WEST INVESTMENTS LLC v. HAMILTON STATE BANK (2012)

Bartow County Bank (“BCB”), the predecessor to Hamilton State Bank (“HSB”), sued 3 West Investments, LLC, Dennis Graham, Michael Allen, and Christie Graham (collectively, “the defendants”) to recover a deficiency on a loan following a nonjudicial foreclosure sale of collateral property.¹ The defendants contended that HSB was precluded from seeking a deficiency judgment because BCB had previously foreclosed on property that secured the loan without obtaining judicial confirmation of the foreclosure sale. The parties filed cross-motions for partial summary judgment on this issue, and the trial court ruled in favor of HSB, concluding that it could pursue a deficiency judgment against the defendants. The defendants appeal this ruling, and we affirm, for the reasons that follow.

Summary judgment is proper when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. OCGA § 9–11–56(c). A de novo standard of review applies to an appeal from a grant of summary judgment, and we view the evidence, and all reasonable conclusions and inferences drawn from it, in the light most favorable to the nonmovant. 2

The relevant facts in this case are undisputed. The record shows that on February 11, 1998, Dennis Graham and Allen borrowed $211,611 .50 from BCB to acquire and improve property located at 301 N. Tennessee Street in Cartersville, Georgia. On December 15, 1998, they borrowed an additional $147,955 from BCB to purchase and improve property located at 110 McEver Street in Cartersville, which property is contiguous to the 301 N. Tennessee Street property. By virtue of dragnet clauses contained in the security deeds, the two loans were cross-collateralized and the two parcels (hereinafter the “Real Estate Collateral”) secured both loan obligations.³ On May 31, 2001, the two loans were consolidated, and the consolidated loan was renewed twice, with the last renewal occurring on October 21, 2009, when BCB renewed the outstanding principal balance of $190,676.94 (hereinafter, “Loan 608076”).

On December 17, 2007, 3 West borrowed $7,056,551 from Unity National Bank (“Unity”), and the loan (“3 West Loan”) was secured by commercial property located near Euharlee, Georgia. The Unity note was guaranteed by Dennis Graham, Allen, and Jimmy Don Crane. Crane's guarantee was secured by commercial real estate; Graham's and Allen's guarantees were unsecured, but they caused Millennium Commercial Contractors, LLC, an entity controlled by them, to pledge commercial property to secure their guaranties. Unity sold a participation in the 3 West loan to BCB. The participation agreement provided that all payments for the 3 West Loan were owed to Unity, who collected the payments as BCB's agent.⁴ The 3 West Loan was renewed twice, with the final renewal occurring on May 28, 2009, in the amount of $7.4 million. Graham, Allen, and Crane guaranteed the payment of the renewal note to Unity; Crane's guaranty was secured, while Graham's and Allen's were not. Again, Unity sold a participation in each renewal to BCB.

On October 21, 2009, Graham and Allen borrowed $250,000 from BCB to complete a sewer line to property owned by 3 West. The loan (“Loan 20030”) was secured by the Real Estate Collateral, and was renewed on February 19, 2010, in the amount of $250,000.

3 West subsequently defaulted on the 3 West Loan when it failed to make the interest payment due on December 5, 2009. On March 25, 2010, Unity assigned its interest in the 3 West Loan to BCB, including the security documents and guaranties by Graham, Allen, and Crane. Unity simultaneously purchased a 25.34 percent interest in the 3 West Loan.

On March 26, 2010, banking regulators closed Unity, and Unity's banking operations were purchased by Bank of the Ozarks. On May 28, 2010, BCB, with the Bank of the Ozarks—Unity's successor—declared the 3 West Loan in default, and on July 7, 2010, BCB sued the defendants seeking to recover the full amount due on the 3 West Loan.

On July 6, 2010, BCB declared Loans 608076 and 20030 in default and accelerated the balance on those due by Graham and Allen based on their guaranty obligations on the 3 West Loan. On December 7, 2010, BCB foreclosed on the security deeds for Loans 608076 and 20030 by selling the Real Estate Collateral. BCB then bid for and purchased the Real Estate Collateral for $800,000. The purchase price was applied to pay in full the outstanding balances on Loans 608076 and 20030, and the remaining balance of $380,820.30 was applied toward Graham's and Allen's guaranties on the 3 West Loan. BCB did not seek to confirm the foreclosure sale pursuant to OCGA § 44–14–161(a).

Following the nonjudicial foreclosure sale, the parties filed cross-motions for summary judgment as to the issue of whether BCB's failure to seek confirmation of the foreclosure precluded it from obtaining a deficiency judgment against the defendants. On May 24, 2011, HSB was substituted as the party plaintiff for BCB. The trial court subsequently granted partial summary judgment to HSB and denied the defendants' motion for partial summary judgment, concluding that

the note obligations from [d]efendants Graham and Allen are separate and distinct obligations from the 3 West Loan and guaranties․ [T]he dragnet provision ․ alone is not enough to make [d]efendants' obligation inextricably intertwined. The [c]ourt finds that the [p]laintiff was not required to confirm the foreclosure sale as a condition precedent to seeking judgment for the deficiency against [d]efendants.

The defendants appeal, arguing that the trial court erred by denying their motion for partial summary judgment and granting HSB's motion for partial summary judgment. We disagree.

The issue before the trial court was whether HSB's failure to confirm the foreclosure sale pursuant to OCGA § 44–14–161(a) bars recovery of the outstanding balance on the 3 West Loan. In Georgia,

[a] creditor may not seek a deficiency judgment with respect to any real estate sold on foreclosure unless a confirmation of the sale is obtained. OCGA § 44–14–161. A deficiency judgment is the imposition of personal liability on [a] mortgagor for [the] unpaid balance of mortgage debt after foreclosure has failed to yield [the] full amount of due debt.5

With regard to deficiency judgments, OCGA § 44–14–161(a) provides that

[w]hen 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

obtains a judicial confirmation of the sale.⁶

Here, the proceeds from the foreclosure sale exceeded the amounts owed on Loans 20030 and 608076, so there was no need to pursue a deficiency judgment as to those loans.⁷ However,

[t]his Court has applied OCGA § 44–14–161(a) to foreclosure proceedings on separate debts which are inextricably intertwined to prevent creditors from circumventing the statute's mandates by making successive loans against the security of the same property. This prevents creditors from avoiding the very purpose of the confirmation statute; that being to protect debtors from deficiency judgments when their property is sold at a foreclosure sale for less than its market value.8

Debts that are “ ‘secured by the same property, held by the same creditor and with the assumption of the debt, [and] owed by the same debtor ․ are inextricably intertwined. They are not independent of each other, and a foreclosure of one affects the other.’ “⁹

The confirmation requirement of OCGA § 44–14–161(a) does not apply to the instant case because the 3 West Loan is not inextricably intertwined with Loans 608076 and 20030. Loan 608076 and Loan 20030, between Graham and Allen and BCB, were executed in 1998 and 2009, respectively. The 3 West Loan was executed in 2007 between 3 West and Unity. Loans 608076 and 20030 were both secured by the Real Estate Collateral. The 3 West Loan was secured by the Euharlee property, and Graham's and Allen's guaranties for the 3 West Loan were unsecured. Thus, we conclude that Loans 608076 and 20030 are separate from the 3 West Loan,¹⁰ and confirmation of the foreclosure sale was not required in order for HSB to pursue collection under the 3 West Loan.¹¹

We also reject the defendants' argument that the dragnet clause contained in the initial loans effectively merged the debts into one debt requiring judicial confirmation of the foreclosure sale. OCGA § 44–14–1(b) limits the operation of dragnet clauses to debts “arising ex contractu ․ between the original parties to the security instrument.” Here, Graham, Allen, and BCB were the original parties to Loans 608076 and 20030; 3 West and Unity were the original parties to the 3 West Loan, with Graham and Allen as guarantors. Thus, the loans were separate, and this argument is without merit.¹²

Judgment affirmed.

DOYLE, Presiding Judge.

ANDREWS and BOGGS, JJ., concur.