Georgia law extols private property rights . . . for some.  Many of those who fall on hard times, often due to no fault of their own, have little if any protection short of bankruptcy.  That option itself imposes disabilities and stigmas moving forward.

A real estate developer, successful for decades, has a secured commercial real estate loan routinely renewed over more than 20 years.  He makes all payments on time.  A new bank acquires the loan and refuses any more extensions.  No real reason; just doesn’t want the loan anymore. The borrower diligently but unsuccessfully works to refinance the loan or sell the property to pay out the lender. The lender sues on the note and gets a judgment.  The lender now has the right to foreclose its judgment lien on any property of the debtor, including the one subject to the loan.

In Georgia, the lender can elect to foreclose on the property under either the security deed or the judgment lien.  If under the judgment lien, the lender can sell the property at the public sale without regard to market value or any equity of the borrower. It will apply that payment against the debt and can then pursue the debtor and the debtor’s other assets for the remaining amount (the “deficiency”).

If the lender forecloses the security deed, realizes at the public sale a price less than the debt and wants to pursue the borrower or a guarantor for the deficiency, it must go before a court in a “confirmation action.”  If the judge “confirms” the foreclosure sale by finding that the lender followed the rules and that the foreclosure brought the fair value for the property, then the lender can go against the borrower and guarantor for the deficiency.

Foreclosing a judgment lien avoids the risks of confirmation, but obtaining one requires a court action.  Foreclosure of a security deed is faster and cheaper but requires confirmation to pursue the debtor further.  That’s the basic analysis, all things being equal.

Or maybe not.

The Georgia Supreme Court in 2016 confirmed lines of cases establishing that a lender must confirm a security deed foreclosure sale before pursuing a deficiency against a guarantor unless the guarantor waives that protection, which it may do in the loan documents PNC Bank v. Smith, pp 12-13, 2016 WL 1276376 (S15Q1445, decided April 4, 2016).  Properly drafted loan documents routinely include these waivers by borrowers and guarantors.    I agree with the observation by Justice Nahmias in his concurring opinion that there is no reason to expect a different outcome for borrowers:

[I]f guarantors can waive the protections of the confirmation statute, it would seem to follow that borrowers too can waive those protections. And if that is the case, then it may well be – given the imbalance in bargaining power between lenders and many borrowers – that before long, virtually every security deed in Georgia, particularly for residential home buyers, will include such a waiver, and the confirmation requirement of OCGA § 44-14-161 could become a dead letter for those whom it was most clearly designed to protect.

Id., p. 16.  The “imbalance in bargaining power” noted by Justice Nahmias manifests itself partly in the non-negotiability of most loan documents.  Lenders close residential loans on computer-generated forms that the borrower must sign on a “take-it-or-leave-it-basis.”  A commercial lender will rarely negotiate the remedial provisions of its loan documents except perhaps for its larger customers. The Supreme Court based its decision in PNC Bank largely on the “sacrosanct freedom of contract.  Id., p. 9.  I question whether there can truly be a contract, except of adhesion, when one party has no right to say yay or nay.

Here’s the bottom line:  if you take out a mortgage loan, or guarantee one, and default, or the lender gets a judgment, just assume that the lender can sell the property at a foreclosure sale for any price it wants, you will lose any equity that you may have built up, and the lender may go after you for the deficiency.

Justice Nahmias tactfully invited the General Assembly to recalibrate the applicability of the confirmation statute. They should also look at the foreclosure of judgment liens. There are other issues also deserving attention, but these concerns are low-hanging fruit:  current and susceptible to simple statutory fixes.

Legislative action is doubtful.  Republicans have little appetite for debtor-protection issues (even though they affect individuals and companies all along the economic spectrum). Democrats would have to sponsor the push, but they’re currently in exile, as the Republicans were and will be again.  I am not hopeful.

I hope I’m wrong.