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

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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 Gibson’s contention that the modification wasn’t enforceable.   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.