You et al. v. JP Morgan Chase Bank, N.A.

The Georgia Supreme Court rendered a long-anticipated decision on May 20 related to foreclosure procedure in Georgia.  The case arose as a result of a recent split of authority in Georgia as to whether a party seeking to exercise the power of sale provision in a security deed must also hold or have a beneficial interest in the underlying promissory note underlying the security deed.  Borrowers had been making an argument commonly referred to as “produce the Note”, in which they argued that unless a holder of a security deed also held the underlying promissory note, they could not lawfully exercise the right to non-judicially foreclose on the property subject to the security deed.

For many years, Georgia courts had routinely rejected the borrower’s argument, holding that a holder of a security deed did not have to hold the underlying promissory note in order to foreclose and therefore, there was no requirement that they “produce the note” during a non-judicial foreclosure.   However, in the past year or so, a federal District Judge in the Northern District of Georgia (Judge Amy Totenberg, the sister of Nina Totenberg, the legal reporter for NPR, for those of you who listen to NPR) had ruled that a foreclosing creditor would have to also hold the promissory note or at least have a beneficial interest in it to lawfully foreclose.

Due to this split in authority, 3 “certified questions” of law were posed to the Georgia Supreme Court as follows:

1)      Can the holder of a security deed be considered a “secured creditor” such that the deed holder can initiate foreclosure proceedings on residential property even if it does not also hold the Note or otherwise have a beneficial interest in the debt obligation underlying the security deed?

2)      Does the Georgia statute requiring that the “secured creditor” be identified in the notice required by Georgia statute (the statute requires that notice be given to a borrower prior to foreclosure of the individual or entity having full authority to negotiate, amend and modify all terms of the mortgage with the debtor);  and

3)      If question 2 was answered in the affirmative, would substantial compliance with the statute suffice?

The Court answered the first question in the affirmative, holding that the holder of the deed can initiate foreclosure proceedings on residential property even if it does not also hold the Note or underlying debt obligation.   The Court answered the second question in the negative, holding that the “secured creditor” did not have to be specifically identified in the notice to the borrower, as the plain reading of the statute only requires that the individual or entity having the authority to modify the note be identified.   Under the court’s analysis, a loan servicer can be such a party, although it is still recommended that it be clearly set forth that the party is the servicer if it is in fact the loan servicer.    The Court’s answer then made the 3rd certified question moot.

As the Court noted, it is essentially up to the Georgia legislature to enact changes to the law regarding foreclosures in Georgia.  As you may know, the foreclosure procedure in Georgia is very fast and provides Borrowers with little opportunity to effectively contest or defend a non-judicial foreclosure.  While we may see some efforts to enact changes to Georgia law to slow down the foreclosure process, some of the momentum to do so has been lost as the effects of the Great Recession finally ebb.

As you may recall, the Georgia Court of Appeals had rendered an opinion last summer in the case of Reese v. Provident Funding, that essentially set aside a foreclosure due to the failure of the foreclosing lender to identify the “secured creditor”.  That opinion has led to much consternation for foreclosure attorneys in  Georgia, as it seemed to require the identification of the “secured creditor” without offering a definition of what is a “secured creditor” under Georgia law.  The Reese case is up on certiorari to the Supreme Court, so we may see  a new opinion in light of the You v. Chase case.

 There was great concern that if the Georgia Supreme Court had ruled differently in this case, it could have formed a basis for borrowers to attempt to invalidate foreclosures previously conducted in Georgia.  This ruling is very beneficial to creditors and will provide support in the defense of future actions brought by borrowers to stay or set aside foreclosure actions.