DIRT DEVELOPMENT for Tuesday, August 25, 2009
Daniel B. Bogart
Donley and Marjorie Bollinger Chair in Real Estate Law
Chapman University School of Law, Orange, California
MORTGAGES; DEFICIENCY JUDGMENTS; ANTI-DEFICIENCY STATUTES: Multiple notes and mortgages covering same property are  deemed "inextricably intertwined," and foreclosure of senior secured note eliminates any claim on the second secured note as well, even if second note was entered into for a new loan (from the same lender) at a later date than the first. 

Iwan Renovations, Inc. v. North Atlanta National Bank, 673 S.E. 2d 632 (Ga. Ct. App. 2009)
Iwan obtained a $338,000 loan from North Atlanta National Bank (“Bank”) in May of 2005 for the purpose of buying real property and building a home on it. Iwan executed both a note and a deed to secure debt (which is the Georgia mortgage form that permits non judicial foreclosure.)    The initial loan amount was skimpy: on two separate occasions Bank agreed to modify the terms of the loan. The first modification increased the balance of the loan to $360,150 and extended the maturity date of the note, and the second modification extended the maturity date even further. 

Apparently, Iwan asked for additional funds to accompany the second extended maturity date.  However, the Bank’s internal guidelines prohibited it from providing additional funds and modifying the terms of the original note once more as it had previously done for Iwan.  The Bank was willing to give Iwan an additional $25,000 in loan money, but it required Iwan to sign a new note and secure the note with a new deed to secure debt. The deed to secure debt covered the same property described in the first deed to secure debt. The various notes and deeds to secure debt contained cross default clauses.  The second loan was consummated on December 19, 2005, seven months after execution of the original note and deed to secure debt.

Although the opinion does note relate the details, it is clear that things did not go well for Iwan.  On June 26, 2006, Iwan asked the Bank to once again extend the date for maturity of the debt – that is, to extend the maturity date to both promissory notes. The Bank agreed, but this time it asked for a personal guarantee of Dave Iwan (“Dave”) of the second note (which, as you recall, was in the principal amount of $25,000.) Iwan and Dave agreed and Dave became a guarantor of the additional loan money.

Obviously, the next step was Iwan’s default. The Bank demanded payment on both promissory notes as well as attorney’s fees permitted under Georgia statute if forced to file suit for recovery of the debt. Two weeks after sending its demand letter, the Bank filed suit against Iwan and Dave to recover amounts owed under both the notes, as well as fees to collect.

With its lawsuit already underway, the Bank then proceeded to foreclose non judicially the first deed to secure debt, secured by the $360,150 promissory note.  The Bank purchased the property at the foreclosure sale for $398,322.15. The Bank did not seek a deficiency judgment from Iwan and did not take the step of confirming the sale price.

The original lawsuit sought payment on both promissory notes. However, foreclosure of the first deed to secure debt eliminated the debt under the first note.  Bank therefore amended its complaint to state that it would seek only recovery of the money owed on the second note, plus expenses.  Iwan responded that the Bank’s attempt to collect on the second note was nothing more than a disguised deficiency judgment.  The trial court granted summary judgment to the Bank; the Court of Appeals reversed.

Georgia Code 44-14-161(a) bars parties foreclosing on property pursuant to powers of sale from obtaining 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.”

The confirmation proceeding is meant to allow the judge to determine whether the property was sold for less than market value and whether any of the technicalities of foreclosure (time and manner of sale) were violated.  

In the usual course, when a lender makes a loan evidenced by a note and secured by a mortgage, the lender is not required to pursue the collateral and may choose instead simply to enforce the contractual obligation for payment of the note.  The problem is that this can create an incentive for lenders to creatively paper deals to avoid judicial confirmation proceedings that might have the effect of depriving the lender of deficiency judgments.

Quoting Oakvale Road Assoc. v. Mtg. Recovery Fund, 499 S.E. 2d 404 (1998), the opinion states “As a general rule, two debts that are incurred for the same purpose, secured by the same property, held by the same creditor, and owed by the same debtor are inextricably intertwined.”  If the debts are inextricably intertwined, then the court will treat the debts as one for the purposes of the confirmation requirement.

In this case, the Bank essentially argued that the second note and deed to secure debt represented a separate loan and therefore it had every right to enforce the promissory note.   The Bank relied on prior Georgia cases, including Devin Lamplighter, Ltd. v. American Gen. Finance, 426 S.E.2d 645 (1992). In that case, a junior creditor purchased a senior’s debt and foreclosed without obtaining confirmation, then proceeded to sue on the junior note.  The court was unimpressed, saying that Devin “involved separate debts, evidenced by separate notes, made initially to different creditors at different times, and for different purposes.”  In other words, the debts were not intertwined for the purposes of confirmation of sale. 

The debts in Iwan Renovations were incurred seven months apart, but the court viewed this as of no consequence.  Furthermore, the court suggested that the cross default provision indicated the Bank viewed the debts as part of a single loan arrangement.  As a result, the Bank’s attempt to proceed on the second note after foreclosure of an intertwined first mortgage was barred. 

Reporter’s Comment 1: The Bank’s internal guidelines were not much help to it.  The guidelines certainly did not limit the Bank from loaning more money to Iwan. Perhaps the Bank had a policy of splitting loans in this manner because of the hope that it could pursue a deficiency in a manner proscribed by the court in the opinion.  Iwan asked for an extended maturity date, and it would have been entirely fair for the Bank to ask for new security – additional property secured by a new deed to secure debt and evidenced by a new loan.  The Bank did not take new collateral; instead it obtained a new note and a new mortgage over the old property, as well as a personal guarantee.   

Reporter’s Comment 2: The court focuses on the fact that the debts were only seven months apart; it uses this fact (among others) to determine that the debts were inextricably intertwined.  Seven months may seem fairly close together in time to the court, but that is still more than half a year.  What if Iwan had requested an extended maturity date a year after the first debt?  What if the request came 18 months afterwards? What (if any) time period would have suggested to the court that the debts were not intertwined?

Reporter’s Comment 3: The different jurisdictions vary in the kinds of statutes employed to deal with lender’s right to obtain a deficiency judgment, but in every state lenders are tempted to work around the rules.  California employs a robust one action rule, but casebooks are filled with lender attempts to take that second bite.

The Reporter for this case was Professor Daniel Bogart of the Chapman Law School.
Items reported here and in the ABA publications
are for general information purposes only and
should not be relied upon in the course of
representation or in the forming of decisions in
legal matters.  The same is true of all
commentary provided by contributors to the DIRT
list.  Accuracy of data and opinions expressed
are the sole responsibility of the DIRT editor
and are in no sense the publication of the ABA.
Parties posting messages to DIRT are posting to a
source that is readily accessible by members of
the general public, and should take that fact
into account in evaluating confidentiality
DIRT is an internet discussion group for serious
real estate professionals. Message volume varies,
but commonly runs 5 to 15 messages per work day.
Daily Developments are posted every work day.  To
subscribe, send the message
subscribe Dirt [your name]
To cancel your subscription, send the message
signoff DIRT to the address:
for information on other commands, send the message
Help to the listserv address.
DIRT has an alternate, more extensive coverage that includes not only
commercial and general real estate matters but also focuses specifically upon
residential real estate matters.  Because real estate brokers generally find
this service more valuable, it is named “BrokerDIRT.”  But residential
specialist attorneys, title insurers, lenders and others interested in the
residential market will want to subscribe to this alternative list.  If you
subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as
BrokerDIRT carries all DIRT traffic in addition to the residential discussions.
To subscribe to BrokerDIRT, send the message
subscribe BrokerDIRT [your name]
To cancel your subscription to BrokerDIRT, send the message
signoff BrokerDIRT to the address:
DIRT is a service of the American Bar Association
Section on Real Property, Probate & Trust Law and
the University of Missouri, Kansas City, School
of Law.  Daily Developments are copyrighted by
Patrick A. Randolph, Jr., Professor of Law, UMKC
School of Law, but Professor Randolph grants
permission for copying or distribution of Daily
Developments for educational purposes, including
professional continuing education, provided that
no charge is imposed for such distribution and
that appropriate credit is given to Professor
Randolph, any substitute reporters, DIRT, and its sponsors.
DIRT has a WebPage at: