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Who is the “Secured Creditor” with Standing to Foreclose under Georgia Law?

Posted By USFN, Wednesday, January 2, 2013
Updated: Tuesday, December 1, 2015

January 2, 2013


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

Georgia’s foreclosure statutes mandate that any foreclosure sale of real property must be conducted by the “secured creditor.” See O.C.G.A. § 44-14-162; O.C.G.A. § 44-14-162.1; O.C.G.A. § 44-14-162.2. Because Georgia’s foreclosure statutes impose duties upon the “secured creditor” in connection with the foreclosure process, an understanding of exactly who qualifies as a “secured creditor” is important to ensure statutory compliance and alleviate uncertainty in the foreclosure process. However, despite the fact that the term “secured creditor” is utilized in multiple places within Georgia’s foreclosure statutes, the term is not defined in the relevant provisions of the Georgia Code. See O.C.G.A. §§ 44-14-160, et seq.; O.C.G.A. § 23-2-114. Consequently, the definition of the term “secured creditor” under Georgia foreclosure law has been varyingly interpreted by the Georgia Court of Appeals, as well as by the federal district courts in Georgia.

The majority of federal courts sitting in Georgia addressing the issue of how “secured creditor” is defined under Georgia foreclosure statutes have held that an assignee of the security instrument containing a power of sale provision is the “secured creditor” and may initiate nonjudicial foreclosure proceedings against the property, even without also holding the subject promissory note evidencing the underlying indebtedness. See, e.g., LaCosta v. McCalla Raymer, LLC, No. 1:10-CV-1171-RWS, 2011 WL 166902, at *4 (N.D. Ga. 2011) (Story, J.) (“Plaintiff does not direct the Court’s attention to any Georgia statute or decision that requires that the Note be legally transferred to the entity carrying out the foreclosure sale, if that entity is in possession of the security deed to the property.”); Kabir v. Statebridge Co., LLC, No. 1:11-CV-2747-WSD, 2011 WL 4500050, at *5 (N.D. Ga. 2011) (Duffy, J.) (same); Smith v. Saxon Mortgage, 446 F. App’x 239 (11th Cir. 2011) (unpublished opinion) (same).

The reasoning behind this analysis is that under Georgia law, a security instrument that includes express language granting the holder of the security instrument an assignable power of sale is a contract and the provisions under the security instrument are controlling as to the rights of the parties and their privies. See McCarter v. Bankers Trust Co., 247 Ga. App. 129, 132, 543 S.E.2d 755, 757 (2000) (citations and punctuation omitted). Moreover, O.C.G.A. § 44-14-64 expressly provides that the underlying indebtedness follows the transfer of the security instrument; i.e., the security deed or deed to secure debt. See O.C.G.A. § 44-14-64(b) (“Transfers of deeds to secure debt … shall be sufficient to transfer the property therein described and the indebtedness therein secured, whether the indebtedness is evidenced by a note or other instrument or is an indebtedness which arises out of the terms or operation of the deed, together with the powers granted without specific mention thereof.”) Thus, the security instrument constitutes a separate contractual agreement between the lender and the borrower and “stands alone” so long as the underlying indebtedness remains on the subject promissory note. See Decatur Federal Sav. & Loan v. Gibson, 268 Ga. 362, 364, 489 S.E.2d 820, 822 (1997).

However, the minority view among federal courts sitting in Georgia is that Georgia law mandates that in order to conduct a nonjudicial foreclosure pursuant to a power of sale contained in a security instrument, the “secured creditor” must be the holder of the promissory note and/or possess an interest in the underlying debt in addition to being the holder of the security instrument. See Stubbs v. Bank of America, 844 F. Supp. 2d 1267, 1273 n.3 (N.D. Ga. 2012) (Totenberg, J.); Morgan v. Ocwen Loan Servicing, LLC, 795 F. Supp. 2d 1370, 1376 (N.D. Ga. 2011) (Totenberg, J.) (citing Weems v. Coker, 70 Ga. 746, 749 (1883)).

Recently, the Georgia Court of Appeals in Reese v. Provident Funding Associates, LLP, 730 S.E.2d 551, 553 (Ga. Ct. App. July 12, 2012), the majority opinion, without explicitly defining the term “secured creditor” as part of its holding, in dicta, appeared to equate the term “secured creditor” with the “owner” of the loan for purposes of Georgia’s foreclosure statutes and found that the servicer of the loan does not qualify as a “secured creditor” under Georgia foreclosure law. However, the majority opinion of the Georgia Court of Appeals in Reese did not clarify whether a party is also required to be a “holder in due course” of the promissory note, in addition to being the owner of the loan in order to qualify as a “secured creditor” for purposes of Georgia’s foreclosure statutes. This created more confusion as to how “secured creditor” is defined under Georgia foreclosure law because Georgia’s Uniform Commercial Code (UCC) makes a clear distinction between a “holder in due course” and the “owner” of a negotiable instrument. See O.C.G.A. § 11-3-301 (setting forth who qualifies as a “holder in due course” entitled to collect on a negotiable instrument, such as a promissory note). Under Georgia’s UCC, there is a clear distinction between “owners” of negotiable instruments and persons “entitled to enforce” those instruments and, as a result, more litigation has ensued as to whether the “owner” or “holder of the loan” is defined as the “secured creditor” under Georgia’s foreclosure statutes based on Stubbs and Reese.

As a result of the great ambiguity created by the split of authority defining the term “secured creditor” under Georgia foreclosure law, on September 7, 2012, the Chief Judge of the U.S. District Court for the Northern District of Georgia, in You v. JPMorgan Chase Bank, N.A., No. 1:12-CV-00202-JEC, Doc. 16 (N.D. Ga. Sept. 7. 2012), certified three questions to the Supreme Court of Georgia, asking the state Supreme Court to provide guidance and clarity on the legal issues pertaining to Georgia foreclosure law. The question relevant to defining the secured creditor states:

“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?”

Id., No. 1:12-CV-00202-JEC, at Doc. 16, p. 2 of 3. The certified questions were docketed in the Georgia Supreme Court on September 13, 2012 and were assigned case number S13Q0040. They are presently pending before the Georgia Supreme Court and oral arguments were presented on January 7, 2013.

The recent court decisions related to the party having standing to prosecute foreclosure cases in Georgia that have diverged from the longstanding rule allowing the assignee of the mortgage the right to foreclose have created inefficiencies and delays in the Georgia foreclosure process. Today, as a result of the recent case law, many investors and servicers have chosen to err on the side of caution when foreclosing in Georgia by taking the following actions: (1) recording assignments prior to the initiation of the foreclosure action; and (2) naming the loan investor in addition to the note holder on the statutory foreclosure notices. However, investors, servicers, and law firms handling foreclosures all hope that when the Supreme Court of Georgia hears this issue, the court will specifically address the meaning of secured creditor.

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