Commercial Law - James C. Marshall

• Publication year: 1994

Commercial Law by James C. Marshall^*

Georgia legislation concerning perfection of security interests, federal bankruptcy amendments, and a decision by the United States Supreme Court were the most significant developments in Georgia commercial law during the survey period.

I. Realizing Upon Real Property Collateral

Georgia creditors secured by real property typically enjoy a power of sale contained within a deed to secure debt granted by the debtor.¹ This power permits the creditor to conduct a nonjudicial foreclosure sale of the collateral upon the debtor's default.² If the proceeds of such a sale do not satisfy the debt, the Georgia creditor typically seeks to collect the deficiency by foreclosing upon additional collateral, if any, or by obtaining an in personam deficiency judgment against the debtor. Before obtaining a deficiency judgment, however, the creditor must first file a petition for confirmation with the local superior court.³ The court receiving such a petition will "confirm" the foreclosure sale if it concludes the sale was regularly conducted⁴ and the price received reflected the property's "true market value."⁵ If the court refuses to confirm the sale, the court may permit a resale, essentially restarting the foreclosure process.⁶ If the court does not confirm and does not permit a resale, the creditor loses any right to collect an in personam deficiency judgment.⁷ The survey period produced interesting decisions concerning the debtor's entitlement to notice of confirmation hearings,⁸ the necessity for obtaining confirmation when the creditor holds multiple notes,⁹ the effect of bankruptcy upon the confirmation process,¹⁰ and the timing of collateral valuation when the court permits a resale after refusing to confirm.¹¹ These confirmation developments, however, pale in comparison to the significance of the decision of the United States Supreme Court in BFP v. Resolution Trust Corporation.¹²

A. The Demise of the Rule in Durrett

If a nonjudicial foreclosure of real property under power of sale satisfies the creditor's debt, confirmation is unnecessary since no deficiency remains for collection. Assuming it is regularly conducted, Georgia law provides that such a foreclosure sale is final and may be set aside only if tainted by fraud or procedural irregularity.¹³ Gross inadequacy of the price received at the sale evidently does not provide grounds under Georgia law for avoiding a regularly conducted, non-fraudulent foreclosure sale.¹⁴ But, until the decision in BFP, regularly conducted foreclosure sales that were not fraudulent under Georgia law could be avoided under federal law if the debtor filed bankruptcy within one year of the date the sale became binding against a subsequent bona fide purchaser for value.¹⁵ Following the lead of the Fifth Circuit with its decision in Durrett v. Washington National Insurance Co.,¹⁶ many federal courts avoided foreclosure sales after concluding that the sale price was not a "reasonably equivalent value" for the collateral within the meaning of the fraudulent conveyance statute found in federal bankruptcy law.¹⁷ Indeed, the decision in Durrett often was cited for the proposition that the price received at a regularly conducted, non-fraudulent foreclosure sale must equal or exceed seventy percent of the collateral's fair market value if the sale is to withstand a timely avoidance attack under federal bankruptcy law.

The Durrett rule may have had a chilling effect upon Georgia foreclosure sales because, generally speaking, prospective buyers could not be certain the sale was final until a year elapsed following recordation of their foreclosure deeds. In essence, the better the deal, the greater the uncertainty of its survival. But it is more likely that Durrett had a beneficial effect upon the price received at Georgia foreclosures since, in actual practice, the price received is almost always dictated by the wishes of the creditor conducting the foreclosure sale and not by third party bidding.

Most creditors foreclosing upon Georgia real estate participate as bidders in the foreclosure sales they conduct. If the creditor is concerned about obtaining confirmation following the sale and if the local confirmation process works as designed, the creditor is motivated to bid more than seventy percent of the collateral's fair market value because the creditor is concerned about proving to the superior court that the price received was the property's "true market value."¹⁸ But, in many cases, the foreclosing creditor is not concerned about obtaining confirmation of a particular foreclosure sale. This could be because the sale will satisfy the debt, or other collateral is available to satisfy the debt, or the debtor is judgment proof, or confirmation is unnecessary under one of the numerous exceptions created by court decision,¹⁹ or for some other reason. Absent a confirmation concern, the Durrett rule was the only significant legal reason motivating foreclosing creditors in Georgia to assure the price received upon foreclosure bore some relation to the property's fair market value.

The Supreme Court eliminated the Durrett rule with its five to four decision in BFP.²⁰ There, the Court held that the price received at a regularly conducted, non-collusive²¹ foreclosure sale of real property was conclusively presumed to be "reasonably equivalent value" in exchange for the involuntary transfer of that property and that, therefore, such sales could not be avoided under federal bankruptcy law.²² Although its pronouncement specifically is limited to real property foreclosures, BFP certainly presages the demise of the Durrett rule for personal property foreclosures as well.²³

The decision in BFP might encourage more third party bidders to attend foreclosure sales in the hopes that the foreclosing creditor is not concerned about confirmation and, therefore, will not be motivated to bid "true market value." Under the regime of BFP, third party bidders attending foreclosure sales might stumble upon a real deal that cannot be undone so long as the sale is regularly conducted and non-collusive. Thus, the decision in BFP may heighten third party interest in foreclosure sales and, in that sense, promote the bidding process rather than chill it. But, perhaps in a more important sense, the decision in BFP may chill bidding by eliminating a substantial motivation for the foreclosing Georgia creditor to obtain a price commensurate with fair market value, a price that is not a real deal for the buyer. After all, chilling the bidding is problematic only if it results in lower prices.

It is quite unlikely that Congress will overrule the decision in BFP, and consequently, states must determine whether they wish to fill the gap left by the demise of Durrett. Of course, Durrett can be viewed as a relatively recent, insulting, and unnecessary infringement upon states' rights. State lawmakers holding such views are likely to herald Durrett's demise and are unlikely to fill any void created. For the time being, however, nothing like Durrett operates to constrain creditors in Georgia, and both debtors and creditors should plan accordingly. If a bankruptcy petition is inevitable or likely, debtors are well advised to seek a commitment from a foreclosing creditor concerning the price it will bid at its foreclosure sale. The debtor should consider filing its petition before the sale if the creditor is not forthcoming concerning its bid price or if the stated bid price is insufficient.

B. Multiple Notes and the Necessity for Confirmation

In Ward v. Pembroke State Bank,²⁴ a creditor holding two notes conducted a nonjudicial sale under power and did not confirm the sale. The two notes were secured by the same tract of land under one deed to secure debt, the second note by virtue of an "open end" or dragnet clause.²⁵ After purchasing the property at foreclosure by bidding the amount of its first note, the creditor then filed suit to recover on the second note.²⁶ The debtor defended this action with reference to the creditor's failure to confirm,²⁷ and the court of appeals determined that its decision in C.K.C., Inc. v. Free²⁸ was controlling.²⁹

In Free the court held that when notes are related and secured by the same security deed, a creditor's failure to obtain confirmation of foreclosure sale conducted to satisfy one note will bar any deficiency judgment on the second note.³⁰ The court distinguished Ward from Clements v. Fleet Finance³¹ and Devin Lamplighter, Ltd. v. American General Finance³² in which the courts ruled that a creditor is not barred from instituting a deficiency judgment after foreclosing upon a prior note if the subsequent note is a separate debt secured by a separate security deed.³³ In Ward the court stated that the "open end" clause effectively caused the second loan to merge with the first and become one debt for purposes of foreclosure.³⁴ The court emphasized the two notes were secured by the same deed to the same property.³⁵

C. Timeliness of Notice to Debtor of Confirmation Hearing

In Vlass v. Security Pacific National Bank,³⁶ the Supreme Court of Georgia affirmed the constitutionality of the notice provisions in Georgia's confirmation statute.³⁷ The creditor in Vlass conducted its nonjudicial foreclosure on October 6, 1992, and reported the sale to the superior court on October 30, 1992, well within the thirty day period mandated by the confirmation statute.³⁸ On December 9, 1992, the creditor served the debtor with a copy of the confirmation application and gave the debtor notice that the confirmation hearing was scheduled for December 28, 1992.

The debtor found this timing and process objectionable, contending that service of the creditor's application for confirmation must comply with the Civil Practice Act ("CPA").³⁹ But the court in Vlass found the CPA inapplicable because the confirmation process is begun by an application, not a complaint, the application invokes...