Court Opinion Reiterates Deference to Trial Court in Confirmation Proceeding
As I wrote back in November, the dramatic fall in real estate values is leading to litigation involving confirmation proceedings after a non-judicial foreclosure. Under Ga. law, a creditor is allowed to foreclose on real property without a court hearing or other judicial action. However, if the lender claims that the foreclosure sale did not fully satisfy the debt obligation and seeks to recover the deficiency, the lender must file a confirmation action which requires a court hearing and testimony as to the fair market value of the property.
The Ga. Court of Appeals issued an opinion earlier this month in Statesboro Blues Development, LLC v. Farmers and Merchants Bank (PDF) which reiterates the deference given to the trial court in determining fair market value. The case involves a very typical scenario in Georgia: the borrower purchased a large acreage tract with the intention of developing the property for single-family home lots. After the residential market collapsed, the borrower defaulted. At the time of default, the outstanding loan balance was over $3.5MM. The bank was the sole bidder at the foreclosure sale (as is usually the case) and bid $2.915MM. After the foreclosure, the bank sought to recover the deficiency from the borrower and guarantors.
At the hearing, the borrower contested the bank's appraiser's use of comparable sales and his estimate of development costs. The trial court accepted the appraiser's calculations and found for the bank. On appeal, the court reiterated Ga. law: “The trial court is the trier of fact in a confirmation proceeding, and an appellate court will not disturb its findings if there is any evidence to support them.” Because the trial court found in favor of the bank, the court of appeals held: "it appears that the opinion is not based on sheer speculation, then this court cannot second guess the methodology utilized to reach the opinion.”
The upshot for future litigation is that the ruling of a trial court will not often be overturned. The trial court judges are relying on appraisers who are often guessing at fair market value. The result will be inconsistent rulings based on the leanings of the appraisers and the judges. In other words, borrowers can only hope for friendly judges.
Given the dramatic drop in commercial real estate values over the past two years, many borrowers are finding that their loan balances exceed the value of the property at the time of a default. As a result, there has been an increase in litigation surrounding confirmation proceedings after a non-judicial foreclosure.
