I’ve had several recent discussions with lender clients regarding election of remedies in connection with loan defaults. I wrote about this topic a couple of years ago, so I’ve decided to re-post the article from the Georgia Real Property Law Section Newsletter, Summer 2009.
You Don’t Have to Pick Your Poison: Foreclosure, Deficiency Judgments, and other Collection Strategies in Georgia
Despite record numbers of foreclosure filings in Georgia in recent months, many lenders are not aware of the full array of collection strategies available to them in pursuing deficiency judgments against borrowers, guarantors, or both.
A basic understanding of the Georgia confirmation statute is critical to evaluate properly all available collection strategies. Pursuant to O.C.G.A. § 44-14-161, to obtain a deficiency judgment after foreclosure, a lender must report a sale to a superior court judge in the county where the foreclosed property is located within thirty days after the sale and request confirmation. In a confirmation hearing, a lender must present evidence to the court, usually in the form of an appraisal effectively dated as of the day of the sale, that the successful bidder at the foreclosure sale bid at least the “true market value” for the property. A lender must also present evidence regarding the legality of the notice and advertisement and the regularity of the sale. The primary purpose of the requirement to confirm foreclosure sales is to protect the borrower “from being subjected to double payment in cases where the property was purchased for a sum less than its market value.” First Nat’l Bank v. Kunes, 128 Ga. App. 565, 567 (1973). The Georgia legislature enacted the confirmation statute during the Great Depression when many borrowers were forced into bankruptcy after their properties were sold for substantially diminished values at foreclosure. Taylor v. Thompson, 158 Ga. App. 671, 672 (1981).
When a borrower defaults, the first instinct of most lenders is immediately to exercise the power of sale and foreclose the property, confirm the sale, and then file suit to obtain a deficiency judgment. This process is effective, but it is not the only method of obtaining a deficiency judgment. In Georgia, “a creditor who holds a promissory note secured by a deed is not put to an election of remedies as to whether he shall sue upon the note or exercise the power of sale contained in the deed, but he may do either, or ‘pursue both remedies concurrently until the debt is satisfied.’” Taylor, 158 Ga. App. at 672 (internal citations omitted). In other words, foreclosure and suit on the note or guaranty are not necessarily mutually exclusive remedies and do not have to be pursued in any particular order.
A lender can always sue on the note, guaranty, or both first, obtain a judgment, and then exercise the power of sale contained in the security deed to foreclose the property. Taylor, 158 Ga. App. at 673. Because the confirmation statute is in derogation of the common law “and must be strictly construed,” courts have interpreted the statute to require confirmation only as a condition precedent to future deficiency actions. Taylor, 158 Ga. App. at 672 (citing First Nat’l Bank, 128 Ga. App. at 565) (emphasis added); see also Frank S. Alexander, Real Estate Finance and Foreclosure Law 158-59 (Thompson West 2004). Accordingly, foreclosures carried out subsequent to the lender obtaining a judgment are not subject to the confirmation statute—only deficiency actions brought after foreclosure.
Another useful strategy in some instances is to file suit on the note, guaranty, or both concurrently with commencement of foreclosure on the property. Once the foreclosure and confirmation process is complete, the lender can amend its complaint to account for any developments during the foreclosure process. The primary benefit of this strategy is to accelerate the litigation timeline (rather than waiting until after the foreclosure and confirmation process is complete to file suit). This strategy often produces a judgment more quickly than a purely bifurcated foreclosure and litigation strategy.
There are pros and cons to all methods of obtaining and collecting on deficiency judgments in Georgia. A lender who immediately exercises the power of sale and forecloses the property takes title cheaply and quickly, while avoiding waste of the property during the pendency of a potentially lengthy lawsuit, but the lender must comply with the confirmation statute if the lender intends to seek recovery of a deficiency. If the borrower, guarantor, or both have “deep pockets,” and the lender determines there is a high probability of collection from one of those parties, it may be prudent for the lender to sue on the note or guaranty first, obtain a judgment, exhaust collection efforts, and then foreclose on the property to collect the balance of the judgment. There is also the strategy of foreclosing and suing on the note, guaranty, or both simultaneously where the lender desires to quickly take title to the property, accelerate the litigation timeline, and has concluded based on the appraised value of the property and loan balance that it will pursue a deficiency.
Any good collection strategy should include an assessment of the likelihood of a deficiency after foreclosure of the property and selection of the best remedy for successful recovery of the indebtedness. The assessment should be made early in the collection process and should consider the unique facts of each loan. Early planning can make the difference between successfully collecting a debt in full and writing off a loan loss.