[NOTE: This opinion is subject to change until published in final.]

The case of MPP Investments, Inc. v. Cherokee Bank, N.A., Case # S10A1363 (Ga. January 10, 2011) concerned the following timeline of events:

April 30, 1998 Old Roswell Investments, LLC delivered note and security deed to Etowah Bank, encumbering property in Roswell, Georgia.

October 29, 1998 Old Roswell delivered a note and security deed to Howe, encumbering the same property.

June 1999 Old Roswell signed a modification agreement evidencing the merger of Etowah Bank with Regions Bank. Howe signed a subordination agreement.

September 28, 2001 The debt of Old Roswell to Howe matured, as referenced in the security deed.

December 2006 Old Roswell delivered a note and security deed to Cherokee Bank for a loan secured by the same property, the proceeds of which Old Roswell used to pay off the Regions Bank loan.

September 2008 Howe commenced foreclosure proceedings.

November 24, 2008 Cherokee filed a quiet title action and filed a related lis pendens, together with a motion for injunction to stop the Howe foreclosure.

November 25, 2008 Hearing was held on Cherokee’s motion. The parties agreed to a consent order delaying foreclosure to January 6, 2009.

December 30, 2008 The trial court appointed a special master.

January 6, 2008 Howe foreclosed and conveyed the property to MPP Investments, Inc.

July 30, 2009 Special master hearing occurred.

The dominant issue at the special master hearing was whether title under Howe’s security deed reverted to Old Roswell, prior to Howe’s commencement of foreclosure, by operation of O.C.G.A. § 44-14-80 (a)(1):

Title to real property conveyed to secure a debt or debts shall revert to the grantor or his or her heirs, personal representatives, successors, and assigns at the expiration of seven years from the maturity of the debt or debts or the maturity of the last installment thereof as stated or fixed in the record of the conveyance or, if not recorded, in the conveyance; provided, however, that where the parties by affirmative statement contained in the record of conveyance intend to establish a perpetual or indefinite security interest in the real property conveyed to secure a debt or debts, the title shall revert at the expiration of the later of (A) seven years from the maturity of the debt or debts or the maturity of the last installment thereof as stated or fixed in the record of conveyance or, if not recorded, in the conveyance; or (B) 20 years from the date of the conveyance as stated in the record or, if not recorded, in the conveyance.

After the hearing the special master requested that the parties brief the question of whether Howe’s failure to follow the notice requirements in the security deed voided the foreclosure sale. The Howe security deed required that Howe give sixty (60) days notice before foreclosing.

The special master determined that (a) the foreclosure sale was void due to Howe’s failure to satisfy the notice requirements, (b) title reverted to Old Roswell pursuant to O.C.G.A. § 44-14-80 (a)(1) and (c) Cherokee Bank held a first-priority security deed. The trial court adopted the special master report. Howe and MPP Investments appealed on six grounds.

First, the appellants argued that Cherokee waived the notice issue by failing to raise it at the November 25, 2008 hearing and to include it in the pre-trial order. The Supreme Court construed the hearing as a preliminary hearing on an issue separate from the underlying quiet title claim and observed that, at the time of the initial pleadings, no foreclosure had occurred and the only issue was determination of the competing interests of Howe and Cherokee Bank. Upon completion of the foreclosure sale, Cherokee Bank properly amended its petition to put at issue the validity of the foreclosure sale. The pre-trial order included as substantive issues the validity of the foreclosure sale and possible reversion under O.C.G.A. § 44-14-80(a)(1). The notice requirement related directly to the legality of the foreclosure sale and was clearly within the purview of the special master within the scope of the pleadings.

Second, the appellants argued that Cherokee Bank’s failure to assert the reversion claim prior to the foreclosure sale estopped the Bank from raising it before the court. The Supreme Court dismissed this argument, noting that Cherokee Bank filed suit and recorded its lis pendens well in advance of the foreclosure sale; MPP Investments admitted at the special master hearing that it knew of the suit and, since the security deed was recorded, had notice of both the stated maturity date and the date upon which the reversion would occur; and the record was devoid of evidence that MPP Investments relied upon Cherokee Bank’s actions, silence or inactions in the matter.

Third, appellants argued that the security deed did not require notice from Howe because the secured note stated that the debt would become due and payable upon a default without demand or notice and that the note, being the principal obligation, should control over the conflicting provisions of the security deed. The Supreme Court agreed with the conclusion of the special master, however, that the two provisions did not conflict. Acceleration of the debt required no notice but consequent foreclosure did.

Fourth, the appellants argued that a letter from Howe to Old Roswell on September 4, 2008 constituted the required notice. This letter contained the requisite information but notified Old Roswell that the foreclosure sale was to occur on October 7, 2008. Foreclosure notices were published on September 8, 15, 22 and 29, 2008. Howe did not send the letter sixty days before he commenced the foreclosure proceedings. Therefore, the foreclosure was invalid and title under Howe’s security deed reverted to Old Roswell.

Fifth, MPP Investments claimed status as a bona fide purchaser for value pursuant to O.C.G.A. § 23-1-20. The Court responded with a litany of reasons that MPP Investments could not claim to be without notice of the possible adverse claim.

Sixth, MPP objected to the trial court’s failure to grant its motion for an oral hearing on its exceptions to the special master’s report. The trial court was not required to hold a hearing.

Observations:

1. Cherokee Bank made its loan in face of Howe’s open loan deed. If Howe had commenced foreclosure proceedings just a little earlier, Cherokee Bank would likely have had to rely upon the argument that it was subrogated to the rights of Regions Bank under the loan deed satisfied with the proceeds of the Cherokee Bank loan. Still a question though, as to Cherokee Bank’s closing in face of that open security deed clearly within the reversion period.

2. This case emphasizes that any open security deed within the reversion period should be cancelled and not finessed. A secured debt can go seven years without payment and still be foreclosed.

3. Counsel for Cherokee Bank seems to have been on its game here: doing everything required to give notice of the Bank’s claim and prompt amendment of the Bank’s petition to include the issue of the validity of the foreclosure sale.