Redman Industries v. Tower Properties, Inc.

• Decision Date: 29 May 1981
• Docket Number: Civ. A. No. C79-1326.
• Citation: 517 F. Supp. 144
• Parties: REDMAN INDUSTRIES, INC., and Redman Development Corporation, Plaintiffs, v. TOWER PROPERTIES, INC., Presidential Properties, Inc., and American Allegheny, Inc., formerly Thirty-Three Hundred Corporation, Defendants.
• Court: U.S. District Court — Northern District of Georgia

517 F. Supp. 144

REDMAN INDUSTRIES, INC., and Redman Development Corporation, Plaintiffs, v. TOWER PROPERTIES, INC., Presidential Properties, Inc., and American Allegheny, Inc., formerly Thirty-Three Hundred Corporation, Defendants.

Civ. A. No. C79-1326.

United States District Court, N. D. Georgia, Atlanta Division.

May 29, 1981.

COPYRIGHT MATERIAL OMITTED

John A. Howard and David K. Whatley, Smith, Cohen, Ringel, Kohler & Martin, Atlanta, Ga., for plaintiffs.

Edgar H. Sims, Jr. and Frank A. Lightmas, Jr., Kutak, Rock & Huie, Atlanta, Ga., for defendants.

ORDER

ROBERT H. HALL, District Judge.

I. Introduction

This case arises from a complex series of business transactions between plaintiffs (Redman), defendants, and Wachovia Realty Investments (Wachovia). In February, 1975, Tower Properties, one of the defendants, purchased the Quail Creek apartment project from Redman Development Corporation for $6,800,000.00. Wachovia provided the financing. In the course of this transaction Tower executed two notes in favor of Wachovia, and Redman Development executed a note to Wachovia in the amount of $991,909.50 representing the amount by which its debt on the Quail Creek property exceeded the purchase price paid by Tower. As a condition of its financing, Wachovia required that plaintiffs guaranty one of the notes given by Tower to Wachovia in the amount of $1,300,000.00. In turn, as a condition of their guaranty, plaintiffs required that defendants indemnify plaintiffs for any loss or expense incurred by reason of the guaranty of Tower's debt to Wachovia. The precise scope of the indemnity agreement is disputed.

On March 26, 1975, plaintiffs and Wachovia entered into a contract known as the Deficiency Debt Agreement, which consolidated all of plaintiffs' outstanding liabilities to Wachovia including the guaranty of defendants' $1,300,000.00 note associated with the Quail Creek purchase. The agreement called for plaintiffs to execute a note to Wachovia in the amount of $2,100,000.00. In exchange, Wachovia, among other things, cancelled the guaranty of Tower's note. The agreement provided that the $2,100,000.00 note executed by plaintiffs would be increased by $700,000.00 if certain events occurred. One such event was the default by Tower on the $1,300,000.00 Quail Creek note within eighteen months of the execution of the Deficiency Debt Agreement. Defendants allege that they had no knowledge of the Deficiency Debt Agreement.

Tower indeed defaulted on its Quail Creek obligations on September 17, 1976, and Wachovia foreclosed on the Quail Creek property on November 2, 1976. The default occurred within eighteen months of the execution of the Deficiency Debt Agreement and was sufficient to increase plaintiffs' obligations to Wachovia pursuant to the Deficiency Debt Agreement by $700,000.00. Redman and Wachovia agreed among themselves that Wachovia had suffered a deficiency of at least $700,000.00 as a result of the Quail Creek foreclosure. This deficiency, however, was never confirmed or established in accordance with Georgia law.

On November 30, 1976, Wachovia conveyed Quail Creek to a party unrelated to this litigation but related to defendants. At that time, Allegheny, another of the defendants, executed a $300,000.00 note to Wachovia in satisfaction of its guaranty of Tower's note. Defendants also assert that Allegheny's $300,000.00 note exhausted the obligation under Allegheny's indemnity agreement with plaintiffs.

In 1977, plaintiffs and Wachovia negotiated an exchange arrangement in which Wachovia cancelled the $2,800,000.00 Deficiency Debt Agreement note and plaintiffs transferred certain assets to Wachovia. Defendants claim to have had no knowledge of or participation in the exchange of assets.

Plaintiffs have filed a four-count complaint against defendants in which they seek to recover $700,000.00, which represents their liability associated with the guaranty of Tower's $1,300,000.00 note to Wachovia. The first count is on the indemnity agreements and is brought against all three defendants. The second, third, and fourth counts are against Tower alone and set forth theories of subrogation, assumpsit, and suretyship respectively. Defendants have asserted several defenses against the first count and argue that the second, third, and fourth counts are inappropriate. Defendants have also filed a counterclaim with their answer, and plaintiffs have moved for summary judgment in their favor on it.

The case is now before the court on cross motions for summary judgment on the complaint and on plaintiffs' motion for summary judgment on the counterclaim. In order for defendants to defeat plaintiffs' motion for summary judgment on Count I, there must be at least one asserted defense that is either established as a matter of law or pertinent to which there is a disputed issue of fact. Defendant Tower must similarly succeed as to the second, third, and fourth counts of the complaint. For plaintiffs to defeat defendants' motion for summary judgment on the complaint, they must establish either that none of defendants' defenses are plausible as a matter of law or that at least an issue of fact remains as to one defense that is plausible. Therefore, the court will proceed by examining each of plaintiffs' counts in relation to the legal soundness of the defenses raised by defendants in response to that count. Finally, the court will consider plaintiffs' motion on the counterclaim.

II. Count I: The Confirmation Statute Defense

Count I of plaintiffs' complaint arises under the indemnity agreement by which defendants indemnified plaintiffs for certain losses that plaintiffs might incur because of the Quail Creek transaction. The exact scope of the indemnity agreement is disputed, but the court need not determine that scope precisely or finally. Rather, the court turns to defendants' argument that plaintiff cannot recover against them under the indemnity because the foreclosure sale was not confirmed as required by Georgia law. Ga.Code Ann. § 67-1503.^* If defendants' argument is meritorious, plaintiffs' motion for summary judgment on the indemnity count must be denied.

The statute requires that a foreclosure sale must be confirmed by a court as a prerequisite to bringing an action for a deficiency judgment against a debtor. If the foreclosure sale is not judicially confirmed within 30 days after the sale, no deficiency judgment may be had. This case, on the surface, does not appear to be in the form of a deficiency action prohibited by the Georgia confirmation statute. In the pursuit of justice, however, the court will examine the substance of this transaction and will not stop with an analysis of form. The court will carefully review this transaction and the facts surrounding it in order to determine if the cause of action stated in Count I of the complaint is, in substance, an action against plaintiffs to recover a deficiency judgment.

On one hand, the statute prohibits seeking a deficiency judgment absent confirmation of the foreclosure sale. On the other hand, a secured creditor, even if he is prohibited from seeking a deficiency judgment, may pursue any other remedies available to him. First Federal Savings and Loan Association v. Fisher, 422 F.Supp. 1 (N.D.Ga. 1976). In essence, the court must decide whether Count I states a cause of action for a deficiency judgment or some other remedy available to the creditor in this case. While it is true that the "statute in no way precludes a creditor from exercising other available remedies to satisfy the indebtedness," id. at 3, if Count I resembles a deficiency judgment in substance, plaintiffs' motion for summary judgment must be denied.

The court begins its analysis with the public policy of the confirmation statute itself. The confirmation statute was enacted at the height of the Great Depression and is intended to protect debtors. At the same time, it furthers the state policy of quieting title to land, and is to that extent useful to creditors as well.

"The strongest ground of public policy which occurs for the enforcement of statutes requiring confirmation in foreclosure proceedings is to protect the debtor from being subjected to double payment in cases where the property was purchased for a sum less than its market value." Goodman v. Nadler, 113 Ga.App. 493, 496, 148 S.E.2d 480, 483 (1966). Accord, First National Bank & Trust Co. v. Kunes, 128 Ga. App. 565, 197 S.E.2d 446, aff'd, 230 Ga. 888, 199 S.E.2d 776 (1973). Indeed, confirmation statutes are thought necessary to prevent inequities that arise when a creditor buys property on which it has foreclosed at a low price when property values are depressed and the economy is recessionary, and then proceeds to seek a personal judgment against the debtor for the difference between the low price the creditor has paid for the property at the foreclosure sale and the balance of the debt. Comment, 49 Tul. L.Rev. 1094 (1975). Thus, the statute is designed to protect debtors from deficiency judgments when their property has been sold at a foreclosure sale for less than its fair market value. United States v. Gulf Club Co., 435 F.2d 9 (5th Cir. 1970).

In light of this public policy adopted by the Georgia General Assembly and enacted by it in section 67-1503, the court wishes to assure that the Deficiency Debt Agreement between plaintiffs and Wachovia does not operate so as to be a subterfuge of the confirmation statute and the public policy of this state. Under the Deficiency Debt Agreement involved in this case there is a danger that defendants will be subjected to double payment and that the confirmation statute will be a mere matter of form easily circumvented by clever draftsmanship and artful structuring of transactions. The court does not wish to contribute to the construction of a formal trap by which debtors may be stripped of the protection intended for them to have by the General Assembly under the...