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December 2011 Update: Recent Georgia Appellate Court Decisions Hold Important Lessons for Lenders

Georgia appellate courts recently issued several opinions pertinent to the day-to-day operations of Georgia lenders. The following summaries of the opinions warrant review and consideration in order to avoid a number of potential pitfalls.

  1. An appraiser’s inclusion of a margin of error in making a value determination could save lenders from certain challenges during confirmation proceedings.

Summary

In one of its most recent banking opinions, the Georgia Court of Appeals issued a November 10, 2011, decision that emphasizes the importance of utilizing value appraisals that attach a margin of error when seeking judicial confirmation of a foreclosure sale.[1] In Superior Home Design, LLC v. State Bank & Trust,[2] a borrower challenged a trial court’s deduction of property taxes paid by the lender in determining that a foreclosed property sold for its true market value. The Court of Appeals found no need to address the merits of the borrower’s challenge, however, because the property sold for an amount that was within the 5 percent value margin of error assigned by the lender’s appraiser. Because the 5 percent margin of error created a value range that encompassed the actual sale price, the Court of Appeals affirmed the trial court’s confirmation of the foreclosure sale.

Pertinent Law

A trial court cannot confirm a foreclosure sale unless it is satisfied that the property sold for its true market value. The Court of Appeals noted:

Value on the date of sale is a factual question to be resolved by the trier of fact. In a proceeding for confirmation of a foreclosure sale of real property, the judge sits as a trier of fact, and his findings and conclusions have the effect of a jury verdict. Where the trial judge, sitting as the trier of the facts, hears the evidence, his finding based upon conflicting evidence is analogous to the verdict of a jury and should not be disturbed by a reviewing court if there is any evidence to support it.[3]

Background

State Bank & Trust Company (the “Bank”) loaned Superior Home Design, LLC (“Superior Home”), $429,199.65 in exchange for a security deed on property located in Gwinnett County, Georgia. Superior Home defaulted on the loan and the Bank foreclosed on the property. The Bank subsequently purchased the property at a public auction (as the sole bidder) for $270,000.

The Bank filed a petition for the confirmation of the foreclosure sale (the “Confirmation Proceeding”) in accordance with the Georgia foreclosure statute (the “Foreclosure Statute”).[4] During the Confirmation Proceeding, the Bank and Superior Home stipulated as to the legality of notice, advertisement, and regularity of the foreclosure sale. Superior Home contested, however, that the $270,000 foreclosure sale price represented the true market value of the property.

Superior Home’s appraisal expert opined that the property was worth $285,000, subject to a 5 percent margin of error. The Bank’s appraisal expert opined that the property was worth $280,000, subject to a 5 percent margin of error. The Bank also introduced evidence that it paid $10,740.82 to remove a property tax lien and clear title to the property. The trial court initially determined that the true market value of the property was $280,000. The trial court then proceeded to give the Bank credit for the $10,740.82 property tax payment and ultimately concluded that the true market value of the property was $269,259.18. Because the property sold for $270,000, the trial court concluded that the property sold for its true market value and confirmed the foreclosure sale.

On appeal, Superior Home argued that the trial court erred in taking the property tax payment into consideration in determining the true market value of the property. The Court of Appeals found it unnecessary to address the property tax issue because the 5 percent margin of error in the Bank’s appraisal created a range of value that encompassed the $270,000 purchase price.[5] Although the trial court did not utilize the Court of Appeals’ rationale in reaching its confirmation decision, the Court of Appeals refused to overrule the trial court’s confirmation decision because the Bank’s appraisal provided some evidence that the property was sold for its true market value.

Pitfall to Be Avoided

A lender is advised to obtain appraisals that attach a margin of error to the assigned value of a property. Attaching a margin of error increases the chances of withstanding a challenge to a Superior Court’s confirmation of a foreclosure sale.

  1. A statute that authorizes lenders to rescind foreclosure sales survives a challenge in the Georgia Supreme Court.

Summary

In fulfilling the Georgia Legislature’s intent to “create a mechanism to give homeowners every opportunity to cure a default and avoid the harmful and disturbing effects of foreclosure,” on July 5, 2011, the Georgia Supreme Court rejected a foreclosure purchaser’s challenge to the statute that permits lenders to rescind foreclosure sales under certain circumstances (the “Rescission Statute”). In JIG Real Estate, LLC v. Countrywide Home Loans, Inc.,[6] a foreclosure purchaser argued that the Rescission Statute did not empower lenders to rescind foreclosure sale contracts but only served to limit a lender’s liability upon rescission. The foreclosure purchaser also argued that the Rescission Statute was impermissibly vague and, thus, unconstitutional. The Supreme Court rejected the foreclosure purchaser’s arguments and ruled that the Rescission Statute does, in fact, empower a lender to rescind foreclosure sales under specific circumstances. The Supreme Court also held that the Rescission Statute is not impermissibly vague because persons of common intelligence would have no difficulty understanding it.

Pertinent Law

Under the Rescission Statute (O.C.G.A. § 9-13-172.1), within 30 days of a judicial or non-judicial foreclosure sale, but prior to the delivery of the deed to a purchaser, a lender is permitted to rescind the foreclosure sale if: (i) a person with an interest in the subject property files for bankruptcy protection, (ii) there are irregularities in the statutory foreclosure requirements, (iii) the underlying default has been cured prior to the sale, or (iv) the lender and debtor entered into an enforceable agreement prior to the sale whereby the debtor agrees to cure its default.[7]

Background

On March 6, 2007, JIG Real Estate, LLC (“JIG”), was the successful bidder for a parcel of foreclosed residential property being sold by Countrywide Home Loans, Inc. (“Countrywide”). On March 8, 2007, prior to the delivery of a deed under power to JIG, Countrywide returned JIG’s purchase funds and notified JIG that it was rescinding the sale of the property in accordance with the Rescission Statute. Unbeknown to JIG and apparently to the law firm that conducted the March 6, 2007, foreclosure sale, Countrywide and the homeowners reached an agreement (prior to the commencement of the foreclosure sale) to cancel the foreclosure and modify the loan terms in order to cure the homeowners’ default. JIG rejected Countrywide’s tender of the funds paid at the foreclosure sale and filed suit demanding the tender of the deed to the property. The trial court dismissed JIG’s suit. JIG appealed to the Georgia Supreme Court.

JIG argued that Countrywide was not entitled to rescind the foreclosure sale because the Foreclosure Statute only serves to limit a lender’s liability upon rescission. The Supreme Court determined that JIG’s argument lacked merit. The Supreme Court ruled that the Rescission Statute provides authority for a lender’s rescission of an eligible foreclosure sale when (among other circumstances) the underlying default has been cured prior to the sale, or when the lender and debtor enter into an enforceable agreement prior to the sale whereby the debtor agrees to cure its default.

JIG also argued that the Rescission Statute is impermissibly vague and ambiguous with respect to its application in light of existing case law, which holds that a foreclosure purchaser is entitled to a deed even when the borrower cures the underlying default. The Supreme Court rejected JIG’s argument, ruling that (i) while the language of the Rescission Statute may be imprecise, persons of common intelligence would have no difficulty in understanding the Rescission Statute, and (ii) the Rescission Statute superseded the case law cited by JIG.[8]

Pitfall to Be Avoided

Outside counsel’s failure to verify the continued existence of a default prior to conducting a foreclosure sale may result in unnecessary litigation expenses if the lender has grounds to rescind the sale. Therefore, outside counsel should verify that there has been no cure of an existing default, or other events encompassed within the Rescission Statute, prior to tendering a deed to a foreclosure purchaser.

  1. An appraisal expert’s failure to inspect the interior of a residential foreclosure property may result in the trial court’s refusal to confirm a foreclosure sale.

Summary

As additional evidence of the marked reaction to the record number of property foreclosures in Georgia, and in a clear attempt to protect borrowers, on July 26, 2011, the Georgia Court of Appeals effectively barred another fairly common lender practice in conducting and confirming foreclosure sales. In Hammock v. Issa,[9] the lender sought the confirmation of a foreclosure sale in accordance with the Foreclosure Statute. During the required evidentiary hearing, the lender’s appraisal expert opined as to the fair market value of the residential property but admitted that he did not inspect the interior of the property. Although the appraisal expert testified that an inspection of the interior of the property would not have impacted his value determination, the trial court denied confirmation because the borrower testified as to improvements made to the interior of the property. On appeal, the Court of Appeals held that the trial court properly exercised its discretion to deny confirmation in light of the borrower’s testimony.

Pertinent Law

Under the Foreclosure Statute, within 30 days of a non-judicial foreclosure under a power of sale, a lender is required to initiate proceedings to have the Superior Court confirm and approve the sale of the subject property. During a required evidentiary hearing, the lender must present testimony or other admissible evidence establishing (among other requirements previously noted) that the property sold for its true market value.

Background

James Hammock and Emily Hammock (collectively, the “Lender”) sold their home to Michael Issa (the “Borrower”) in exchange for a $319,500 promissory note and a deed to secure debt on the home. The deed contained a non-judicial power-of-sale provision in case of the Borrower’s default. The Borrower committed multiple defaults under the promissory note, resulting in the Lender foreclosing on the home and purchasing same at auction (as the sole bidder) for $230,000. The Lender then proceeded to file a Confirmation Proceeding under the Foreclosure Statute.

During a required evidentiary hearing, the Lender established that the Borrower defaulted on the promissory note and that the auction sale was properly noticed and advertised. The Lender then presented testimony from an appraiser (the “Appraiser”), who opined that the value of the home was $230,000. In reaching his opinion, the Appraiser relied upon tax records to discern physical data, including zoning and square footage, visually inspected the outside of the home from the street, and compared the home to other homes in the area that had recently been sold.

The Borrower introduced no competing evidence as to the value of the home but cross-examined the Appraiser as to whether an inspection of the interior of the home was necessary to develop an accurate value appraisal. The Appraiser testified:

I don’t feel that an interior inspection would have made much of a difference on this property. … It was consistent with the other properties in the neighborhood and certainly consistent with the sales that I use to support value. … Certainly there are issues that could be unknown to me that would affect value, but from the street there were none that were obvious.[10]

The Borrower subsequently testified as to substantial improvements that he made to the interior of the home. The Borrower did not offer any testimony as to the actual cost or monetary value of his reported improvements to the home.

The trial court considered the evidence and determined that the Lender did not fulfill the requirements of the Foreclosure Statute. The trial court held that the Lender …

has failed to demonstrate to a preponderance of the evidence that the foreclosure sale yielded the fair market value of the property. Specifically, the Court finds that the [Lender’s] appraiser failed to account for substantial improvements to the interior of the residence in developing his opinion of the market value of the subject property.[11]

On appeal, the Georgia Court of Appeals held that there was sufficient evidence to support the trial court’s determination. The Court of Appeals held that, although the Appraiser testified that unknown internal improvements would not have changed his valuation opinion, it was within the trial court’s discretion to find the Appraiser’s valuation testimony unpersuasive based on the Borrower’s testimony regarding the internal improvements.

Pitfall to Be Avoided

The failure to require an appraiser to inspect the interior of a property may result in a trial court’s refusal to confirm a foreclosure sale. Outside counsel should confirm that an appraiser conducts a full and complete inspection of the subject property.

For more information about this Client Alert, please contact:

Jeffery Randolph Saxby
Atlanta
(404) 923-9079
JSaxby@ebglaw.com


ENDNOTES:

[1] In Georgia, a non-judicial foreclosure sale must be confirmed by a Superior Court in order for a lender to pursue a deficiency judgment against a borrower.

[2] 2011 Ga. App. LEXIS 984 (Nov. 10, 2011).

[3] Id. at *3.

[4] Under the Foreclosure Statute (O.C.G.A. § 44-14-161), within 30 days of a non-judicial foreclosure, under a power of sale, a lender is required to initiate proceedings to have the Superior Court confirm and approve the sale of the subject property. During a required evidentiary hearing, the lender must present testimony or other admissible evidence establishing (i) the true market value of the subject property, (ii) that the debtor received adequate notice of the evidentiary hearing, (iii) that the foreclosure sale was properly advertised, and (iv) the regularity (i.e., the occurrence and outcome) of the sale. The failure to present evidence establishing any of the foregoing will result in the Superior Court’s refusal to confirm and approve the sale.

[5] The 5 percent margin of error assigned to the Lender’s $280,000 appraisal created a value range between $266,000 and $294,000. The $270,000 foreclosure sale price thus fell within the value range assigned by the Lender’s appraisal expert.

[6] 289 Ga. 488 (July 5, 2011).

[7] The full Rescission Statute provides that:

  1. As used in this Code section, “eligible sale” means a judicial or nonjudicial sale that was conducted in the usual manner of a sheriff’s sale and that was rescinded by the seller within 30 days after the sale but before the deed or deed under power has been delivered to the purchaser.
  2. Upon rescission of an eligible sale, the seller shall return to the purchaser, within five days of the rescission, all bid funds paid by the purchaser.
  3. Where the eligible sale was rescinded due to an automatic stay pursuant to the filing of bankruptcy by a person with an interest in the property, the damages that may be awarded to the purchaser in any civil action shall be limited to the amount of the bid funds tendered at the sale.
  4. Where the eligible sale was rescinded due to:
  1. The statutory requirements for the sale not being fulfilled;
  2. The default leading to the sale being cured prior to the sale; or
  3. The plaintiff in execution and the defendant in execution having agreed prior to the sale to cancel the sale based upon an enforceable promise by the defendant to cure the default,

the damages that may be awarded to the purchaser in any civil action shall be limited solely to the amount of the bid funds tendered at the sale plus interest on the funds at the rate of 18 percent annually, calculated daily. Notwithstanding any other provision of law, specific performance shall not be a remedy available under this Code section.

[8] The Rescission Statute took effect on July 1, 2003, subsequent to the case law cited by JIG.

[9] 310 Ga. App. 547 (July 6, 2011).

[10] Id. at 548.

[11] Id. at 549.