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Georgia Supreme Court Decisions Resolve Foreclosure Requirements

Posted By USFN, Thursday, June 6, 2013
Updated: Monday, November 30, 2015

June 6, 2013


by Adam Silver, Kimberly Wright, Steven Flynn
McCalla Raymer, LLC – USFN Member (Georgia)

On Monday, May 20, 2013, the Georgia Supreme Court issued two important decisions clarifying lingering questions regarding the nonjudicial foreclose process in the state of Georgia.

Background — The Reese Case
The nonjudicial foreclose process in Georgia garnered considerable interest after the Georgia Court of Appeals decided the case of Reese v. Provident Funding Associates, LLP, 317 Ga. App. 353, 730 S.E.2d 551 (2012), interpreting a 2008 amendment to the nonjudicial foreclosure statutes to include the requirement that the “secured creditor” be included in the notice of foreclosure sale letter to the debtor (the pre-foreclosure notice). The language added by the 2008 amendment required, among other items, that an assignment to the secured creditor must be filed prior to the foreclosure sale, that the secured creditor send the pre-foreclosure notice to the debtor, and that the pre-foreclosure notice contain the name and contact information of the individual or entity with full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.

The 2008 amendments to the Georgia foreclosure statutes were made by the Georgia General Assembly in order to provide more transparency in the foreclosure process for the benefit of the debtor. See, e.g., O.C.G.A. § 44-14-162.2. In Reese, the Georgia Court of Appeals, citing this legislative desire for additional transparency, read an additional requirement into the statute that the “secured creditor” must also be identified in the pre-foreclosure notice. Id. at 355, 730 S.E.2d at 552. However, despite the legislature’s use of the term “secured creditor” in multiple places within the Georgia foreclosure statutes, the term “secured creditor” is not defined in the relevant provisions of the Georgia Code.

In Reese, the court held that the “secured creditor” must be identified in the pre-foreclosure notice, in addition to the entity or individual with the full authority to negotiate, amend, or modify the terms of the mortgage with the debtor. Id. at 359, 730 S.E.2d at 555. In dicta, the Reese court deemed to equate the term “secured creditor” with the “owner” of the loan, which created a substantial question of who is authorized to foreclose under Georgia law. Id. at 355-56, 730 S.E.2d 553. A petition for certiorari to the Georgia Supreme Court was filed on August 20, 2012.

More Background — The You Case
That question from Reese of whether the secured creditor must be named in the pre-foreclosure notice was certified to the Georgia Supreme Court by the U.S. District Court for the Northern District of Georgia in You v. JP Morgan Chase Bank, N.A, No. 1:12-CV-00202-JEC, Doc. 16 (N.D. Ga. 2012).

In You, the foreclosing entity was alleged to hold the security deed, but not the note. Further, the pre-foreclosure notice did not identify the holder of the note or the owner of the loan alleged by the plaintiff to be the “secured creditor.” The pre-foreclosure notice referred to the security deed holder, but without directly identifying that entity as the secured creditor. The U.S. District Court for the Northern District of Georgia, citing a split in authority, as well as the Reese holding, issued an order on September 7, 2012, certifying three questions to the Georgia Supreme Court:

1) Can the holder of a security deed be considered to be a secured creditor, such that the deed holder can initiate foreclosure proceedings on residential property even if it does not also hold the note or otherwise have any beneficial interest in the debt obligation underlying the deed?
2) Does O.C.G.A. § 44-14-162.2(a) require that the secured creditor be identified in the notice described by that statute?
3) If the answer to the preceding question is “yes,” (a) will substantial compliance with this requirement suffice, and (b) did defendant Chase substantially comply in the notice it provided in this case?

Supreme Court Decides You & Remands Reese
In a well-reasoned opinion, the Supreme Court of Georgia answered the first certified question in the affirmative and the second certified question in the negative, rendering the third certified question moot.

First, the court concluded that a party initiating a nonjudicial foreclosure sale may exercise the power of sale clause in a security deed by virtue of holding the security deed without also being required to hold the note or possess any interest in the underlying debt obligation. Contract law primarily governs nonjudicial foreclosure sales in the state of Georgia. Therefore, the terms of the security deed determine the method by which a nonjudicial foreclosure sale may occur. Because the security deed specifically allows for a nonjudicial foreclosure sale in the event of default of the underlying loan obligation, the security deed, even without the note or an interest in the underlying debt obligation, provides standing to foreclose. Further, the You court stated, this determination is not at odds with the Georgia Uniform Commercial Code because the security deed, unlike the note, is not a negotiable instrument. Id. at p. 12.

Second, in deciding whether the secured creditor needs to be named in the pre-foreclosure notice, the Georgia Supreme Court looked to the plain language of the statute. The court determined that the secured creditor need not be identified in the pre-foreclosure notice. Id. at p. 15. In its analysis, the court relied on the unambiguous language of the statute, which requires only that the pre-foreclosure notice identify the individual or entity with the full authority to negotiate, amend, and modify the terms of the mortgage with the debtor. The court concluded that the statute does not include an additional requirement to identify the “secured creditor” in the pre-foreclosure notice. This determination rendered the third question regarding substantial compliance with any requirement to identify the secured creditor in the pre-foreclosure notice moot.

On the same day that the Georgia Supreme Court issued its opinion in You, the court also issued an order granting certiorari in the Reese case. The court’s order vacated the decision of the Georgia Court of Appeals and remanded Reese to that court for consideration in light of the Supreme Court’s decision in You.

While the state Supreme Court appears to have resolved the most significant outstanding and unresolved issues of Georgia law related to the nonjudicial foreclosure process, affected members of the financial community should use caution before changing any foreclosure processes and procedures that may have been modified in light of the Georgia Court of Appeals’ decision in Reese last summer. Further consideration of the practical ramifications of these decisions should be undertaken prior to making any such changes. Banks, servicers, and investors may also choose to review pending foreclosure litigation cases to determine whether any of them are subject to dismissal for failure to state a claim due to these recent decisions of the Georgia Supreme Court.

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