When Things Go Wrong

Rescission ... contract reformation ... specific performance ... declaratory judgment ...  injunction ... fraud ... slander of title.  What do these terms have in common?  Answer:  one heck of a lawsuit.  In Executive Excellence v. Martin Bros. Invs. LLC, 11 FCDR 1152 (4/15/11), all these issues and more were fought over and appealed to the Georgia Court of Appeals.

The case involved the sale of two parcels of property owned by Executive Excellence, LLC, Executive Excellence LLC's principal owner, Richard R. Fritts, and Sterling Trust Company (collectively "sellers").  In December 2006, the sellers agreed to sell two tracts of land to Sund Enteprises.  Sund Enterprises assigned its purchase rights to Southern Tradition Investments, LLC and Martin Brothers Investments, LLC (collectively "buyers").  Each agreement contained a zoning contingency, entitling buyers and sellers to rescind the contract if zoning approval hadn't been completed by April 1, 2007.

Ultimately the county didn't schedule zoning approval meetings until April 2 and April 26, 2007, which was after the deadline in the agreements.  Thus, on March 28, 2007, buyers notified sellers they were unilaterally removing the zoning contingency from the agreements.  That didn't go over well with the sellers, who responded by formally rescinding the agreements.

A lawsuit was filed in which the buyers sought contract reformation based upon a scrivener's error.  Buyers asserted that the parties intended the zoning contingency deadline to be June 1, 2007, rather than April 1, 2007.  Buyers also sought an injunction, declaratory judgment, specific performance, fraud, and attorneys' fees.  Sellers filed a counterclaim for slander of title and attorneys' fees.

Sellers filed a motion for summary judgment, which apparently caused buyers to dismiss their claims.  But that did not end the litigation because sellers still had claims for slander of title and attorneys' fees.

Sellers complained their title was maliciously impugned because buyers filed a lis pendens but failed to cancel it after buyers had dimsissed their claims.  Further, sellers claimed that buyers made verbal statements to third-parties about the property that weren't true.  The buyers filed summary judgment on the slander of title claim, which was granted by the trial court.

In analyzing slander of title, the Court of Appeals reiterated the criteria to recover under slander of title: (1) publication of slanderous statements, (2) false and malicious statements, (3) that the plaintiff sustained special damages, and (4) that the plaintiff possessed an estate in the subject property.  OCGA   Sec. 51-9-11.

With regard to the lis pendens (a lis pendens is a notice to the public that a lawsuit had been filed in connection with real estate), the Court of Appeals ruled that lis pendens were privileged under OCGA Sec. 51-5-8, and, by definition, could not be be the basis of a slander of title claim.  Regarding whether sellers were liable because they failed to timely cancel the lis pendens after dismissing their claims, the Court explained that a lis pendens notices remain in effect until a final judgment has been entered and the time for appeal has expired.  OCGA Sec. 44-14-612 states that it is the clerk of court's responsibility, not a plaintiff's, for  marking the lis pendens with the final disposition of the case.  In this case, the buyers didn't have any responsibility for cancelling the lis pendens, and therefore couldn't be liable for slander of title for not timely cancelling the lis pendens.

With regard to the alleged slanderous remarks to third parties, the Court determined that these statements were not actionable because the statements were either substantially true or "were nothing more 'than subjective, hyperbolic opinion that cannot be proved to be true or false[.]'"  Citing Evans v. The Sanderville Georgian, 296 Ga. App. 666, 669, 675 SE2d. 574 (2009).

Be Careful Before Buying a Property at Foreclosure

The lesson to be learned from the situation summarized below, which is a true story, is that purchasing and selling properties as part of a foreclosure are fraught with unfamiliar traps.  At Krause Golomb & Witcher, we have years of experience helping lenders foreclose properties and investors buy foreclosure properties.  Please call us at (404) 835-8080 to discuss any questions regarding foreclosures and real estate disputes in the Atlanta, Georgia metro area.

In April 1998, a company borrowed money from a Lender 1 to buy some property.  The company signed a promissory note to Lender 1, and gave Lender 1 a security deed to the property.  In October 1998, the same company borrowed additional money from Lender 2 and gave Lender 2 a security deed on the same property.

Lender 1 merged into another bank, Lender 3.  The borrower signed a modification of Lender 1’s loan, allowing Lender 3 to become the holder of the April 1998 promissory note and security deed.  At the same time, Lender 2 signed a subordination agreement, which placed Lender 3’s security deed in first position (i.e., in front of the Lender’s October 1998 second mortgage).

In December 2006, the borrower secured another loan from Lender 4 and paid off Lender 3.

In September 2008, Lender 2 began foreclosure proceedings in accordance with its October 1998 security deed.  In November 2008, Lender 4 filed a petition to quiet title on the subject property, claiming it held a first mortgage on the property.  Lender 4 also filed a lis pendens and asked the court to stop Lender 2’s foreclosure action.

The parties agreed to postpone the foreclosure until January 2009.  At the same time a special master was appointed in December 2009.  Lender 2 foreclosed the property in January 2009 and sold the property to a third-party investor.

The special master conducted a hearing in June 2009.  Primarily at issue was whether O.C.G.A. § 44-14-80, which provides that title under a security deed will automatically revert to the grantor seven years after the maturity of the underlying secured indebtedness, applied to Lender 2’s October 1998 security deed.  Also at issue was whether Lender 2 had provided the requisite 60-day notice to cure to the borrower before initiating the foreclosure, as provided in the October 1998 security deed.

The special master found in favor of Lender 4, and the trial court adopted the special master’s recommendations and entered a final order.  Lender 2 and the purchaser at the January 2009 foreclosure sale appealed.   The Georgia Court of Appeals in the companion cases of MPP Inv. v. Cherokee Bank NA. et al., S10A1361, S10A1363 (01/21/11), upheld the trial court’s final order.

In rejecting the argument that the 60-day notice issue had been waived by Lender 4, the Georgia Court of Appeals found that the November 2008 hearing did not deal with the foreclosure such as to require that Lender 4 raise the 60-day notice issue, that the pre-trial order did sufficiently reference the foreclosure (and by extension the 60-day notice issue), and, finally, O.C.G.A. § 23-3-66 gave the special master “complete jurisdiction with the scope of the pleadings to . . . determine the validity . . . [o]f all . . . interests in the land . . . .”  Thus, the special master was within her discretion to determine that the foreclosure sale was invalid because Lender 2 failed to provide the requisite 60-day notice.

Similarly, the Court rejected the argument that Lender 4 was estopped from asserting that title under Lender 2’s security deed had reverted back to the borrower because Lender 4 had failed to raise the issue prior to the January 2009 foreclosure.  The Court noted that in order to have a valid claim for estoppel, the buyer at the January 2009 foreclosure must have been unaware of the true nature of the title and must have relied upon the silence of the true owner.  The evidence in this case revealed that Lender 4 filed the lawsuit in November 2008, before the foreclosure in January 2009.  Also, Lender 4 recorded a lis pendens.  Further, the purchaser admitted that it was aware if Lender 2’s security deed and the maturity date contained therein; thus, the purchaser, prior to the foreclosure sale, should have known that O.C.G.A. § 44-14-80(a)(1) caused an automatic reversion of Lender 2’s security deed back to the borrower.  Finally, no evidence showed that the purchaser relied on Lender 4 in purchasing the subject property.

The next argument was that Lender 2’s promissory note didn’t contain the 60-day notice provision.  Therefore, by extension, notice was not required under Lender 2’s security deed.  The Court quickly dismissed this argument by pointing out that the promissory note provides for a method of accelerating the note, which does not require a 60-day notice, while the security deed provides for a power of sale, which does require a 60-day notice.  These two provisions are not in conflict.

Lastly, the purchaser argued that it was a bona fide purchaser for value under O.C.G.A. § 23-1-20.  The Court reiterated that the purchaser in this case has constructive knowledge of issues with the title.  Specifically, it was aware of Lender 4’s claim and was aware of the maturity date on Lender 2’s security deed.  The bona fide purchaser principle is meant to protect an innocent purchaser from the true title owner who stands silently by and permits such purchaser  to act to his own injury or such true title owner who fails to timely assert an unknown interest in the property.  Neither occurred in this case because Lender 4 took steps to make its interest known and because the purchaser had sufficient knowledge of Lender 4’s claims prior to purchasing the subject property.