Georgia foreclosure law has been given a lot of attention over the last several years, both by the courts as well as the legislature. The Georgia Supreme Court has had to resolve the issue of whether a lender must sue on a note prior to foreclosing under a security deed and held that the choice is up to the lender. (See REL Development, Inc. v. BB&T, 699 SE2d 779 (2010).)  Likewise, the legislature addressed a perceived problem in large loan servicing companies foreclosing on real property even though a division of the servicer was still negotiating with the borrower to cure the default.  Thus, a lender can rescind a foreclosure, for among other reasons, the fact that it had entered into an agreement when the default was cured prior to the sale or the borrower had entered into an agreement to cure the default. (See OCGA 9-13-172.1.)  What happens though if a lender actually conducts a foreclosure sale and then simply decides that it would rather sue on the note. Can it unwind the foreclosure even if its reasons for doing so do not fall with the statutory guidelines?

The Georgia Supreme Court has decided that a lender may in fact rescind a properly conducted foreclosure sale for its own internal business reasons.(See Tampa Investment Group, Inc. v. BB&T, 2012 WL 933110 (Ga.).) From 2005 to 2008, BB&T made 16 loans for residential housing development to two companies secured by various deeds to secure debt. After the borrowers defaulted on the notes, BB&T conducted non-judicial foreclosures on June 2, 2009 on nine of the notes. BB&T credit bid the properties in but later informed the borrowers that it was rescinding the sale.  Most importantly, BB&T did not record a deed under power. On June 22, 2009, BB&T brought suit against borrowers and guarantors for more than $19 million then due under the notes.

At the trial on the enforcement of the notes the court found that BB&T could not pursue the notes since it had failed to confirm the initial foreclosure sale. The Georgia Court of Appeals reversed that decision on the basis that acceptance of a bid at a foreclosure sale under power creates an oral contract which is subject to the Statute of Frauds.  The Statute of Frauds provides that certain contracts, such as for the sale of real property or an extension of credit, are not enforceable unless they are in writing.  In this case, BB&T, either as borrowers’ attorney-in-fact or as the creditor on the notes, never executed a deed under power conveying the borrowers’ interest to itself or any writing showing that it had applied any foreclosure proceeds. The court further found that rescinding the foreclosures did not harm borrowers but left them in the same position as before the auctions.

Under these circumstances, the Court of Appeals ruled, the transfer of Borrowers’ rights of possession and equity of redemption to BB&T as the foreclosure sale purchaser never occurred and, thus, there had been no foreclosure sale, confirmation was therefore not required, and the failure to seek confirmation could not bar BB&T’s claims.

The case was then appealed to the Georgia Supreme Court. On March 19, 2012, the Georgia Supreme Court found that a “sale under power of real estate at public outcry does not become binding as between the mortgagee and the purchaser unless a memorandum is made as prescribed by the Statute of Frauds.” The court went on to note that until a deed under power is transferred and consideration is passed, the sale itself has not occurred; there is only a contract to buy and sell. Under the circumstances the borrowers have not been harmed. They still hold the same rights as they held prior to the attempted sale.  A copy of the Georgia Supreme Court’s opinion is available here.

The case is an unusual one for several reasons. The decision does not discuss the back-story of why BB&T changed its mind after the foreclosure sale. It is not uncommon occurrence for a lender to advertise a foreclosure sale and then pull the foreclosure ad after negotiating with the borrower or to even simply not show up on the date of the advertised sale.  It is a extremely rare occurrence though  for a lender to seek to rescind an already conducted sale.  Most practitioners would regard a foreclosure sale as a final event and certainly those lawyers who record the deed under power on the day of sale will continue to operate with that understanding. The opinions by the appellate courts do not address the question of how long a party might be able to take before deciding whether to actually rescind. In this case the lender acted to rescind within days of the sale.  It is unclear whether the courts reach the same conclusion if a lender sat on its rights for months.

The take-away for lenders is that the Georgia courts have reaffirmed that lenders have a wide degree  of latitude in the way they proceed to enforce loan documents.  Any celebration over that should be tempered, however, by reviewing the most recent session of the Georgia legislature during which several bills touching on foreclosure or the methods in which a lender pursued borrowers or guarantors were introduced and seriously considered by both houses of the General Assembly.