Trick or Treat!

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Senate votes to rescind CFPB class action rule

Is this action scary for consumers?

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The United States Senate voted last week to dispose of a Consumer Financial Protection Bureau (CFPB) rule that allowed banks and credit card companies to use mandatory pre-dispute arbitration clauses in the fine print of credit card and checking account agreements to deny consumers the right to bring class action lawsuits to resolve financial disputes.

The vote was 51-50 with Vice President Pence casting the deciding vote. Lindsey Graham voted against the repeal. The House of Representatives had already voted to rescind the rule, and President Trump is expected to sign the bill into law.

When the rule was passed last year, CFPB Director Richard Cordray said the purpose was aimed at giving consumers more power by discontinuing the abusive practice of banks inserting arbitration clauses into their contracts for consumer financial products and services and literally “with the stroke of a pen” blocking any group of consumers from filing class action lawsuits. He also said CFPB’s research indicated that these “gotcha” clauses force consumers to litigate over small amounts ($35 – $100) acting alone against some of the largest financial companies in the world. Consumers are forced, he said, to “give up or go it alone.”

After the Senate’s vote last week, Director Cordray released a statement stating the action was “a giant setback for every consumer in this country.”  “Wall Street won”, he said, “and ordinary people lost.”

HousingWire reported on October 30 that Director Cordray wrote a letter directly to President Trump pleading with him to save the arbitration rule. According to the HousingWire report, the letter said, “This rule is all about protecting people who simply want to be able to take action together to right the wrongs done to them.” It also said, “I think you really don’t like to see American families, including veterans and service members, get cheated out of their hard-earned month and be left helpless to fight back.”

Time will tell whether the President will listen to Director Cordray. But it is clear that the CFPB continues its efforts to shake up the market. It has also been clear up to this point Republicans are seeking to dismantle those efforts that they feel hurt the free market.

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Is your client in the market for timber?

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Here’s what you’ll need to know to get started

timber

It’s always good to start with the law. In South Carolina, the case is, believe it or not, a 1938 grand larceny case.* It turns out that stealing standing timber is not grand larceny because standing timber is considered to be a fixture. The proper charge would be trespass.

Once the timber is severed from the real estate, however, it can be the subject of a grand larceny charge. What happens, you ask, if the criminal himself severs the timber and carries it away in a continuous act? That, my friends, is grand larceny. Even the South Carolina Supreme Court suggested this distinction may be subtle and illogical.

Now that we have exhausted my knowledge of subtle and illogical criminal law, let’s look at a few things dirt lawyers can understand. We draw from this case the proposition that standing timber is real estate in South Carolina.

Timber, like all real estate, should be conveyed by a deed. A seller might also reserve timber in a deed of the real estate to a third party. This would be similar to reserving an easement or reserving mineral rights.

The definition of “land” in a title insurance policy would include the timber growing on the land because the fee simple title holder owns all the physical elements (the “bundle of rights”, as we learned in law school) of the land. To insure land where the timber has been reserved, an exception would be taken for the timber.

From time to time, a title insurance company may be asked to insure timber. Only standing timber is insurable. Downed, fallen or cut trees would become personal property and no longer insurable in a title insurance policy. It might be problematic to insure future growth, trees seeded after a conveyance and timber sold expressly as “perpetual”. Consult your title insurance company before you get down into those weeds, so to speak.

Be careful about access issues. Timber roads are notoriously tricky, so pay careful attention to the description and ownership of real estate where the road is located. Often, GPS descriptions may be used to describe timber roads. Your client must be able to access the timber legally. The deed should grant the rights to cut and transport timber as well as the right of access.

Be careful about survey issues. You will typically not insure the acreage, and you may, again, face the problem of only having a GPS description. You might be the bad guy who has to require a survey.

You will typically take exception to the rights of others to use the land, as well as the terms and conditions of the timber deed.

Finally, determine whether a separate tax bill exists for the timber in order to prorate the correct tax amount.

You will likely want to involve your friendly title insurance company underwriter early and often if you become involved in a timber transaction.

 

 * State v. Collins, 288 S.C. 338, 199 S.E. 303 (1938).

SC Supreme Court tells Kentucky lawyer what she’s NOT gonna do….

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I’ve blogged before about Mike Goodwin, the “Bow Tie Comedian” based here in Columbia, who entertained us during lunch at Chicago Title’s seminar last year. I highly recommend Mike if you need a comedian suitable for a family audience. A joke that bubbled up through his very funny presentation was a line his mother used to keep him on the straight and narrow during his childhood, “what you NOT gonna do is…..”

 

For example, she would say, what you NOT gonna do is to stand there and hold that refrigerator door open while you try to decide what you want to eat. During one lull in the laughter, Mike said to us, “what you NOT gonna do is sit there and not laugh at my jokes.” (So we laughed.)

Mike’s tag line kept coming to me as I read In the Matter of McKeever, a September 20, 2017 South Carolina disciplinary case where a Kentucky lawyer was permanently debarred from seeking any form of admission to practice law (including pro hac vice admission) in South Carolina.

The Court clearly told McKeever what she’s NOT gonna do in the Palmetto State!

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McKeever engaged in several interesting and dangerous courses of action in South Carolina. One of the most damaging to her position seemed to be failing to respond to the disciplinary charges or to participate in the disciplinary proceedings in any way. The Court held this failure to be indicative of a disinterest in the law. No lawyer should ever be found to be disinterested in the law if she wants to continue to practice in this or any state!

Other activities were equally dangerous. McKeever and her husband left Kentucky in the midst of a foreclosure of their $1 million home loan. She arrived in Charleston and came into contact with Betty McMichael who owned two properties, 991 Governors Road where she resided, and 986 Governors Road, which she rented out.

McMichael faced foreclosure on both properties, and McKeever offered her legal representation despite not being licensed in South Carolina. McMichael repeatedly declined the offer but ultimately agreed to an arrangement, after repeated phone calls and visits, that allowed McKeever and her family to live at 986 Governors Road.

I hear the Supreme Court say, “what you’re NOT gonna do is to enter into an improper fee arrangement where the scope of the legal representation and the basis of the fee are not clearly explained to the client.) I also hear the Court say, “what you’re NOT gonna do is to create a conflict of interest by taking a possessory interest in property that is the subject of litigation.”

Later McKeever induced McMichael to execute a quitclaim deed in favor of Bondson Holdings, a “fictitious entity” owned by McKeever and her husband. (I can’t even put to paper the words the Court really wanted to use for this bit of deception.)

The saga continued with delay tactics, frivolous and meritless legal positions, false statements to courts, threatened civil actions and criminal prosecutions against opposing counsel, the presiding judge and the clerk of court. The Court was not amused and, in addition to the permanent debarment, reserved the right to void the deed after other proceedings involving the property are finally resolved.

I recommend the case as interesting reading in classic hutzpah and failing to follow any rules.

Development of precarious beach properties…

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Exciting for developers; problematic for environmentalists

A quick search the Internet for stories on “Captain Sam’s Spit” in Kiawah Island will reveal a treasure trove of news, opinion and case law involving the proposed development of a gorgeous but extremely precarious tract of pristine beach property on South Carolina’s coast. This link contains a picture.

The South Carolina Bar’s Real Estate Intensive seminar in July of 2016 included a field trip to view this property, from a distance at least. (And let me put in a plug for the same seminar to be held in July of 2018. Stay tuned! It will be great!)

Real estate development is my bread and butter, but one quick look told me that property should not be developed. A fellow field tripper, however, pointed out that the south end of Pawleys Island, which has been developed for many years, is just as precarious.

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Image by www.whereverimayroamblog.com

An entity that fights these cases in our state is the South Carolina Environmental Law Project located in Pawleys Island. A recent case* fought by this entity was decided by the South Carolina Court of Appeals on September 27. This case involves a 4.62 acre tract of beachfront property on Kiawah Island, not far from Captain Sam’s Spit.

Here are greatly simplified facts in a very complicated case: the developer and the community association entered into a development agreement in 1994. That agreement covered many issues, one of which was the proposed conveyance from the developer to the community association of a ten-mile strip of beachfront property, basically, the entire length of the island. A deed consummated that conveyance in 1995. All of the property conveyed was undevelopable because of the State’s jurisdictional lines.

I didn’t learn the following fact from the case, but I learned it from one of the lawyers who was kind enough to speak with me. When the jurisdictional lines were redrawn by the State, the 4.62 acre tract became developable. The developer then took the position that the 1994 development agreement and the 1995 deed resulted from a mutual mistake, and that the parties never intended to include that tract.

The Master-in-Equity and Court of Appeals did not see it that way. Both found that the agreement and deed were unambiguous and that parole evidence of the intent of the parties was not allowable.

Simple enough, right? As the football prognosticator, Lee Corso would say, “not so fast, my friends.” If the litigation history of Captain Sam’s Spit is a barometer, litigation may continue for years over the 4.62 acre tract. Captain Sam’s Spit has been argued in the South Carolina Supreme Court four times. I understand one of the justices used the term “weary” to describe the reaction of the court to the most recent round in the battle.

Count on a petition for rehearing and an appeal in this case, at least. I’ll keep you posted!

*Kiawah Resort Associates, L.P. v. Kiawah Island Community Association, South Carolina Court of Appeals Opinion 5517 (September 27, 2016)

Reminder for dirt lawyers of a “secret lien” trap

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The sale of a majority of the assets of a business

Real estate lawyers despise unrecorded liens. I like to refer to them as secret liens. One such trap for the unwary dirt lawyer in South Carolina is the state tax lien imposed by Code §12-54-124. This statute was effective June 18, 2003, and I can vividly remember the day we first read it and scratched our heads about what it meant.

The statute reads:

“In the case of the transfer of a majority of the assets of a business, other than cash, whether through a sale, gift, devise, inheritance, liquidation, distribution, merger, consolidation, corporate reorganization, lease or otherwise, any tax generated by the business which was due on or before the date of any part of the transfer constitutes a lien against the assets in the hands of a purchaser, or any other transferee, until the taxes are paid. Whether a majority of the assets have been transferred is determined by the fair market value of the assets transferred, and not by the number of assets transferred. The department may not issue a license to continue the business to the transferee until all taxes due the State have been settled and paid and may revoke a license issued to the business in violation of this section.” (Emphasis added.)

That’s it! Very simple, but how are those terms defined?  What’s a business? Is a rental house in Pawleys Island a business?  How can a purchaser’s lawyer know whether taxes are due to South Carolina by the seller?  How can a purchaser’s lawyer know whether the sale of one Subway store is a sale of the majority of the assets of a franchisee’s business?

I had a friend and former law school professor who worked at the Department of Revenue at the time, so I called him and told him we were struggling with the meaning of the statute.  He gave me two very valuable pieces of information: (1) the terms in the statute are defined as the Internal Revenue Code defines them; and (2) the Department of Revenue (DOR) was likely to give us some guidance at some future date.

We struggled with the definitions in the Internal Revenue Code and finally decided that unless a property is an owner-occupied single family residence, the closing attorney should consider that it might be a business asset.

Thankfully, in 2004, the DOR did provide guidance in the form of Revenue Ruling 04-2. The Revenue Ruling stated that the code section does not apply if the purchaser receives a certificate of compliance from the DOR stating that all tax returns have been filed and all taxes generated by the business have been paid. The certificate of compliance is valid, according to the Revenue Ruling, if it is obtained no more than thirty days before the sale.

This Revenue Ruling also authorized attorneys to accept Transferor Affidavits, in the form promulgated by the DOR, when the transferor can state that the assets subject to the transfer are not business assets or are less than a majority of the transferor’s business assets, based on fair market value, in the current and other planned transfers.

house mousetrapThe Revenue Ruling addressed whether a vacation home is a “business” by stating that it is not a business if IRC §280A limits the deduction of vacation home rental expenses. That’s a little deep for dirt lawyers, so the safe approach is to always obtain a certificate of compliance or Transferor Affidavit when you close on that rental home in Pawleys Island.

I like to remind dirt lawyers that they are not tax lawyers (unless they ARE tax lawyers). Generally, when you represent a purchaser in a real estate transaction, do not give the seller tax advice on how to complete a Transferor Affidavit.