County May Owe Duty to Lot Owners in Failed Subdivision

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Infrastructure regulations were not followed

scales - blue backgroundOn January 6, the S.C. Court of Appeals reversed the Georgetown County Circuit Court’s directed verdict and remanded a case involving failed West Stewart Subdivision.* The developer, Harmony Holdings, LLC, went belly up in 2007, leaving the lot owners without roads and utilities after the County failed to follow its own regulations that provided a safety net for such catastrophes.

The plaintiff owned two lots in the subdivision, and filed a negligence action, arguing that Georgetown County had a “tort-like” duty to lot owners under the plain language of its development regulations. The County denied that it owed a duty to lot owners.

The County attorney explained the administrative issues at trial. He testified that in South Carolina, a developer is generally not allowed to sell lots that do not have infrastructure (roads, water and sewer). County regulations, however, allow the County to accept cash, bonds, financial guarantees or letters of credit to ensure money is available to complete infrastructure in case a developer fails.

Under the regulations in question, the County had discretion to accept a letter of credit equal to 125% of the cost estimate to complete the infrastructure. In this case, the developer posted a letter of credit on May 23, 2006 in the amount of $1,301,705 based on a cost estimate of $1,040,000.

Also under the regulations, the County had the power to approve reductions in the letter of credit upon receipt of an engineer’s certification that a certain amount of the work had been completed and sufficient funds were available for the remaining work. Other technical procedures were also required. The County allowed for a reduction in the letter of credit on July 20, 2006, October 9, 2006 and November 8, 2006, reducing the letter of credit to $553,370. In December of 2006, the County was advised that the estimated cost to complete the infrastructure was $1,153,205, which was higher than the original estimate. Despite this information, the letter of credit was reduced again on March 9, 2007 to $156,704.

The letter of credit expired in May of 2007, and the developer gave the county a check for $140,000. In August of 2007, the developer informed the County that it no longer had the financial means to complete the construction. Then the developer declared bankruptcy.

Repko described his lot as “woods” accessible by a path but inaccessible by a road. He testified that he believes his property is valued at “zero”. He said he pays property taxes on his lot, but the County will not allow him to build because of the absence of basic utilities.

The trial court directed a verdict in favor of the County on the grounds that the regulations do not create a private duty to lot owners. (Other issues were argued that will not be discussed here.) The Court of Appeals agreed with the lot owner that the County owed a special duty to him with respect to the County’s management of the financial guaranty that allowed the developer to sell lots.

inigo montoya memeThe County had relied on a 1993 Hilton Head case.** In that case, the preamble to the development ordinances stated, “The town council finds that the health, safety and welfare of the public is in actual danger….if development is allowed to continue without limitation.” When the development failed, a lot owner sued the Town, claiming it had negligently administered its ordinances. The Supreme Court held that the ordinances did not create a special duty to lot owners because their essential purpose, according to the preamble, was to protect the public from overdevelopment.

The Court of Appeals in the current case held that, unlike the Hilton Head ordinances, the Georgetown County regulations contained no express language declaring their purpose, but reviewing them as a whole, the purpose is to protect lot owners in the event the developer does not complete infrastructure.

I expect we have not seen the end of this case!

* Repko v. County of Georgetown, Opinion 5374, January 6, 2016.

** Brady Development Co. v. Town of Hilton Head Island, 312 S.C. 73, 439 S.E.2d 266 (1993).

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