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Can a Guarantor Waive his Right to a Foreclosure Confirmation Proceeding in Georgia?

Yes.

On Monday, February 22, 2016, in a case closely watched by commercial real estate lenders, borrowers and guarantors, the Supreme Court of Georgia issued its opinion in PNC Bank, N.A.  v. Smith, et al., S15Q1445.  The case was before the Supreme Court on two certified questions from the United States District Court for the Northern District of Georgia.  The two Certified Questions were: (1) Is a lender’s compliance with the requirements contained in OCGA § 44-14-161 a condition precedent to the lender’s ability to pursue a borrower and/or guarantor for a deficiency after a foreclosure has been conducted?; and (2) If so, can borrowers or guarantors waive the condition precedent requirements of such statute by virtue of waiver clauses in the loan documents?

In answering the first question in the affirmative, the Georgia Supreme Court upheld its reasoning in First Nat. Bank & Trust Co. v. Kunes, 230 Ga. 888, 890-91 (1973). The Georgia Supreme Court echoed the reasoning in Kunes by stating “that notice to both sureties and guarantors is necessary to satisfy the purpose of the confirmation statute— ‘to limit and abate deficiency judgments in suits and foreclosure proceedings on debts’ and to enable sureties and guarantors ‘an opportunity to contest the approval of the [foreclosure] sales.”

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Oral Arguments on HWA Decision

On Monday, September 14, 2015, the Georgia Supreme Court heard oral arguments in the case of PNC Bank, National Assoc. vs. Kenneth D. Smith, et al., Case No. S15Q1445.

As noted in our prior blog post, this case is of great interest to banks operating in Georgia which are involved in real estate lending.  At issue is whether a lender may conduct a non-judicial foreclosure on real estate serving as collateral, and then pursue a guarantor without first pursuing a confirmation of the sale.  In addition, the Court is being asked to consider whether a guarantor may waive such a requirement.  In an earlier case, HWA Properties, Inc. v. Cmty. & S. Bank, 322 Ga. App. 877 (2013), the Court of Appeals held that a confirmation following a foreclosure sale is no longer a prerequisite to suing the guarantor for a deficiency when the guaranty waives such a confirmation.  Several other panels of the Court of Appeals have since reached a similar conclusion.

The arguments yesterday were dominated by questions from the bench, most of which came from Justice David Nahmias.  The questions asked by the Court revolved primarily around the following topics:

  • Whether the word “debtor” in the Confirmation Statute should be construed to include guarantors;
  • Whether the legislative history indicated that the General Assembly intended the Confirmation Statute to include protections for guarantors;
  • The exact scope of the holding in an earlier decision by the Court, First Nat. Bank & Trust Co. v. Kunes, 230 Ga. 888 (1973), and whether the Court had already held that the protections of the Confirmation Statute extended to guarantors;
  • The ramifications to lenders and borrowers from these holdings (as the Court put it, “the parade of horribles” alleged by each side); and
  • Whether the sanctity of the right to contract by guarantors and lenders should be recognized in such circumstances.

It was not at all clear from the proceedings which way the Court may rule.  Many of the justices did not ask any questions at all, and Justice Nahmias did not tip his hand during his usual intense questioning of both sides.  A decision is likely within the next few months.

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Bryan Cave Files Amicus Brief On Behalf Of Georgia Bankers Association Regarding Recent HWA Decision

Today, Bryan Cave filed an amicus curiae brief on behalf of the Georgia Bankers Association in a case currently pending before the Georgia Supreme Court styled PNC Bank, National Assoc. vs. Kenneth D. Smith, et al., Case No. S15Q1445.  The case is of great interest to banks operating in Georgia because the Supreme Court will be reviewing the reasoning of the HWA Properties, Inc. v. Cmty. & S. Bank, 322 Ga. App. 877 (2013) decision, in which the Georgia Court of Appeals held that a lender was entitled to pursue a guarantor for any deficiency remaining on a debt after a foreclosure, regardless of whether the lender had confirmed the foreclosure sale, if the guaranty included language waiving all defenses to collection of the debt.  As articulated in the amicus brief filed by Bryan Cave on behalf of the Georgia Bankers Association, a ruling by the Georgia Supreme Court upholding the HWA decision and its progeny will do much to correct the current abuse of Georgia’s foreclosure confirmation statute, O.C.G.A. § 44-14-16, which commercial borrowers and guarantors have long used to draw out foreclosure proceedings and prevent collection of any deficiency.  Oral argument in the case is scheduled for Monday, September 14, 2015.  A copy of the brief is available here.

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FDIC Updates TLGP Opt-Out Lists

On May 6, 2009, the FDIC provided updated opt-out lists for the Debt Guarantee Program and Transaction Account Guarantee Program.  The decision to opt-out of either program was a binding decision as of December 5, 2008, and the FDIC has not given any explanation for why the opt-out lists have been updated, other than a generic statement that “entities may be added as we finalize the election submissions.”

As of December 12, 2008, 863 banks had elected to opt-out of the Transaction Account Guarantee, but that number is 1,110 banks as of May 6, 2009.  Similarly, 3,116 entities (which includes affiliated bank holding companies) had elected to opt-out of the Debt Guarantee as of December 12, 2008, but that number is 6,501 entities as of May 6, 2009 (a 109% increase).  In Georgia, 25 banks have opted out of the Transaction Account Guarantee, while 165 entities have opted out of the Debt Guarantee.

The continued updates of the opt-out lists serves as a strong reminder to review these lists before (a) presuming that noninterest bearing deposit accounts have an unlimited guarantee; or (b) accepting any senior unsecured debt as being guaranteed by the FDIC.

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Issuance of FDIC Guaranteed Debt

Issuance of FDIC Guaranteed Debt

January 14, 2009

Authored by: Robert Klingler

Over the last several weeks, we have had further conversations with clients and the FDIC regarding the details of the Debt Guarantee Program under the FDIC’s Temporary Liquidity Guarantee Program.  In the course of these conversations, we have noticed a misunderstanding of several key components of the program.

  • Lines of Credit are not Senior Unsecured Debt. Under the regulations, senior unsecured debt must have “a specified and fixed principal amount.”  (12 CFR 370.2(e)(1).)  As a result, lines of credit are not eligible for an FDIC guarantee, and should not be included in calculating the amount of senior unsecured debt outstanding at September 30, 2008.
  • 2% of Liabilities Test is Only Available for Depository Institutions. If a bank holding company had no “senior unsecured debt” outstanding at September 30, 2008 (and remember that lines of credit are not included), then its maximum amount of guaranteed debt that can be issued is zero.  Only depository institutions themselves (and not their parent entities) can take advantage of the alternative cap of 2% of the total liabilities outstanding as of September 30, 2008.
  • Approvals to Establish or Increase a Debt Guarantee Cap will be “Very Rare.” The regulations provide a process for entities to establish or increase a debt guarantee cap.  However, we understand that all applications go to the highest levels of the FDIC in Washington DC, and there face high levels of scrutiny.  No timeframe has been provided, but given the level of scrutiny and DC review, bottlenecks are virtually guaranteed to develop.  We understand that the FDIC has lots of applications currently in the system, but the FDIC believes that approvals will be “very rare.”
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FDIC Clarifies Use of Guaranteed Debt to Provide Capital

We have previously posted on the possibility of bank holding companies using the TLGP Debt Guarantee to provide capital to subsidiary banks.  In that post, we commented on the odds of success and noted that the FDIC had not taken a formal position.  Today, the FDIC updated its TLGP FAQ and confirmed that the odds of success are in fact very low.

The FDIC’s revised answer states:

Can guaranteed debt issued by the parent company be put in a subsidiary bank as capital?

The FDIC envisions few if any circumstances under which it would approve holding company applications to establish a cap or to increase a cap where the proceeds from the resulting guaranteed debt issuance would be injected as capital into a subsidiary bank.  The Temporary Liquidity Guarantee Program was not intended to be a capital enhancement program.  The Treasury Department’s TARP program has been set up for that purpose.  The purpose of the Temporary Liquidity Guarantee Program is to restore liquidity to the intermediate term debt market.

As a reminder, the TLGP’s alternative guarantee cap of 2% of liabilities only applies to depository institutions.  Bank holding companies are not entitled to use the 2% of liabilities test and are only eligible to issue 125% of the amount of senior unsecured debt that was outstanding as of September 30, 2008.  As a result, we believe most community bank holding companies will be required to seek FDIC approval to establish a cap or to increase a cap in order to issue FDIC guaranteed debt.  Based on the FDIC’s updated analysis, this approval seems highly unlikely.

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TLGP Opt-Out Lists

TLGP Opt-Out Lists

December 12, 2008

Authored by: Robert Klingler

On December 10, 2008, the FDIC published preliminary lists of financial institutions that have elected to opt-out of either the Debt or Transaction Account Guarantees under the Temporary Liquidity Guarantee Program.  As noted by the FDIC,  the decision to opt-out should not be read as a signal, either positive or negative, about the financial health of the entity.  The FDIC recommends that depositors and investors with questions ask the entities on either of these lists for a further explanation concerning the entity’s decision to opt-out of the TLGP.

As of December 12, 2008, 863 banks elected to opt-out of the Transaction Account Guarantee, while 3,116 entities (which includes affiliated bank holding companies) elected to opt-out of the Debt Guarantee.  Looking specifically at Georgia, 16 banks elected to opt-out of the Transaction Account Guarantee, while 54 entities elected to opt-out of the Debt Guarantee.

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Using the TLGP Debt Guarantee to Provide Capital

We are having discussions with clients regarding the possibility of issuing FDIC-guaranteed debt under the TLGP’s Debt Guarantee Program at the holding company level and using the proceeds of that debt to increase the capital of the bank subsidiary.  This is particularly attractive for banks that are eligible to report their risk-based capital positions on a bank-only basis.  (The Federal Reserve’s risk-based capital measures are generally applied on a bank-only basis for bank holding companies with consolidated assets of less than $500 million.)

Permissible Use for BHC FDIC-Guaranteed Debt

The FDIC’s Frequently Asked Questions (FAQ) explicitly permits a bank holding company to use the proceeds from a guaranteed debt issuance to purchase additional shares of bank stock.

Need to Apply to FDIC for Approval

In our experience, however, most bank holding companies for community banks had no, or very limited amounts of, senior unsecured debt outstanding as of September 30, 2008.  As a result, the bank holding company will have to file a letter application with the FDIC and, if different, the federal banking regulator for its largest subsidiary bank to establish an FDIC-guaranteed debt limit.  The letter application must describe the details of the request, provide a summary of the applicant’s strategic operating plan, and describe the proposed use of the debt proceeds.

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Further Guidance on Debt Guarantee

Further Guidance on Debt Guarantee

December 11, 2008

Authored by: Robert Klingler

On December 11, 2008, the FDIC updated its Frequently Asked Questions (FAQ) on the Temporary Liquidity Guarantee Program.  The updated questions address both the Transaction Account and Debt Guarantee portions of the TLGP, but this post focuses on the Debt Guarantee.

Further Clarification on Brokered Interbank CDs

The FAQ clarifies that if an issuing bank owes a CD to a broker, the CD does not meet the definition of senior unsecured debt (and will not be guaranteed) even where an insured depository institution or credit union is the beneficiary of the CD.  If, on the other hand, the broker merely arranges placement of a CD and the bank or thrift owes the CD directly to another insured depository institution or credit union, then the CD meets the definition of senior unsecured debt (and will be guaranteed), provided that the debt is owed to the insured depository institution or credit union in its own capacity and not as agent for someone else.

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TLGP: Debt Instrument Reporting

TLGP: Debt Instrument Reporting

December 9, 2008

Authored by: Robert Klingler

On December 8, 2008, the FDIC published a Financial Institution Letter that clarifies the reporting requirements for newly issued guaranteed senior unsecured debt.

Beginning on December 6, 2008, all newly issued guaranteed debt must be reported to the FDIC via FDICconnect within five (5) calendar days of the date of issuance.  Guaranteed debt that was issued between October 14, 2008 through December 5, 2008 and was still outstanding on December 5, 2008 must be reported to the FDIC via FDICconnect by December 19, 2008.

The FDIC will generate the first TLGP assessment invoices for guaranteed debt on December 17, 2008, with settlement of the invoices on December 19, 2008.  Thereafter, new invoices will run each Wednesday for debt issuances reported the prior week, with settlement each Friday.

These reporting requirements are in addition to the monthly reports to the FDIC of aggregated guaranteed debt outstanding pursuant to the Master Agreement.  The FDIC promises to issue information on these ongoing reporting requirements shortly.

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