Real Estate

Don’t Amend Your Master Deed As A Litigation Strategy

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The South Carolina Court of Appeals was not impressed!

The owners of The Gates at Williams-Brice (a great place to tailgate!) were surprised in 2012 when a maintenance company refused to bid on an exterior caulking/sealant job because of perceived construction defects.  Almost immediately, the owners’ association and an individual owner filed a complaint alleging negligence, gross negligence, breach of warranty and strict liability claims. The defendants were numerous developer and contractor entities.

The plaintiffs demanded a jury trial and sought to establish a class action for the condominium owners. The developer filed a motion for a nonjury trial and to strike the class action allegations. The Circuit Court ruled for the plaintiffs, and the defendants appealed. The Court of Appeals, in an Opinion dated August 31*, reversed.

The case contains several practice pointers for dirt lawyers, especially those who draft master deeds and amendments to master deeds and those who represent owners’ associations.

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The Master Deed establishing The Gates at Williams-Brice contained provisions requiring arbitration, waiving the right to a jury trial, waiving the right to a class action, and eliminating the right to secondary, incidental or consequential damages.

The original complaint was filed in December of 2012. An answer, opposing the certification of a class, was filed in May of 2013. Later that month, the complaint was amended to add defendants. And on May 23, the homeowners amended the Master Deed to remove the provisions that thwarted their litigation efforts.

The Circuit Court found that the provisions at issue were no longer within the Master Deed and that the defendants were precluded from enforcing unconscionable arbitration and alternative dispute resolutions that contained oppressive, one-sided terms.

On appeal, the defendants argued that the Master Deed could not be amended retroactively to remove the provisions at issue. Neither party contested that the homeowners’ actions were taken in anticipation of litigation. The Court of Appeals held that the homeowners knowingly, voluntarily and intelligently waived their rights to a jury trial and to a class action when they signed their deeds.

Citing a North Carolina case**, the Court of Appeals said that to remove the agreed-upon waivers retroactively would effectively substitute a new obligation for the original bargain of the parties. The Court pointed to the cites in the North Carolina case that indicate several jurisdictions apply a reasonableness standard when reviewing amendments to covenants and holding a provision authorizing an owners’ association to amend covenants does not permit amendments of unlimited scope; rather, every amendment must be reasonable in light of the contracting parties’ original intent.

The Court of Appeals discounted several cases involving amendments in condominium projects by the Circuit Court as not controlling. One such case found the developer’s amendment to increase maintenance assessments was enforceable against new purchasers. Another case approved an amendment regarding leasing restrictions. A third case found that an owners’ association properly amended covenants to prohibit the developer from advertising on the property. The final case held that an amendment authorizing the association to suspend utilities for unpaid judgments was properly applied against a unit owner because any alleged retroactivity was proper based on the contractual relationship between the association and the unit owner.

Other cases cited by the Circuit Court were dismissed as neither dealing with amendments to condominium declarations nor to master deeds.

The Court stated that it was unaware of any authority in South Carolina that would permit contracting parties to unilaterally alter agreed upon provisions once litigation has started.

The developer also argued that the amendments were ineffective because they failed to obtain the required permission of lenders and other “bound parties” such as the developer. The Court declined to address that issue because of its other conclusions.

What will the Supreme Court say if it gets the opportunity to rule on this issue?

 

*The Gates at Williams-Brice Condominium Association v. DDC Construction, Inc., S.C. Court of Appeals Opinion 5438 (August 31, 2016)

**Armstrong v. Ledges Homeowners Ass’n, Inc., 633 S.E.2d 78 (N.C. 2006)

Another South Carolina Arbitration Case

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Following these cases is like watching a tennis match!

This is the third blog on this topic this summer! The June 7 blog surrounded a South Carolina Court of Appeals case* that held an arbitration clause in a roofing supplier’s warranty provision was not unconscionable. The lower court had ruled that the supplier’s sale of shingles was based on a contract of adhesion and that the injured property owners lacked any meaningful choice in negotiating the warranty and arbitration terms, which were actually contained in the packaging for the shingles.

The Court of Appeals indicated that the underlying sale was a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate terms. The Court found it significant that the packaging for the shingles contained a notation:  “Important: Read Carefully Before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The Court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund, and blessed the arbitration provision.

SCORE:  15- Love in favor of arbitration

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Let’s Talk Dirt on July 14 addressed a South Carolina Supreme Court case that appeared to take the opposite approach. ** A national residential construction company’s contract contained a number of “oppressive and one-sided provisions”, including an attempted waiver of the implied warranty of habitability and a prohibition on awarding money damages of any kind. The Supreme Court held that the home purchasers lacked a meaningful ability to negotiate their contract, the only remedy through which appeared to be repair or replacement.

SCORE:  15-all.

Note that Justices Kittredge and Pleicones dissented, stating that the contract involves interstate commerce and, as a result, is subject to the Federal Arbitration Act (FAA), “a fact conspicuously absent in the majority opinion”. The dissent stated that federal law requires that unless the claim of unconscionability goes to the arbitration clause itself, the issue of enforceability must be resolved by the arbitrator, not by the courts. The majority construed the Warranties and Dispute Resolution provisions of the contract as comprising the arbitration agreement and thus circumvented controlling federal law, according to the dissent.

Since the property owners raised no challenges to the arbitration clause itself, the dissent would have required that the other challenges be resolved through arbitration.

In a case dated August 17***, the majority decision is written by Chief Justice Pleicones with Justice Kittredge concurring. (Do you see a pattern here?) This case involved a residential subdivision that had been built on property previously used as an industrial site. The developer had demolished and removed all visible evidence of the industrial site and removed underground pipes, valves and tanks.

The plaintiffs bought a “spec” home in the subdivision and later discovered on their property PVC pipes and a metal lined concrete box containing “black sludge”, which tested positive as a hazardous substance. The present lawsuit was brought, alleging the developer failed to disclose the property defects. The developer moved to compel arbitration.

Paragraph 21 of the purchase agreement stated that the purchaser had received and read a copy of the warranty and consented to its terms. The purchasers had been provided with a “Homeowner Handbook” containing the warranty.

The circuit court, which was affirmed by the Court of Appeals, found the arbitration clause was enforceable for two reasons:

  1. it was located within the warranty booklet, making its scope limited to claims under the warranty. The Supreme Court held that the plain and unambiguous language of the arbitration clause provides that all claims, including ones based in warranty, are subject to arbitration.
  2. The alleged outrageous tortious conduct of the developer in failing to disclose concealed contamination made the outrageous torts exception to arbitration enforcement applicable. The Supreme Court overruled all South Carolina cases that applied to outrageous torts exception, making that exception no longer viable in South Carolina.

The Supreme Court discussed the heavy presumption in favor of arbitration by the FAA and in the federal courts and the push to place arbitration agreements on equal footing with other contracts and enforce them in accordance with their terms.

SCORE:  30-15 in favor of arbitration

You won’t be surprised to learn that there was a dissent, this time by Acting Justice Toal, and a concurrence, by Justices Hearn and Beatty.

And remember that the CFPB recently announced a proposed rule that would ban financial companies from using mandatory pre-dispute arbitration clauses to deny consumers the right to join class action lawsuits.

SCORE:  30-all

All of these authorities affect matters involving dirt law. So the tennis match involving arbitration clauses in our area is still being played, and we will continue to watch!

*One Belle Hall Property Owners Association v. Trammell Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1, 2016)
** Smith v. D.R. Horton, Inc., S.C. Supreme Court Opinion 27643 (July 6, 2016)
*** Parsons v. John Wieland Homes, S.C. Supreme Court Opinion 27655 (August 17, 2016

Feds Extend Footprint of Shell Game

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Will this obligation eventually extend to South Carolina?

Secretly purchasing expensive real estate continues to be a popular method for criminals to launder dirty money. Setting up shell entities allows these criminals to hide their identities. When the real estate is later sold, the money has been miraculously cleaned.

Early this year, the Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasurer issued an order that required the four largest title insurance companies to identify the natural persons or “beneficial owners” behind the legal entities that purchase some expensive residential properties.

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At that time, the reach of the project extended to the Borough of Manhattan in New York City, and Dade County, Florida, where Miami is located. In those two locations, the designated title insurance companies were required to disclose to the government the names of buyers who paid cash for properties over $1 million in Miami and over $3 million in Manhattan. The natural persons behind the legal entities had to be reported for any ownership of at least 25 percent in an affected property.

Now, all title insurance underwriters, in addition to their affiliates and agents, will be involved, and the footprint of the project is being extended effective August 28.

The targeted areas and their price thresholds will be:

  • Borough of Manhattan, New York; $3 million;
  • Boroughs of Brooklyn, Queens and Bronx, New York; $1.5 million;
  • Borough of Staten Island, New York; $1.5 million;
  • Miami-Dade, Broward and Palm Beach Counties, Florida; $1 million;
  • Los Angeles, San Francisco, San Mateo, Santa Clara and San Diego Counties, California; $2 million; and
  • Bexar County (San Antonio), Texas; $500,000.

Although the initial project was termed temporary and exploratory, FinCEN has indicated that the project is helping law enforcement identify possible illicit activity and is also informing future regulatory approaches.

We have no way of knowing whether or when this program may be expanded to South Carolina, but it is entirely likely that expensive properties along our coast are being used in money laundering schemes. We will keep a close watch on this program for possible expansion!

Probate Problems: When Doing Things The Old-Fashioned Way Can Get Your Documents Rejected

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This is not news, but we hear recording offices are beginning to reject documents.

Effective June 2, 2014, South Carolina Code §26-1-120 (E) 4, dealing with notarial certificates, was amended to require that a subscribing witness in a probate form must attest that he or she is not a party to or beneficiary of the transaction.

This is a correct version of the new probate form:

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Probates are notoriously difficult to complete correctly, especially for documents sent out-of-state. It is probably always a better idea to use a simple acknowledgement form, particularly in light of the statutory change:Screenshot 2Note that South Carolina Code §26-1-90(B) now requires that the notary legibly type or print his or her name near the signature.

This is a technicality, but a technicality that can cause your documents to be rejected by recording offices. Don’t let that happen!

The SC-NC Boundary Legislation Passed!

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SC law “clarifying” the boundary will be effective at the beginning of the year.

The long awaited and much debated legislation defining the boundary line between The Palmetto State and the Tar Heel State was signed by Governor Nikki Haley on June 10.  The effective date of the law is January 1, 2017.

The purpose of the law is “clarifying the original location of the boundary” with North Carolina along Horry, Dillon, Marlboro, Chesterfield, Lancaster, York, Cherokee and Spartanburg Counties and providing additional information about the plats describing the location along Greenville, Pickens and Oconee counties.  In other words, our legislature doesn’t believe the law establishes a new boundary line.

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As expected, much of the legislation deals with tax issues. The legislative intent is set out specifically, and includes the thought that no business or residence owner should be liable for back taxes to South Carolina nor refunds from South Carolina as a result of a change from one state to the other. And the Department of Revenue is given the authority to compromise taxes in cases that result in taxation in both states.

Several issues are of particular interest to dirt lawyers. For example, no deed recording fees or county filing fees may be charged for deeds recorded as a result of the boundary clarification.

On the effective date of the legislation, Registers of Deeds (and Clerks of Court in those affected counties that do not have ROD offices) will be required to file a Notice of State Boundary Clarification for each affected piece of property. The form is described specifically in the legislation and requires the legal description, tax map number, derivation (if available), the names of the owners of record and the “muniments of title”, a defined term meaning “documents of record setting forth a legal or equitable real property interest or incorporeal hereditament in affected lands of an owner”.

I’m a dirt lawyer of more years than I like to divulge, but I admit I had to investigate the meaning of that word. The learned source, Wikipedia, indicates a muniment of title is the written evidence a landowner can use to defend title, such as a deed, will, judgment or death certificate.

Apparently, lawyers in states with marketable title legislation may be familiar with this term. South Carolinians have neither the benefit of tidy legislation to correct our title problems nor the knowledge and widespread use of this nifty term, until now.  We will all need to use and pronounce the word, muniment, next year. A North Carolina colleague asked me where the RODs and Clerks of Court will obtain the information to supply the  muniments of title. My best guess is that somebody is going to have to do a lot of title work!

(Note to Professor Spitz:  I apologize if you taught me that term in law school. It’s been a long, long time!)

Also of interest to dirt lawyers are provisions relating to foreclosures. A foreclosing attorney will have to file and serve the summons and complaint along with the aforesaid Notice of Boundary Clarification and an attorneys’ certification “that title to the subject real property has been searched in the affected counties and the affected jurisdictions” on all parties having interest in the real property pursuant to the muniments of title.  Whew! The foreclosure can then proceed after thirty days. I’m not sure how all that will be sorted out. I assume South Carolina foreclosure lawyers will be hiring counterparts across the state line to assist in these title examinations.

How will dirt lawyers and title insurance companies deal with sales and mortgages for properties that change states?  I think we are going to take these issues on a case-by-case basis and work together to sort out the various issues that are surely to arise. Be sure to involve your title insurance underwriter in these decisions rather than going out on a limb alone!

Old McDonald Had a Farm

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South Carolina Court of Appeals says partition actions in probate court require an open estate; sends action back to circuit court.

The South Carolina Court of Appeals held last week that probate courts in South Carolina have subject matter jurisdiction over partition actions only where open estates are involved.*

The dispute involved a farm in Darlington County originally owned by S.W. Byrd. Mr. Byrd died in 1923, and his estate was probated in Darlington County and finally closed in 1948. The estates of several of Mr. Byrd’s heirs were not subsequently probated, and in April of 2012, E. Butler McDonald filed an action for partition and the determination of heirs in the Darlington County Probate Court.

At that time, more than ten years had passed since the deaths of Mr. Byrd’s original heirs. Since §62-3-108 of the South Carolina Code establishes a time limitation of ten years after death for the administration of an estate, these estates could not be probated at the time Mr. McDonald filed his action.

farmlandThe Probate Court determined the heirs of S.K Byrd and their percentages of ownership. The Probate Court also found that no interested party had expressed a desire to purchase the property and that physical partition of the farm was impractical. The farm was ordered to be sold at a public auction, and Mr. McDonald’s reasonable attorneys’ fees were ordered to be paid.

On appeal by the other heirs, the Circuit Court affirmed. On appeal to the Court of Appeals, the appellants made several arguments, but the Court of Appeals focused on subject matter jurisdiction. Section 62-3-911 of the South Carolina Code establishes the jurisdiction for probate courts and specifically states that an heir may petition the probate court for partition prior to the closing of an estate. Since it was clearly established at trial that S.K. Byrd’s estate was closed in 1948, an action to partition his farm should have been brought in the circuit court, according to the Court of Appeals. The probate court’s determination of heirs and their percentages of ownership was affirmed, but the order was vacated as to the remaining issues.

*Byrd v. McDonald, S.C. Court of Appeals Case 5409 (June, 8, 2016)

Upscale Mt. Pleasant Condo Project Subject of Arbitration Clause Dispute

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Court of Appeals sides with roofing supplier

The South Carolina Court of Appeals handed down a decision on June 1 that will delight the drafters of corporate contracts who imbed arbitration clauses within their warranty provisions.  Whether the South Carolina Supreme Court will approve remains to be seen.

The dispute arises over the construction of One Belle Hall, an upscale condominium community in Mt. Pleasant. Tamko Building Products, Inc. was the supplier of the asphalt shingles for the community’s four buildings, and placed a mandatory binding arbitration clause within its warranty provision. The warranty purported to exclude all express and implied warranties and to disclaim liability for all incidental and consequential damages.

roof shingles

At some point after construction was completed, the owners’ association determined that the buildings were affected by moisture damage, water intrusion and termite damage, all resulting from various alleged construction defects. The developer contacted Tamko to report a warranty claim on the roof shingles, contending they were blistering and defective.  Tamko sent the developer a “warranty kit”, requiring the claimant to provide proof of purchase, samples of the allegedly defective shingles and photographs. The developer failed to respond.

Two years later, the owners’ association filed a proposed class action lawsuit on behalf of all owners, alleging defective construction against the community’s various developers and contractors. Tamko filed for a motion to dismiss and compel arbitration.

Circuit Court Judge J. C. Nicholson, Jr. denied the motion and ruled that Tamko’s sale of shingles was based on a contract of adhesion and that the condominium owners lacked any meaningful choice in negotiating the warranty and arbitration terms. The trial court held the arbitration clause to be unconscionable and unenforceable because of the cumulative effect of several oppressive and one-sided terms in the warranty.

The Court of Appeals begged to differ. It held that the circuit court erred in finding the arbitration clause in the warranty was unconscionable. It stated that our supreme court has made it clear that adhesion contracts are not per se unconscionable. The underlying sale of Tamko’s shingles was stated to be a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate warranty terms.

The court found it significant that the packaging contained a notation: “Important: Read Carefully Before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund.

The appellate court also found it significant that the arbitration clause did facilitate an unbiased decision by a neutral decision maker and that the arbitration clause was separable from the warranty.

Consider the exact opposite approach of the CFPB’s recently-announced proposed rule that would ban financial companies from using mandatory pre-dispute arbitration clauses to deny consumers the right to join class action lawsuits. That proposed rule can be read here and is the subject of a May 12 blog entitled “CFPB’s proposed rule would allow consumers to sue banks”.

It’s interesting to see such different approaches by two authorities on an issue affecting consumers in the housing arena. I wouldn’t be surprised to see more to come from either ruling.

* One Belle Hall Property Owners Association, Inc. vs. Trammell Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1,2016)

What’s That Terrible Smell?

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A Midlands landowner is forced to abandon his stinky property, and the SC Court of Appeals says Insurance Reserve Fund doesn’t need to pay.

The South Carolina Court of Appeals held on March 23 that the South Carolina Insurance Reserve Fund (the Fund) has no duty to defend or indemnify East Richland County Public Service District (the District) in connection with a claim by a property owner of inverse condemnation, trespass and negligence resulting from offensive odors*.stinky smell

In 2010, Coley Brown filed a complaint alleging the District had installed a sewage force main and air relief valve which released offensive odors on his property multiple times a day.

A District employee testified that a force main had been installed as a part of a larger project that included two nearby pump stations. The pump stations were designed to pump sewage through the force main when the sewage reached a certain level. Depending on the area’s water usage and weather, the pump stations might turn on as often as ten times per hour. The odor was a result of naturally occurring hydrogen sulfide-which smells like rotten eggs-and methane.

In response to the complaints, the District made several attempts to remedy the odors, including using a chlorine-based chemical, installing charcoal filters, and eventually using a granulated chemical media. When the District failed to cure the problem, Brown moved to a different location but was unable to sell the stinky property.

The District tendered Brown’s complaint to the Fund pursuant to its insurance policy, but the Fund denied coverage. Under the policy, the Fund is obligated to pay damages resulting from property damage caused by an occurrence, defined as an accident, including continuous or repeated exposure to conditions, which result in personal injury or property damage neither expected nor intended. The policy has a “pollution exclusion” that refers to gasses and fumes.

The Circuit Court found that the Fund had no duty to defend or indemnity the District in the underlying case, finding the policy’s policy exclusion to be valid despite the District’s argument that the exclusion conflicts the South Carolina Tort Claims Act. The Court of Appeals reviewed the Tort Claims Act and found no conflict. The Court also reviewed cases from other jurisdictions holding that foul odors are encompassed by such pollution exclusions.

The District then argued that an exception to the pollution exclusion applies if the discharge, dispersal, release or escape of pollutants is sudden and accidental. The Court was not persuaded by this argument, indicating the releases were not accidental and unexpected, but were a necessary function of the District’s normal operations.

* S.C. Insurance Reserve Fund v. East Richland Public Service District, Appellate Case No. 2014-000728, March 23, 2016)

Minimum Standards Revised for ALTA/NSPS Surveys

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Celebrating the festival of Terminalia?

surveyorAmerican Land Title Association and National Society of Professional Surveyors have spent two years working on a new set of minimum standards for surveys. Their efforts resulted in the adoption of new 2016 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys which go into effect on February 23.  The standards can be found here.

A notable change is the title which acknowledges the merger of ASMC with NSPS. The list of atypical interests in real estate has been expanded to clearly include easements. And a surveyor should now be provided with the most recent title commitment. The term “record documents” has been abandoned in favor of referencing documents that are “to be provided to the surveyor”.

A significant change is the new duty of the surveyor to show “the location of each edge of the traveled way”, including divided streets and highways. The 2011 standards required showing the “width and location of the traveled way”. The change will require surveyors to show the width of the dedicated road in addition to the width of the asphalt.

The requirement to show water features has beefed up. Previously, surveyors were required to show springs, ponds, lakes, streams and rivers bordering or running through the property. Now surveyors must also show canals, ditches, marshes and swamps if any are “running through, or outside but within five feet of the perimeter boundary of the surveyed property.”

If a new legal description is prepared, the surveyor must include a note stating that the new description describes the same real estate as the record description, or if it does not, then the surveyor has to explain how the new description differs from the record description.

The surveyor must now show all observable evidence of both easements and utilities on his plat. Previously, there was some confusion as to whether both had to be shown.terminus 2

There are other modifications, most of which will assist surveyors while not diminishing the value of their surveyors to commercial practitioners and title insurers.

What’s the significance of the date? The Roman god Terminus protected boundary markers. The name “Terminus” was the Latin word for boundary marker. On February 23, Roman landowners celebrated a festival called Terminalia in honor of Terminus. Let’s throw a party!

Will Biltmore Estate’s Owners Get Their Fairytale Ending When IRS Is Done With Them?

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Biltmore EstateOne piece of real estate that fascinates most Carolinians is the picturesque Biltmore Estate in Asheville surrounded by the natural beauty of the Appalachian Mountains. According to articles in Law360*, a trial is scheduled for February 24 in the U.S. Tax Court that may determine whether the property continues to be privately owned and operated or whether portions of the real estate must be sold to developers to pay taxes.

The estate consists of 8,000 acres, 75 acres of formal gardens, and the largest privately owned house in the United States. The 255-room mansion was built between 1889 and 1895, in the Gilded Age, by George Washington Vanderbilt. Mr. Vanderbilt intended for the estate to be self-supporting, so he established a forestry program, poultry farms, cattle farms, hog farms, a dairy and a furniture business.

IMG_3884[1]George Vanderbilt had one child, Cornelia, who married British diplomat John Francis Amherst Cecil. Mr. and Mrs. Cecil worked with the City of Asheville to open the estate to the public in 1930 to spur tourism in the area during the Depression and to generate revenue to support the estate. The Cecil family turned the aging estate into a thriving tourist attraction, now including an inn, a farm, restaurants, gift shops and a winery, among other money-making ventures.

Most national treasures are operated by governmental agencies. According to the Law360 articles, the Cecils believe The Biltmore should be given special consideration because it operates as a business venture causing no drain on federal or state governments.

At issue now is a stock gift to the Cecils’ five grandchildren reported on 2010 tax returns at $20.88 million. The IRS claims the stock is worth $95 million. The family believes the stock should be valued as minority interests in a going concern.  But the IRS argues that the asset value is worth more than the value of the going concern, so a liquidation value should be used.

Lovers of this historic landmark will need to follow this story to determine whether the preferred destination of more than a million visitors per year will remain available as a vacation destination.

*Biltmore Owners Say IRS Is Stonewalling $95M Gift Row, 1/11/2016; Biltmore Owners Battle IRS over $95M Stock Gift, 7/7/2014.

(The Estate’s website is the source for many of the facts in this blog.)