In a decision issued on February 22, 2016, the Supreme Court of Georgia ruled that a guarantor can waive by contract the requirement for a lender to obtain confirmation of a foreclosure sale before pursuing the guarantor for a deficiency. PNC Bank, National Association v. Smith, 2016 WL 690406.
The fact scenario in this case is typical of a commercial mortgage financing transaction. PNC holds a promissory note secured by commercial property located in Jackson County, Georgia. Kenneth D. Smith, and a number of others, personally guaranteed the original loan. The borrower defaulted on the loan, and PNC foreclosed on the property. Ultimately PNC chose not to obtain confirmation of the foreclosure sale pursuant to OCGA § 44-14-161, commonly referred to as the “confirmation statute.” PNC then filed an action in the U.S. District Court for the Northern District of Georgia against the guarantors for a deficiency.
The Northern District certified two questions to the Georgia Supreme Court, seeking guidance on what has been deemed by some to be unsettled law: (1) whether a lender must comply with the requirements contained in the confirmation statute and obtain court confirmation of a foreclosure sale before pursuing a deficiency against a guarantor; and (2) if so, whether a guarantor can waive a lender’s compliance with those requirements by contract.
The Georgia Supreme Court held that the answer to both questions was “yes.” By doing so, the court affirmed two recent holdings by the Georgia Court of Appeals that guarantors may waive the requirements of the confirmation statute.1 In those cases the Court of Appeals emphasized the fundamental principle that “the freedom of contract is sacrosanct,” and that the freedom of contract should not be limited absent some important public policy reason.2
The court limited its opinion to guarantors and thus left unclear whether borrowers can also waive their rights to a confirmation. However, in a concurring opinion, Justice David Nahmias suggested that the same reasoning would apply to borrowers—“. . . it would seem to follow that borrowers too may waive the protections the confirmation statute affords them.”3 The practical impact of extending the waiver to borrowers is minimized by the fact that a property sold at foreclosure is often a special-purpose entity’s only asset.
The court’s decision will likely further erode the protections the legislature intended to provide when the confirmation statute was enacted. Lenders are already reluctant to negotiate on the waivers included in virtually every form guaranty, and with this decision, guarantors should expect to see more expansive waiver provisions specifically referencing anti-deficiency laws or laws preventing a lender from bringing any action, including a claim for deficiency, before or after a foreclosure. For a borrower and a guarantor, it is important to understand the implications of the court’s ruling. Borrowers and guarantors should assess their position and consult legal counsel regarding this issue when first negotiating letters of intent and term sheets with lenders.
1 See HWA Properties, Inc. v. Community & Southern Bank, 322 Ga. App. 877 (2013); see also Community & Southern Bank v. DCB Investments, LLC, 328 Ga. App. 605 (2014).
2 See DCB Investments, LLC, 328 Ga. App. at 610(2).
3 On page 2 of the concurring opinion, Justice Nahmias cites First National Bank & Trust Co. v. Kunes, 230 Ga. 888 (1973). In Kunes, the court equated guarantors of loans secured by real property with borrowers and their sureties under the earlier versions of the confirmation statute.