Friday, October 24, 2008

Banks Held to A “True Market Value” Standard in Deficiency Confirmation

The Court of Appeals indicated in Cartersville Developers, LLC. v. Georgia Bank & Trust., (“GB&T”) No. A08A0533., Court of Appeals of Georgia, July 1, 2008, that it intends to continue to hold Banks to a true “true market value,” standard in a confirmation hearing post foreclosure.

In Cartersville, Supra, GB&T foreclosed on 17 townhomes. GB&T paid in at foreclosure the amount of the secured debt and then sought a deficiency judgment. At the confirmation hearing 30 days later, GB&T testified that each unit should be discounted $10,000 based on the fact that the units were “in foreclosure.” The trial court allowed the discount on each unit. On appeal, the Court of Appeals indicated that this “in foreclosure,” discount was arbitrary and erroneous and that the Trial Court, whether it was is difficult standard or not, must find – by an evidentiary hearing – the actual “true market value.” The confirmation judgment was vacated and the case remanded.

It may be that Cartersville Developers, LLC, is a signal to banks that, in this time of massive foreclosure red ink, the Courts are going to examine deficiency judgments more stringently.

The only thing novel about Cartersville, Supra, is that it exists. While perhaps cynical on this author’s part, generally, banks have been able to put on most any reasonable evidence at confirmation and walk out with a deficiency judgment. [It should be noted that deficiency judgments post foreclosure are not particularly common in Georgia.] Maybe Cartersville, Supra, will raise the evidence bar a bit and make banks work toward proving “true market value,” in post-foreclosure deficiency.

Hugh Wood, Atlanta, Georgia

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The relevant Georgia Confirmation statute is:

§ 44-14-161. Sales Made On Foreclosure Under Power Of Sale -- When Deficiency Judgment Allowed; Confirmation And Approval; Notice And Hearing; Resale.

(a) 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.
(b) The court shall require evidence to show the true market value of the property sold under the powers and shall not confirm the sale unless it is satisfied that the property so sold brought its true market value on such foreclosure sale.
(c) The court shall direct that a notice of the hearing shall be given to the debtor at least five days prior thereto; and at the hearing the court shall also pass upon the legality of the notice, advertisement, and regularity of the sale. The court may order a resale of the property for good cause shown.

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No. A08A0533.
Court of Appeals of Georgia,
July 1, 2008
Smith, Presiding Judge.
Cartersville Developers, LLC, appeals from the Bartow County Superior Court's order confirming a foreclosure sale by Georgia Bank & Trust. Because the trial court applied the wrong legal standard when confirming the foreclosure, we must vacate its order and remand this case for further proceedings.
"At a confirmation hearing, the judge sits as the trier of fact and his findings and conclusions have the effect of a jury verdict; therefore the trial judge's findings should not be disturbed by this court if there is any evidence to support them." (Citations and punctuation omitted.) Wilson v. Metropolitan Fed. Sav. & Loan Assoc., 196 Ga.App. 588, 589 (396 S.E.2d 546) (1990). The facts in this case are not disputed. Georgia Bank & Trust purchased 17 town homes built by Cartersville Development at a foreclosure sale, paying $129,500 for each two-bedroom unit and $130,900 for each three-bedroom unit. A real estate appraiser hired by Georgia Bank & Trust testified that he valued the town homes at $128,600 for each two-bedroom unit and $130,000 for each three-bedroom unit. The appraiser acknowledged that in arriving at these values he made a $10,000 deduction because the properties were "in foreclosure." According to the appraiser, his assignment included taking into account that the properties were under foreclosure and that "homes that sold in foreclosure tended to sell for approximately eight to twelve thousand dollars less than homes that were not under foreclosure that were similar competitive homes in the market." Georgia Bank & Trust submitted no other evidence demonstrating the specific fair market value of the town homes. A real estate appraiser hired by Cartersville Development gave both the two-bedroom and three-bedroom units a value of $150,000.
During the confirmation hearing, Cartersville Development argued that it was inappropriate for the superior court to consider the $10,000 foreclosure discount and that the minimum value for the units established by the evidence was approximately $140,000. The trial court rejected this argument and concluded that it was obligated only to determine if its "judicial conscience was shocked" by any disparity between the foreclosure sale price and the true market value.
Cartersville Development asserts in this appeal that the trial court erred by confirming the sale based on an appraisal that discounted the value of the properties by $10,000 because they were in foreclosure. We agree.
The standard to be applied by a trial court in an action by a lender to confirm a foreclosure sale differs from that used in an equity action filed by the borrower to set aside a foreclosure sale. Grizzle v. Federal Land Bank of Columbia, 145 Ga.App. 385, 388 (244 S.E.2d 362) (1978); Federal Deposit Ins. Corp. v. Ivey-Matherly Constr. Co., 144 Ga.App. 313, 315 (241 S.E.2d 264) (1977). A different rule applies because the lender's right to foreclose is governed by statute, OCGA § 44-14-161 (b), and a judicial confirmation "that the property brought at least its true market value on the foreclosure sale" is a condition precedent to the lender's right to obtain a deficiency judgment against the borrower. See Wheeler v. Coastal Bank, 182 Ga.App. 112, 114 (1) (354 S.E.2d 694) (1987).
In an action brought by a borrower to set aside a foreclosure sale,
inadequacy of price paid upon the sale of property under power will not of itself and standing alone be sufficient reason for setting aside the sale. It is only when the price realized is grossly inadequate and the sale is accompanied by either fraud, mistake, misapprehension, surprise or other circumstances which might authorize finding that such circumstances contributed to bringing about the inadequacy of price that such a sale may be set aside by a court of equity.
(Citations omitted.) Giordano v. Stubbs, 228 Ga. 75, 79-80 (3) (184 S.E.2d 165) (1971). The lender's right to obtain a deficiency judgment is not directly at stake in a motion to set aside a foreclosure sale.
A trial court cannot confirm a foreclosure sale, on the other hand, "unless it is satisfied that the property so sold brought its true market value." (Citation, punctuation and footnote omitted.) Wilson v. Prudential Industrial Properties, 276 Ga.App. 180 (1) (622 S.E.2d 890) (2005). True market value "is the price that the property will bring when it is offered for sale by one who is not obligated, but has the desire to sell it, and is bought by one who wishes to buy it, but is not under a necessity to do so." (Citation and punctuation omitted.) Id. at 181 n.1.
Based on this definition, this court has previously found that a trial court erred by confirming a foreclosure sale based upon "evidence of the 'quick sale' value of the subject property because such a valuation does not reflect the price that would be obtained in a sale under the usual market conditions." (Citation omitted.) Guthrie v. Ford Equipment Leasing Co., 206 Ga.App. 258, 261 (1) (424 S.E.2d 889) (1992). The appraiser's $10,000 foreclosure deduction in this case is precisely the type of valuation precluded by our opinion in Guthrie.
The trial court relied upon this court's opinion in Darby & Assoc. v. Federal Deposit Ins. Corp., 141 Ga.App. 78, 79 (232 S.E.2d 615) (1977), to confirm the foreclosure sale at issue here. In Darby, this court stated in dicta that "[t]he purpose of confirmation hearings is to establish that the sale was fairly conducted and that any disparity between value and sale price, if it exists, is not such as to shock the judicial conscience. Brooks v. Bast, 242 Md. 350, 219 A.2d 84, 15 ALR3d 1265, 1271; Giordano, [supra]." Id. at 79 (1).
We find that the trial court erred in applying this language to confirm a judicial sale when no construction of the evidence would authorize a finding that the sale price was at least the true market value of the property. This language was impliedly overruled in Ivey-Matherly Constr. Co., supra, where we held that the rule set out by the Georgia Supreme Court in Giordano, supra, should not be applied in proceedings to confirm a foreclosure sale, but only in equity cases to set aside a foreclosure sale. 144 Ga.App. at 315. We now expressly disapprove the use of the above-quoted language in Darby, supra, in actions to confirm a judicial sale where the evidence demonstrates that the sale price is not at least as much as the true market value of the property.
Because the trial court applied the wrong legal standard when determining whether to confirm the foreclosure sale, we vacate its order and remand this case to the trial court for further proceedings consistent with this opinion. Wheeler, supra, 182 Ga.App. at 114 (1); Gutherie, supra, 206 Ga.App. at 261-262 (2).
Judgment vacated and case remanded with direction. Barnes, C. J., Johnson, P. J., Blackburn, P. J., Ruffin, P. J., Andrews, Miller, Ellington, Phipps, Mikell, Adams, and Bernes, JJ., concur.

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Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084
Phone: 404-633-4100
Fax: 404-633-0068

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Anonymous said...

So can't the bank just sue based upon the terms in the note since the debt is still unpaid in full?

Anonymous said...

In Georgia, what is the Statute of Limitations for a bank to obtain a deficiency judgement AFTER the foreclosure sale is confirmed in court? I know they have to initiate proceedings to confirm the sale within 30 days of the date of foreclosure sale. My questions is if there is a time limit to take the next step, which is seeking a deficiency judgement, after succesful confirmation of the sale