GSB Vol. 17, NO. 5, Pg. 18. The Confirmation Resale Conundrum.

• Author: by Justin Lischak Earley and James B. Jordan

Georgia Bar Journal

Volume 17.

GSB Vol. 17, NO. 5, Pg. 18.

The Confirmation Resale Conundrum

GSB JournalVol. 17, NO. 5February 2012The Confirmation Resale Conundrumby Justin Lischak Earley and James B. JordanThe hangover from the Great Recession continues to drag more and more Georgia properties into foreclosure. As it does so, it has also worn away the veneer covering numerous rifts in the law that have long been buried just beneath the surface-some of them in existence since the Great Depression of the 1930s. One of those rifts, deriving from the so-called "confirmation statute" of 1935,(fn1) has become of increasing importance to legal practitioners and real estate investors (both commercial and residential alike) as the markets seek to clear away their distressed inventories. It involves the most basic question of all property transactions: Is title marketable? Unfortunately, when it comes to foreclosures, the answer (unlike the question) is not so simple.

This article challenges the existing assumptions about what it means to have marketable title to a foreclosed property in Georgia. Although we propose that the problem is more pervasive than most have heretofore recognized, we also propose that the problem has solutions. The basic premise of this article is that the law should encourage the acquisition of distressed property so as to normalize the real estate markets and promote the transition of distressed properties back into healthy, productive properties.

The (Title) Standard Answer

In 1935, with the nation mired in the midst of the Great Depression, the general assembly passed what is now codified at O.C.G.A. § 4414-161. The statute provides, in relevant part:

When any real estate is sold on foreclosure, without legal process, and under powers contained in security deeds, mortgages or other lien contracts and at the sale the real estate does not bring the amount of the debt secured by the deed, mortgage, or contract, no action may be taken to obtain a deficiency judgment unless the person instituting the foreclosure proceedings shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.(fn2)

In determining whether to confirm a sale and permit a deficiency judgment action against the debtor, "[t]he court . . . shall not confirm the sale unless it is satisfied that the property so sold brought its true market value on such foreclosure sale,"(fn3) and further, "the court shall also pass upon the legality of the notice, advertisement and regularity of the sale."(fn4)

The statute provides the judge faced with a confirmation action three possible choices: he/she may (1) confirm the foreclosure and permit the lender to pursue a deficiency judgment; (2) deny the confirmation and thereby preclude a deficiency judgment; or (3) "order a resale of the property for good cause shown."(fn5) It is this last choice - the ability to order the property to be reforeclosed-that creates the issue that this piece explores.

Because the pronounced economic downturn that began in 2007 has clobbered property values, it stands to reason that most recent foreclosures in Georgia have involved properties that are not worth the amount of the debt that encumbers them; that is, they are "underwater" and therefore possible candidates for a deficiency judgment to the extent that the debt encumbering the property is recourse (whether with regard to the borrower or to a guarantor, and whether fully, partially or con-tingently).(fn6) Therefore, in the ordinary Georgia foreclosure (whether commercial or residential), there exists the possibility that the lender may file a confirmation action, and upon doing so, the court could "for good cause shown" order the property to be reforeclosed upon.

Thus, whoever is holding title to the property while reforeclosure remains a possibility is holding title that is unmarketable, because there is no way to know that such person will not be divested of such title by a superior court's refore-closure order if the lender seeks confirmation. Georgia title practitioners have long recognized this possibility. Accordingly, as stated in Georgia Title Standard 17.3, "if a confirmation is pending or subject to appeal, title is considered to be unmarketable."(fn7)

The purpose of the title standards is to serve as a set of guide-posts for assisting the title examiner in exercising legal judgment.(fn8 )Insofar as a marketable title is not a perfect title, the examination and certification of titles is very much a risk-weighing art,(fn9) and it is not fair to expect the title standards to be perfect, any more than it is fair to expect a title to be perfect. Yet the title standard's choice to limit the unmarketabil-ity of title in this realm only to situations where a confirmation action is pending or on appeal seems quite underinclusive, both in light of logic and caselaw.

Logically, it does not make sense to limit the marketability problem only to situations where there is an ongoing confirmation action or appeal. As long as the 30-day period in which the foreclosing lender may file for confirmation has not passed, there is no reason that the lender cannot file for confirmation, and thereby change the hypothetical into the real. Further, because the caselaw indicates that "good cause shown" for ordering a resale is almost entirely at the discretion of the superior court,(fn10) from the perspective of the attorney certifying title there is no way of rationally weighing this risk, and the possibility of a confirmation resale therefore seems to merit an exception to marketability as long as the 30-day statutory period for filing a confirmation action has not passed.

It is not clear why the authors of the title standards chose to draw the line where they did.(fn11) Yet the most likely reason is a practical one: If the title standard declared title to be unmarketable during any such time that a confirmation action was even possible (and not just pending or on appeal), then the title standards would be holding that no title acquired by foreclosure at the courthouse steps would be marketable, because such a buyer would be assuming the risk of divestiture should there be a later confirmation action in which the judge orders reforeclosure. Adopting such a policy statement would depress property prices even further, as buyers on the courthouse steps would have to price the reforeclosure risk into their bids.

From the perspective of the third-party buyer on the courthouse steps, this risk is presumably catastrophic. Such a person would pay cash (or cash equivalent) to the lender,(fn12 )only to have the entire value of his or her investment (the property) stripped away by a court. In addition to being catastrophic, the risk would be nearly impossible to underwrite. How could any buyer at a public auction ever realistically determine whether the foreclosing lender will thereafter file for confirmation against the foreclosed borrower...