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11th Circuit Rejects Reverse Mortgage Foreclosure Statute-Based Defense

The Eleventh Circuit recently rejected a defense to foreclosure based on a federal statute governing insurance of reverse mortgages by the Department of Housing and Urban Development (“HUD”).

HUD administers a mortgage-insurance program designed to induce lenders to offer reverse mortgage loans to elderly homeowners.  If the loan meets certain conditions, HUD insures against any outstanding balance owed on the loan.  One condition, contained in 12 U.S.C. § 1715z-20(j), provides:

The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term “homeowner” includes the spouse of a homeowner.

Borrowers and their estates have argued the statute prevents lenders from seeking repayment of a loan subject to a reverse mortgage until either the sale of the home, or the death of both the borrower and his or her non-borrowing spouse – even if the loan documents provide to the contrary.   The Court in Estate of Caldwell Jones, Jr. v. Live Well Financial, Inc., No. 1:17-cv-03105-TWT (decided Sept. 5, 2018) rejected this argument.

In Estate of Caldwell Jones, Jr., former NBA star, Caldwell Jones, Jr., obtained a reverse mortgage secured by his home.  Jones lived in the home with his wife and his minor daughter, until he passed away in 2014.  Jones’s wife was not a co-borrower.

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Georgia Supreme Court Weighs in On Guarantor Liability for Deficiencies

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).

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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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CFPB Finalizes Amendments To New Mortgage Servicing Rules

On September 13, 2013, the Consumer Financial Protection Bureau (“CFPB”) issued final amendments and clarifications to its mortgage servicing regulations, which go into affect January 10, 2014.  These rules were initially issued in January 2013 and have been amended based on comments received during the implementation period.  The rules relating to loss mitigation procedures are set out in Regulation X of the Real Estate Settlement Procedures Act.  (12 CFR § 1024.41.)  Among the important loss mitigation rules that go into effect on January 10, 2014:

I.    Rules Affecting Foreclosures.

  • Servicers may no longer begin a foreclosure until the borrower is more than 120 days delinquent.  In some states it is not uncommon for foreclosures to begin when borrowers are delinquent by as a little as 60 days.  It is therefore important that servicers take note of this new restriction.  Servicers must delay first legal action until the borrower is at least 121 days delinquent, unless the foreclosure is based on a due-on-sale clause or the servicer is joining the foreclosure action of a subordinate lienholder.
  • Servicers may not begin a foreclosure while considering a pending “Complete Loss Mitigation Application.”  Foreclosures may not begin until the servicer has sent the borrower written notice denying the application, and either (1) any borrower appeal has been concluded; (2) the borrower has rejected all offered loss mitigation options; or (3) the borrower has failed to perform under a loss mitigation agreement.  Facially complete applications must be treated as complete until the borrower has had a reasonable opportunity to respond after being notified that additional information is required.
  • Where first legal action has already occurred, servicers may not conduct the sale or move for an order of sale if a Complete Loss Mitigation Application is received more than 37 days before the sale.  In nonjudicial states where foreclosure sales are typically scheduled with less than 37 days notice, this rule may have little effect.
  • Servicers need only comply with these requirements for a single Complete Loss Mitigation Application.  However, if servicing is transferred to a new servicer, the transferee servicer must still comply regardless of whether the borrower received an evaluation of a complete loss mitigation application from the previous servicer.
  • Small servicers, though exempt from many requirements, remain subject to certain rules.  These include the prohibitions on starting a foreclosure where the borrowers is less than 121 days delinquent and where the borrower is performing under a loss mitigation agreement.
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Georgia Court Holds Foreclosure Confirmation Statute Inapplicable to Certain Guarantors

In a landmark decision, the Georgia Court of Appeals recently ruled that a guarantor may waive the right to require the holder of a secured debt to confirm a forceclosure sale prior to seeking a deficiency judgment.  In HWA Properties, Inc. v. C&S Bank, 2013 WL 3498088 (Ga. App. July 15, 2013), the Court of Appeals was asked to consider whether a guarantor could be liable for a loan deficiency where there had not been a valid confirmation pursuant to O.C.G.A. § 44-14-161 and the borrower had been discharged.  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.

The Georgia confirmation statute, which has been on the books in Georgia since the Great Depression, requires a secured creditor to show that it bid the fair market value of the property securing the note before it can collect a deficiency.  Prior to this decision, neither the Court of Appeals nor the Georgia Supreme Court had addressed the issue of whether a guarantor could contractually waive its right to require confirmation of the foreclosure sale.

While the guaranty at issue in HWA Properties did not specifically mention waiver of the provisions of the confirmation statute, the Court was persuaded by three key provisions in the guaranty to find such a waiver existed.  First, the guaranty contained broad catchall waiver language, which included a waiver of, “any and all defenses, claims and discharges of Borrower, or any other obligor, pertaining to the Indebtedness, except the defense of discharge by payment in full.”  The Court emphasized in its holding that the guaranty contained, “an express and comprehensive wavier of any and all defenses to his liability on the entire balance due on the note.”

Second, the guaranty expressly provided that proceeds from any collateral sold to satisfy the debt, “shall not reduce, affect or impair the liability of [the guarantor].”  A literal application of this provision in the typical scenario, where the property is worth less than the balance of the debt, would seem to require that the guarantor’s liability not be lessened through the collateral liquidation process.  However, because Georgia maintains a “one satisfaction” rule whereby a lender may only collect enough to make itself whole,  it is unclear from the text of the decision why this language was pivotal to the Court.  One possibility is that the Court considered this provision further evidence of the parties’ intent to contract out of the confirmation statute.

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11th Circuit Clarifies the TILA Servicer “Administrative Convenience” Exception

On May 23, 2013, the Eleventh Circuit upheld an Alabama federal court’s dismissal of a proposed class action brought by a mortgage holder who claimed the servicer violated the Truth in Lending Act (“TILA”) by failing to notify her of a transfer in ownership of her mortgage loan, as required by Section 1641(g).  In an unpublished per curium opinion, a three-judge panel in Giles v. Wells Fargo Bank, N.A. (No. 12-15567)  agreed with the lower court that, under TILA’s “administrative convenience” exception,  the servicer, who was assigned an ownership interest in the mortgage loan prior to foreclosing on the loan, was not obligated to provide notice of the assignment.

Section 1641(g) of TILA provides that a creditor who is the new owner or assignee of an existing mortgage loan must provide written notice to the borrower within thirty days of the date on which the new creditor acquired the loan.  See 15 U.S.C. § 1641(g).   The 11th Circuit explained, “[b]ased on its plain language, section 1641(g)’s disclosure obligation is triggered only when ownership of the ‘mortgage loan’ or ‘debt’ itself is transferred, not when the instrument securing the debt (that is, the mortgage) is transferred.”  The Giles case involved an assignment of the security deed to the servicer prior to foreclosure that was not disclosed to the borrower.  The borrower argued that under Alabama law,  the transfer of the security deed also transfers an interest in the note secured thereby implicating the disclosure requirements of Section 1641(g).

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Georgia Supreme Court Addresses Non-Judicial Foreclosures

On May 20, 2013, the Georgia Supreme Court issued a unanimous opinion in the You v. JP Morgan Chase case (Case No. S13Q0040).  The You Opinion addresses several questions that the United States District Court for the Northern District of Georgia had certified to the Supreme Court regarding the operation of Georgia’s law governing non-judicial foreclosures.

First, the Supreme Court addressed the question: “Can the holder of a security deed be considered a secured creditor, such that the deed holder can initiate foreclosure proceedings on residential property even if it does not also hold the note or otherwise have any beneficial interest in the debt obligation underlying the deed?” The Supreme Court answered “Yes” to this first question.

Second, the Supreme Court addressed the question “Does O.C.G.A. § 44-14-162.2 (a) require that the secured creditor be identified in the notice described by the statute?”  The Supreme Court answered “No” to this second question.

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Georgia Appellate Court Decisions Back Secured Lenders

Two recent Georgia Court of Appeals en banc decisions issued on March 29 have weighed in on one aspect of the MERS fallout, holding in favor of the secured lender.

In Montgomery v. Bank of America et al., No. A12A0514, 2013 WL 1277830 (Ga. App. March 29, 2013) and LaRosa v. Bank of America, N.A., et al., No. A12A2393, 2013 WL 1286692 (Ga. App. March 29, 2013), the Court of Appeals was asked whether a security deed which includes a non-judicial power of sale is transferable without evidence of the transfer of the underlying debt instrument. Montgomery at *2; LaRosa at *1.  Without discussing the myriad legal issues on both sides of this debate, the Court of Appeals upheld the trial court’s ruling in favor of the mortgagee, citing the lack of statutory authority or case law supporting the mortgagor’s theory that the note and deed must “travel together” for an assignment of the foreclosure remedy to be valid. Montgomery at *2; LaRosa at *2.  See also O.C.G.A.  §44-14-64(b).

But secured lenders and their servicers initiating non-judicial power of sale foreclosure in Georgia should not breathe a collective sigh of relief just yet.  As the dissents in both decisions point out, the Georgia Supreme Court has yet to issue its ruling in You v. JP Morgan Chase Bank, N.A., No. 1:12-cv-202-JEC-AJB (N.D. Ga. Sept. 7, 2012) where the federal court certified the question of note/mortgage severability, along with two related foreclosure notice questions  to the Supreme Court of Georgia, citing the “substantial need of federal courts to obtain enlightenment [from the Georgia Supreme Court] on these questions.” (The district court also certified the questions of whether (i) O.C.G.A. § 44-14-162.2(a) requires a secured creditor to be specifically identified in the foreclosure notice and, if yes, whether (ii) “substantial compliance” with the preceding statute suffices.)

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