You learn something new every day!

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Question gives insight into IRS collection procedures against JTROS properties

In August of last year, an excellent South Carolina real estate lawyer raised this issue with Underwriting Counsel in our office:

The property owners are Sally Seller and Samuel Seller, as joint tenants with right of survivorship. Sally Seller died January 7, 2017. A federal tax lien was filed against Sally Single, Mrs. Seller’s maiden name, March 3, 2014. Mr. and Mrs. Seller were married in April 20, 2015. Please confirm that we should either pay off this lien at closing or obtain a release from the IRS.

Title insurance underwriting is all about pre-closing risk prevention and risk management, and I always joke that underwriting is more of an art than a science. This is true, in part, because few issues in the law are black and white. Most lawyers will confirm that a fair amount of gray area exists in most legal questions. But I digress.

The truth is that when a trusted, intelligent real estate lawyer calls her friendly South Carolina title insurance underwriter and says, in effect, “I should deal with this title problem at closing, shouldn’t I?”… that is an easy answer! Unless the Underwriter knows of a magic solution to eliminate the title issue, the friendly title insurance Underwriter will almost always respond, “Yes, please take care of that issue at closing.”  That’s exactly what our Underwriter did in this case last August.

Around Halloween, a follow-up question was raised:

The sellers’ attorney has been working on obtaining a satisfaction for the IRS lien, but the IRS has told him that the lien will not be released or satisfied because the taxpayer is deceased. IRS Agent Arnold Adams (IRS ID#10000797284)* referred me to Notice 2003-60. The IRS agent further said it will not file a release of lien for the convenience of title insurance companies and mortgage lenders**, but that the tax lien upon the death of a joint tenant is extinguished and not collectable on the basis of U.S. vs. Craft*** and its application.

The IRS notice linked above is entitled “Collection Issues Related to Entireties Property”. Every South Carolina dirt lawyer knows that we do not have a tenancy by the entirety form of ownership in South Carolina. If we don’t have that form of ownership, then does this IRS Notice have any application in South Carolina?

Married couples in South Carolina can own properties as tenants in common, joint tenants with right of survivorship or joint tenants with an indestructible right of survivorship under Smith v. Cutler.****

Several years ago, my friend and fellow South Carolina dirt lawyer, Paul Dillingham, called me to twist my arm to write an article with him for the Bar’s South Carolina Lawyer magazine, linked here, about a couple of deed drafting traps that were troubling him. In that article, we questioned whether Smith v. Cutler had created, in effect, a tenancy by the entirety form of ownership. That case dealt with property owned by couple pursuant to a deed with this language:

“for and during their joint lives and upon the death of either of them, then to the survivor of them, his or her heirs and assigns forever in fee simple”

The case held that property owned pursuant to the quoted language cannot be partitioned. If the property cannot be partitioned by the creditor of one owner, then the IRS Notice would have application in South Carolina. Apparently the IRS agent who was questioned for this closing believes the notice does apply in the Palmetto State, but please note that the question before the IRS agent didn’t deal with the Smith v. Cutler form of ownership. It dealt with a standard joint tenancy with the right of survivorship.

Did the IRS Agent give our South Carolina good advice? Would all IRS agents give the same advice? Can we ignore this IRS lien for the purposes of closing? What do you think?

This is fictitious name and number. Don’t try to contact this IRS agent!

** That wasn’t very friendly!

*** 545 U.S. 274 (2002)

**** 366 S.C. 546, 623 S.E.2d 644 (2005)

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Constitutionality of CFPB upheld

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cfpb-logoThe D.C. Circuit Court of Appeals upheld the constitutionality of the Consumer Financial Protection Bureau (CFPB) in a case decided last week. This decision reverses the October 11, 2016 holding of a three-judge panel which ruled unanimously that the structure of the CFPB allowed its director to wield too much power.

The highly publicized case began when PHH Corp. was ordered by former CFPB Director Richard Cordray to pay $109 million in restitution resulting from illegal kickbacks to mortgage insurers pursuant to Section 8 of RESPA. An administrative law judge had ordered a $6 million penalty at the trial level, but former Director Cordray apparently wanted to set an example and ordered the “ill-gotten gains” to be disgorged. The trial court had limited the violations to loans that closed on or after July 21, 2008. Director Cordray applied the fines retroactively.

PHH brought suit, arguing that the CFPB is unconstitutional because the Director has the sole authority to issue final decisions, rendering the CFPB’s structure to be in violation of the separation of powers doctrine. The petition stated, “Never before has so much power been consolidated in the hands of one individual, shielded from the President’s control and Congress’s power of the purse.” The petition argued that the Director is only removable for cause, distancing him from the power of the President, and that the agency is distanced from Congress’s power to refuse funding by allowing for funding directly from the Federal Reserve.

The lower Court agreed, writing, “Because the Director alone heads the agency without Presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency.” The lower Court removed the restriction that the Director can only be removed for cause, giving the President the power to remove the Director at will. The lower Court also reversed former Director Cordray’s retroactive applicability of fines.

The Court of Appeals upheld the constitutionality of the CFPB, preserving the single-director leadership and the independence of the agency. The ruling indicates the President can only fire the Director for cause and allows the current five-year terms to remain in place. Five-year terms will, of course, mean that directors of the agency may remain in place after the termination of the term of the president who appointed him or her.

The CFPB is largely the brain child of the Democratic Party, and Acting Director Mulvaney has taken steps to rein in its power since he was appointed by President Trump. The Court of Appeals ruling was mostly decided on ideological lines. One Republican appointee joined the Democratic appointed judges in upholding the CFPB’s structure.

The Court did rule in favor of PHH by rejecting the large penalty imposed by former Director Cordray. The decision requires that the penalty be reviewed again by the CFPB.

Federal class action seeks to invalidate non-condo HOA foreclosures

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Is there authority for these foreclosures under SC law…or not?

On January 9, a lawsuit was filed in the Federal Court in Charleston seeking to certify a class of plaintiffs who have faced foreclosure in situations where the Horizontal Property Regime Act was not involved. In other words, the properties are not condominiums and are not subject to the statutory scheme that establishes lien and foreclosure rights in owners’ associations. The power to foreclose these properties is supported only by restrictive covenants, that is, only by contract.

subdivision

The complaint refers to a good faith estimate that one-third of all South Carolinians own property subject to restrictive covenants establishing owners’ associations, and those associations manage more than $100 billion in assets. Many of the properties are separate lots of land in contrast to “slices of air” in condominium projects.

The defendants in this class action suit include five homeowners’ associations in various counties in South Carolina, four law firms who represent the associations in their foreclosure actions, and five management companies who manage the business of the associations in various counties in South Carolina. All are said to be representative of the associations, law firms and management companies who do business across the state.

The class intends to exclude all associations governed by the Horizontal Property Regime Act. It also excludes employees, owners, officers, partners and management of the law firm and management defendants. The law firm and management defendants are alleged to be agents of the owners’ associations.

The main issue in the suit is whether non-condominium associations have the right to file liens and prosecute foreclosures for unpaid property assessments under South Carolina law. Underlying issues include whether the defendants have violated the Fair Debt Collection Practices Act, whether they have interfered with the plaintiffs’ contracts with their mortgage holders, and whether they have the power to lawfully evict homeowners for unpaid assessments.

The owners’ associations are typically established as non-profit corporations, and the suit questions whether non-profit corporations have the power to create liens for unpaid dues or assessments prior to obtaining judicial judgments.

The suit accuses the defendants of seeking to use the equitable remedy of foreclosure in actions that seek monetary damages for contractual breaches. The inability to use equitable remedies to collect money damages is well established in South Carolina law, according to the complaint. The complaint further states that the remedy of foreclosure is used to frighten the plaintiffs to settle their claims to avoid losing their homes.

The law firm defendants were accused of violating Professional Conduct Rule 3.3 by making deceitful arguments to courts. The law firms were also accused of demanding fees that are not proportionate to the hours devoted to the files in violation of Rule 1.5.

Threatening communications and pressure tactics are allegedly used to settle claims, typically without the advice of counsel because the amounts in controversy are often so small that the homeowners are unable to obtain legal counsel on a cost-effective basis. Typically, according to the complaint, holders of first mortgages are not named in the HOA foreclosures. The homeowners continue to be obligated to make their mortgage payments despite being evicted from their homes by their owners’ associations.

The first cause of action is violation of the Fair Debt Collection Practices Act on the theory that there is no right to use pre-suit liens or the equitable remedy of foreclosure by owners’ associations to collect damages in the form of past due assessments. The use of unjustified liens and foreclosures is alleged to constitute false, deceptive or misleading representations to collect debts.

The second cause of actions seeks a declaratory judgment that the activities of the defendants are unlawful. One point raised in this cause of action is that the homeowners are denied their statutory homestead exemption rights by the defendants’ actions.

The third cause of action is for intentional interference with the contractual relationship with the homeowners’ mortgage companies. The mortgage holders have a right to be named in actions that attempt to impair their interests in the subject properties, according to the complaint.

The complaint seeks actual, compensatory and consequential damages, in addition to punitive damages and attorneys’ fees. I can’t wait to see what happens with this one!

Department of Insurance files data security bill in SC legislature

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Bill is similar to model data security law adopted by NAIC

If you are a SC title agent, this bill will likely affect you if it passes!

The National Association of Insurance Commissioners (NAIC) adopted the Insurance Data Security Model Law, intending to promote rigorous cyber risk management practices, in October. And the South Carolina Department of Insurance (SCDOI) has introduced a similar bill in the South Carolina legislature. The South Carolina version, the South Carolina Insurance Data Security Act, is now in committee, and can be read here.

The model law creates data security standards for insurers and agents. The rules would apply to the real estate lawyers in South Carolina who are also title insurance agents. The rules require overseeing third-party providers, investigating data breaches and notifying consumers and regulators of data breaches.

security unlocked data breach

Insurers and agents will be required to have a written information security program for protecting sensitive date. Incident response plans and data recovery plans will also be required. Compliance certifications to the DOI will be required annually.

One important exemption applies to licensees with ten or fewer employees. This exemption will benefit small South Carolina law firms. Cyber security insurance may become a hotter commodity in South Carolina if this law passes, but the law is not intended to create a private cause of action.

We will watch this legislation and keep everyone posted on how it proceeds through the legislative process in South Carolina.

Did you hear the one about Katy Perry and the convent?

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It’s not a joke! It’s a true, real estate story!

Dirt lawyers, you know how your friendly title insurance underwriters are always harping about authority issues?  You have to carefully determine that the individuals with authority to sell or mortgage real estate are the individuals who actually sign the deeds and mortgages involved in your transactions.

katy perry nun

How do you solve a problem like Katy Perry?  (image from dailystar.co.uk)

And you know how the same friendly title insurance lawyers really harp about authority issues involving churches? Hardly a seminar goes by without the mention of a problematic closing or claim involving church property. I always say you should be particularly suspect if anyone, like a preacher, says he or she can act alone to sell or mortgage church property. Church transactions almost always involve multiple signatories.

Lawyers involved in transactions concerning church properties must ascertain whether the church is congregational, meaning it can act alone, or hierarchical, meaning a larger body at a conference, state or even national level must be involved in real estate transactions. In South Carolina, we have seen recent protracted litigation involving the Episcopal Church, making real estate transactions involving some of the loveliest and oldest church properties in our state problematic at best.

Lawyers must also determine, typically by reviewing church formation and authority documents, which individuals have authority to actually sign in behalf of the church. It is not at all unusual to find a church property titles in the names of long-deceased trustees.  It is always advisable to work with local underwriting counsel to resolve these thorny issues.

With that background, let’s dive into this Katy Perry story. The superstar decided to purchase an abandoned convent sitting on 8.5 acres in the beautiful Los Feliz neighborhood of Los Angeles for $14.5 million in 2015. Only five nuns were left in the order, The Sisters of the Most Holy and Immaculate Heart of the Blessed Virgin Mary. This order had previously occupied the convent for around forty years. Two of the nuns searched the web to find Katy Perry’s provocative videos and music and became uncomfortable with the sale. Instead, those two nuns, without proper authority, sold the property to a local businesswoman, Dana Hollister, for only $44,000 plus the promise to pay an additional $9.9 million in three years.

Proper authority for the sale should have involved Archdiocese Jose Gomez and the Vatican. Both were required to approve any sale of property valued at over $7.5 million. The Archdiocese believed Ms. Hollister took advantage of the nuns and brought suit. After a jury trial that lasted almost a month, the church and Ms. Perry were awarded $10 million on December 4. The jury found that that Ms. Hollister acted with malice to interfere with Perry’s purchase. Two thirds of the verdict are designated for the church and one third for Ms. Perry’s entity.

Assuming lawyers were involved in the Hollister closing, you would not want to be in their shoes! Always pay careful attention to authority issues in your real estate transactions. In South Carolina, real estate lawyers are in the best position to avoid problems like the ones in this story.

SC dirt lawyers sued for email funds diversion by a third-party criminal

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This is the first suit of this type I’ve seen. I’m confident it won’t be the last!

A dirt lawyer friend sent a copy to me of a hot-off-presses lawsuit filed in a circuit court in South Carolina against a closing law firm because the purchaser’s $50,000 in closing funds were diverted by a third-party criminal posing in an email exchange as the transaction’s real estate agent. My friend said he sent the case for my information. I think he sent it so I wouldn’t sleep!

Here are the facts as recited in the complaint. The names are being changed to protect all parties.

Paul and Penny Purchaser signed an Attorney Preference Form on March 28, 2017, selecting Ready and Able, LLC as their legal counsel for the purchase of a residential home and the closing of a purchase money mortgage with Remedy Mortgage, LLC.

On April 10, Paul and Penny Purchaser received Ready and Able, LLC’s “Purchaser’s Information Sheet” which required Paul and Penny to pay all closing funds over $500 to Ready and Able, LLC by wire transfer. The complaint states that these were silent as to the security of wire transfers, the security of private information to be conveyed between the purchasers and the law firm, and the security or lack of security of the use of email for closing information.

Also on April 10, Penny Purchaser telephoned the law firm and spoke with paralegal, Candy Competent, providing her with the purchasers’ Social Security numbers. The complaint states that Ms. Competent accepted the information and provided no wiring information or warnings.

hacker

The complaint states that on April 14, Paul Purchaser received what purported and reasonably appeared to be an email from Regina Realtor, their real estate agent for the transaction, asking Mr. and Mrs. Purchaser to wire closing funds in the amount of $48,490.31 that day so that the closing scheduled for April 21 would not be delayed. Penny Purchaser replied to the email requesting wiring instructions. An attachment purporting to be wiring instructions for Ready and Able, LLC. was sent via reply email.  The complaint states that the wiring instructions reasonably appeared to be the correct wiring instructions for the law firm and appeared to be printed on law firm letterhead. This email exchange was actually with a third-party criminal.

Later on April 14, Penny Purchaser telephoned Candy Competent and requested the amount needed to close. Ms. Competent discussed the amount needed to close despite the fact, according to the complaint, that she knew or should have known that the law firm had not sent wiring instructions to the purchasers or the real estate agent.

On April 17, Ms. Competent sent an email to Mrs. Purchaser advising her to add $550 to the funds due to close to cover a survey bill that came in on April 14. No mention was made of wiring instructions in that email. The email also did not discuss the fact that the law firm had not yet provided an amount to close to the purchasers or to the real estate agent. Mrs. Purchaser wired $49,015.31 using the wiring instructions provided by the third-party criminal.

On April 21, Paul and Penny Purchaser learned for the first time that the wiring instructions were the work of a criminal third party, who received the funds and has failed to return the funds.

The complaint states two causes of action, negligence and legal malpractice, and lists the following breaches of duty committed by the law firm:

  • Requiring the plaintiffs to use wire closing funds to defendant, without counseling the plaintiffs about the methods by which the secure delivery of such funds could be compromised;
  • Failing to counsel the plaintiffs about the risks and insecurity of email communications, particularly of private, sensitive, or financial closing information; and
  • Failing to be alerted by the circumstances of Mrs. Purchaser’s telephone call on April 14, and therefore to warn her that no communication had been sent by the law firm.

Is this, in fact, negligence or legal malpractice?  We will have to wait to see.  Would the processes established by your law firm for the protection of your clients’ funds prevent this type of crime? That is the question of the day. Please discuss among yourselves!