Georgia foreclosure law has been given a lot of attention over the last several years, both by the courts as well as the legislature. The Georgia Supreme Court has had to resolve the issue of whether a lender must sue on a note prior to foreclosing under a security deed and held that the choice is up to the lender. (See REL Development, Inc. v. BB&T, 699 SE2d 779 (2010).) Likewise, the legislature addressed a perceived problem in large loan servicing companies foreclosing on real property even though a division of the servicer was still negotiating with the borrower to cure the default. Thus, a lender can rescind a foreclosure, for among other reasons, the fact that it had entered into an agreement when the default was cured prior to the sale or the borrower had entered into an agreement to cure the default. (See OCGA 9-13-172.1.) What happens though if a lender actually conducts a foreclosure sale and then simply decides that it would rather sue on the note. Can it unwind the foreclosure even if its reasons for doing so do not fall with the statutory guidelines?
The Georgia Supreme Court has decided that a lender may in fact rescind a properly conducted foreclosure sale for its own internal business reasons.(See Tampa Investment Group, Inc. v. BB&T, 2012 WL 933110 (Ga.).) From 2005 to 2008, BB&T made 16 loans for residential housing development to two companies secured by various deeds to secure debt. After the borrowers defaulted on the notes, BB&T conducted non-judicial foreclosures on June 2, 2009 on nine of the notes. BB&T credit bid the properties in but later informed the borrowers that it was rescinding the sale. Most importantly, BB&T did not record a deed under power. On June 22, 2009, BB&T brought suit against borrowers and guarantors for more than $19 million then due under the notes.
At the trial on the enforcement of the notes the court found that BB&T could not pursue the notes since it had failed to confirm the initial foreclosure sale. The Georgia Court of Appeals reversed that decision on the basis that acceptance of a bid at a foreclosure sale under power creates an oral contract which is subject to the Statute of Frauds. The Statute of Frauds provides that certain contracts, such as for the sale of real property or an extension of credit, are not enforceable unless they are in writing. In this case, BB&T, either as borrowers’ attorney-in-fact or as the creditor on the notes, never executed a deed under power conveying the borrowers’ interest to itself or any writing showing that it had applied any foreclosure proceeds. The court further found that rescinding the foreclosures did not harm borrowers but left them in the same position as before the auctions.
As many readers are aware, Georgia has led the nation in the number of failed financial institutions in the recent financial crisis. Integrity Bank, of Alpharetta, was one of the first of those banks to fail in Georgia, on August 28, 2008, and drew the first lawsuit filed by the FDIC as receiver against former directors and officers in Georgia. The lawsuit was filed against former members of the Director Loan Committee of the Bank, and asserted claims against the Defendants based on their alleged pursuit of an unsustainable rapid growth strategy, involving high risk lending concentrated in speculative real estate and acquisition, construction and development loans. The suit alleged over $70 million in losses from 21 such loans, between February 4, 2005 and May 2, 2007.
On February 27, 2012, in response to motions to dismiss filed by the defendants, and motions to strike certain affirmative defenses filed by the FDIC as Receiver, Judge Steven C. Jones of the United States District Court for the Northern District of Georgia issued an Order which made some critical rulings regarding the standard of care and the availability of certain defenses in actions brought by the FDIC as receiver in Georgia. A copy of the Order is available here. Given that this is the first such substantive ruling in this context by a court in Georgia, the decision is notable and will likely have a significant impact on future FDIC litigation in Georgia going forward.
Of potentially greatest significance, the Court granted the Defendants motion to dismiss all of the FDIC’s claims based on ordinary, as opposed to gross, negligence. The Court was persuaded that in Georgia, the deviation from the standard of care necessary to state a claim against former bank officers and directors must rise at least to the level of the “gross negligence” floor set by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) . The Court reached this conclusion after determining that Georgia ‘ s Business Judgment Rule protects directors and officers from claims based on simple, or ordinary, negligence. This sets the bar fairly high for the FDIC to prevail on claims against former directors and officers of failed banks,and should provide some comfort in that regard.
Detracting somewhat from the defendants victory on that aspect of the motion to dismiss, however, Judge Jones also ruled that the relatively unexceptional allegations by the FDIC of uncontrolled rapid growth and over concentration in speculative and risky acquisition, development and construction loans were sufficient to withstand a motion to dismiss, even at the heightened “gross negligence” standard. Thus, while the decision sets the bar high for the FDIC to ultimately prevail on these sorts of claims, it does not necessarily provide much ammunition to argue for dismissal at the motion to dismiss stage.
Georgia Governor Nathan Deal recently signed into law HB 683, a bill that reforms the way in which banks and other corporations may respond to a garnishment summons. Under the new law, banks may now use their own employees to respond to a garnishment summons and are no longer required to hire an attorney for this task.
This statute seeks to overrule a 2011 Georgia Supreme Court decision which held that corporations must use a Georgia-licensed attorney to answer garnishments, and that non-lawyer employees who responded to garnishments on behalf of their employers were engaging in the unauthorized practice of law.
If you decide to utilize non-attorney personnel to answer garnishments, as permitted by the new statute, you should keep in mind the following issues:
- The new law only permits non-lawyers to file answers to garnishment summons. If a traverse is filed in response to the answer, an attorney is then required to represent the bank. A traverse is a statement filed by a plaintiff in response to the answer, claiming that the answer is untrue or insufficient. Once a traverse is filed, the bank then must then hire an attorney to represent it further in the case.
On August 16, 2011, the Financial Institutions and Consumer Credit subcommittee of the House Committee on Financial Services held a field hearing in Newnan, Georgia, with a stated topic of “Potential Mixed Messages: Is Guidance from Washington Being Implemented by Federal Bank Examiners?”
Representatives Shelley Moore Capito, Spencer Bachus, Lynn A. Westmoreland and David Scott each heard testimony from panels of federal banking regulators and Georgian bankers about the condition of banking in Georgia, including the effect that federal banking regulations, guidance, policies and actions have had on community banks. Copies of the written testimony submitted, including that of the FDIC, OCC and Federal Reserve are now available on the Subcommittees website.
Although it is hard to draw any overall themes from the hearings (other than possibly that the issues involved aren’t easily addressed in this format), there were several good points made.
From the FDIC’s written testimony, addressing the challenges faced by Georgia banks:
As the Subcommittee has discussed in previous oversight hearings, the collapse of the U.S. housing market in 2007 led to a financial crisis and economic recession that has adversely affected banks and their borrowers in Georgia and nationwide. Georgia’s economy was hit especially hard following years of strong economic growth characterized by rising real estate prices, abundant credit availability, and robust job creation. Financial institutions, whose performance is closely linked to economic and real estate market conditions, have been significantly affected by a rise in the number of borrowers who are unable to make payments.
Gil Barker, the Deputy Comptroller for the Southern District, specifically addressed many concerns expressed by bankers in his written testimony, including statements of regulators criticizing loans to a particular industry, performing non-performing loans, criticizing loans merely because of a decline in collateral value, and the second guessing of independent appraisers. While one can certainly question whether the interpretations provided by Mr. Barker line up with some of the actions of the on-site examiners, it is definitely a good read for anyone dealing with the OCC in the Southern District.
The loss share method of resolving closed institutions seems to have significant benefits over the FDIC retaining the assets for bulk sale, but there is significant disagreement as to whether the loss share agreements properly incent the acquiring bank with regard to working with borrowers to minimize losses. The representatives seemed particularly attuned to the additional issues related to loan participations where the lead bank has gone through receivership.
Courtesy of William Linkous, Jr. and Kimberly Civins, two of Bryan Cave’s trusts and estates attorneys.
On July 1, 2010, the provisions of a completely revised Georgia trust code became effective. This month we celebrate its first anniversary, so it seemed to be a good time to reflect on what were the top “attention-getters” of the new code. In thinking about this “top three” list, we’re reminded of the last time we trained a new puppy. The theme was: reward the good behavior, ignore the bad. Fortunately, the new code will help you take care of your dog and rewards good trustee behavior, but there could be serious consequences for a trustee not complying with some of the new provisions.
1. The Dog: By far and away, for better or for worse, most attention has been focused on the new provisions allowing pet trusts. In the past, we were able to (somewhat) accommodate people’s wishes to provide for their pets upon their deaths by naming an individual as beneficiary of the trust fund so long as they were caring for the pet. Now, it’s much easier because the pet itself can be a trust beneficiary.
2. The Carrot: Trustees of Georgia trusts now may take comfort in a shorter period during which a beneficiary can sue for a breach of fiduciary duty. If the trustee has provided the beneficiary a “written report” that “adequately discloses the existence of a claim against the trustee”, then a shortened two-year statute of limitations applies instead of the former six-year period. Without that “written report” the beneficiary has the normal six years to sue beginning when the beneficiary discovered, or should have discovered, the existence of the claim. Over this first year, virtually all trustees we talk to praise this new provision.
On May 11, 2011, Georgia Governor Nathan Deal signed House Bill 30 into law, ushering in a new era for non-competition agreements (non-competes), non-disclosure agreements (NDAs), and non-solicitation covenants under Georgia law. Historically, Georgia courts have not been friendly to such agreements and have made enforceability unclear. The new statute clarifies and strengthens the ability of parties to restrict conduct during and after employment or a deal. Perhaps most importantly, the law expressly authorizes courts to cure or “blue pencil” such agreements signed on or after May 11, 2011. Under the previous regime, one faulty provision generally invalidated an entire restrictive covenant in Georgia. In addition, the new law makes clear that NDAs need not specify a time limit on a requirement to maintain information as confidential so long as the information otherwise remains confidential.
In Georgia, new consideration is not required to execute new non-competes, so employers are in a good position to strengthen their competitive protections under the revised statute, but action is required as only new agreements will enjoy the benefits of the new law. The new law also governs restrictive covenants between distributors and manufacturers, lessors and lessees, partnerships and partners, franchisors and franchisees, sellers and purchasers of a business or a commercial enterprise, and two or more employers.
In-Term Covenants Generally
The bill codifies many aspects of the law in this area that had developed in the Georgia courts. This includes the presumption that any restriction within an agreement that operates during the term of the underlying employment or business relationship is not unreasonable because it lacks any specific limitation on the scope of activity, duration, or geographic area as long as it promotes or protects the purpose of the agreement or deters any potential conflict of interest.
Regulation 80-1-6-.03 of the Georgia Department of Banking and Finance requires each director of a Georgia state bank to maintain an annual financial statement in the files of the bank for which he or she serves as a director. The regulation requires that the financial statement be revised annually and that the financial statement not be more than 18 months old.
In the past, bank examiners have carefully reviewed these financial statements to ensure that estimates of asset values, particularly estimates of the values of bank stock, are reasonable. Given the volatility of bank stock valuations over the recent years, directors should ensure that their estimates of the value of bank stock in their portfolios are reasonable. For banks and bank holding companies that have thinly traded securities, estimates should reflect current market conditions as well as the financial condition of the institution. The latest price at which the securities were sold may or may not reflect those factors.
On Friday, November 5, 2010, the Georgia Department of Banking and Finance determined that the final rule being adopted to address loan renewals will not contain the requirement that the loan be a performing loan, and elected not to make any revisions to Rule 80-1-5-.01. In addition to withdrawing the proposed rule, the Georgia DBF has affirmatively confirmed that it no longer interprets the statute as pertaining only to “performing” loans. As we’ve previously discussed, this brings the Georgia legal lending limits in the context of a loan renewal into parity with the comparable requirements for national banks.
The Georgia DBF’s announcement was as follows:
In an effort to ensure parity between state and federally chartered banks regarding the renewal of loans, the Department no longer interprets 7-1-285(c)(9) as pertaining to only “performing” loans as originally stated in our February 2010 bulletin. Bankers are encouraged to familiarize themselves with 7-1-285(c)(9) and ensure that safe and sound underwriting procedures are undertaken and documented when making these renewal/restructuring decisions.
On Friday, October 22, 2010, the DBF announced that it was withdrawing the proposed rule as it relates to the legal lending limit for further study. Both the Georgia Bankers Association and the Community Bankers Association sent the DBF comment letters opposing the change.
Arguments against adopting the proposal were based on two points, one based on legal interpretation and the second on practicalities. The first is that the proposed rule reads into the statute something that is simply not there. If the legislature had wanted to limit the loan renewals to ones that were performing it could have easily done so. The fact that they did not should be read as a decision by the legislature not to limit the renewal provision in that way.
The second point is based on the fact that a restrictive interpretation will put state chartered banks on a competitive disadvantage with national banks. Apparently the OCC does not read its regulations allowing for renewal of loans when the bank’s capital has shrunk to require that a loan be performing in order to be renewed or restructured.
We will keep readers apprised of further developments as they occur.
The Georgia Department of Banking and Finance announced proposed rule making on September 23, 2010 to conform DBF rules to statutory changes adopted in the 2010 legislative session. One of those rules addresses the issues that have arisen concerning interpretation of the amendment to the Georgia legal lending limit statute. That amendment was adopted earlier this year in response to many banks finding themselves unable to renew loans due to the fact that loan renewals were treated as a new extension of credit for legal lending limit purposes and banks had suffered capital reductions making the renewal unlawful. HB 926 was proposed as a means to allow state chartered banks in Georgia to deal with this situation in the same way that national banks currently deal with it. The legal lending limit for national banks is found at 12 USC § 84 and the applicable regulations are found in 12 CFR § 32.2. The OCC regulations do not consider a loan renewal to be an extension of credit for purposes of the legal lending limit. 12 CFR § 32.2 (k)(2)(iv) provides that an extension of credit does not include:
A renewal or restructuring of a loan as a new “loan or extension of credit,” following the exercise by a bank of reasonable efforts, consistent with safe and sound banking practices, to bring the loan into conformance with the lending limit, unless new funds are advanced by the bank to the borrower (except as permitted by § 32.3(b)(5)), or a new borrower replaces the original borrower, or unless the OCC determines that a renewal or restructuring was undertaken as a means to evade the bank’s lending limit.
The amendment to the Georgia statute used a similar approach. A bank must use reasonable efforts to try and bring a loan into compliance with the legal lending limit. If it is unable to do so then the bank would be authorized to renew the loan even though its capital has shrunk and the loan would constitute a violation of the legal lending limit. The revised statute now provides that a renewal or restructuring of a loan following the exercise by the bank of reasonable efforts, consistent with safe and sound banking practices, to bring the loan into conformance with the lending limits of the statute will not be considered a new extension of credit unless unless:
(A) New funds are advanced by the bank to the borrower, except as permitted under the statute;
(B) A new borrower replaces the original borrower; or
(C) The department determines that a renewal or restructuring was undertaken as a means to evade the bank’s lending limit.