On December 3, the United District Court for the Eastern Division of Texas granted a nationwide preliminary injunction that prohibits the federal government from enforcing The Corporate Transparency Act.
In response, the United States Treasury Financial Crimes Enforcement Network (FinCEN) announced on December 9 that while the injunction is in place, compliance with the CTA is only voluntary.
The Corporate Transparency Act, which went into effect January 1, 2024, requires many companies to report beneficial ownership information to FinCEN. Beneficial ownership information is defined as identifying information about the individuals who directly or indirectly own or control a company. The deadline for entities created before January 1, 2024 was January 1, 2025
Lawyers have been scrambling to grasp the intricacies of the new law and to assist their corporate clients, including homeowners’ associations, in compliance.
Six plaintiffs filed the lawsuit in May challenging the constitutionality of the law. The decision is based on the Commerce Clause, and the statute is based on national security and aimed at enforcing laws against money laundering.
This case will surely go to the Supreme Court, and we will have to wait to see how that Court reacts. It is possible that the rationale for the legislation holds for some but not all entities. Homeowners’ associations seem to be likely candidates to dodge this particular bullet.
In the meantime, your clients are not required to comply with the new law.
The Corporate Transparency Act, which went into effect January 1, 2024, requires many companies to report beneficial ownership information to the United States Treasury Financial Crimes Enforcement Network (FinCEN). Beneficial ownership information is defined as identifying information about the individuals who directly or indirectly own or control a company. The deadline for entities created before January 1, 2024 is January 1, 2025.
Lawyers have been scrambling to grasp the intricacies of the new law and to assist their corporate clients, including homeowners’ associations, in compliance.
But we have a huge development.
On December 3, the United District Court for the Eastern District of Texas granted a nationwide preliminary injunction that prohibits the federal government from enforcing the new law.
Six plaintiffs filed the lawsuit in May challenging the constitutionality of the law. The decision is based on the Commerce Clause, and the statute is based on national security and aimed at enforcing laws against money laundering. This case will surely go to the Supreme Court, and we will have to wait to see how that Court reacts. It is possible that the rationale for the legislation holds for some but not all entities. Homeowners’ associations seem to be likely candidates to dodge this particular bullet.
On November 24, just 48 hours before the National Association of Realtors’ settlement agreement headed to final approval, the Department of Justice filed a statement of interest in the lawsuit.
The filing indicated that the DOJ did not participate in the underlying litigation, but it challenged the settlement’s provision that requires buyers and buyers’ agents to enter into a written agreement before touring a home. This provision raises concerns under antitrust laws that could be addressed in multiple ways, according to the DOJ’s statement.
The DOJ suggested rectifying the issue by eliminating the buyer broker agreement requirement or to disclaim that the settlement creates any immunity or defense under the antitrust laws. Otherwise, the court could clarify that the settlement approval affords no immunity or defense for the buyer-agreement provision. The DOJ believes the settlement could limit the ways buyer brokers compete for clients.
The final hearing is scheduled for November 26 in Missouri. The NAR said in a statement that it will advocate for a final settlement that day. The statement suggested that the settlement is not what the NAR wants, but that it is preferable to continued litigation and the uncertainty of a jury verdict.
We’ll see lots of news on this topic this week and next week!
In the meantime, Happy Thanksgiving wishes for you and your family!
Heads up, dirt lawyers, this is another case dealing with drafting issues. Please read it carefully and apply its concepts the next time you are asked to draft a right of first refusal.
Crescent Homes SC, LLC v. CJN, LLC* involved a contract for CJN to develop 32 lots in a subdivision for sale to Crescent Homes. Crescent Homes would build single-family homes on these lots for sale to homebuyers. The contract referenced a “Future Phase on adjacent property owned by CJN and contained the following paragraph:
“Right of First Refusal: At the Initial Closing, (CJN) will grant to (Crescent) a right of first refusal with respect to the lots cross-hatched and shown on Exhibit ‘A-2’ as “Future Phase” and any additional lots that may from time to time be annexed or otherwise included in the Subdivision. A memorandum of such right of first refusal in a form reasonabl(y) acceptable to the Parties will be recorded in the public records of Greenville County at the Initial Closing.”
CJN did not start development of the future phase because of cost concerns. Crescent brought a lawsuit for breach of contract asserting CJN delayed the initial closing by, most significantly, failing to maintain the lots free from trash and debris. Crescent sought specific performance and other remedies.
CJN entered into a contract with Douglas Clark making termination of the right of first refusal in the Crescent contract a contingency. When CJN provided a copy of the Clark offer to Crescent, Crescent responded by offering $700,000 to purchase the property and by filing a lis pendens. Crescent notified CJN that even though the right of first refusal was binding, Crescent was not required to exercise or waive it at that time because the initial closing had not yet occurred.
Crescent asserted that the right of first refusal had not been delivered and was not capable of being validly exercised at that time. Clark withdrew his offer for reasons unrelated to this controversy.
The initial closing took place and the parties began the process of developing the lots in the first phase of the subdivision.
CJN filed a lawsuit against Crescent seeking a declaratory judgment and alleging abuse of legal process. The suit alleged that that the right of first refusal was invalid and Crescent had filed four lis pendens for the ulterior purpose of preventing the sale of the future phase property to third parties. CJN also answered Crescent’s complaint asserting counterclaims of breach of contract and quantum meruit/unjust enrichment and seeking remedies of specific performance and monetary damages.
CJN filed a motion for partial summary judgment alleging the right of first refusal was void because it constituted a restraint on the alienation of the property. The Master denied the motion, finding factual disputes and novel issues required further inquiry.
CJN continued to market the property and obtained at least one additional offer. Crescent filed a motion to consolidate the cases. CJN amended its complaint, adding causes of action for tortious interference with a contractual relationship and unfair and deceptive trade practices.
The Master bifurcated the proceeding and tried CJN’s cause of action for a declaration that the right of first refusal was unenforceable. Crescent moved to dismiss, arguing no justiciable controversy as the matter was not ripe because the previous offers had been withdrawn.
The Master denied that motion and found the right of first refusal to be unenforceable because it was an unreasonable restraint on the alienation of an interest in land, stating “based on the language used in (the paragraph), the court is unable to interpret and/or give meaning to the parties’ agreement without substantially and significantly creating terms and conditions that the parties themselves could have and should have included.” This appeal followed.
The Court of Appeals held that the matter was justiciable once a bona fide offer had been made. Neither party provided cases regarding ripeness in which offers were made and subsequently withdrawn.
As to the enforceability of the right of first refusal, the Court stated that such a right does restrain an owner’s power of alienation, but the question becomes whether the right unreasonably restrains alienation.
The Court cited a prior case holding that a right of first refusal was unenforceable because it failed to identify the property it encumbered, failed to contain price provisions and failed to contain procedures governing the exercise of the right. The Court found those factors present in this case and affirmed the Master’s finding of unenforceability.
Dirt lawyers, a rule against perpetuities issues was also raised against the right of first refusal, but the Court held it did not have to reach that issue. That is drafting challenge that we will save for another day. The bottom line in this case is that drafting real estate documents requires a great deal of skill and continuing legal research. Be careful out there!
*South Carolina Court of Appeals Opinion 6093 (November 20, 2024)
Court of Appeals holds arbitration clause unconscionable
Photo from PalmettoBluff.com
315 Corley CW LLC v. Palmetto Bluff Development* involves an appeal from Beaufort County arising from the sale of real estate in the Palmetto Bluff Development to homeowners who ultimately became plaintiffs in this case.
Palmetto Bluff is a planned residential community. Purchasers, by accepting deeds, automatically become members in the Palmetto Bluff Club. Club membership is further memorialized by a Club Membership Agreement. The governing terms of the Club are set out in the Club Membership Plan. The Club is a for-profit entity which retains the power, according to the parties, to unilaterally change its fees and policies with no input from Club members.
In 2017, a clause was added to the Membership Agreement stating that disputes surrounding the Membership Agreement will be resolved by mandatory arbitration in accordance with the rules of the American Arbitration Association (AAA), applying the substantive law of South Carolina.
In 2020, several homeowners complained that the Club was planning to make changes that they understood would limit the ability of their short-term tenants to use the Club’s facilities. After failed mediation attempts, this lawsuit was brought in 2022. The plaintiff homeowners then demanded arbitration.
Later in 2022, the homeowners asked the circuit court to stay arbitration and sought summary judgment on the alleged invalidity of the arbitration clause. The defendants moved to compel arbitration. The lower court held that the arbitration clause was invalid because the agreement was unconscionable.
The Court of Appeals agreed that the agreement was unconscionable because the homeowners lacked a meaningful choice in entering the agreement and because the agreement can be unilaterally modified.
The Court cited cases to the effect that whether one party lacks a meaningful choice in entering the arbitration agreement typically speaks to the fundamental fairness in the bargaining process. Courts consider the relative disparity in the parties’ bargaining power, the parties’ relative sophistication, whether the parties were represented by independent counsel, and whether the plaintiff is a substantial business concern. Contracts of adhesion, according to these cases, are standard form contracts offered on a take-it-or-leave-it basis with terms that are not negotiable. However, contracts of adhesion are not per se unconscionable. Instead, adhesion contracts are not unconscionable in and of themselves so long as the terms are even-handed.
The Court of Appeals held that the contract at issue is unconscionable because there is no conceivable potential for bargaining power on the part of those whom the provisions purport to bind. There was an absence of meaningful choice. The Court also held that the agreement was oppressive and one-sided because it limited the award of treble damages, regardless of whether they are construed as compensatory or punitive.
I recommend that South Carolina dirt lawyers read this case in detail and apply its guidelines in drafting documents for developer and builder clients.
*South Carolina Court of Appeals Opinion 6074 (Filed July 24, 2024, Refiled November 13, 2024)
In the Matter of Bush* resulted in a disbarment of a dirt lawyer who used a common “robbing Peter to pay Paul” scheme to steal from clients. The case involved three disciplinary complaints.
The first complaint revolved around the failure to wire $334,000 to a lender to pay off a mortgage in a real estate closing. The lawyer eventually admitted he used the money to replace funds he misappropriated from another closing.
The second complaint arose when the lawyer issued a closing protection letter and a title insurance commitment despite the fact that his title insurance company had suspended him as an agent and his title insurance agency license had expired. The lawyer received funds for this closing but, again, failed to satisfy the prior mortgage. The lawyer eventually admitted he used the funds to pay off the underlying mortgage for the closing described in the first complaint.
After the lawyer was placed in interim suspension by the Supreme Court, he responded to a third client whose mortgage had not been satisfied that, “I am going to plow back in to this and let me talk with some colleagues about a way to get a better resolution quickly.” The lawyer did not tell the third client that he had failed to satisfy her mortgage. Instead, he provided false information to the client regarding the status of the debt. The lawyer finally admitted that he had stolen the funds.
It’s amazing that a few bad apples continue to employ these deceptive techniques that eventually come to light. It is impossible to hide this type of scheme forever because the economy always ebbs and flows. Even a small economic downturn can result in the failure of the next closing to materialize. Without the funds from the next closing, the mortgage from the prior closing is never paid, and the house of cards falls quickly. In this case, the lawyer’s former title insurance company received a claim from one of the lenders who was not paid. A title insurance complaint will also cause the house of cards to fall quickly.
Lawyers, please read this case carefully as a model of what not to do! Be careful out there!
Late in 2023, this blog discussed multiple class action lawsuits across the United States attempting to hold brokerage companies responsible for conspiring to keep residential real estate commissions artificially high. We have a development.
A Federal judge in Missouri said on October 31 that he will approve a $110 million settlement with nine brokerage companies. In May, a similar $208 million settlement was approved. And two more orders are expected in November, when the same judge weighs a pair of settlements against the National Association of Realtors and HomeService of America.
This blog also discussed last November that a similar class action was brought in South Carolina. Dirt lawyers, I would love to know what you are seeing in your markets. Are commissions now being negotiated to avoid the potential liability? I’d love to hear what’s going on out there.
Real estate impersonation scams have “evolved”, it says
In September, the United States Secret Service issued an update to its “Real Estate Scam – Vacant Properties” Advisory (v. 1.1) The original Advisory was issued in Spring of 2022.
The current Advisory warns that the Secret Service has become aware of an increase of instances where criminals are impersonating title companies to steal real estate funds. Remember that “title companies” actually close transactions in many states. In South Carolina, the bad actors would impersonate law firms and banks.
Now more than ever, it is important for everyone involved in a real estate transaction to validate wires before they are sent. The last thing you need is for your law firm to have to provide funds to replace lost closing proceeds!
Often, the perpetrator impersonates the title holder and negotiates to sell unoccupied property to an unsuspecting buyer. Once the contract is signed, the criminal directs the buyer or realtor to the criminal’s account, impersonating a title company or law firm. The perpetrator impersonates the closing office by purchasing fake domains, similar to the closing office’s domain. (Such as me@lawfiirm.com vs. me@lawfirm.com.)
Red flags are identified by the Advisory:
Communications are primarily by email and communications contain poor grammar. (This is from me, not the advisory. If you ever seen the word “kindly”, such as “kindly wire the funds to….” Remember we don’t typically talk that way! Any twisted language or bad grammar may indicate the communication is coming from someone and some place with a first language other than English. Always use common sense!)
Wiring instructions are sent over standard email instead of a secure email platform.
The listing is below market value and the “seller” is looking for a cash buyer or quick closing.
The “seller” wants to use its preferred closing office.
The closing office is outside of the area where the real estate is located.
The Advisory suggests the following avenues of prevention:
Conduct an online independent search of the entity to which the funds are to be wires.
With a known phone number (from a trusted website or previous contact) CALL and verify the wiring instructions and names on accounts.
If possible, visit a local branch of the entity to which the funds are to be wired.
Obtain a government issued ID from each party, and evaluate IDs for abnormalities.
Consider a form of multi-factor authentication with your clients. For example, send an overnight letter to the mailing address on the tax bill asking the property owner to call you with a one-time code embedded within the letter.
Chicago Title sent out a memorandum to its agents on September 27 that I want to bring to the attention of those who read this blog.
South Carolina’s Real Estate Commission has begun to send out enforcement letters to investors the Commission believes are participating in illegal “wholesaling.” One of those redacted letters is attached.
On May 21, Governor McMaster signed into law former bill HB 4754, which requires a real estate broker’s license for those engaging in wholesaling. The new law defines the term “wholesaling” as “having a contractual interest in purchasing residential real estate from a property owner, then marketing the property for sale to a different buyer prior to taking legal ownership of the property.” The definition further states that “wholesaling does not refer to the assigning or offering to assign a contractual right to purchase the real estate.”
The question has become whether an investor can avoid the technicalities of the statute by marketing an assignment of a contract rather than directly marketing the underlying real estate. Investors appear to be taking the position that this activity is not prohibited, but the Real Estate Commission appears to disagree.
Investors are apparently being reported to the Real Estate Commission for potential violations of the new statute, and the Real Estate Commission is purportedly sending out letters to enforce the statute.
It is likely that our courts will become involved in resolving this question.
Anyone who has been involved in attempting to pass legislation will understand that drafting, redrafting, and amending bills often leads to tricky language. My guess is that most dirt lawyers could have drafted a clearer statute, but the bargaining and back-and-forth nature of drafting legislation has likely resulted in the complicated language we have.
Stay tuned as the Real Estate Commission and our courts deal with this issue.
Williams v. Jeffcoat* involved real estate in Charleston owned by Bradford Jeffcoat and Sandra Perkins, a couple who had a roughly two-decade relationship but who never married. In April 2000, Jeffcoat bought a house and lot, and in July 2000, he executed a deed conveying the property to himself and Perkins “jointly with right of survivorship and not as tenants in common.” The two resided together at that location until 2015.
In 2009, Perkins developed dementia. Jeffcoat served as her sole caregiver until he hired an in-home aid. In the spring of 2015, Perkins’ health rapidly declined, and Jeffcoat asked Vanessa Williams, Perkins’ only child, to come to Charleston from her home in Alabama to help care for Perkins. Soon after Williams arrived in Charleston, her name was added to Perkins’ checking account. Williams used Perkins’ funds to pay for Perkins’ medical appointments, but also allegedly used Perkins’ funds to pay Williams’ personal expenses, including closing costs on a mobile home in Alabama, living expenses totaling around $2,200 per month, and Williams’ daughter’s college tuition.
During her five weeks in South Carolina, Williams helped care for Perkins. On June 16, 2015, Williams was scheduled to take Perkins to a doctor in Charleston. Instead, without telling Jeffcoat, Williams took Perkins to live with her in Alabama. Perkins resided with Williams until her death, later that year.
Jeffcoat said Williams shut Jeffcoat out of Perkins’ life and give him no information about her whereabouts or condition despite his repeated efforts to contact them.
Before Perkins’ death, Williams filed a petition for general guardianship and conservatorship in Alabama to “protect and manage the person, assets and financial affairs” of Perkins. The petition did not mention Jeffcoat. The Alabama court granted letters of guardianship and conservatorship. Williams then, acting as Perkins’ guardian and conservator, deeded Perkins’ interest in the Charleston property to herself, individually, for $10.00 and love and affection, thus allegedly severing the joint tenancy between Jeffcoat and Perkins and creating a tenancy in common between Jeffcoat and Williams.
Two days before Perkins’ death, Williams brought this action, individually and as Perkins’ guardian and conservator, against Jeffcoat, in Charleston County, asking the court to compel partition of the property. Jeffcoat answered, asserting affirmative defenses of failure to state a claim, unclean hands, and lack of standing, and counterclaims for fraud, breach of fiduciary duty and slander of title.
Williams amended her complaint to also appear as personal representative of Perkins’ estate. Williams moved for partial summary judgment, arguing a joint tenancy can be severed by a cotenant’s unilateral conveyance to a third party under South Carolina law and that Alabama law permits a conservator to collect, hold, and retain a ward’s property without prior court order. Jeffcoat also moved for summary judgment, arguing that a joint tenancy with right of survivorship cannot be unilaterally severed by conveyance to a third party and that the deed to herself individually was self-dealing contrary to South Carolina and Alabama law. He requested a deed in his name only.
The Master granted Williams’ motion, finding that a joint tenancy may be unilaterally severed without the consent of the other joint tenant and that the deed to herself was lawful. The Court of Appeals affirmed, and the Supreme Court granted Jeffcoat’s petition for a writ of certiorari.
I’m going to skip several issues to concentrate on the joint tenancy issue. The Supreme Court ultimately remands the case, concluding that there were issues of material fact with regard to the unclean hands issue.
As to the joint tenancy issue, Jeffcoat contended that the master erred in finding the joint tenancy could be unilaterally severed, arguing South Carolina Code §27-7-40 prohibits such severance. The Court held that it did not need to decide this issue because the deed was executed prior to the effective date of the statute, (August 17, 2000) and the statute should not be applied retroactively. Under common law, according to the Court, the joint tenancy could be unilaterally severed by conveyance by one joint tenant to a third party. Consequently, Jeffcoat and Perkins own the property as tenants in common, and the sole remaining issue is whether Jeffcoat’s defense of unclean hands will defeat Williams’ demand for partition.
Acting Justice Addy concurred, writing separately to bring attention to issues which may arise under §27-7-40.
The Court of Appeals had correctly stated, according to Justice Addy, that the General Assembly’s primary purpose in passing this statute was to delineate specific language which would conclusively create a joint tenancy with right of survivorship. Although the statute accomplishes that purpose, in light of the legislature history and the holding by the majority opinion, joint tenancies with right of survivorship which were created pursuant to the language of the statute may well remain subject to severance by unliteral conveyance of a joint tenant.
Addy noted that the original bill read: “The fee interest in real estate held in joint tenancy may not be encumbered or conveyed to a third party or parties by a joint tenant acting alone without the joinder of the other joint tenant or tenants in the encumbrance or conveyance. Prior to passage, however, the legislature removed the underlined language. Therefore, because the legislature elected to remove the language prohibiting conveyance by a joint tenant, the Court of Appeals’ holding that even joint tenancies created pursuant to the statute remain subject to severance under the common law may well prove prescient.”
In a footnote, Justice Addy said, “I am sympathetic to the common sense of Jeffcoat’s argument. It makes little logical sense to a unilateral encumbrance by a joint tenant is ineffective and void, but a unilateral conveyance acts to destroy a joint tenancy and create a tenancy in common. However, under a strict reading of the statute’s text and, considering its legislative history, this result appears to have been the intention of the General Assembly.”
I can’t tell you the number of times I’ve unsuccessfully tried to apply logic to this statute! I appreciate Justice Addy’s affirmation of my efforts!
The Concurrence’s other footnote is even more interesting. It reads: “The facts of this case present, at best, a cautionary tale and, at worst, a liability trap to the real estate practitioner. As the court of appeals noted, had the author of the deed in issue created a tenancy in common with right of survivorship pursuant to the language used in Smith v. Cutler, 366 S.C. 546, 551, 623 S.E.2d 664, 647 (2005), Williams’ unilateral conveyance would have been ineffective in severing the tenancy.” (Citation to the Court of Appeals omitted.)
Cautionary tale, indeed! Trap, indeed!
South Carolina Supreme Court Opinion 28236 (September 18, 2024)
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