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Note: To provide for real estate developer's maintenance bonds for the development of a subdivision infrastructure, Windermere Development, Inc. and Simon Road Development, Inc. (Applicants/Grantees), obtained two standby letters of credit in the amounts of USD 78,750 and USD 176,250 in favor of the Douglas County Board of Commissioners (Local Government/Beneficiary). Applicants/Grantees then obtained two more standbys in the amounts of USD 229,212 and USD 46,250 for the same purpose, related to the development of a second subdivision. Bank of North Georgia (Issuer/Grantor) which issued the standbys was also the lender for several other real estate loans taken out by Applicants/Grantees that were secured by real estate deeds and personal guarantees from officers of the Applicant/Grantee companies. The loan terms stated that the reimbursement for amounts paid under the standbys was to be secured by the same collateral as the loans and be subject to the terms of the other loans. Each standby reimbursement obligation contained identical cross-default provisions, each listing as a default event the borrower's "failure to make timely payment of any sum required to be paid hereunder, or to perform and fully satisfy any other covenant or obligation of Customer to Lender set forth herein or in the Separate Agreement or any related instrument". Each standby "also provided that, upon default, the lender could accelerate the amount due under the reimbursement obligation, as well as any other agreement between the parties hereto".

When Applicants/Grantees defaulted on the loans, Issuer foreclosed on Applicants/Grantees' property as well as executed its power of sale of the real estate given for the purpose of securing the loan. Issuer, however, failed to seek judicial confirmation of the foreclosure sales pursuant to the applicable state statute. Local Government/Beneficiary subsequently drew on the LCs, and Issuer honored.

Issuer sued Applicants/Grantees for reimbursement of the amount paid on the standbys and applicable attorney's fees and moved for summary judgment. Applicants/Grantees separately moved to dismiss due to Issuer's failure to seek judicial confirmation for the foreclosure sales. The State Court of Douglas County denied both motions, and both parties appealed.

The Court of Appeals of Georgia, First Division, Ellington, Blackwell, and Dillard, JJ., in an opinion by Ellington, C.J., applying Georgia statute OCGA 44-14-61(a), affirmed the denial of Issuer's motion for summary judgment and reversed the denial of Applicants/Grantee's motion for summary judgment (consolidated appeal and cross appeal).

State statute OCGA§ 44-14-61 (a) states that

[w]hen 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.

Because Issuer failed to follow the legal process of reporting the sale of the collateralized real estate, the appellate opinion concluded that Issuer was denied the ability to pursue deficiency judgment for both the development loans and the standbys.

As the Applicants/Guarantees' reimbursement agreements for the standbys were for the same purpose as the other loans, the appellate court ruled that they were "inextricably intertwined", reasoning,

This Court has applied OCGA § 44-14-161 (a) to foreclosure proceedings on separate debts which are inextricably intertwined to prevent creditors from circumventing the statute's mandates by making successive loans against the security of the same property. This prevents creditors from avoiding the very purpose of the confirmation statute [,] that being to protect debtors from deficiency judgments when their property is sold at a foreclosure sale for less than its market value. 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.

It concluded that the deficiency judgment concerning the development loans, therefore, applied to reimbursement for drawings on the standbys.

[JEB/sb]

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