Month: March 2023

How do mail away closings work in light of In re Lester*?

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A reader posed this question to me

A recent blog about a South Carolina Supreme Court amendment to a comment following our UPL rule contained the following paragraph:

“Remember that our Supreme Court adamantly told us in In re Lester* that a lawyer must be physically present for a closing. Prior to Lester, a closing attorney might be on vacation and available by telephone to answer closing questions. Lester called a halt to that practice.”

A reader responded, “Claire, can you clarify the effects of In Re Lester on ‘mail away’ closings?” This is such a great question, and I responded that I would answer with a new blog. This is that blog!

In the South Carolina Bar’s publication, Handbook for South Carolina Dirt Lawyers, I included the following discussion of mail-away closings.

“Attorneys in resort areas have done “mail away” closings routinely for years. Titles are examined, closing packages are prepared and mailed to a remote location for signatures. Recent South Carolina Supreme Court disciplinary cases requiring attorneys to be present at closings have caused some attorneys to question whether mail away closings can be done ethically by South Carolina attorneys.

The Supreme Court has not addressed this issue specifically, so no one knows the answer to this question. However, in a seminar in 2005, a lawyer from the Office of Disciplinary Counsel was asked whether an attorney can ethically handle a closing by mail.

He responded that it was his opinion that the attorney should:

           •     Schedule a closing date, time and place;

           •     Advise the clients that they should attend the closing;

           •     Advise the clients that the attorney will be able to provide better representation if the clients attend the closing; and

           •     Require the clients to sign a document indicating they received the foregoing advice but chose not to attend the closing.

Another speaker at the seminar suggested that he would only handle mail away closings if the clients agreed to meet with a lawyer in the clients’ location to execute the documents.

On September 16, 2005, we received a more formal opinion in the form of Ethics Advisory Opinion 05-16. This opinion states that an attorney may ethically conduct a real estate closing by mail as long as it is done in a way that:  (1) ensures that the attorney is providing competent representation to the client; (2) all aspects of the closing remain under the supervision of an attorney;  and (3) the attorney complies with the duty to communicate with the client, so as to maintain the attorney-client relationship and be in a position to explain and answer any questions about the documents sent to the client for signature. To meet this test, according to the opinion, clients must have reasonable means to be in contact with the attorney, by telephone, facsimile, or electronic transmission.

The Opinion states that there is no legal requirement that a client attend the closing, but it must be the client’s decision not to attend the closing. The Opinion acknowledges today’s climate by this statement: “Given today’s technological advances in communications and funds transfer, to require a client living in one part of the country to attend a closing against the client’s own wishes is both unnecessary and punitive.” The Opinion makes the point that the duties of the attorney do not change when the closing is accomplished by mail in this statement: “The prudent attorney will conduct closings by mail in such a fashion that the client is fully informed and properly advised, that the client has a reasonable means to consult with the attorney, and that all personnel assisting the attorney are properly supervised.”

South Carolina closing attorneys are relieved to have this authority and appreciative of the efforts of the South Carolina Bar Ethics Advisory Committee.”

Of course, technology has drastically changed since these words were written, but the legal issues have not. A dirt lawyer can certainly handle mail away closings ethically. But dirt lawyers must still practice law in connection with those closings.

Please feel free to make comments and ask questions about these blogs!

*353 S.C. 246, 578 S.E. 2d 7 (2003).

Transactions involving failed banks require extra attention

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Dirt lawyers: call your friendly, intelligent title insurance underwriter!

Unfortunately, failed banks are back in the news and again affecting the stock market and our 401(k) accounts. It is doubtful that the California and New York banks that have failed have significant assets or loans in South Carolina, but Chicago Title’s underwriters have heard of at least one recent local transaction that involved one of the failed banks.

How should real estate lawyers protect their clients and themselves?

First, here’s a link provides general information about failed banks: http://www.fdic.gov/bank/individual/failed/index.html

Next, remember that assets are not automatically transferred by state law to an acquiring bank when the FDIC is appointed receiver and simultaneously announces the acquisition of the failed bank’s assets. Also, remember that the acquiring bank is not necessarily a “successor” to the failed bank.

Such an acquisition does generally mean that we can treat the acquiring bank as the owner of certain loans of the failed bank. We can generally rely on payoff statements, releases, satisfactions, and foreclosure actions by the acquiring bank if the acquiring bank asserts that it is the assignee by purchase. Documents should recite that the acquiring bank is the assignee of the loan. And we should be able to rely on that recitation.

In foreclosure situations, the acquiring bank may be required to prove its ownership of the debt and its record interest in the mortgage.

Payoff statements from the failed bank may be relied upon and the payoff statement may be made at the failed bank’s direction. But any release or satisfaction executed in response to that payoff must come from the receiver or its attorney in fact. Closing attorneys should confirm that the appropriate signature will be obtained before making the payoff.

The FDIC should sign recordable affidavits, as receiver, to the effect that it sold the particular loan asset to the acquiring bank to support assignments and modifications.

If your client purchases an REO asset that was owned by a failed bank, the proper grantor in the deed will be the FDIC, as receiver for the named failed bank. The FDIC will likely grant powers of attorney to individuals at the failed bank, at the acquiring bank, or internally, to facilitate signing these deeds. The power of attorney should comply with South Carolina law.

FDIC Statement of Policy on Foreclosure Consent and Redemption Rights provides that where the FDIC holds a junior mortgage, it “hereby grants its consent” to any foreclosure by a holder of a bona fide senior mortgage. Your title insurance company may require notice to the FDIC and the acquiring bank.

My best advice in all these cases is to call the person who either knows the answer to your many questions or will find out the answers to each of these questions for you: your favorite friendly and intelligent title insurance company underwriter!

SC Supreme Court amends comment to UPL rule

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The intent is to allow lawyers from other jurisdictions to work remotely here

I begin this blog by admitting that I wouldn’t have thought this Supreme Court Order was a big deal if the brilliant Teri Callen (Chicago Title lawyer and USC Law School Adjunct Professor) had not pointed out its significance.

On March 15, The South Carolina Supreme Court amended Comment 4 to Rule 5.5, South Carolina Rules of Professional Conduct, Rule 407, by adding the following sentence at the end of the comment:

“A lawyer admitted in another jurisdiction does not establish an office or other systematic presence in this jurisdiction for the practice of law by engaging in remote work in this jurisdiction, provided the lawyer’s legal services are limited to services the lawyer is authorized to perform by a jurisdiction in which the lawyer is admitted, and the lawyer does not state, imply, or hold out to the public that the lawyer is a South Carolina lawyer or is admitted to practice law in South Carolina.”

This type of remote work in South Carolina by out-of-state lawyers was formerly only allowed in the event of a state of emergency, as in a global pandemic. Now, a lawyer admitted in New York can live, permanently or temporarily, in Hilton Head and practice law from her computer and telephone. The South Carolina Bar had requested an amendment to this comment, and the Court adopted a modified version of the Bar’s proposal.

Teri has previously taught us that a South Carolina lawyer working remotely in another state might be participating in the unauthorized practice of law. A Charleston lawyer who decides to live, permanently or temporarily, in the mountains, should check the court rules of that state to determine whether remote work is considered UPL in that state. 

Remember that our Supreme Court adamantly told us in In re Lester* that a lawyer must be physically present for a closing. Prior to Lester,  a closing attorney might be on vacation and available by telephone to answer closing questions. Lester called a halt to that practice.

The Court didn’t weigh in on whether a South Carolina lawyer is allowed under our rules to work remotely in another state where he is not licensed without running afoul of our rules. Our Court probably wouldn’t touch that issue because of the implications and unintended consequences that might occur. For example, if it is permissible for a South Carolina lawyer to work remotely in another state, is it also permissible to perform a South Carolina closing there?

There are land mines everywhere, lawyers. I feel as if I end 9 out of 10 blogs with the thought that everyone needs to be careful out there. This blog falls in the “be careful” category.

* 353 S.C. 246, 578 S.E. 2d 7 (2003).

Does real estate “wholesaling” work in our market?

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Maybe, but real estate practitioners should be careful!

A recent discussion on South Carolina Bar’s real estate section listserv surrounded whether and how to close “double closings” vs. “assignments of contracts”.  This is not a novel topic in our market. In the very hot market that preceded the crash beginning in 2007, one of the biggest traps for real estate attorneys was closing flip transactions. Title insurance lawyers fielded questions involving flips on an hourly basis!

Flips have never been illegal per se. Buying low and selling high or buying low and making substantial improvements before selling high are great ways to make substantial profits in real estate.  

Back in the day, we suggested that in situations where there were two contracts, the ultimate buyer and lender had to know the property was closing twice and the first closing had to stand on its own as to funding. In other words, the money from the second closing could not be used to fund the first closing. (Think: informed consent confirmed in writing!)

Where assignments of contracts were used, we suggested that the closing statements clearly reflect the cost and payee of the assignment.

The term real estate investors are using these days to define buying low and selling high is “wholesaling”.  A quick Google search reveals many sites defining and educating (for a price, of course) the process of wholesaling. This is a paraphrase of a telling quote I found from one site:

If you’re looking for a simple way to get started in real estate without a lot of money, real estate wholesaling could be a viable option. Real estate wholesaling involves finding discounted properties and putting the properties under contract for a third-party buyer. Before closing, the wholesaler sells their interest in the property to a real estate investor or cash buyer.

One of the smart lawyers on our listserv, Ladson H. Beach, Jr., suggested that there does not appear to be a consensus among practitioners about how to close these transactions. He suggested reviewing several ethics cases* that set out fact-specific scenarios that may result in ethical issues for closing attorneys.

In addition to the ethics issues, Mr. Beach suggested there may be a licensing issue where an assignor is not a licensed broker or agent. A newsletter from South Carolina Real Estate Commission dated May 2022 which you can read in its entirety here addresses this issue. The article, entitled “License Law Spotlight: Wholesaling and License Law” begins:

“The practice of individuals or companies entering into assignable contracts to purchase a home from an owner, then marketing the contract for the purchase of the home to the public has become a hot topic, nationwide in the real estate industry in recent years. This is usually referred to as ‘wholesaling’. The question is often, “is wholesaling legal?’ The answer depends upon the specific laws of the state in which the marketing is occurring. In South Carolina, the practice may require licensure and compliance with South Carolina’s real estate licensing law.”

The article suggests that the Real Estate Commission has interpreted that the advertising of real property belonging to another with the expectation of compensation falls under the statutory definition of “broker” in S.C. Code §40-57-30(3) and requires licensure. Further, the newsletter suggests S.C. Code §40-57-240(1) sets up an exception; licensing is not required if an unlicensed owner is selling that owner’s property. The Commission has interpreted, according to this article, that having an equitable interest is not equivalent to a legal interest for the purpose of licensing. In other words, a person having an equitable interest acquired by a contract is not the property’s owner and has no legal interest in the property for the purposes of this licensing exemption.

So real estate practitioners have several concerns about closing transactions of this type. Be very careful out there and consult your friendly title insurance underwriter and perhaps your friendly ethics lawyer if you have concerns as these situations arise in your practice.

*In re Barbare (2004), In re Fayssoux (2009), In re Brown (2004) and In re Newton (2007)

South Carolina has another builder arbitration case

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Real estate law never bores me, but our cases may seem particularly mundane considering the Murdaugh prosecution that has gripped our state for more than a month. You may want to put this blog aside until the jury returns its verdict. I’ve seen so many photos on social media of groups of lawyers watching the case together that I am confident real estate is not top of mind!

Huskins v. Mungo Homes, LLC* is a South Carolina Court of Appeals case which was originally issued June 1, 2022, then withdrawn, substituted and refiled February 15, 2023.

The Huskins signed a Purchase Agreement with Mungo in June 2015 for a home in Westcott Ridge subdivision in Irmo. The document consisted of three pages. The first page contained a statutory notice of arbitration, the second page included a paragraph entitled “LIMITED WARRANTY”, and the third page included a paragraph entitled “ARBITRATION AND CLAIMS.”

In 2017, the Huskins filed an action against Mungo alleging the Purchase Agreement violated South Carolina law by disclaiming implied warranties without providing for a price reduction or other benefit to the purchaser for relinquishing those rights. The causes of action included: (1) breach of contract and the implied covenant of good faith and fair dealing; (2) unjust enrichment; (3) violation of the South Carolina Unfair Trade Practices Act, and (4) declaratory relief regarding the validity of the waiver and release of warranty rights and the validity of Mungo’s purported transfer of all remaining warranty obligations to a third party.

Mungo filed a motion to dismiss and compel arbitration. The Huskins’ responsive memorandum argued that the arbitration clause was unconscionable and unenforceable. They asserted that the limitation of warranties provision should be considered as a part of the agreement to arbitrate. The Circuit Court issued an order granting the motion to dismiss and compelling arbitration. In ruling the arbitration clause was not one-sided and unconscionable, the Circuit Court found that (1) the limited warranty provision must be read in isolation from the arbitration clause; and (2) terms in the arbitration clause pertaining to a 90-day time limit were not one-sided and oppressive because they did not waive any rights or remedies otherwise available by law.

The Court of Appeals initially held that the Circuit Court’s order was immediately appealable, stating that our state procedural rules, rather than the Federal Arbitration Act, govern appealability of arbitration orders. While arbitration orders are not typically immediately appealable under South Carolina law, this order had granted Mungo’s Rule 12(b)(6) motion to dismiss, which is an appealable order.

The Court next held that the arbitration clause must be considered separately from the limited warranty provision, citing cases to the effect that arbitration provisions are separable from the contracts in which they are imbedded. A prior D.R. Horton South Carolina Supreme Court case** considered the arbitration and warranty provisions together, in part because the title of the paragraph, “Warranties and Dispute Resolution” signaled that the provisions should be read as a whole. Since the Mungo paragraphs were separated, the Court of Appeals said they should be read separately. In addition, the two provisions did not contain cross references.

The Court next addressed the Huskins’ argument that the limitation of claims provision restricted the statutory limitations period from three years to 90 days and was therefore not severable from the arbitration clause. The Court agreed that the provision that limited the statute of limitations is one-sided and oppressive, but held that the arbitration clause is enforceable because the unconscionable provision is severable.

After concluding that the Huskins lacked a meaningful choice in entering the arbitration clause, the Court of Appeals held that the arbitration clause’s shortening of the statute of limitations violates South Carolina law and is therefore unconscionable and unenforceable.

The Circuit Court’s order was affirmed as modified.

Now …. back to the Murdaugh trial!

*South Carolina Court of Appeals Opinion 5916 (June 1, 2022, Withdrawn, Substituted and Refiled February 15, 2023.

**Smith v. D.R. Horton, Inc., 417 S.C. 42, 790 S.E.2d 1 (2016).