Originally published in Real Property Law Section, Spring 2012
If the dramatic increase in foreclosures has resulted in the closing attorney being forced to get up to speed in short order on nonjudicial foreclosure and its effect on marketable and insurable title. A title report with a properly recorded Deed Under Power is only the first step toward a closing attorney certifying to marketable and insurable title of foreclosed real estate. As a result of the declining real estate values, property is often not worth the underlying debt owed to the lender. Therefore, lenders are filing confirmation actions in much higher numbers (particularly on commercial property) in an effort to preserve the lender's ability1 to file a deficiency action against a borrower and/or guarantor. The effect of a pending confirmation action on marketable and insurable title is an issue real estate closing attorneys must address before the conveyance of a foreclosed property.
Let's consider this hypothetical. Lender is the new owner by nonjudicial foreclosure of a 70 acre tract that is comprised of platted lots. The lender/seller is anxious to recover its lost revenue on the underlying transaction so is moving quickly to market and sell the property at a significant discount. The lender/seller is also eager to recover what it can from the borrower and guarantor so, as a first step to what will be a deficiency action, the lender has reported the sale and has filed a petition to confirm the foreclosure sale. Residential Builder is thrilled to be able to pick up the lots in a partially developed subdivision for a fraction of what the lots were being sold for three years ago and enters into a contract to purchase all of the lots. The purchase and sale agreement is silent as to the issue of a pending confirmation action because neither the broker nor the asset manager is aware of any such action. A title examination reveals a recorded Deed Under Power of Sale, that on its face, indicates that the foreclosure sale met all the statutory requirements, but there is no separate search of the civil dockets2. To all the parties, it would appear that a closing is just over the horizon.
However on these facts, the pending confirmation action renders the title unmarketable. Georgia Title Standard 17.3, states "if a confirmation is pending or subject to an appeal, title is considered to be unmarketable." In addition, the pending confirmation action also renders the property uninsurable. The confirmation statute, at O.C.G.A. Section 44-14-161 provides in part:
(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 sold brought its true market value on such foreclosure sale.
(c) The court . . . shall also pass upon the legality of the notice, advertisement, and regularity of the sale. The court may order a resale of the property for good cause shown.
The petitioner/lender must prove three elements to the satisfaction of the court: (1) did the lender follow the strict requirements of the confirmation statute in its petition in providing notice, naming of parties and service? (2) is the lender able to prove the regularity of the foreclosure sale, in notice, advertisement and regularity in calling the sale? (3) was the property sold by the lender for its fair market value? At the confirmation hearing, the court can rule to confirm the sale (thereby satisfying the necessary prerequisite to a suit on the deficiency), the court can deny the confirmation, (which has the effect of barring the lender from filing suit on the deficiency, but holds the foreclosure sale itself a valid nonjudicial foreclosure), or finally, the court can not only deny the confirmation but also order a re-sale of the property.
In fact, the case law is clear that it is within the total discretion of the court to order a resale. Therefore, in every confirmation action there is the risk that the court will void the foreclosure sale and order a resale of the property. Going back to our hypothetical, Residential Builder now not only owns the lots but a considerable amount of time has passed between the filing of the action and the confirmation hearing, so Residential Builder has now constructed and sold completed homes to end-sale buyers. A court voiding the foreclosure sale and ordering a resale would have a devastating effect on Residential Builder, its lender, each end-sale buyer and each of their lenders.
As a result, the title insurance companies have taken a firm position regarding the insurability of title to property with regard to which a confirmation action is pending. First American Title Insurance Company, (hereinafter "First American"), Fidelity National Title, (hereinafter "Fidelity") and Stewart Title (hereinafter "Stewart") provide that title is uninsurable while a confirmation action is pending. Unless an exception is set out in Schedule B setting forth the risk and excepting from the policy any loss as a result of a pending confirmation action.
First American, in its Title Solutions, The Georgia Underwriting Newsletter dated September 2010, detailed the exception that must appear in any policy issued with confirmation action pending:
"No insurance is afforded as to the possibility that the foreclosure sale through which the insured or its predecessor in title acquired the property might not be confirmed, or might be set aside, in a proceeding for confirmation of the sale."
In addition, because there is a statutory thirty (30) day appeal period following the filing of an order in Superior Court, any policy issued after an order of confirmation but before the expiration of the statutory thirty (30) day period must also contain this exception.
In Bulletin No, 2010-GAO8, dated April 26, 2010, Fidelity provided guidance to its agents by providing the following exception which provides a specific recitation to the deed to secure debt that was foreclosed as well as a reference to the pending confirmation proceeding. The exception reads:
"Any final order to require [Lender] to re-foreclose that certain Deed to Secure Debt recorded in Deed Book ___, page ___, ____ County Georgia records in that certain Confirmation Proceeding in Case No. _______, ______ County Superior Court."
Stewart has issued national guidelines and bulletins which deal with the issue of Insuring At or After Foreclosure. In Item 8, of Bulletin No. 128898342900000015, agents are directed to "not issue without Stewart Underwriter approval if you know that the lender is currently pursuing a separate deficiency judgment against the mortgagors and such judgment is not yet final."
Clearly, the hypothetical illustrates the perfect storm in the area of confirmations. Closing attorneys can take affirmative measures that will facilitate the attorney being aware of a pending confirmation action. If the closing attorney represents the purchaser, a representation and warranty in the contract stating that a confirmation action is not pending and a covenant by the seller in the contract that such an action will not be filed is recommended. In addition, closing attorney's title examiner should be instructed that on every REO sale, the civil dockets must be checked for the existence of a pending confirmation action.3 Furthermore, as a part of the pre-closing checklist requirements closing attorney should require a certification by seller that a confirmation is not pending and (if the contract has been entered into within thirty (30) days of foreclosure that an action will not be filed). This language should also be included in the Owner's Affidavit to be signed by the seller.
An answer in the affirmative as to a pending confirmation action does not necessarily put the death knell on the transaction. It may be that a seller/lender when faced with a purchaser (or purchaser's lender) who is unwilling to close under these circumstances and with the exception to title, may choose to dismiss the confirmation action with prejudice in an effort to save the transaction.
It also may be that the timing of the confirmation hearing is imminent, and the purchaser and seller/lender are willing to extend the closing date to provide for the hearing outcome and the passage of the statutory thirty (30) day appeal period. In both cases, the policy would be issued without exception. The effect of the economic downturn in 2007 is truly a gift that just keeps on giving. As a result, closings are more difficult and fraught with more challenges. The confirmation statute and its ever growing effect on marketable and insurable title is just one example of how the real estate practice is a fluid and always changing practice area.
1 Assuming the underlying debt securing the property is recourse.
2 The confirmation statute does not require notice of confirmation to be recorded in the deed records.
3 If property being conveyed has come out of a foreclosure that occurred within the past 3-5 years, out of an abundance of caution it is recommended that the civil dockets are searched for a pending confirmation (as to the parties to the foreclosure). If the confirmation matter is contested the civil action can take a significant amount of time before the court rules and the appeal process is concluded.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.