Dave Whitener’s “Palmetto Logs”

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SC palmetto state

Two weeks ago, this blog paid tribute to the late, great Dave Whitener, a giant among real estate legal professionals in South Carolina. As suggested in that blog about Dave’s “Top Ten You Betters”, I also wanted to share with you Dave’s “Palmetto Logs”.

Several years before his death, Dave was asked to address the American Bar Association. The issue was whether a successful defense might be mounted if a federal agency attacked the rights now existing in South Carolina for lawyers, and only lawyers, to close real estate transactions. In that talk, Dave cited ten areas of defense that he called the Palmetto Logs. For non-South Carolinians, the palmetto log has traditionally been a symbol of protection for South Carolinians in time of war. South Carolina is nicknamed “The Palmetto State”.

Here are Dave’s suggested protections against an attack from outside our state for closings performed by licensed South Carolina attorneys:

Caselaw

  1. State v. Buyers Service, 292 S.C. 426, 357 S.E.2d 15 (1987). In this case, the South Carolina Supreme Court defined the practice of law in a residential real estate closing to include: certification of the title; preparation of the deed and loan closing documents, closing the transaction and overseeing recording.
  2. Doe v. Condon, 351 S.C. 158, 568 S.E.2d 356 (2002). In this case, the South Carolina Supreme Court reiterated and confirmed that the four protected areas set out in Buyer’s Service would also apply to residential refinances.
  3. Doe v. McMaster, 355 S.C. 306, 585 S.E.2d 773 (2003). In 2003, the South Carolina Supreme Court again reiterated its holding in Buyer’s Service.

Statutes and South Carolina Constitution

  1. C. Code §40-5-310 makes it a felony for an individual to participate in the unauthorized practice of law.
  2. C. Code §40-5-320 makes it a misdemeanor for a corporation or other entity to participate in the unauthorized practice of law.
  3. C. Code §37-10-102 gives a borrower the absolute right to choose the closing attorney in a residential loan closing. The statute provides for a $7,500 penalty if the disclosure is not given.
  4. South Carolina’s Constitution gives the S.C. Supreme Court the exclusive right to define the practice of law within South Carolina

Practical Considerations

  1. The low cost attributable to attorneys’ fees for residential closings in South Carolina. Dave believed the low cost would present a major difficulty if a federal agency argues that South Carolina’s practice is anti-competitive or increased prices.
  2. Major job losses would possibly result from the outsourcing of jobs to closing centers outside of South Carolina
  3. Major risks would be raised in turning over the duties now performed by experienced lawyers to unregulated and inexperienced lay persons.

I’m not sure whether Dave would say differently if he were here to analyze this topic for us today. I fear that the retirement of Chief Justice Jean Toal may have resulted in the loss of the South Carolina lawyer’s strongest advocate in the South Carolina Supreme Court. So far, the Palmetto Logs are holding strong, but some more recent cases from our Supreme Court give me some concern on this topic.

In any event, I am continually thankful for Dave Whitener and his influence, mentorship and friendship to South Carolina dirt lawyers!

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Abbeville fraud litigation leads to noteworthy arbitration case

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Supreme Court finds arbitration clause unenforceable against nonsignatories

Abbeville, SC

I found it hard to believe the South Carolina Supreme Court took 21 pages to hold an arbitration provision unenforceable against nonsignatories to the contract, but it did! In an April case involving insurance fraud in Abbeville County, the Supreme Court reversed the Court of Appeals, which had relied on an equitable estoppel theory to bind individual insureds to a contract between an insurance agency and the insurance companies*.

The case arose out of numerous lawsuits brought by individual insureds against an insurance agent, Laura Willis, her broker, their agency and six insurance companies for which their offices sold policies. The suits alleged Willis engaged in fraudulent conduct including forging insurance documents and converting cash payments to her own use, resulting in the insureds having no coverage or reduced coverage. Two of the lawsuits were brought by other insurance agents, alleging Willis engaged in illegal business practices that effectively blocked them from the local market, resulting in a substantial loss of clients and revenue.

The other defendants were alleged to have failed to properly investigate, train and supervise Willis, especially after she was fined, publicly reprimanded and place on probation for dishonesty by the South Carolina Insurance Commission in 2011. Alternatively, Willis was alleged to have acted with express or implied permission of the other defendants.

A full year into the litigation, three of the insurance companies filed motions to compel arbitration and dismiss the lawsuits. The arbitration clause in question was contained in a 2010 agency contract signed by the insurance companies and the insurance agency. The theory was that the insureds were third-party beneficiaries to the contract or were equitably estopped from asserting their nonparty status. The Circuit Court denied the motion to compel arbitration, but the Court of Appeals reversed and remanded, holding equitable estoppel should be applied to enforce arbitration against the nonsignatories because the individuals sought to benefit from other provisions in the agency agreement.

The Supreme Court stated that while arbitration is viewed favorably by the courts, it is predicated on an agreement to arbitrate because parties are waiving their fundamental right to access to the courts. The Court held that whether the provision is enforceable is a state law question, and that South Carolina has recognized several theories that could bind nonsignatories to arbitration agreements under general principles of contract and agency law, including (1) incorporation by reference, (2) assumption, (3) agency, (4) veil piercing/alter ego, and (5) estoppel.

The estoppel argument is based on a direct benefits theory in South Carolina. Under that theory, a nonsignatory may be compelled to arbitrate where the nonsignatory knowingly exploits the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement.

In this case, according to the Supreme Court, the plaintiffs did not allege a claim of breach of the contract, and they were not even aware of the existence of the contract until arbitration was sought a year into the litigation. In the Court’s view, the plaintiffs did not knowingly exploit and receive a direct benefit from the agency agreement. The Agreement was purely for the benefit of its parties, outlining their business relationship.

The Court also stated that equitable estoppel is ultimately a theory designed to prevent injustice, and it should be used sparingly. This litigation will continue!

And I’ve reduced the 21-page case to less than 600 words for your reading pleasure. You’re welcome!

Wilson v. Willis, South Carolina Supreme Court Opinion 27879 (April 10, 2019)

South Carolina lawyers: “Reply All” is not always your friend!

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Don’t communicate with represented parties accidentally!

business woman shocked computer

“Ruh-roh”

There are numerous ways a lawyer can get into trouble with the Supreme Court, but inadvertently communicating with another lawyer’s client can be avoided simply by thinking before hitting “Reply All” in your email system.

Ethics Advisory Opinion 18-04 addressed this concern. The situation posed to the Ethics Advisory Committee was:

Factual Background: Lawyer A sends an email to Lawyer B and copies several people, including Lawyer A’s client. Lawyer A has not previously consented to Lawyer B contacting Lawyer A’s client and does not expressly do so in the email.

Question:  If Lawyer B receives an email from Lawyer A on which Lawyer A’s client is copied, may the lawyer “reply to all” – copying Lawyer A’s client with the response – without the express consent of Lawyer A?”

The Committee discussed Rule 4.2, SCRPC, which provides that in representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter unless the lawyer has consent of the other lawyer or is authorized to do so by law or a court order.

The purpose of the rule is to ensure proper functioning of the legal system by protecting a party who is represented by counsel from overreaching by other lawyers. The rule is also aimed at preventing interference in the lawyer-client relationship.

Two previous opinions discussed whether letters can be ethically mailed to opposing parties represented by counsel. Ethics Advisory Opinion 91-02 advised prosecutors to avoid copying criminal defendants on court appearance notifications without the consent of the defense attorney. Similarly, Ethics Advisory Opinion 93-16 advised plaintiffs’ lawyers to avoid copying defendants on settlement offers to defense counsel without the consent of defense counsel.

The Committee opined that copying an opposing party on email is prohibited in the same way sending a letter is prohibited, absent consent of opposing counsel. The question then became whether consent must be express or may be implied. The Restatement (Third) of the Law Governing Lawyers indicates the consent may be implied: “An opposing lawyer may acquiesce, for example, by being present at a meeting and observing the communication. Similarly, consent may be implied rather than express, such as where such direct contact occurs routinely as a matter of custom, unless the opposing lawyer affirmatively protests.”

The North Carolina, Alaska and New York City Bar Committees had previously opined that, while this consent may be implied, the mere fact that an attorney copies a client on an email sent to opposing counsel does not, by itself, constitute implied consent to a response sent to both opposing lawyer and the opposing client. South Carolina’s Committee agreed.

The Committee stated, however, that consent to a “reply all” may sometimes be implied. The Committee indicated that whether the matter is adversarial is an important factor. Additionally consent may be implied if the email is about scheduling under circumstances whether the client’s availability is at issue along with counsels, if email conversations among counsel and sophisticated clients together are the normal course of dealing, or if the lawyer initially cc’d the client expressly invites a “reply all” response.

The Committee cautioned that the practice of copying a client by either “cc” or “bcc” when emailing opposing counsel poses the risk of revealing confidential information. The Committee said that the recipient of an email might not recognize all the names in a group email and might communicate with opposing client’s client inadvertently by using “reply all”.  For these reasons, the Committee said that it is generally unwise to “cc” a client on an email communication to opposing counsel.

The Committee summarized its opinion: “Absent consent of Lawyer A, Lawyer B may not communicate with Lawyer A’s client about the subject of the representation either directly or by copying Lawyer A’s client in an emails sent in response to Lawyer A’s email on which the client was copied. The mere fact that a lawyer copies his own client on an email does not, without more, constitute implied consent to a “reply to all” responsive email.

My advice? Use caution when hitting “reply all” in all circumstances! “Less is more” is a generally good rule to follow in email communications. I have actually heard that one lawyer may set up another lawyer by coping a client in email communications. Don’t be a victim!

Nat Hardwick ordered to pay $40M in restitution

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Nat Hardwick

Nathan E. Hardwick IV

This blog discussed Nat Hardwick, a name familiar to many South Carolina real estate lawyers, last fall when he was convicted of embezzling more than $25 million from his former companies, including his former law firm, Morris Hardwick Schneider. He was discussed again in February when he was sentenced to 15 years in prison. His co-conspirator and controller, Asha Maurya, was sentenced to seven years after she cooperated with the government. On May 9, Hardwick and Maurya were ordered to pay $40 million in restitution.

Nathan E. Hardwick IV, 53, described himself as the face of Morris Hardwick Schneider, an Atlanta residential real estate and foreclosure firm that grew into sixteen states, including South Carolina. The firm once had more than 800 employees and boasted of offices in Charleston, Hilton Head, Columbia and Greenville.

On October 12, Hardwick was convicted in federal court in Atlanta of 21 counts of wire fraud, one count of conspiracy to commit wire fraud, and one count of making false statements to a federally insured financial institution. In federal court, sentencing is typically delayed, and the convicted person is released and allowed to get his affairs in order. In this case, however, Hardwick had been released pending trial on bond. After his conviction, he was described by the U.S. Attorney who prosecuted him as a flight risk and was handcuffed and taken to jail immediately.

This story hits close to home. My company was one of the victims of the crimes and one of the parties awarded restitution because it funded the firm’s escrow accounts when the losses were discovered.

The prosecutor described an extravagant lifestyle that Hardwick enjoyed at the expense of others. The case was said to be particularly troubling because the illegal activity was orchestrated by a lawyer who swore an oath to uphold the law and represent his clients with integrity. The U.S. Attorney said he hoped the case sent the message that the FBI and the U.S. Attorney’s office will not tolerate this type of white-collar crime.

According to the evidence, from January 2011 through August 2014, Hardwick stole more than $26 million from his law firm’s accounts, including its trust accounts, to pay his personal debts and expenses. The firm’s audited financial statements showed that the firm’s net income from 2011 through 2013 was approximately $10 million. During that time, according to the evidence, Hardwick took more than $20 million from firm accounts.

Asha Maurya, who managed the firm’s accounting operations, reached an agreement last May with the U.S. Attorney’s office and pled guilty. She was expected to testify at the trial, but was unexpectedly not called as a witness. Her lawyer argued at the restitution hearing that she should be liable for only $900,000, the amount she admitted taking from the firm for her own benefit. She had agreed to pay restitution in that amount as a part of her plea bargain.

During the trial, Hardwick did take the stand in his defense and attempted to blame Maurya with the theft. He said that he trusted her to his detriment, that he was entitled to the funds, and that he was unaware that the funds were wired from trust accounts. Hardwick testified for more than a day and explained that he believed Maurya followed proper law firm procedures.

On the stand, Hardwick, described as the consummate salesman, said that he gave his cellphone number to almost everyone. He said he returned calls and messages within a few hours and instructed his employees to do the same. He apparently believed himself to be a master in marketing and customer service and prided himself in focusing on the firm’s expansion strategy. He hoped to expand to all fifty states and make money through a public stock offering.

With his ill-gotten gains, Hardwick bought expensive property, made a $186,000 deposit for a party on a private island, spent $635,000 to take his golfing friends to attend the British Open in 2014, paid off bookies, alimony obligations, and sent more than $5.9 million to various casinos, all according to trial evidence. Hardwick’s activities lead to the loss of his law license and the bankruptcy of his firm.

Hardwick’s former partners, Mark Wittstadt and his brother, Gerald Wittstadt, were each awarded $6 million in restitution, and Art Morris, a retired member of the firm, was awarded $5 million.  All claim damage to their reputations in addition to substantial monetary losses.

SC Supreme Court “debars” two lawyers for UPL violations

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Mortgage modification practices get out-of-state lawyers in trouble

red card - suit

On April 24th, two out-of-state lawyers were debarred by the South Carolina Supreme Court.* If the word “debar” isn’t familiar to you, don’t feel alone. Miriam-Webster indicates the definition of the word, used in a legal sense is, “to bar from having or doing something.” Our Supreme Court uses the word to mean to preclude a lawyer from another state from practicing law or seeking any form of admission to practice law in South Carolina, including pro hac vici admission, without first obtaining an order of the Supreme Court.

What did these two lawyers do to cause the wrath of our Court? They were both involved in mortgage modification schemes in multiple states. Naderi was licensed in California and provided legal services operation as the Pacific National Law Center (PNLC).

Ochoa was previously licensed in Florida but was disbarred in 2018 for misconduct involving lack of competence, failure to keep clients’ property safe, and conduct involving dishonest, fraud, deceit, or misrepresentation. He operated a solo practice and entered into an agreement with a non-attorney owned company (NVA) to market his legal services on the internet. Through NVA’s advertisements, he specifically targeted South Carolina residents seeking to negotiate modifications of their home loans.

Let’s look at just one example of the activities of these lawyers from the Naderi case. The Court refers to this scenario as “The J. H. Matter.” In December of 2013, Naderi was hired by J.H. a South Carolina resident, homeowner and veteran, to assist him in negotiating a modification of his home loan. Individuals from PNLC assured J.H. that the firm could get his loan modified and decrease his mortgage payments by securing both a balance reduction and a lower interest rate. J.H. was promised that the firm would work diligently and return his telephone calls within 48 hours.

J.H. signed several forms provided by PNLC staff members, including an “Attorney Client Retainer Agreement” and a “Third Party Authorization and Release Form”. The release form permitted the lender to discuss the loan with PNLC. Naderi was specifically named as the individual permitted to discuss the loan on behalf of J.H., but, interestingly, the form listed Naderi’s title as “Paralegal”.

The retainer agreement provided that, in exchange for $2,995, PNLC would provide “legal services” including “representation…for negotiation and resolution of disputes with current lender(s) regarding the subject real property and mortgage loan(s).” But litigation services were excluded from the scope of representation.

The agreement also provided that the fees were not conditioned on the outcome of the case and restricted J.H.’s ability to cancel the agreement and seek a refund after five days. Disputes arising after five days were to be handled by the guidelines and standards adopted by the California Bar.

In January, February and March of 2014, J.H. made payments totaling $2,995 via counter deposits into PNLC’s bank account. PNLC staff members told J.H. not to worry, that the law firm would secure the loan modification, and his lender would not take his home. Shortly after making his last payment, J.H. began experiencing difficulties reaching anyone at PNLC. PNLC never obtained a loan modification or offered J.H. any other solutions.

J.H. received notice of a foreclosure hearing, but he was unable to reach anyone at PNLC. J.H. appeared by himself and eventually hired another lawyer to file bankruptcy.

J.H. testified that he was unaware of any contact PNLC made with his lender. He believed he had been scammed and thought the wrongdoer should be in jail or disbarred.

Other matters were similarly described in both cases. It sounds as if the services were to collect fees only, and not to, in fact, perform legal work. The fact that these schemes cause delays when homeowners are in trouble with their loans make them particularly egregious. Dirt lawyers who are legitimately licensed by the South Carolina Supreme Court should be aware of these schemes and should be in a position to advise clients to avoid them with a vengeance!

 

* In the Matter of Naderi, South Carolina Supreme Court Opinion 27881 (April 24, 2019); In the Matter of Ochoa, South Carolina Supreme Court Opinion 27881, (April 24, 2019).

Nat Hardwick sentenced to 15 years

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Nat HardwickThis blog discussed Nat Hardwick, a name familiar to many South Carolina real estate lawyers, last fall when he was convicted of embezzling more than $25 million from his former companies, including his former law firm, Morris Hardwick Schneider. Last week, he was sentenced to 15 years in prison. His co-conspirator and controller, Asha Maurya, was sentenced to seven years after she cooperated with the government.

Nathan E. Hardwick IV, 53, described himself as the face of Morris Hardwick Schneider, an Atlanta residential real estate and foreclosure firm that grew into sixteen states, including South Carolina. The firm once had more than 800 employees and boasted of offices in Charleston, Hilton Head, Columbia and Greenville.

On October 12, Hardwick was convicted in federal court in Atlanta of 21 counts of wire fraud, one count of conspiracy to commit wire fraud, and one count of making false statements to a federally insured financial institution. In federal court, sentencing is typically delayed, and the convicted person is released and allowed to get his affairs in order. In this case, however, Hardwick had been released pending trial on bond. After his conviction, he was described by the U.S. Attorney who prosecuted him as a flight risk and was handcuffed and taken to jail immediately.

This story hits close to home. My company was one of the victims of the crimes.

The prosecutor described an extravagant lifestyle that Hardwick enjoyed at the expense of others. The case was said to be particularly troubling because the illegal activity was orchestrated by a lawyer who swore an oath to uphold the law and represent his clients with integrity. The U.S. Attorney said he hoped the case sent the message that the FBI and the U.S. Attorney’s office will not tolerate this type of white-collar crime.

According to the evidence, from January 2011 through August 2014, Hardwick stole more than $26 million from his law firm’s accounts, including its trust accounts, to pay his personal debts and expenses. The firm’s audited financial statements showed that the firm’s net income from 2011 through 2013 was approximately $10 million. During that time, according to the evidence, Hardwick took more than $20 million from firm accounts.

Asha Maurya, who managed the firm’s accounting operations, reached an agreement last May with the U.S. Attorney’s office and pled guilty. She was expected to testify at the trial, but was unexpectedly not called as a witness.

Hardwick did take the stand in his defense and attempted to blame Maurya with the theft. He said that he trusted her to his detriment, that he was entitled to the funds, and that he was unaware that the funds were wired from trust accounts. Hardwick testified for more than a day and explained that he believed Maurya followed proper law firm procedures.

On the stand, Hardwick, described as the consummate salesman, said that he gave his cellphone number to almost everyone. He said he returned calls and messages within a few hours and instructed his employees to do the same. He apparently believed himself to be a master in marketing and customer service and prided himself in focusing on the firm’s expansion strategy. He hoped to expand to all fifty states and make money through a public stock offering.

With his ill-gotten gains, Hardwick bought expensive property, made a $186,000 deposit for a party on a private island, spent $635,000 to take his golfing friends to attend the British Open in 2014, paid off bookies, alimony obligations, and sent more than $5.9 million to various casinos, all according to trial evidence. Hardwick’s activities lead to the loss of his law license and the bankruptcy of his firm.

Nat Hardwick convicted on 23 counts

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Nat HardwickMany South Carolina real estate lawyers know the name Nat Hardwick.

Nathan E. Hardwick IV, 53, described himself as the face of Morris Hardwick Schneider, an Atlanta residential real estate and foreclosure firm that grew into sixteen states, including South Carolina. The firm once had more than 800 employees and boasted of offices in Charleston, Hilton Head, Columbia and Greenville.

On October 12, Hardwick was convicted in federal court in Atlanta of 21 counts of wire fraud, one count of conspiracy to commit wire fraud, and one count of making false statements to a federally insured financial institution. In federal court, sentencing is typically delayed, and the convicted person is released and allowed to get his affairs in order. In this case, however, Hardwick had been released pending trial on bond. After his conviction, he was described by the U.S. Attorney who prosecuted him as a flight risk and was handcuffed and taken to jail immediately.

This story hits close to home. My company was one of the victims of the crimes.

The prosecutor described an extravagant lifestyle that Hardwick enjoyed at the expense of others. The case was said to be particularly troubling because the illegal activity was orchestrated by a lawyer who swore an oath to uphold the law and represent his clients with integrity. The U.S. Attorney said he hoped the case sent the message that the FBI and the U.S. Attorney’s office will not tolerate this type of white-collar crime.

According to the evidence, from January 2011 through August 2014, Hardwick stole more than $26 million from his law firm’s accounts, including its trust accounts, to pay his personal debts and expenses. The firm’s audited financial statements showed that the firm’s net income from 2011 through 2013 was approximately $10 million. During that time, according to the evidence, Hardwick took more than $20 million from firm accounts.

Asha Maurya, who managed the firm’s accounting operations, was also charged. She reached an agreement in May with the U.S. Attorney’s office and pled guilty. She was expected to testify at the trial, but was unexpectedly not called as a witness.

Hardwick did take the stand in his defense and attempted to blame Maurya with the theft. He said that he trusted her to his detriment, that he was entitled to the funds, and that he was unaware that the funds were wired from trust accounts. Hardwick testified for more than a day and explained that he believed Maurya followed proper law firm procedures.

On the stand, Hardwick, described as the consummate salesman, said that he gave his cellphone number to almost everyone. He said he returned calls and messages within a few hours and instructed his employees to do the same. He apparently believed himself to be a master in marketing and customer service and prided himself in focusing on the firm’s expansion strategy. He hoped to expand to all fifty states and make money through a public stock offering.

With his ill-gotten gains, Hardwick bought expensive property, made a $186,000 deposit for a party on a private island, spent $635,000 to take his golfing friends to attend the British Open in 2014, paid off bookies, alimony obligations, and sent more than $5.9 million to various casinos, all according to trial evidence. Hardwick’s activities lead to the loss of his law license and the bankruptcy of his firm.