                                FOURTH DIVISION
                                  BARNES, P. J.,
                              RAY and MCMILLIAN, JJ.

                     NOTICE: Motions for reconsideration must be
                     physically received in our clerk’s office within ten
                     days of the date of decision to be deemed timely filed.
                                http://www.gaappeals.us/rules/


                                                                        July 16, 2015




In the Court of Appeals of Georgia
 A15A0431. COMMUNITY & SOUTHERN BANK v. CLEAR
     CREEK PROPERTIES et al.

      MCMILLIAN, Judge.

      Community & Southern Bank (the “Bank”) appeals after a jury returned a

verdict in favor of Garry Haygood (“Haygood”) and Haygood Family Investments,

LLC (“HFI”) in the Bank’s contract action against them. For the reasons set forth

below, we reverse.

      “On appeal following a jury verdict and judgment, this Court must construe the

evidence with every inference and presumption in favor of upholding the verdict, and

after judgment, the evidence must be construed to uphold the verdict even where the

evidence is in conflict.” (Citation and punctuation omitted.) One Bluff Drive, LLC v.

K. A. P., Inc., 330 Ga. App. 45, 45 (766 SE2d 508) (2014).
      So viewed the evidence shows that HFI and Haygood, along with Clear Creek

Properties, LLC (“Clear Creek”), Legacy Mountain Properties, LLC (“Legacy”), A.

S. Dover Development, Inc. (“A. S. Dover”), Dover-Pfister, LLC n/k/a Dover

Development, LLC (“Dover Development”), and Alan S. Dover (“Dover”), executed

nine promissory notes and numerous commercial guaranties in favor of Gilmer

County Bank (“GCB”)1 in connection with real estate development projects,

including a project known as “Falling Waters.” Haygood and Dover both held a

percentage ownership interest in Legacy and Clear Creek, and both men participated

in borrowing money to finance Falling Waters.2 Ultimately, Clear Creek, HFI,

Legacy, A. S. Dover, Dover Development, Haygood, and Dover all defaulted on their

repayment obligations under their respective promissory notes and guaranties. The

Georgia Department of Banking and Finance closed GCB in March 2010,3 and the




      1
          GCB was a division of Appalachian Community Bank (“ACB”).
      2
        Dover testified that Dover Development owned Legacy and Clear Creek, and
in connection with Haygood’s investment in Falling Waters, he received a 25 percent
stake in Legacy and Clear Creek.
      3
      The evidence indicated that fraudulent loans made by GCB president Tracy
Newton and chief loan officer Adam Teague ultimately led to the bank’s failure.

                                        2
loans were assigned and transferred to the Bank pursuant to a Purchase and

Assumption Agreement with the Federal Deposit Insurance Corporation. (“FDIC”).

      At the pertinent time, Dover was a real estate developer and a director at GCB,

serving on the loan committee. Dover originally purchased the land for the Falling

Waters project for around $36 million in August 2006. He borrowed the money for

this purchase from GCB and did not put up any of his own money to fund the

transaction. Dover was the largest borrower at GCB, and his loan requests were

routinely approved. Additionally, he was sometimes present at loan committee

meetings in which his loans were approved, although he did not vote on his own

loans. Dover did not provide his financial information to GCB in connection with his

loan applications, and GCB did not maintain any financial information on him.

      Nevertheless, GCB routinely renewed Dover’s loans over a period of 13 years.

Over time, as Dover’s loans approached or exceeded legal lending limits, GCB sold

portions of the loans to other banks pursuant to participation agreements. As one

former GCB loan officer explained, federal banking laws provide that a single

borrower can only borrow a certain percentage of a bank’s capital. If the borrower

exceeds that limit, the bank must divest itself of the loans. Once GCB divested itself

of some of Dover’s loans, it could then lend him additional funds.

                                          3
       Haygood also was involved in real estate development and construction during

the relevant period.4 At issue in this appeal is a $3 million loan GCB extended to

Haygood individually on September 21, 2007 in connection with the Falling Waters

project (the “Haygood Loan”). (See Addendum “A” for a list of the other promissory

notes and guaranties at issue at trial, hereinafter referred to collectively as the “Other

Notes.”) Haygood testified that he was solicited by Dover to invest money in Falling

Waters in or around September 2007. Dover first suggested that Haygood buy a 49

percent interest in the project, but Haygood had “no interest in that at all.” Dover later

suggested that Haygood buy 25 percent of the project for $5.2 million. Haygood was

hesitant; he did not have much cash at the time because he had recently paid off all

of his debt. Nevertheless, he told Dover that he could raise about $2 million to invest.

Dover knew that Haygood owned real property on Rackley Road in Hall County (the

“Rackley Road Property”) debt-free, and he suggested that Haygood use the property

as collateral to apply for a loan at GCB. Haygood ultimately agreed to the $5.2

million investment, if he could borrow $3 million from GCB on the Rackley Road

Property.


      4
       Haygood served on the board of directors of a Cherokee County bank and was
a shareholder in GCB, having invested $75,000.

                                            4
      In connection with the Haygood Loan, GCB ordered an appraisal on the

Rackley Road Property at Haygood’s expense. That appraisal, dated September 13,

2007, set the value for the Rackley Road Property at $2,640,000, which was not high

enough to support the loan as GCB required an 85 percent loan-to-value ratio. GCB

subsequently ordered another appraisal, from the same appraiser, which reflected a

value for the Rackley Road Property of $3,510,000 as of September 20, 2007.

Because Dover needed the funds quickly, the Haygood Loan closed the next day, and

Haygood was not provided a copy of either appraisal, although GCB’s policy was to

give the borrower an appraisal three days before closing. Also in connection with the

Haygood Loan, Haygood signed a Security Deed and Agreement dated September 21,

2007, which contained a dragnet clause providing that any subsequent debt incurred

by Haygood could be consolidated under its terms, allowing foreclosure on the

Rackley Road Property in connection with such debt. Haygood gave Dover the

proceeds of the Haygood Loan and $2.2 million in cash to fund his $5.2 million

investment in Falling Water.5

      5
        The Haygood Loan apparently was renewed on two occasions, and the Bank
ultimately brought suit on a promissory note dated September 30, 2009 in favor of
GCB in the principal amount of $3,002,363, plus interest and a Commercial Loan
Agreement dated October 1, 2009, each signed by Haygood, individually. The
September 30, 2009 promissory note states that it is a re-financing of an earlier note

                                          5
      In December 2008, Adam Teague, chief loan officer at GCB, informed

Haygood of a problem with the loans relating to Falling Waters, and he scheduled a

meeting to discuss the matter with Haygood, Dover, GCB president Tracy Newton

and Joseph C. Hensley, a member of the GCB board of directors, who served on

GCB’s Audit Committee. Hensley, a CPA, also worked for Dover. At the meeting,

GCB informed Haygood that Unity Bank had entered into a participation agreement

with regard to a portion of a $7.5 million loan issued to Legacy in connection with

the purchase of the Falling Waters property. (See Note 5 in Addendum “A”) Although

GCB had renewed the loan several months earlier, Unity was no longer willing to

participate in it, and GCB was unable to carry the full loan on its books because

Dover had reached his legal lending limits. Accordingly, GCB told Haygood that

unless the loan was paid in full, GCB would have to foreclose on the Falling Waters

property. Haygood was asked to assume $3 million of the loan. Prior to this meeting,

Haygood was unaware of Unity Bank or any problems with Dover’s loans.

      At first, Haygood refused to assume any portion of the loan, but later, on behalf

of HFI, he signed a December 23, 2008 promissory note in the principal amount of

$4,623,000, plus interest (“First HFI Note”). Haygood stated that he signed the loan

dated September 21, 2008 in the amount of $3 million.

                                          6
documents because “[i]t was just a function, basically, to . . . get the bank out of

trouble and to keep the project from going into foreclosure and [to keep the loan]

current.” He stated that the loan also gave the Falling Waters project some operating

money. Haygood said that if he had not signed the loan, the Falling Water Project

would have been “dead,” and he would have lost the money he invested.

      On April 21, 2009, the FDIC issued an “Order to Cease and Desist” (the

“Order”) against GCB directing it to cease and desist from a list of “unsafe or

unsound banking practices and violations of law and/or regulations.” Haygood did

not receive a copy of the Order and was unaware of it when, on August 27, 2009, he

signed another promissory note in the principal amount of $4,022,286.50, plus

interest, on behalf of HFI (the “Second HFI Note”).6 The proceeds of that loan were

used to bring all the other loans current. Haygood stated that he would never have

signed Second HFI Note if he had known of the Order. Haygood did not receive any

of the proceeds of the two HFI loans.




      6
       Haygood, Dover, and A. S. Dover signed commercial guaranties with GCB
guaranteeing repayment of the First and Second HFI Notes (collectively, the “HFI
Guaranties”).


                                         7
      At trial, Haygood asserted the defense of illegality to the Haygood Loan based

on this evidence, and the Bank moved for a directed verdict on that defense, which

the trial court denied. The jury subsequently returned a verdict in favor of Haygood

on the Haygood Loan and in favor of Haygood and HFI on the First and Second HFI

Notes and the Other Notes.7

      1. The Bank first asserts that the trial court erred in denying its motion for

directed verdict on Haygood’s illegality defense. We agree.

      Under Georgia law, “[a] contract to do an immoral or illegal thing is void. If

the contract is severable, however, the part of the contract which is legal will not be

invalidated by the part of the contract which is illegal.” OCGA § 13-8-1 (a). And

“[t]he character of the contract in such case is determined by the intention of the

parties.” OCGA § 13-1-8 (b). But OCGA § 13-8-1 “has been held inapplicable where

the object of the contract is not illegal or against public policy, but where the

illegality or immorality is only collateral or remotely connected to the contract.”

(Citation and punctuation omitted; emphasis in original.) Kelley v. Cooper, 325 Ga.

App. 145, 147 (1) (751 SE2d 889) (2013).

      7
       The jury, however, found in favor of the Bank and against Crystal Creek,
Legacy, A. S. Dover, Dover Development, and Dover on the Other Notes, but that
determination is not a part of this appeal.

                                          8
      In connection with that defense, Haygood’s counsel argued to the jury that the

Bank’s actions with regard to the Haygood Loan constituted the crime of residential

mortgage fraud in violation of OCGA § 16-8-102 (2).8 In particular, counsel argued

that the appraisal used to acquire the loan was fraudulent, which he argued violated

the statute. He also argued that the Bank entered into the Haygood Loan to get around

the cap on Dover’s lending limits and as part of a “scheme” to avoid having the

regulators investigate the Bank’s practices. Haygood’s counsel further argued that the

illegality of the Haygood Loan “infected every one of the later loans.” We find that

any alleged illegality is only collateral to the Haygood Loan, and therefore does not

render the Haygood Loan, the HFI Notes, or the Other Notes void.




      8
          OCGA § 16-8-102 (2) provides:

      A person commits the offense of residential mortgage fraud when, with
      the intent to defraud, such person . . . [k]nowingly uses or facilitates the
      use of any deliberate misstatement, misrepresentation, or omission,
      knowing the same to contain a misstatement, misrepresentation, or
      omission, during the mortgage lending process with the intention that it
      be relied on by a mortgage lender, borrower, or any other party to the
      mortgage lending process.

                                           9
      In reaching this conclusion, we find the case of Scott v. Citizens Bank of

Americus, 188 Ga. App. 618 (373 SE2d 633) (1988), to be instructive.9 In that case,

the bank was being investigated by state banking examiners for entering into a

number of “‘criticized loans,’” as the bank continued to operate pursuant to a

“‘memorandum of understanding.’” Id. at 618. After the state bank examiners

completed their investigation, bank officials found a defaulted real estate loan that the

examiners had failed to discover. The bank’s president and its loan officer decided

not to disclose this loan to the examiners, but instead they “devised a plan to remove

this defaulted loan from the [b]ank’s books before it was discovered.” Id. Under the

plan, the appellant, who was “a close personal friend of the [b]ank’s president,”

signed a promissory note in favor of the bank, and the funds from that note were

given to a third party, who used them to purchase the property underlying the

defaulted loan. Id. “The president and the loan officer of the [b]ank acknowledged

that their plan was to create a ‘paper trail’ and to use appellant ‘as sort of a strawman,

third party, just as somebody to sign the notes and create the documents to satisfy



      9
          There, because the appellant did not assert the affirmative defense of
illegality, this Court’s analysis on the issue could be considered dicta. Nevertheless,
we find the reasoning persuasive and adopt it.

                                           10
banking requirements.’” Id. The appellant denied any knowledge of this plan or his

role in it, and he subsequently defaulted on the note. Id. at 618-619.

      When the bank sued to collect on the note, the appellant, on appeal, apparently

raised the defense of illegality based on the bank officials’ plan to remove the loan

from their books. However, this Court found that the appellant’s defense of illegality

was not viable as to the note at issue. As the Court explained,

      [t]he underlying transaction at issue was merely an advancement of
      funds which appellant agreed to repay as evidenced by his execution of
      the note. This transaction was no more illegal than any other loan
      transaction evidenced by a promissory note. It may have been intended
      that the transaction serve as a means for removing a defaulted real estate
      loan from the [b]ank’s books, but this would not render the transaction
      illegal. Financial institutions are certainly authorized to arrange for the
      removal of such loans from its books under the most favorable terms
      that can be negotiated. There may have been an element of unethical
      behavior underlying this particular transaction, because it was timed so
      as to remove the defaulted loan from the Bank’s books prior to its
      discovery by the bank examiners. However, this unethical behavior
      would not render the note unenforceable against appellant. Scott, 188
      Ga. App. at 620 (2).


      Here, Haygood’s illegality defense centered on the illegal appraisals in

connection with the Haygood Loan in September 2007, which he argued tainted all


                                          11
subsequent loans. We disagree. It is apparent from the record that GCB advanced the

funds to Haygood to facilitate his purchase of a 25 percent interest in Legacy and/or

Clear Creek and thereby invest in Falling Waters. In signing the note, Haygood

agreed to repay the funds borrowed. And, indeed, shortly after signing the Haygood

Loan, on October 11, 2007, Haygood and Dover signed a “Transfer and Assignment

of Membership Interest,” which transferred a 25 percent interest in Legacy to HFI in

exchange for consideration of $5,128,205; an amendment to the Legacy’s operating

agreement, reflecting that HFI owned 25 percent of the company; and an “Indemnity

and Guaranty Agreement,”under which HFI agreed to indemnify A. S. Dover for

certain listed loans signed in connection with Falling Waters. Additionally, the

evidence at trial indicated that Haygood sought legal advice before entering into this

investment. These events occurred approximately one year before Unity Bank decided

that it would no longer participate in Dover’s loans and approximately one year and

one-half before the Order.

      Accordingly, “[t]his transaction was no more illegal than any other loan

transaction evidenced by a promissory note.” Scott, 188 Ga. App. at 620 (2). And no

evidence exists that the contract was based on illegal or immoral consideration. Dover

was legally entitled to seek other investors to support the Falling Waters project and

                                         12
to reduce his own debt. Haygood had the legal right to invest in the Falling Waters

project, and the Bank was legally entitled to loan him money for that purpose. No

evidence exists that Haygood was approaching his lending limits with the Bank; to

the contrary, he indicated that he had just paid down his debt.

      Although the Bank may have asked for a second, higher appraisal to support

the Haygood Loan, which Haygood contends was fraudulent and even criminal,10 and

may have engaged in other subsequent illegal activity, any such illegal activity was,

at most, merely collateral to the Haygood Loan; it was not the object of the loan. As

our Supreme Court explained in R.R.R., Ltd. Partnership v. Recreational Svcs., Inc.,

264 Ga. 494 (448 SE2d 211) (1994), such incidental illegality is insufficient to render

an otherwise valid promissory note unenforceable. There, the Court rejected the

defense of illegality in connection with a promissory note, where the borrower alleged

that the lender threatened violence if the loan was not repaid promptly, resulting in

an extortionate extension of credit in violation of 18 USC § 891 (c). The Supreme

Court explained that


      10
         Although Haygood presented expert testimony at trial attacking the
methodology and validity of these appraisals , we note that in a financial statement
dated April 2008, Haygood himself represented the value of the Rackley Road
Property to be $3,600,000.

                                          13
      the federal statute upon which appellee relies merely serves to
      criminalize the lender’s alleged act of making an “extortionate extension
      of credit.” 18 USC § 892 (a). Nothing whatsoever in that federal statute
      purports to render the underlying loan agreement itself illegal and civilly
      unenforceable against the borrower. In this state, a contract to do an
      illegal thing is void [under] OCGA § 13-8-1. However, there is nothing
      inherently “illegal” in an agreement whereby one party merely agrees to
      lend money and the other party merely agrees to repay it.


(Citations and punctuation omitted; emphasis in original.) Id. Thus, the Supreme

Court found that the breach of the statute was not a viable defense to the borrower’s

obligation to repay the loan in full, noting that

      [t]he rule that an agreement in violation of law is invalid does not
      always apply where the existence of the thing in question is due to a
      violation of law only in the sense that incidentally some law was
      violated in its production, where it might have been created without such
      violation. Here, the contract was for a legal purpose, and did not require
      a violation of any statute in order for [the borrower] to perform under
      the contract. There may or may not have been a violation of the federal
      criminal statute, but such violation was not required by the contract and
      was incidental to contractual performance.


(Citation and punctuation omitted; emphasis in original.) Id. at 496-497 (2) And, here,

even if the Bank violated the law in connection with obtaining the appraisals to



                                          14
support the Haygood Loan or subsequently violated Georgia banking laws, any such

violation was not required by the Haygood Loan and was merely incidental to its

purpose.

      Accordingly, we find that the trial court erred in denying the Bank’s motion for

directed verdict as to Haygood’s defense of illegality. See R.R.R. Ltd. Partnership,

264 Ga. at 495-496 (2); Crooke v. Gilden, 262 Ga. 122, 123 (2) (414 SE2d 645)

(1992); Smith v. Saulsbury, 286 Ga. App. 322, 323-324 (1) (b) (649 SE2d 344)

(2007); Douglas v. Bigley, 278 Ga. App. 117, 124 (1) (d) (628 SE2d 199) (2006);

Boot v. Beelen, 224 Ga. App. 384, 386 (1) (480 SE2d 267) (1997) (where promise to

be enforced is one to pay a debt, parties’ meretricious relationship was incidental to

the contract). Compare Minor v. McDaniel, 210 Ga. App. 146 (435 SE2d 508) (1993)

(promissory note between broker and client to reimburse broker for monies borrowed

to pay part of closing costs was illegal where broker induced client to falsely certify

that the residence was free and clear of all liens, that she would not have any other

outstanding unpaid obligations in connection with the mortgage transaction, and that

she had paid all the closing costs and client knew such certifications were false);

Southern Flour & Grain Co. v. Smith, 31 Ga. App. 52, 53 (120 SE 36) (1923)

(contract illegal where terms of contract involved directly involved sale of

                                          15
“concentrated commercial feeding-stuffs” in non-standard weight bags, a direct

infraction of a civil statute).

       Therefore, we also agree with the Bank that the trial court erred in denying its

directed verdict on the First and Second HFI Notes and the Other Notes, in submitting

the issue of whether the Bank had violated the OCGA § 16-8-102 to the jury, and in

charging the jury on the statute. Moreover, because Haygood offered his expert’s

testimony in connection with his affirmative defense of illegality, we need not reach

the issue of whether the trial court properly applied the standard under Daubert v.

Merrell Dow Pharmaceuticals, 509 U.S. 579 (113 SCt 2786, 125 LE2d 469) (1993).

Accordingly, we reverse the judgment in favor of Haygood and HFI and remand for

entry of judgment in favor of the Bank on the Haygood Note, the HFI Notes and the

Other Notes in accordance with this opinion.

       Judgment reversed. Barnes, P. J., and Ray, J., concur.




                                          16
                         Addendum “A” – Other Notes

                               Clear Creek Notes

      The record indicates that Clear Creek signed the following three promissory

notes in favor of GSB:

            –     a December 14, 2007 promissory note in the principal
                  amount of $3,000,000, plus interest (“Note 1”);


            –     a September 26, 2008 promissory note in the principal
                  amount of $800,000, plus interest (“Note 2”); and


            –     an August 27, 2009 promissory note in the principal
                  amount of $3,087,000, plus interest (“Note 3”). Legacy, A.
                  S. Dover, Dover Development, HFI, Haygood, and Dover
                  entered into commercial guaranties with GCB guaranteeing
                  repayment of Notes 1, 2, and 3 (collectively, the “Clear
                  Creek Guaranties”).


                                 Legacy Notes

      Legacy also entered into two promissory notes in favor of GCB, as follows:

            –     an August 30, 2008 promissory note in the principal
                  amount of $1,000,000, plus interest (“Note 4”); and


            –     an August 30, 2008 promissory note in the principal
                  amount of $7,500,000, plus interest (“Note 5”).

                                        17
A. S. Dover, Dover Development, and Dover executed commercial guaranties with

GCB guaranteeing repayment of these notes (collectively the “Legacy Guaranties”).



                               Dover Development

      On March 26, 2009, Dover Development entered into a promissory note with

GCB in the principal amount of $111,380.86, plus interest (“Note 6”). Dover entered

into a guaranty of this note with GCB, guaranteeing repayment of the note (“Dover

Guaranty”).




                                        18
