South Carolina legislature passes “IPEN” electronic notary law

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Don’t know what that is? Neither did I!

South Carolina rarely leads the pack when it comes to innovation, and we certainly didn’t break our streak with the early passage of an electronic notarization law. When we did pass legislation, it undoubtedly wasn’t the RON (remote on-line notary) legislation we need to move into this century. Instead, we have “IPEN” legislation—in person electronic notary, a term I had never heard. Why do we need in person electronic notarization when old fashion notarization is easier?

Doing my best to put a positive spin on this idea, perhaps we have taken baby steps.  Our legislature passed the South Carolina Electronic Notary Public Act on May 13, and Governor McMaster signed it into law on May 18. Our Code was amended to add Chapter 2 to Title 26. Chapter 1 was also amended.

At first blush, the new law does appear to be RON legislation, but buried deep inside is the requirement that signatory be in the notary’s presence. This provision defeats the whole purpose of RON legislation.

The last time I was at an in-person seminar with a roomful of South Carolina real estate lawyers where the topic of RON was discussed (and that seminar was pre-COVID, so it’s been awhile), several lawyers pushed a collective panic button and encouraged the group to lobby against this idea because they believed RON legislation may lead to electronic notaries, not South Carolina lawyers, supervising closings.

The new law specifically addresses that issue. Section 26-1-160 was amended to add Section 5, “Supervision of attorney”, which reads, “Nothing in this act contravenes the South Carolina law that requires a licensed South Carolina attorney to supervise a closing.”  Maybe this is the baby step we need. If lawyers are assured that this provision will be included in RON legislation, they may support that legislation.

Implementing the new law we do have will not be a simple process. Our Secretary of State has significant work to do to get ready to receive applications for registration of electronic notaries. The Secretary of State must create the regulations necessary to establish standards, procedures, practices, forms and records relating to electronic signatures and seals. The regulations must create a process for “unique registration numbers” for each electronic notary. The Secretary of State must approve “vendors of technology.”

Each electronic notary must secure an electronic signature, an electronic journal, a public key certificate and an electronic seal. A form called a “Certificate of Authority for an Electronic Notarial Act” must accompany every electronic notarization. I’m not sure any of this is worth the effort unless it facilitates the implementation of true RON legislation that may be passed in the future. The earliest the new legislation can be considered is January of 2022.

South Carolina dirt lawyers: let’s get behind RON legislation with the provision requiring lawyers to continue to supervise closings. We really don’t have anything to lose, and there is much to gain!

Special thanks to Teri Callen, professor and dirt lawyer extraordinaire,  who helped me figure out what is going on with this legislation!

SC Supreme Court’s footnote impacts easement law

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In a March 17 case*, the South Carolina Supreme Court made a thought-provoking comment on easement law through a footnote.

As with most real estate cases involving neighbors, the facts in this case are interesting. (I should probably admit the facts may only be interesting to dirt lawyers.) Paul and Susan McLaughlin bought Lot 22 in Seabrook Island and spent the next six years meeting and negotiating to build on the lot because of the existence of a pipe and an easement they were told had been abandoned.

The backstory involves a draining pipe and easement running through the backyards of seven lots. The easement and pipe were originally owned by Seabrook Island Property Owners Association (SIPOA). Over the years, the pipe degraded and became porous such that, aside from carrying away stormwater from the road, as intended, it also drained standing water from the lots. Nearly 20 years later, SIPOA installed a new draining system for the road, rendering the old one obsolete. At a property owner’s request, SIPOA abandoned the easement, but left the porous pipe in place.

After six excruciating years, the McLaughlins received home design and location approval from SIPOA, including the right to build on a former “no-build area” occupied by the abandoned easement. They removed the pipe and built their new home.

Neighbors Richard and Eugenia Ralph owned Lot 23 and sued claiming their backyard flooding became even worse as a result of the pipe removal. The jury awarded the Ralphs $1,000 in “nominal” damages. The Court of Appeals reversed and remanded for a new trial on damages alone, and the Supreme Court reversed the Court of Appeals and reinstated the jury’s verdict.

I won’t dwell on the remainder of the opinion, which deals mostly with litigation issues, but I wanted to point dirt lawyers specifically to footnote 5.

The Ralphs claimed some sort of ownership right in the abandoned easement, which the Supreme Court did not feel the need to address. But the Supreme Court did express concern over the Court of Appeals discussion of a seminal easement case in South Carolina, Blue Ridge Realty Co. v. Williamson**.

Blue Ridge is the case we rely upon for the right of property owners who buy lots with reference to a plat to use the roads shown on that plat. Without that case, many properties would have access issues.

The Supreme Court voiced concern over the alteration of a quote from the Blue Ridge case by the Court of Appeals. The Court of Appeals quoted the case: “It is generally held that when the owner of land has it subdivided and platted into lots and (easements,) and sells and conveys the lots with referenced to the plat, he hereby dedicates said (easements) to the use of such lot owners (and) their successors in title…”

Blue Ridge actually said, “It is generally held that when the owner of land has it subdivided and platted into lots and streets and sells and conveys the lots with reference to the plat, he thereby dedicates said streets to the use of such lot owners, their successors in title, and the public. (Emphasis added by the Supreme Court in the current case.)

The Supreme Court said the scenarios presented by the current case and the Blue Ridge case were fundamentally different. Blue Ridge involved the claim of a property owner to use a public street shown on a recorded plat. In the current case, lot owners whose property contains an easement intended for the benefit of the HOA claims an ownership interest because the easement inadvertently benefits the property owner as well.

In Blue Ridge, the property owner and its successors in title were the intended beneficiaries.  Here, the opposite is true. The owners of Lots 22 – 28 were never intended to benefit directly from the easement. The fact that they did so, according to the Supreme Court, was a pure accident, caused by the unexpected degradation of the pipe. In short, Blue Ridge does not stand for the proposition for which it was cited by the Court of Appeals, according to the Supreme Court.

This distinction might be significant in many of the title scenarios real estate practitioners face routinely.

Interesting indeed! I also find it interesting that the Supreme Court refers to the Blue Ridge case, as we dirt lawyers refer to it, as the Williamson case, but that’s a blog for another day.

*Ralph v. McLaughlin, South Carolina Supreme Court Opinion 28015, March 17, 2021.

**247 S.C. 112, 145 S.E.2d 922 (1965).

Protracted litigation leads to noteworthy federal title insurance case

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Early in my legal career, I searched a title prior to contentious litigation surrounding a commercial tract in Horry County. I was eight months pregnant with my son at the time. Title examiners as old as I am will remember we used to pull huge books down from high shelves to search titles in South Carolina. I remember this project so well not because of the difficult work in my puffy condition, but because of the time it took to resolve the litigation. When we finally received the final order, my son was in the second grade.

That timing may not hold a candle to the case decided last year in The United States District Court for South Carolina surrounding a tract in Dorchester County. Dudek v. Commonwealth Land Title Insurance Company* is the culmination (I hope) of what the court calls a “long- standing and enduring legal battle” over an eight-acre tract that was divided into two parcels of six and two acres, respectively.

Summarizing the almost undisputed facts as briefly as possible, plaintiffs Stephen Dudek and Doreen Cross entered into a contract to purchase the six-acre tract in 2012. A third party, Molly Morphew, entered into a back-up contract with the sellers to purchase the property in the event the plaintiffs’ purchase fell through. Both parties ultimately sued the seller for specific performance, and the plaintiffs in this case prevailed.

Dudek and Cross purchased the property in 2017 and obtained a title insurance policy from Commonwealth. The litigation with Morphew continued with two subsequent suits, the first alleging fraud and abuse of process in the purchase, and the second seeking to enforce a contract provision setting up a water and sewer easement in favor of the two-acre tract, which by this time had been purchased by Morphew. Dudek and Cross filed a title insurance claim on the easement issue, and Commonwealth denied the claim relying on an exception for easements and the exclusion for risks created by or known to the insured prior the policy date.

I’m eliminating a lot of facts and procedural nuances that title insurance nerds like me will find fascinating, so pull the case for the long story.

The Court held Commonwealth had no duty to defend the insured property owners, relying on the fact that they knew about the easement before they closed. Simple enough, right?

The more convoluted and interesting discussion revolves around the treatment of the policy of the easement issue.  The covered risk in question in the policy was that “someone has an easement on the Land”. The policy contained two exceptions, however, one for unrecorded easements and one for recorded easements. The court stated that the policy simultaneously extended and eliminated coverage for easements, rendering the policy provision meaningless and illusory.

Title insurance agents routinely add specific exceptions to title insurance policies to limit coverage. This case cautions against adding exceptions that operate to prevent all coverage from a covered risk. We will all need to be careful about this holding as time progresses.

*466 F. Supp. 3d 610 (D.S.C. 2020)

ALTA/NSPS Survey Standards have been revised

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Changes will take effect February 23, 2021

Almost every commercial transaction requires an ALTA/NSPS survey, so commercial practitioners are familiar with the most recent 2016 guidelines. Those guidelines are reviewed every five years, and a new version will be in effect beginning February 23, 2021.

You can review the new standards in their entirety, including a red-lined version, here.

The changes were made primarily to make the standards easier to understand and to correct a few inconsistencies. One change was made as a result of the 1995 U.S. Supreme Court case, Gutierrez de Martinez v. Lamagno, which held the word “shall” is a false imperative that actually means “may”. As a result, the word “shall” in the standards was changed to the word “must” to indicate an obligation or imperative.

Section 5.E was revised to clarify that the surveyor must only note observed evidence of easements, servitudes and other uses which are “on or across” the surveyed property instead of those which affect the surveyed property. This section also changes the necessity to locate utility poles within ten feet of the surveyed property from the prior requirement of five feet.

A change to Section 6.C states that if the surveyor becomes aware of a recorded easement not listed in the title evidence, the surveyor must advise the title company (in our case, the closing attorney) of the easement. If evidence of the easement isn’t provided to the surveyor, the easement must be shown or explained. This section was also revised to allow the surveyor to omit matters of record that are not survey related from the summary of title matters.

The introductory paragraph of Table A optional items has been revised to clarify that the wording of a Table A item may be negotiated. Item 6 of Table A was modified to clarify that zoning information must be provided to the surveyor. Item 11 regarding underground utilities has been simplified to two choices: (a) plans and/or reports provided by the client; or (b) markings coordinated by the surveyor pursuant to a private utility request. Item 18 (wetlands) was deleted. If a wetlands delineation is required, it must now be negotiated as an additional Table A, item 20. Item 19 was revised to allow for off-site easements appurtenant to be surveyed in their entirety.

We have a couple of weeks to become fully familiar with the new standards.

SC Court of Appeals rejects “replacement mortgage” doctrine

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Our Court of Appeals issued an opinion* on November 25 addressing and rejecting a novel foreclosure theory in South Carolina. Let’s look at the facts.

Jimmy and Laura Bailey owned a residence located at 247 Morninglow Drive in Winnsboro. They obtained a $256,500 mortgage loan from Quicken Mortgage in 2009. Later that year, the Baileys obtained an equity line of credit from ArrowPointe in the amount of $99,000. Next, the Baileys obtained a loan from Quicken in the amount of $296,000. The proceeds of this loan were used to pay off the first Quicken mortgage, which was satisfied of record.

At the time of the second Quicken loan, Quicken did not have actual knowledge of the ArrowPointe mortgage, but that mortgage was recorded. The Baileys signed an owner’s affidavit stating there were no outstanding mortgages.

The Baileys defaulted on the ArrowPointe line of credit, and ArrowPointe filed the subject foreclosure action. U.S. Bank (a successor to Quicken) and ArrowPointe filed competing motions for summary judgment, both claiming priority. U.S. Bank first asserted an equitable subrogation argument but abandoned that argument before the hearing and argued the replacement mortgage doctrine instead.

The special referee denied U.S. Bank’s motion, concluding that the replacement mortgage doctrine is not the law of South Carolina and that ArrowPointe’s mortgage had priority. U.S Bank appealed.

The Court of Appeals began its analysis by stating that South Carolina is a race-notice state, that is, the recording statute determines the priority of mortgages, and a mortgage is valid from the date of recording without notice. A subsequent creditor who records first, without notice, is protected by the recording statute.

One exception to the race-notice statute, the Court stated, is the doctrine of equitable subrogation. That doctrine allows a subsequent creditor to obtain priority if it meets the following elements: (1) the lender claiming subrogation has paid the prior debt; (2) that lender was not a volunteer but had direct interest in the discharge of the prior debt; (3) that lender was secondarily liable for the prior debt or for the discharge of the lien; (4) no injustice will be done by allowing the equity; and (5) that lender must not have actual notice of the prior mortgage.

The doctrine of replacement mortgage is also an exception to the race-notice statute, the Court stated. This theory, according to the Restatement (Third) of Property (Mortgages), is described as follows: (a) If a senior mortgage is released of record and, as a part of the same transaction, is replaced with a new mortgage, the latter mortgage retains the priority of the predecessor, except (1) to the extent that any change in the terms of the mortgage or the obligation it secures is materially prejudicial to the holder of a junior interest, or (2) to the extent that one who is protected by the recording act acquires an interest in the real estate at a time that the senior mortgage is not of record.

Courts have adopted three different approaches to equitable subrogation: (1) the majority position holds that a party with actual knowledge of an intervening lien cannot seek equitable subrogation; (2) the minority position holds that a party with actual or constructive knowledge of an intervening lien cannot seek equitable subrogation; and (3) the Restatement approach states that actual or constructive knowledge of an intervening lien is irrelevant and does not bar equitable subrogation.

The Court indicated it is cognizant of a trend toward adopting some form of replacement mortgage doctrine in other states and of our Supreme Court’s dicta in Matrix Financial Services Corp. v. Frazer.** In Matrix, our Supreme Court stated that a lender that refinances its own debt is not entitled to equitable subrogation but specifically did not decide whether a lender that refinances its own debt could succeed under the theory of replacement mortgage.

The Court held that ArrowPoint has priority under our race-notice statute because U.S. Bank had constructive notice of ArrowPointe’s mortgage.

Changing our rule is a matter for the legislature, according to the Court of Appeals. My guess is that our Supreme Court may have the opportunity to weigh in on this issue.

* ArrowPoint Federal Credit Union v. Bailey, South Carolina Court of Appeals Opinion No. 5784 (November 25, 2020).

** 394 S.C. 134, 714 S.E.2d 532 (2011).

Newberry land-transaction dispute replete with equitable issues

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We don’t often see current land-transaction dispute cases among South Carolina’s appellate court decisions, but the Court of Appeals handed down an opinion on September 16 that covers the gamut of equitable issues. Not uncommon, though, is that the facts in this equitable case involving real estate, like most, are quite interesting.

The use of the property in the case, Shirey v. Bishop*, is interesting in itself. Mr. and Mrs. Bishop operated a grave digging and burial vault business on the property for more than 30 years. Mr. Bishop died in 2010, leaving his wife to run the business by herself. Mrs. Bishop suffered from depression and anxiety and ultimately determined that she did not want to continue operating the business.

In 2012, Mrs. Bishop entered into a contract to sell the property to her niece, Cassandra Robinson. Although the bank wasn’t consulted, Robinson agreed to assume the mortgage and make the monthly payments until the mortgage was satisfied.

In 2014, however, Mrs. Bishop approached Shirey about purchasing the property, and a contract was signed in 2015 to sell the property to Shirey for $125,000. (Apparently Robinson was late on many mortgage payments.) The closing was to occur between August 3 and August 12, 2015. Time was stated to be of the essence.

On August 12, 2015, Shirey attempted to close by tendering funds to his attorney. After it became apparent that Mrs. Bishop was not going to appear, Shirey’s attorney called Bishop to ask if the closing period could be extended to August 13. Bishop agreed.

On August 13, Shirey arrived at his attorney’s office, but Bishop again failed to appear. Bishop’s doctor sent a note to Shirey’s attorney asking that Bishop be excused from the closing. (I’ve never seen a doctor’s excuse for a closing!) However, that afternoon, Bishop entered into a second contract with Robinson. This contract added a provision that Bishop would indemnify Robinson against “any and all issues of illegality or fraud concerning the transaction.” Bishop executed a deed conveying the property to Robinson, and Robinson recorded the deed the same day.

This lawsuit followed. The special referee ordered specific performance in favor of Shirey and further determined that Shirey was a bona fide purchaser who took free of any interest of Robinson, that Robinson and Bishop were in a confidential relationship, that the phone call from Shirey’s attorney to Bishop was tantamount to an extension of the contract, and that Bishop’s entering into the 2015 contract with Robinson demonstrated an intention to hold Robinson in default of the 2012 contract.

The Court of Appeals affirmed and made the following points:

  1.  Bishop and Robinson waived their statute of frauds argument by failing to plead it or argue it in the lower court.
  2.  Robinson was not entitled to the property under the 2012 contract because the 2015 contract held her in default.
  3.  The equities in the situation favored Shirey.
  4.  Bishop and Robinson were in a confidential relationship, not only because of their familial relationship, which is not sufficient standing alone, but because the facts indicated Bishop trusted Robinson and failed to seek legal advice. Additionally, Robinson drafted her second contract, and Bishop testified she didn’t understand what she was signing.
  5.  Shirey partially performed by tendering funds.
  6.  Shirey was a bona fide purchaser because he did not have notice of Robinson’s claim at the time he attempted to close. The Court held he had the “best right to” the title to the property.
  7.  Shirey was entitled to attorney’s fees because he prevailed under his contract, which provided for the award of attorney’s fees to the successful party.

All these issues are discussed in detail, and I recommend this case to any lawyer who seeks a refresher on equitable questions involving real estate under South Carolina law.

*South Carolina Court of Appeals Opinion 5718 (September 16, 2020).

Court of Appeals sets a timing rule on ATI exemption

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The new rule favors the taxpayer

A case* from the South Carolina Court of Appeals on August 26 concerns South Carolina Code Section 12-17-3135 which allows a 25% property tax exemption when there is an “Assessable Transfer of Interest” of real estate. The issue was one of timing, whether a property owner must claim this exemption during the first year of eligibility.

The Administrative Law Judge had consolidated two cases. In both cases, the property owner had purchased property during the closing months of 2012. Neither taxpayer claimed the ATI Exemption in 2013, but both claimed it in January of 2014. The Dorchester County Assessor denied the requests, but the ALJ decided the exemptions had been timely claimed.

The statutory language in question provides that the county assessor must be notified before January 31 for the tax year for which the owner first claims eligibility. The taxpayers argued that the plain meaning of this language allows them to choose when to claim the exemption. The Assessor argued that the exemption must be claimed by January 31 of the year following the transfers.

The Court looked at taxation of real property as a whole and held that the legislature intended that all purchasers would have a meaningful opportunity to claim the exemption. Under the Assessor’s interpretation, there would be a much less meaningful opportunity for taxpayers who purchase property later in the calendar year.

The Court also stated that the ATI Exemption is not allowed to override the appraised value set in the statutorily required five-year reassessment scheme, so there would be a built-in time limit for claiming the exemption.

 

*Fairfield Waverly, LLC v. Dorchester County Assessor, Opinion 5769 (August 26, 2020)

U. S. Supreme Court rules CFPB structure is unconstitutional

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CFPB building

The Supreme Court issued an order on Monday, June 29 holding that the structure of the Consumer Financial Protection Bureau is unconstitutional. But the agency has not been abolished.

In a 5-4 decision authored by Chief Justice John Roberts, the Court held that the agency run by a single director who can be fired by the President only for cause violates the separation of powers doctrine. The agency can be saved simply by striking the for-cause termination provision of the Dodd Frank Act.

There will be no immediate effect because the agency is currently being run by an acting director who has not been confirmed by the Senate. For this reason, the director can be fired by the President without case.

In the case, a California law firm alleged that an investigative demand issued by the CFPB is invalid on the grounds that the CFPB’s structure is unconstitutional.

The Episcopal Church property saga continues

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We have a new circuit court order

This is my third blog about the controversy surrounding the properties of various Episcopal churches in South Carolina. I previously said I am thankful to be a real estate lawyer as I attempt to decipher these issues.

charleston episcopal churches

St. Philip’s and St. Michael’s Episcopal Churches, Downtown Charleston, SC 

In August of 2017, the South Carolina Supreme Court issued a 77-page opinion in this litigation. We now have a new circuit court order, and I am confident we will hear more at a later date.

I don’t have to solve the mystery of the rights of gays in churches. I don’t have to ascertain whether the “liberal mainline” members or the “ultra-conservative breakaway” members make up the real Episcopal Church.  I don’t have to delve into the depths of neutral principles of law vs. ecclesiastical law. I don’t have to figure out who will own the name “Episcopal Diocese of South Carolina.”

The real estate issues are sufficiently thorny to occupy our collective real estate lawyer brains. The South Carolina Supreme Court seemed to indicate that the 29 breakaway churches had to return their properties to the national church under the “Dennis Canon”. But the Supreme Court left open the possibility that the lower court might clarify the position, and clarify Circuit Court Judge Edgar Dickson did.

He wrote that state law, not church law, requires the transfer of real property by deed. He said that no parish expressly acceded to the Dennis Canon. He said, “This is a property case. A decision on property ownership is usually governed by the title to real estate—the deed. In this case, all the plaintiff parishes hold title to their property in fee simple absolute.”

News articles refer to the properties as being valued at hundreds of millions of dollars. The historic value of the properties, including St. Michael’s and St. Philip’s of Charleston, is also quite significant. Future appeals are almost guaranteed. Nothing is settled at this point. Let’s not try to insure these titles anytime soon.

The controversy began more than five years ago when local parishes in eastern South Carolina left the Episcopal Church over, among other issues, the rights of gays in church. Since then, the two sides have been involved in a battle over the church’s name, leadership and real estate.

Interestingly, the national church had offered a settlement to the breakaway parishes that would have allowed them to retain their properties if they gave up the name and leadership issues. That settlement offer was apparently summarily rejected.

The South Carolina Supreme Court’s ruling upheld the Episcopal Church’s position that it is a hierarchal church rather than a congregational church in which the vote of church membership can determine the fate of real property. The new circuit court order begs to differ.

I continue to be thankful that I am a real estate lawyer!

*The Protestant Episcopal Church in the Diocese of South Carolina v. The Episcopal Church, South Carolina Supreme Court Opinion 27731, August 2, 2017.