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Wrongful Foreclosure, Confirmation, and Debtors' Remedies #3: The Confirmation Process and a Debtor's Rights

In this third article on commercial property foreclosure, this post will provide an in depth analysis of the confirmation process, a judicial process which follows most commercial property foreclosures.

Confirmation is required in foreclosure proceedings in order "to protect the debtor from being subjected to double payment in cases where the property was purchased for a sum less than its market value."[1] As stated above, if a creditor fails to obtain confirmation of a foreclosure sale, it will be barred from seeking a deficiency judgment against the debtor.[2] However, "[f]ailure to obtain confirmation does not extinguish the debt; it just limits the creditor's remedies."[3] "The failure to obtain confirmation does not affect a creditor's ability to (i) proceed to enforce a prior judgment on the underlying note, (ii) proceed against separate security held by the creditor, or (iii) initiate or pursue separate causes of action which may be available." [4] In fact, a creditor may sue a borrower on the note, without any foreclosure action, and thus avoid the confirmation process altogether.[5] However, most borrowers wish to obtain the collateral property first as it usually has significant value. For this reason, foreclosure actions usually precede any suits against the borrower, a fact which makes the confirmation process so important in this area of law.

Instead, "[f]ailure to confirm bars a subsequent cause of action [against the debtor] based upon the note."[6] In order to initiate a suit against the borrower for any deficiency on the loan still owing after foreclosure, a creditor must first confirm the sale of the foreclosed property with the court. The Georgia confirmation statute "provides that a deficiency judgment is allowed only if the [creditor] shall, within 30 days after the sale, report the sale 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."[7] Initiation of the confirmation requires notice to the debtor, with failure to do so standing "as a bar to any subsequent deficiency action."[8]

It is important to note that a debtor cannot bring a confirmation proceeding to challenge the sale of the property.[9] Rather, only the party which conducted the foreclosure sale, usually the creditor, may initiate the confirmation. If the creditor elects not to confirm the sale the only remedy for the debtor is to challenge the sale under a claim of wrongful foreclosure, addressed in the next blog post, Wrongful Foreclosure, Confirmation, and Debtors' Remedies #4: Bringing a Wrongful Foreclosure Claim. However, as virtually every creditor with an outstanding deficiency will confirm the foreclosure sale, it is important to fully understand the confirmation process. As such, this post will now move on to cover the requirements for a successful confirmation and a debtor's rights during this process.

Waiver of Confirmation Requirement

Though Georgia statute O.C.G.A. § 44–14–161(a) (cited above) clearly states that confirmation is required before a creditor can pursue a deficiency action, some Georgia caselaw suggests that there may be options for creditors to recover the remaining balance on a loan while avoiding the confirmation process. Specifically, depending on the specific waiver language in the loan documents, a debtor can voluntarily give up defenses he may have against the creditor for lack of completing the confirmation process. The validity of confirmation waiver language was addressed in HWA Properties, Inc. v. Cmty. & S. Bank, 322 Ga. App. 877, 746 S.E.2d 609 (2013), cert. denied (Nov. 18, 2013). In this case, the Court of Appeals held that specific language[10] constituted as a waiver of any defense against the creditor pursuing the deficiency, including the requirement of a confirmation action under O.C.G.A. § 44–14–161(a).

However, it is several leading authorities' opinion that the precedent of HWA Properties will not stand for long. O.C.G.A. § 44–14–161(a) is clear that "no action may be taken to obtain a deficiency judgment unless the person instituting the foreclosure proceedings shall . . . obtain an order of confirmation and approval." A creditor's ability to contract out of this requirement should be against public policy, as it tips the balance too far in the creditor's favor in the foreclosure process. Additionally, HWA Propertiesseems to conflict with other rulings in Georgia law concerning confirmations.[11] Only time will tell if future cases will overrule HWA Properties and it will be important to follow new developments in this area of the law in the years to come.

Requirements of Confirmation

The requirements for confirming a foreclosure sale are as follows:

(i) that the foreclosure sales price was equivalent to true market value, and

(ii) that the foreclosure procedures complied with requirements as to "notice, advertisement, and regularity of the sale."[12]

Issues outside the scope of these matters such as

"whether there was a default which justified acceleration and foreclosure, whether there was any indebtedness at all, whether side agreements were violated, whether the foreclosure sales proceeds were misapplied, whether the party seeking confirmation has standing to do so, or whether assignment of the loan at issue was properly recorded are not within the scope of the confirmation proceeding"

and are instead more properly addressed in a wrongful foreclosure claim.[13] As these are not relevant to the issue at hand, we will next tackle the second of the requirements for confirmation, compliance with requirements as to notice, advertisement, and regularity of the sale.

Compliance with Requirements as to Notice, Advertisement, and Regularity of the Sale

As discussed in Wrongful Foreclosure, Confirmation, and Debtors' Remedies #2: A Creditor's Duties, a creditor is under a duty to give notice, advertise the sale properly, and execute the sale in good faith. As a straightforward matter, "[c]onfirmation will be denied if the sale takes place on a date other than the date specified in the notice, or if there is no evidence that the sale was properly advertised."[14] If either of these scenarios are the case, the debtor will easily defeat the creditor's confirmation attempt. However, when an advertisement is considered sufficient by the court despite "errors in the legal description, minor discrepancies as to the first date of publication, inaccurate reference to a senior encumbrance [, or] erroneously identifies the bidder and foreclosure sale purchaser," the confirmation may still be granted absent any other price chilling effects.[15] Though the law is somewhat unclear in this area, most cases in which irregularities exist in the advertisement or sale of the property also require some showing of lack of true market value in the property selling price for a confirmation to be denied.

True Market Value

In protecting the debtor during confirmation, Georgia courts require the creditor to show that the property sold for its "true market value" at the time of the foreclosure sale.[16] True market value is defined as "the price which the property will bring when it is offered for sale by one who desires, but is not obliged, to sell it, and is bought by one who wishes to buy, but is not under a necessity to do so."[17] In simpler terms, this means that the fair market value will be exactly what it sounds like- the value of the property if it was being sold on the open market had there been no foreclosure sale. However, "[b]ecause foreclosure sales are forced sales and are conducted under conditions that differ from the ordinary market for the property in question, they 'notoriously fail to bring the true market price of the property.' Thus, . . . Georgia's confirmation statute requires evidence of fair market value other than the public sale price."[18] Remember that it is the "party seeking confirmation of the sale bears the burden of establishing the value of the property at the time of the sale," not the debtor.[19]

In determining fair market value, Georgia courts will look to the valuation of potential leases, "expert testimony of real estate appraisers, evidence of comparable sales, subsequent resale values, [and] the state of the real estate market."[20] However, "offers to purchase the property . . . speculative rezoning possibilities [and] [a]n appraiser's consideration of the quick sale value" are not conclusive evidence of value.[21] Additionally, "[a]n appraiser's failure to consider substantial interior improvements in arriving at market value calculation is sufficient grounds to deny confirmation."[22] After review of the above-listed information, if the creditor cannot show that the property sold for true market value, "[t]he court may order a resale of the property for good cause shown."[23]

Where a debtor is able to show a lack of fair market value, the confirmation will be denied and the debtor will then have the opportunity to seek a wrongful foreclosure claim under the higher burden of grossly inadequate price. It is important to note that the requirement of obtaining true market value in foreclosure confirmations must be distinguished from the test of grossly inadequate price in wrongful foreclosure. For example, Georgia courts have set forth the distinction between the standard of the confirmation action from that of the wrongful foreclosure claim as follows: "[t]he statute requires that the trial judge make a determination as to whether the sale brought the property's true market value, not whether the price was grossly inadequate."[24]

The difference between these two standards was highlighted in Keever v. General Electric Credit Corp. of Ga.[25] There the court found that "the fact that a sale may have been conducted unfairly has no relevance in a confirmation of sale proceeding . . . unless the unfairness relates to any of the requirements set forth above, such as by chilling the bidding and thereby casting doubt on whether the sale price equaled or exceeded the true market value."[26] This is important because, as finding grossly inadequate sales price places a harder burden on a debtor to prove, a debtor may be able to prove the foreclosed property did not sell for real market value in a confirmation hearing, but not win a wrongful foreclosure claim. Thus in confirmation hearings, as opposed to wrongful foreclosure, "mere inadequacy of price is sufficient reason for denying confirmation and ordering a resale of the property."[27]

The requirements of the wrongful foreclosure action are set forth in the next article, in Wrongful Foreclosure, Confirmation, and Debtors' Remedies #4: Bringing a Wrongful Foreclosure Claim.



[1] Redman Indus., Inc. v. Tower Properties, Inc., 517 F. Supp. 144, 148 (N.D. Ga. 1981) (citing Goodman v. Nadler, 113 Ga. App. 493, 496, 148 S.E.2d 480, 483 (1966)).

[2] In re Snead, 231 B.R. 823 (Bankr. N.D. Ga. 1999).

[3] Id. at 825.

[4] Ga. Real Estate Finance and Foreclosure Law § 9:4.

[5] See Taylor v. Thompson, 158 Ga. App. 671, 282 S.E.2d 157 (1981). In Taylor, before the foreclosure of the debtor's property the creditor brought an action in court against the debtor on the unpaid loan and won. After this judgment in favor of the creditor, the creditor proceeded with the foreclosure sale of the debtor's mortgaged property. After the property was sold and the creditor applied the foreclosure sale price against the outstanding judgment amount, the creditor demanded the remaining balance on the judgment from the debtor. The debtor claimed that this was a deficiency action and that the creditor was required to confirm the sale before seeking a deficiency. Upon review, the Court of Appeals held that the creditor was not required to proceed with a confirmation because the creditor was recovering under the judgment, not a deficiency after a foreclosure.

[6] Id.

[7] In re Snead at 825 (citing O.C.G.A. § 44–14–161(a)); see O.C.G.A. § 44-14-161 ((a) 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 sale 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; (b) The court shall require evidence to show the true market value of the property sold under the powers and shall not confirm the sale unless it is satisfied that the property so sold brought its true market value on such foreclosure sale; (c) The court shall direct that a notice of the hearing shall be given to the debtor at least five days prior thereto; and at the hearing the court shall also pass upon the legality of the notice, advertisement, and regularity of the sale. The court may order a resale of the property for good cause shown.).

[8] Ga. Real Estate Finance and Foreclosure Law § 9:2.

[9] Ga. Real Estate Finance and Foreclosure Law § 9:1 ("A confirmation proceeding may be initiated only by the party which conducted the foreclosure sale.").

[10] "[Guarantor] expressly agrees that [he] shall be and remain liable, to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure of any mortgage or security interest securing Indebtedness, whether or not the liability of Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. [Guarantor] shall remain obligated, to the fullest extent permitted by law, to pay such amounts as though the Borrower's obligations had not been discharged."

[11] See Matthew R. Brooks, Lenders Rejoice: Foreclosure Confirmation Statute May be Waived by Guarantor, Georgia Bar Journal, June 2014, at 12-14.

[12] Id.

[13] Id.

[14] Ga. Real Estate Finance and Foreclosure Law § 9:3.

[15] Id.

[16] Fed. Deposit Ins. Corp. v. Ivey-Matherly Const. Co., 144 Ga. App. 313, 314, 241 S.E.2d 264, 265 (1977).

[17] 3A Ga. Jur. Property § 32:69.

[18] Georgia Ltd. Partners v. City Nat. Bank, 323 Ga. App. 766, 767, 748 S.E.2d 131, 132 (2013) (citingGutherie v. Ford Equip. Leasing Co.,206 Ga. App. 258, 261(1), 424 S.E.2d 889 (1992)).

[19] 3A Ga. Jur. Property § 32:69.

[20] Ga. Real Estate Finance and Foreclosure Law § 9:3.

[21] Id.

[22] Id.

[23] O.C.G.A. § 44-14-161.

[24] Fed. Deposit Ins. Corp., 144 Ga. App. at 315.

[25] Keever v. General Electric Credit Corp. of Ga., 141 Ga. App. 864, 865, 234 S.E.2d 696.

[26] Id.

[27] Fed. Deposit Ins. Corp., 144 Ga. App. at 315.

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