The Landmark Trilogy of HWA Properties, DCB Investments and Smith

On February 22, 2016, the Georgia Supreme Court in PNC Bank, N.A. v. Smith, 2016 Ga. LEXIS 169, affirmed two prior landmark decisions of the Georgia Court of Appeals, HWA Properties, Inc. v. Community & Southern Bank, 322 Ga. App. 877 (2013) and Community & Southern Bank v. DCB Investments, LLC, 328 Ga. App. 605 (2014), and confirmed that a guarantor may contractually waive the statutory protections under the Georgia foreclosure confirmation statute which would otherwise require a lender to confirm a foreclosure sale to pursue a deficiency judgment against guarantors.

In Smith, the Georgia Supreme Court decided two certified questions posed to it by the United States District Court for the Northern District of Georgia regarding the requirements of Georgia’s foreclosure confirmation statute, O.C.G.A. § 44-14-161: “(1) Is a lender’s compliance with the requirements contained in O.C.G.A. § 44-14-161 a condition precedent to the lender’s ability to pursue a borrower and/or guarantor for a deficiency after a foreclosure has been conducted? (2) If so, can borrowers or guarantors waive the condition precedent requirement of such statute by virtue of a waiver clause in the loan documents?” Answering “yes” to both questions, the Georgia Supreme Court affirmed HWA Properties and DCB Investments.

Previously, in 2013, the Georgia Court of Appeals issued its landmark decision in HWA Properties, holding for the first time that a guarantor can contractually waive its right to require the lender to confirm a foreclosure sale as a pre-condition to pursuing a deficiency judgment. In HWA Properties, the Court of Appeals relied on the specific guaranty waiver language at issue in that case, noting that the guarantor expressly: (1) waived all defenses to liability on the entire balance due on the note; (2) gave consent for the lender to collect other collateral and apply the proceeds to the amount due on the note; (3) agreed that the collection of other collateral would not reduce, affect, or impair the guarantor's liability; and (4) agreed that the guarantor would remain liable for any deficiency even after foreclosure of the property and release of the borrower.

Then, in 2014, the Georgia Court of Appeals further expanded the scope of HWA Properties in DCB Investments. In DCB Investments, one of the three guaranties contained language similar to the HWA Properties’ guaranty, the other two guaranties contained some, but not all, of the waivers present in the first guaranty. The Court held that all three guarantors had waived the protection of the confirmation statute based upon the explicit language in the guaranties. DCB Investments made it clear that a lender is not required to pursue confirmation as a condition precedent to suing a guarantor for a post-foreclosure deficiency, provided adequate waiver language exists in the guaranty. It also established that waiver language less comprehensive than that cited in HWA Properties may still suffice to find waiver of the confirmation statute’s protections.

In Smith, PNC chose not to institute a confirmation proceeding after foreclosure, but instead filed a deficiency suit against the guarantors. In the guaranties, each of the guarantors “pledged to remain unconditionally liable on the indebtedness, irrespective of the [borrower’s] own liability or ultimate discharge. In addition, the guarantors waived their legal and equitable defenses, other than payment of the indebtedness.” The guarantors each expressly waived “any and all rights or defenses . . . based on any ‘one action’ or ‘antideficiency’ law or any law which prevents [PNC] from bringing any action, including claim for deficiency against [the guarantors], before or after [PNC's] completion of any foreclosure action. . . .” The guarantors “also acknowledged PNC's right of foreclosure and agreed to remain liable for the indebtedness even if post-foreclosure confirmation did not occur.”

In holding that a guarantor may contractually waive the protections of the Georgia foreclosure confirmation statute, the Georgia Supreme Court found that “this result creates an appropriate balance between the statutory protections of the confirmation statute and the freedom of a guarantor to enter contracts deemed beneficial.” To paraphrase Judge Nahmias in his concurring opinion, before long, virtually every security deed and guaranty in Georgia will include such a waiver, and the confirmation statute could become a “dead letter.”