Beware of new deceptive strains of payroll phishing

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This blog has recommended KnowBe4 previously as an impressive source of news on cybersecurity. I have subscribed to the newsletter and receive weekly, timely and scary cybercrime updates in my inbox. I recommend to all lawyers that they spend the time and funds necessary to remain safe and vigilant in the arena of cybersecurity. Nothing is more important to us than the safety of our clients’ funds. In this case, however, it is our operating funds and our employees’ funds that are at risk. Those funds are important, too!

The July 10 newsletter was particularly interesting in that it reports a new strain of payroll phishing that has surfaced recently. The bad actors pose as employees and request a specific pay stub from a payroll administrator or corporate executive. KnowBe4 reports that it has seen hundreds of these phishing attempts, all almost identically worded and possibly coming from one set of fraudsters. All of the emails came from an “oddball Comcast.net email address” with nonsense usernames of similar length.

Please read this newsletter carefully and pay attention to the emails and supporting documents. In this particular case, the bad actors opened a bank account, ordered checks for that account and used one of those checks to support the phishing attempt.

Unfortunately, many of the targeted payroll employees, always willing to help employees with their payroll concerns, have responded to the requests. The emails are simple, direct and dispense with any attempt to construct believable backstories or pretexts.  According to KnowBe4, the emails invite an unthinking, reflexive response from targeted users.

Share this information with your staff members and encourage them to avoid those unthinking, reflexive responses!

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Redevelopment of golf courses might be possible in South Carolina

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In April, this blog discussed the redevelopment of two Horry County golf courses. The North and South courses at Deer Track Golf Resort in Deerfield Plantation have been closed for more than ten years and are finally being redeveloped as residential lots. Adjacent lot owners waged class actions in Horry County seeking to have the use of the properties in question restricted to golf courses or open spaces. While these battles were being waged in court, nature attempted to reclaim the properties. One property owner testified that his views changed from overlooking a manicured golf course to overlooking a “sea of weeds”.

Similar battles have been successful in other parts of the country. The cases are fact intensive and turn on the law of implied easements, which, of course, varies widely from state to state. Plats showing golf courses may provide rights in adjacent lot owners, depending on the recorded documents, the sales program and the law of implied easements in the location.

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I wanted to invite those interested in this area of the law to take a look at an article published in June by www.citylab.com. The article, written by Nolan Gray, is entitled “Dead Golf Courses Are the New NIMBY Battlefield”. In the interest of full disclosure, I had to Google NIMBY. This acronym stands for “not in my back yard”.

The article states that golf is dying, according to many experts. One study cited in Citylab’s article found that the number of regular golfers fell from 30 to 20.9 million between 2002 and 2016. The thinking is that the fall of Tiger Woods may have led to much of this gloom and doom around golfing. But Mr. Gray believes that the bigger story involves the sport’s aging demographics and the fact that millennials are not interested in the expensive, slow sport that provides few health benefits.

Golf courses and golf clubs across the country are closing, leaving the land to be redeveloped. Mr. Gray’s article states that the average 18-hole golf course sits on 150 acres, property that could host around 600 new single-family detached homes. Add to this mix the fact that many golf communities were built in areas with good schools and work opportunities. These properties are, therefore, particularly valuable in areas where housing inventory is a challenge.

So, what prohibits the development of these properties into residential subdivisions? Zoning is one of the challenges. Many golf courses are zoned for commercial uses to accommodate clubhouses, restaurants, pro shops and bars. But the main stumbling block, according to Mr. Gray, is the NIMBY attitude of neighbors. Residents near golf courses prefer that the properties be turned into parks, open spaces and natural preserves.

Let’s look, for example, at the Deerfield Plantation cases. First, the facts: The golf courses and surrounding residential subdivisions were originally developed beginning in the late 1970’s. The plats contained notes to the effect that the streets were dedicated for public use but the golf courses were to be maintained privately and were specifically not dedicated to public use.

The covenants gave the lot owners no rights, property, contractual, or otherwise, in the golf courses. A Property Report that was delivered to all prospective lot purchasers described the costs of golf memberships, which were not included in lot prices, and stated that to be allowed to use the golf courses, members would be required to pay initial dues and annual dues and fees. The real estate agents made it clear during the sales program that the mere purchase of a lot did not give a lot owner any right or entitlement to use the golf courses. The deeds of the lots did not convey any easements or other interests in the golf courses.

One plaintiff, who was also a real estate agent, testified that he was never told the golf courses would operate in perpetuity and that the real estate agents never told other potential purchasers that the golf courses would always exist on the properties.

What caused the golf courses to fail? When the golf courses opened, there were 30 – 40 golf courses in the Myrtle Beach area. By the time the golf courses closed, there were nearly 125 courses. Property taxes in the golf courses increased from $7,800 per year to $90,000 per year.  And then the economy tanked. These three factors have occurred across the country to varying extents.

Now, let’s look at South Carolina law. In one of the cases, a 38-page Order of Thomas J. Wills, Special Referee, examined the law of implied easements in South Carolina. I’m summarizing and eliminating the citations for this brief discussion.

The Order states that implied easements are not favored by the courts in South Carolina and must be strictly construed. The intent of the parties controls the existence and scope of implied easements, and the best evidence of that intent is the recorded documents. While case law in South Carolina is clear that lot owners in subdivisions hold easements in streets shown on plats by which their lots are sold, the order states that this rule does not extend beyond access, which is necessary and expected for residential purposes. Finally, the order states that no implied easements in views, breezes, light or air exist in this state.

Finally, these golf courses will be redeveloped into new residential subdivisions. Will we see more of this litigation in South Carolina?  Probably. While the law in South Carolina appears generally to favor redevelopment in these cases, there is no doubt that the facts in some of the situations may give rise to implied easements in adjacent lot owners, even in the face of our law. As long as we have NIMBY attitudes of those who live near defunct golf courses, we will continue to see litigation in this area.

Lawyer disciplined for involvement in investment scheme

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The SEC is not “another jurisdiction” for the purpose of reciprocal discipline

On June 27, the South Carolina Supreme Court suspended a lawyer for eighteen months based on Securities and Exchange Commission (SEC) charges*. While this case has nothing to do with dirt law, I bring it to the attention of South Carolina lawyers because they often find themselves in the position of forming and representing limited liability companies (LLCs).

SECThe South Carolina lawyer, John Kern, helped form and served as general counsel for Ventures Trust II LLC and Face-Off Acquisitions, LLC, two of the LLCs used in a fraudulent investment scheme perpetrated by Craig Berkman. Berkman fraudulently raised around $13.2 million from approximately 120 investors by selling memberships in the LLCs he controlled. Unfortunately for these investors, Berkman was subject to a $23 million judgment in Oregon, in connection with another fraudulent investment scheme, and was also facing bankruptcy in Florida. Berkman began to use some of the funds from his new ventures to pay his bankruptcy obligations in Florida, and the SEC got involved.

In 2014, Kern signed an offer of settlement and consented to an entry by the SEC of an order imposing sanctions against him. SEC findings included that (1) Kern willfully aided and abetted the fraudulent conduct of Berkman; (2) Kern was ordered to disgorge fees of around $235,000 and to pay a fine of $100,000; (3) Kern was barred from associating with brokers and investment advisors; and (4) Kern consented to being denied the privilege of practicing law before the SEC.

South Carolina’s Office of Disciplinary Counsel (ODC) filed formal charges in 2016 and argued that the SEC is “another jurisdiction” under the Rule 29(e), which deals with conclusiveness of misconduct adjudications against lawyers in other jurisdictions. The Supreme Court found that the SEC is not a jurisdiction for the purposes of reciprocal discipline, but found that Kern was guilty of providing false information in statements to others.

Kern falsely assured Berkman’s bankruptcy attorney that none of the funds used to settle Berkman’s bankruptcy obligations were derived from Ventures II. Kern also issued a false memorandum to investors in Ventures II to the effect that their funds were secure and were not part of a Ponzi scheme orchestrated by Berkman.

Kern’s primary defense in his South Carolina disciplinary proceedings was that he was totally unaware of Berkman’s malfeasance, and that as soon as he became aware, he resigned as general counsel for the LLCs and encouraged a principal in the companies to act as a whistleblower to the SEC. Kern argued that he had no dishonest or selfish motive, did not profit from his misconduct and showed remorse for the harm caused to investors. The Court said that it took these mitigating factors into consideration in imposing sanctions.

Professor John Freeman, who taught ethics to many of us, was qualified as an expert in the case and testified that when a lawyer acts as general counsel for a private securities company, he or she must exercise due diligence to ensure money is invested for the represented purposes.

Despite the fact that the SEC is not considered by the South Carolina Supreme Court to be a jurisdiction for the purposes of reciprocal jurisdiction against attorneys, this attorney was suspended for eighteen months because of his conduct that led to charges before the SEC.

The lesson to us is clear. Be careful in forming and representing LLCs and use proper due diligence in statements made to the investors in those entities. Lacking a dishonest motive is not enough to protect lawyers from discipline.

*In the Matter of Kern, South Carolina Supreme Court Opinion 27820 (June 27, 2018)

Tax titles are precarious in SC

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New Court of Appeals case demonstrates this fact again

A South Carolina Court of Appeals case* decided on June 20 demonstrates once again how precarious real estate titles coming through tax sales can be in South Carolina.

The unfortunate facts are not unusual. Bessie and Willis Thompson owned a residence in Bamberg County. They died in 2004 and 2005, respectively. The residence was devised to three grandchildren, one of whom, Corretta McMillan, was involved in this case through the appeal. The estates of Mr. and Mrs. Thompson were not probated, leaving the Thompsons as the title holders of record.

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Corretta McMillan paid the 2005 property taxes, but she did not notify Bamberg County of the deaths of her grandparents, nor did she provide a substitute address for tax notices. The 2006 property taxes were not paid, resulting in a letter to the residence from Bamberg County in the spring of 2007. In May of 2007, Bamberg County sent a second notice to the residence via certified mail. The letter was returned undelivered with the receipt marked “Deceased” above the names of Mr. and Mrs. Thompson. McMillan never received the notices, and she rented to house to Bernard Hallman in the summer of 2007.

Bamberg County referred the property to the Delinquent Tax Office which held a tax sale in November of 2007. The tax office submitted a minimum bid on behalf of the Forfeited Land Commission (FLC), a commission within each county which exists to bid on real properties not otherwise sold at tax sales. Following this tax sale, however, Ralph Johnson contacted the tax office with an offer to purchase several dozen tax sale properties. The tax office assigned to Johnson the bids it had submitted on behalf of the FLC, allowing Johnson to purchase 39 tax sale properties, including the residence involved in this appeal.

In January of 2009, McMillan paid a portion of the outstanding property taxes. Bamberg County sent her a notice acknowledging receipt of her payment and informing her that there were still delinquent taxes due. No mention was made of the tax sale.

Johnson acquired a deed to the property in February of 2009, at which time he learned the property was still occupied by Hallman. Johnson asked Hallman to move out and later filed an eviction action. Hallman notified his landlord, McMillan, of the eviction action.

The magistrate held Johnson’s eviction proceeding in abeyance when the FLC filed suit against Johnson alleging the tax office had inappropriately assigned its bids to Johnson without FLC’s authority. This suit also alleged the tax sales had not been conducted in compliance with the “rigid statutory structure.” Johnson answered, cross claimed and counterclaimed. One of his theories was the two-year statute of limitations on challenging tax sales set out in South Carolina Code §12-51-160.

During a November 2013 hearing, McMillan appeared and informed the court that she was an heir of the Thompsons. The FLC abandoned its suit and the circuit court dismissed the FLC’s complaint and Johnson’s counterclaims with prejudice. The circuit court then entered a default judgment in favor of Johnson on his cross claims to quiet title.

On April 8, 2014, McMillan filed an answer and counterclaim to Johnson’s quiet tile action. Johnson maintained McMillan could not contest the validity of the tax sale because the claim was barred by the two-year statute of limitations. At trial, there was no evidence that the property was properly posted with a notice of the tax sale once the second notice was returned marked “Deceased”.  The circuit court granted the quiet title demand.

On appeal, the Court of Appeals reversed and remanded, discussing the two-year statute of limitations and the technicalities required for a successful tax sale. The Court sited earlier cases which held that defects in quiet title actions are jurisdictional and may prevent the statute from running. Other cases have suggested that even in the absence of strict compliance, the statute of limitations will begin to run when the purchaser at the tax sale takes possession of the property.

In this case, the purchaser never took possession because he was unable to evict the tenant. That fact, and the fact that the property was not properly posted with a notice of the sale, led to the Court’s conclusion that the two-year statute did not run.

The moral to this story is simple: always discuss tax sale titles with your friendly and smart title insurance company underwriter. They generally keep up with these cases, no matter how tedious. **

*The Forfeited Land Commission of Bamberg County v. Beard, South Carolina Court of Appeals Opinion 5570 (June 20, 2018).

**Please see footnote 5 in this case. It’s rare that a footnote in an appellate case can make a lawyer cry (unless the lawyer lost the case), but this footnote summarized the exemplary career of the late Tanya Gee, who died in 2016. This case would have been her first case as a temporary justice on the Court of Appeals. After her death, the appellate process had to begin again. Rest in peace, Justice Gee!

SCOTUS refuses to review SC Episcopal property dispute

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It has been close to a year that I wrote in this blog that I was thankful to be a real estate lawyer as I attempted to decipher the South Carolina Supreme Court’s 77-page opinion involving the Episcopal Church published on August 2, 2017*. I continue to be thankful that my mission is limited to the real estate issues in this difficult case because the United States Supreme Court refused to review that ruling on June 11. We are left with the difficult opinion issued in Columbia, and church officials and members from both sides of the dispute are left to sort out their on-going concerns in light of that ruling.

I don’t have to solve the mystery of the rights of gays in churches. I don’t have to ascertain whether the “liberal mainline” members or the “ultra-conservative breakaway” members make up the real Episcopal Church.  I don’t have to delve into the depths of neutral principles of law vs. ecclesiastical law. I don’t have to figure out who will own the name “Episcopal Diocese of South Carolina.”

The real estate issues are sufficiently thorny to occupy our collective real estate lawyer brains, but I am attempting here to boil those issues down to a manageable few words for all of us.

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News articles refer to the properties as being valued at hundreds of millions of dollars. The historic value of the properties, including St. Michael’s and St. Philip’s of Charleston, is also quite significant.  I assume a petition for rehearing will ensue as well as an appeal to the United States Supreme Court. Nothing is settled at this point. Let’s not try to insure these titles anytime soon.

The controversy began more than five years ago when 39 local parishes in eastern South Carolina left the Episcopal Church over, among other issues, the rights of gays in church. Since then, the two sides have been involved in a battle over the church’s name, leadership and real estate.

Interestingly, prior to the ruling by the South Carolina Supreme Court, the national church had offered a settlement to the breakaway parishes that would have allowed them to retain their properties if they gave up the name and leadership issues. That settlement offer was apparently summarily rejected.

South Carolina’s ruling upheld the Episcopal Church’s position that it is a hierarchal church rather than a congregational church in which the vote of church membership can determine the fate of real property. It also orders the breakaway group to return 29 properties to the national church. Seven parishes may maintain their independence.

The position of the properties turns on whether the local parishes agreed to be bound by the “Dennis Canon” which was enacted in 1979 and provided, in effect, that real property of a parish is held in trust for the national church and the local Diocese, subject to the power of the local parish over the property, so long as the parish remains a part of the national church and Diocese. No evidence was found in the records of the seven parishes that those parishes ever agreed to be bound by the Dennis Canon. The other 29 properties were the subject of documentation to the effect that the local churches intended to hold the property in trust for the denomination. The opinion did not uphold the Dennis Canon in and of itself. Explicit recognition of the Canon was required.

That, in short, was the result of the 77-page opinion on real estate lawyers. We will need watch for a potential settlement. In the meantime, we will sit tight and not involve ourselves in sales and mortgages of these properties.

Now that I’ve had a chance to think about it, I am always thankful to be a real estate lawyer!

*The Protestant Episcopal Church in the Diocese of South Carolina v. The Episcopal Church, South Carolina Supreme Court Opinion 27731, August 2, 2017.

Feds extend timeframe of FinCEN order

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Will this obligation eventually extend to South Carolina?

Secretly purchasing expensive real estate continues to be a popular method for criminals to launder dirty money. Setting up shell entities allows these criminals to hide their identities. When the real estate is later sold, the money has been miraculously cleaned.

In early 2016, The Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasurer issued an order that required the four largest title insurance companies to identify the natural persons or “beneficial owners” behind the legal entities that purchase some expensive residential properties.

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At that time, the reach of the project extended to the Borough of Manhattan in New York City, and Dade County, Florida, where Miami is located. In those two locations, the designated title insurance companies were required to disclose to the government the names of buyers who paid cash for properties over $1 million in Miami and over $3 million in Manhattan. The natural persons behind the legal entities had to be reported for any ownership of at least 25 percent in an affected property.

By order effective August 28, 2016, all title insurance underwriters, in addition to their affiliates and agents, were required to be involved in the reporting process, and the footprint of the project was extended.

The targeted areas and their price thresholds as of August 28, 2016 were:

  • Borough of Manhattan, New York; $3 million;
  • Boroughs of Brooklyn, Queens and Bronx, New York; $1.5 million;
  • Borough of Staten Island, New York; $1.5 million;
  • Miami-Dade, Broward and Palm Beach Counties, Florida; $1 million;
  • Los Angeles, San Francisco, San Mateo, Santa Clara and San Diego Counties, California; $2 million; and
  • Bexar County (San Antonio), Texas; $500,000.

By order effective September 22, 2017, wire transfers were included, and the footprint of the project will include transactions over $3 million in the city and county of Honolulu, Hawaii.

The Geographic Targeting Orders were updated again beginning March 21, 2018, and extended to September 16, 2018

Although the initial project was termed temporary and exploratory, FinCEN has indicated that the project is helping law enforcement identify possible illicit activity and is also informing future regulatory approaches.

We have no way of knowing whether or when this program may be expanded to South Carolina, but it is entirely likely that expensive properties along our coast are being used in money laundering schemes. We will keep a close watch on this program for possible expansion!

New Cybersecurity law in SC affects insurance companies and agents

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The effective date is January 1, 2019

South Carolina’s legislature passed a cybersecurity bill on April 18, and Governor Henry McMaster signed it into law on May 3. The new law, which requires that insurers and producers (agents) must establish “strong and aggressive” programs to protect companies and consumers from data breaches, goes into effect at the beginning of next year. The law is called South Carolina Data Security Act, and it will be found at §38-99-10 et seq. of the South Carolina Code.

Insurers and agents must develop, implement and maintain a comprehensive written information security program based on internal risk assessments which contain administrative, technical and physical safeguards for the protection of nonpublic information.

New rules were created that include overseeing third party providers, investigating data breaches and notifying regulators, including the South Carolina Department of Insurance, of cybersecurity events.

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Notification is required to the DOI within 72 hours after determining a cybersecurity event has occurred. Each incident must also be investigated to determine the scope of the breach, the nonpublic information compromised, and the measures to restore the security of the information.

Safe guarding individual insurance policy holders’ personal information is a high priority in the wake of several major insurance companies’ data breaches. Insurers and agents are required to mitigate the potential damage caused by date breaches.

South Carolina was the first state to pass this measure based on the model law developed by the National Association of Insurance Commissioners Cybersecurity Working Group. South Carolina Insurance Director Raymond Farmer chaired the group.

How will this new law be applied to real estate lawyers who are also title insurance agents?  My guess is that the title insurance companies, which probably already have complying programs in place, will provide guidance to their agents between now and the end of the year. Stay tuned!