Loan Modifications Don't Need To Be Recorded If Original Security Deed Not Cancelled

Loan modifications and the resulting consequences to lien priority can be confusing.  This issue was front and center in Gibson Constr. Co. v. GAA Acquisitions LLC, A10A2037; 11 FCDR 246 (2/2/11).  The facts of that case are as follows:

• In May 2005, McNeil borrowed $1.2 million from Charter Bank secured by real estate. 
• Gibson provided construction services on the real estate owned by McNeil, and when it wasn't paid, it obtained a judgment and special lien against McNeil and the subject property.  The special lien was recorded on the public record in February 2008.
• By April 2008, the underlying loan was in default and Charter Bank began foreclosure proceedings.
• On May 5, 2008, a day before the scheduled foreclosure, GAA purchased the loan from Charter Bank and received a Transfer and Assignment of Security Deed.  This was recorded on the public record on May 8, 2008.
• McNeil and GAA then entered into a loan modification agreement on May 6, 2008, which provided that the original loan, including the security deed, would remain in effect except for amendments in the loan modification agreement.  The amendments included a provision for attorney fees and increased the loan amount and interest rate.  The loan modification agreement wasn't recorded on the public record.
• McNeil went into default again and GAA foreclosed on the property.  There were no third-party bidders at the foreclosure, so GAA bought the property itself. 
• In September 2008, Gibson made a demand for distribution of the foreclosure proceeds contending that because the loan modification agreement wasn't recorded, the loan modification agreement wasn't enforceable.

The Court of Appeals disagreed with Gibson.  The Court explained that as long as a security deed is not expressly cancelled, it may be corrected or modified by subsequent agreement and not lose its priority interest.  Aetna Casualty & Surety v. Valdosta Federal Sav. & c., 175 Ga. App. 614, 617; 333 SE.2d 849 (1985) (Georgia law allows the modification of the terms of a note.); Riverview Condominium Assn. v. Ocwen Federal Bank, 285 Ga. App. 7, 8; 645 SE.2d 5 (2007) (The distribution of excess proceeds from a foreclosure sale is governed by the security deed.)

Here, the subject loan modification agreement didn't cancel the original security deed so it didn't lose its priority status relative to Gibson's later filed special lien.  The Court said that it couldn't find any authority for the proposition that a loan modification isn't valid or enforceable unless it is recorded.  The Court reasoned that, as a subordinate lien holder, Gibson had notice from the outset that its lien could be extinguished by the first mortgage holder.  

Foreclosure Confirmations: Battle of the Appraisers

One of the consequences of the recent "Great Recession" has been an avalanche of mortgage foreclosures.  The Atlanta area being no exception.  In turn, this has led to a record number of foreclosure confirmation filings.  As these confirmations have been tried and appealed, we've watched with interest.  A clear pattern has emerged:  the appellate courts in Georgia are reluctant to second guess a trial court.

In Jimmy Britt Builders Inc. v. Suntrust Bank, A10A2352 (2/11/11), the central issue was the extent to which experts can be challenged on appeal.  In that case, both sides came to trial armed with experienced appraisers.  Each appraiser had done thousands of appraisals.  

The property in question was a partially finished spec house.  Both appraisers approached their appraisals similarly.  Each provided an estimate of how much the spec house would be worth fully built and then subtracted the cost of completing the house.  The amounts arrived at by both appraisers was similar.

But the lender's appraiser went one step further.  He applied an additional discount of 15% based on what he termed "builder/buyer's risk."  The lender's appraiser testified that the 15% discount was necessary to account for a homebuilder stepping into to complete a house that had only been partially completed and to account for the condition of the neighborhood (there were other unfinished houses).

The trial court sided with the lender's appraiser and confirmed the foreclosure.

On appeal, the borrower raised several issues. The borrower contended that the 15% "builder/buyer's risk" discount was "unsubstantiated and irrational."  The Georgia Court of Appeals rejected this argument.  It stated that

the question is not whether this Court would have found [the borrower's] or the [lender's] expert more reliable or accurate . . ., "but whether the record contains any evidence to support . . . that the property brought its true market value at the foreclosure sale."

Id. (Citing Greenwood Homes v. Regions Bank, 302 Ga. App. 591, 596, 692 S.E.2d 42 (2010)).

In analyzing the evidence supporting the 15% discount, the Court of Appeals explained that the bank's expert had arrived at his opinion by speaking with two builders and viewing the property.  It is not clear how or why speaking with two builders and viewing the property supports a 15% "builder/buyer's risk" discount, but the Court of Appeals Court of Appeals explained that "'[a]n expert need not give reasons for an opinion."  The borrower also argued that a 15% discount was illogical because the lender's expert had already incorporated the cost of completing the construction of the house into the appraisal.  The Court of Appeals disagreed and found that it was up to the trial court to determine the legitimacy of a 15% discount.

Though it might have been reasonable to conclude that the 15% discount was arbitrary and capricious, the Court of Appeals was unwilling to go down this path.  Jimmy Britt reinforces the notion that, in the context of a confirmation petition, it is virtually impossible to reverse a trial court on claims that an appraiser's opinion was flawed.  In these cases, you must win the appraisal battle at trial or live with the consequences.