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Inland Mortgage Capital Corporation v. Chivas Retail Partners

August 3, 2012


The opinion of the court was delivered by: Milton I. Shadur Senior United States District Judge


Inland Mortgage Capital Corp. ("Inland") loaned Harbins Crossing TC, LLC ("Harbins") $59,670,000 (I. St. ¶8). Harbins used the money to build a retail shopping center in Gwent County, Georgia (a part of metropolitan Atlanta) (id. ¶10). Inland secured the loan by executing a security deed on the property (id. ¶9). Chivas Retail Partners, LLC, the TJD Separate Property Trust and the Walter L. Brown Jr. Revocable Trust (collectively "Guarantors") executed a Loan Guaranty Agreement ("Guaranty Agreement") with Inland (id. ¶11).

Harbins defaulted on the loan (I. St. ¶13), so Inland foreclosed on the property and put it up for auction (id. ¶15). Inland itself won the auction with a bid of $7 million (id. ¶16). Inland then commenced what is called a "confirmation proceeding" in a Georgia state court. Because Georgia is a non-judicial-foreclosure state, lenders can foreclose on mortgaged property without court intervention. When the property does not fetch the full amount of the loan, the lender is left with a deficiency: the difference between the amount outstanding on the debt and the successful bid for the foreclosed property.*fn2

Non-judicial foreclosures are fast and efficient, because the process does not require court proceedings. But during the Great Depression lenders abused the lack of court oversight, not advertising foreclosure auctions and then underbidding for the properties, leaving the lender with a windfall and the debtor with an excessive obligation (Zachary Kimball and Paul Willed, U.S. Mortgage Foreclosure Law, New Palgrave Dictionary of Economics (2012 online ed.) §3.3). Georgia created confirmation proceedings to lend judicial oversight to the foreclosure process (Harris & Tilley, Inc. v. First Nat'l Bank of Cartersville, 276 S.E.2d 137, 140-41 (Ga. App. 1981)). To obtain a deficiency judgment against a borrower, a lender must first receive confirmation from a court that the lender followed proper sale procedures and obtained the fair market value for the property (id.).

In this instance Inland's confirmation action in the Georgia court named both Harbins and Guarantors as respondents. But after the Georgia court refused to confirm Inland's sale (G. St. ¶17), Inland brought this lawsuit against Guarantors*fn3 for breach of the Guaranty Agreement and promptly moved for summary judgment. Guarantors contend that this action is blocked by the Georgia court's rejection of Inland's confirmation petition, but Inland counters that Guarantors waived any such defense in the Guaranty Agreement.

Choice of Law

Inland and Guarantors waste substantial space in their memoranda debating which state's law controls: Inland says Illinois, while Guarantors say Georgia. Inland is correct as to the meaning and effect of the Guaranty Agreement ¶26, which states that the Guaranty Agreement "shall be construed for all purposes and enforced in accordance with the laws of the State of Illinois." On the other side of the coin, Guarantors are correct as to the effect of the Georgia confirmation proceeding (subject, of course, to the possibility that the later-discussed waiver provision in the Guaranty Agreement may trump that effect). As Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985) teaches relevant to the Georgia confirmation proceeding:

The preclusive effect of a state court judgment in a subsequent federal lawsuit generally is determined by the full faith and credit statute, which provides that state judicial proceedings "shall have the same full faith and credit in every court within the United they have by law or usage in the courts of such State...from which they are taken." 28 U.S.C. §1738. This statute directs a federal court to refer to the preclusion law of the State in which judgment was rendered.

Effect of the Georgia Confirmation Proceeding

Guarantors argue that the Georgia confirmation proceeding erased the deficiency or eliminated a necessary condition for Inland to collect on a deficiency. Guarantors repeat that contention twice more in their original Memorandum: once under the rubric of claim preclusion and once under the rubric of issue preclusion. But both preclusion arguments are rehashes of Guarantors' first argument, except that instead of arguing that the confirmation proceeding blocks the deficiency claim, Guarantors say that Inland already had the chance to litigate whether it could pursue a deficiency.

There's no need to traipse through each iteration of that position. This Court must instead answer two questions: what did the confirmation proceeding decide and does the Guaranty Agreement require Guarantors to pay the outstanding debt given the outcome of the confirmation proceeding?

Confirmation proceedings are creatures of statute, and so the statute is the best place to turn to understand their scope (Ga. Code. Ann. §44-14-161):

(a) When 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 shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.

(b) The court shall require evidence to show the true market value of the property sold under the powers and shall not confirm the sale unless it is satisfied that the property so sold ...

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