SunTrust filed a lawsuit against a borrower and guarantor who defaulted on a commercial loan that was secured by the borrower’s interest in real property being developed with the loan proceeds. The defaulting parties admitted that the debt was owed, but they raised the defense that the bank should be required to foreclose on the collateral – three tracts of land – and comply with the Georgia foreclosure sale confirmation statute before being allowed to seek a judgment on the promissory note and guaranty agreement. If required to foreclose prior to a judgment being entered in a lawsuit on the loan documents, the lender would lose its rights to elect not to foreclose and to obtain a judgment prior to foreclosure. Also, if required to foreclose first, the bank could not sue to recover the difference between the total debt owed and the foreclosure sale price unless the court confirmed in a statutory confirmation proceeding that the collateral sold at fair market value. Confirmation is not required if the lender has the election to sue on the note first and decide whether to foreclose later.
For the benefit of SunTrust, AGG argued that lenders should continue to have the right to elect between an approach that involves foreclose first, confirmation of the foreclosure sale and a subsequent lawsuit for any deficiency owed and an alternative approach that involves the filing of a lawsuit on the loan document first, followed by a decision after judgment as to whether to foreclose. AGG argued that a lender should not be forced to foreclose and acquire title to property it does not want. For example, the property might suffer from environmental contamination or involve a substantial cost of ownership. Further, AGG contended that the foreclosure sale confirmation statute was not designed to require foreclosure sales in every instance and that a foreclosure requirement would interfere with commerce and reduce the availability of loans.
AGG obtained favorable judgments in two related Superior Court cases filed to collect for the default on the note and guaranty. The Court of Appeals of Georgia affirmed the ruling in favor of SunTrust, but suggested that the issue raised by the borrower and guarantor was one for the Georgia Supreme Court or Legislature. The Supreme Court declined the request of the defaulting parties to review the Court of Appeal’s decision by certiorari. The bank’s victory was significant for Georgia lenders on the issue of applicability of the foreclosure sale confirmation statute. Many attorneys had been raising the defense of failure to foreclose and confirm first when their debtor clients were being sued on loan documents. The SunTrust victory in the Georgia appellate courts moved the issue into the state legislature, which almost passed a requirement to foreclose first that would have been devastating to lenders who could have been saddled with increasing numbers of problem properties and hampered in their efforts to collect debts.