors living through the Great Recession have become all too familiar with continued personal liability for the balance on loans remaining after foreclosure.  Georgia's foreclosure law allows for advertisement and public auction of the property secured by a deed to secure debt without first filing an action in court.  To protect borrowers against continued liabiity for a loan after foreclosure without judicial review, and particularly after a low ball bid at foreclosure sale, in 1935 the Georgia Legislature enacted O.C.G.A. Sect. 44-14-361(a) which provides: "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 sales 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."

At the confirmation hearing, a lender must prove that the statutory requirements of proper notice, advertisement and public auction were followed, and most importantly, that the property brought at least its true (fair) market value at sale.  Lenders have often been denied confirmation approval by failing to prove that the property brought its fair market value, therefore no deficiency judgment action could be brought against either the borrower or guarantor.

In the PNC case, the Georgia Supreme Court was calle don to answer two questions: (a) whether compliance with Georgia's confirmation statute was a condition procedent to the lender's abiity to pursue a borrower and/or guarantor for a deficiency judment after foreclosure; and (b), if so, can the guarantor waive the condition precedent requirement of the statuteby including waiver language in the loan guaranty.  The Court answered in the affirmative to both questions.  A guarantor may waive the requirement for a confirmation action based on the fundamental principal that freedom of contract is sacrosanct.

Specific waiver language tracking that case will likely find its way into new guaranties.  Red carefully the waive provisions of your next guaranty.

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