Halloween brought a scary judgment in a Missouri class action by residential real estate sellers against the National Association of Realtors (NAR), a real estate agent trade association, and several real estate agent entities. The judgment of $1.8 billion will surely be appealed all the way to the Supreme Court. Appeals may take several years to be completed.
The sellers argued that commissions are rarely negotiable, and that the seller is required to pay commissions for both sides of transactions. I heard a seller interviewed by Lester Holt on NBC Nightly News on November 1. He said that he must pay commission to a real estate agent he never met, will never meet and who did no work for him.
The plaintiffs also argued that this commission structure keeps home prices artificially high.
At least two real estate agent entities settled for large sums prior to the judgment. And similar lawsuits are pending in other jurisdictions.
Dirt lawyers, how do you project this suit may ultimately affect our industry? I wonder if any type of injunction will be put into place pending appeal. I wonder whether the Department of Justice will see the necessity to become involved. I wonder whether commissions will ultimately become negotiable and whether buyers will be required to pay their agents up front or at closing. If that happens, I can imagine extensive negotiations with sellers to pay more of their buyer’s closing costs than customary. I even wonder whether buyer agents may become obsolete.
I hate to report that any South Carolina law firm has fallen victim to fraud, but my friend and successor at Chicago Title, Jennifer Rubin, tells me that fraud is a daily challenge for closing attorneys in South Carolina. I am going to discuss this case delicately, because I believe this might happen to anyone who handles closings. I have sympathy for each closing law firm because they remain under constant pressure. But I also believe that everyone needs all the warnings we can collectively muster! This blog is yet another warning.
First, let me thank my friend, Bill Booth, Columbia attorney who keeps me posted on cases he follows. I appreciate being kept informed. This is an unpublished South Carolina Court of Appeals case* Bill brought to my attention. Bill said, “The fraudster was very clever in how he changed the seller’s email by a single letter.” Clever indeed! I stared at the real email address and the fraudulent email address for several minutes and failed to find the discrepancy. I handed the opinion to my husband and asked him to see if he could find it. He did, but it took him awhile.
Here are the two email addresses: mail4marvin@gmail.com vs. mail4rnarvin@gmail.com. Do you see it? The “m” in marvin was changed to “rn”. The Court of Appeals called this discrepancy “cunning”. I’ll say!
At trial, the seller was awarded a $10,306 verdict against the law firm, and the Court of Appeals affirmed. I assume the law firm will appeal to the South Carolina Supreme Court, and we may get further guidance.
Here are the facts. In 2016, Marvin Gipson contracted to sell his property to Clyde and Betty Williamson for $12,000. Gipson lived in Texas, and his local real estate agent recommended the closing firm, which represented both sides. Gipson testified that his only contact with the law firm was by mail, telephone, and email, mostly with an assistant.
Prior to closing, according to Gipson, the assistant told Gipson that she had received wiring instructions. Gipson testified he told her that he had never sent wiring instructions and expected to receive a check. He said he never received a phone call informing him that the closing had been completed and never received the check. He waited eleven days before contacting the law firm to report that he hadn’t received his seller’s proceeds.
Investigation revealed that the assistant had emailed the fraudulent address that the closing had taken place. By return email, she received fraudulent wiring instructions.
At trial, the law firm presented expert witness testimony to the effect that the law firm’s server was not hacked, and that the theft was facilitated by a “man in the middle attack”, wherein the thief was privy to information possibly obtained through a breach of Gipson’s or the real estate agent’s systems or by overhearing information. But the law firm was held liable at the trial level and by the Court of Appeals.
Lawyers, here is my advice. Please give your closing paralegals time. They need time to discover issues. They need time to investigate discrepancies. Please also give them training, not just once but weekly or even daily. They need to know about this case! No amount of training is too much. Talk to your title company. They have resources to assist! Use those resources! Stay up to date yourself! We spent three years in law school learning to spot issues. Apply those skills to your closing practices to spot those difficult issues.
This blog has previously discussed MV Realty PBC, LLC. South Carolina title examiners report they are discovering “Homeowner Benefit Agreements”, or “Exclusive Listing Agreements” filed in the public records as mortgages or memoranda of agreement. The duration of the agreements purports to be forty years, and a quick search revealed hundreds of these unusual documents filed in several South Carolina counties. The documents indicate that they create liens against the real estate in question.
The company behind these documents is MV Realty PBC, LLC which appears to be doing business in the Palmetto State as MV Realty of South Carolina, LLC. The company’s website indicates the company will pay a homeowner between $300 and $5,000 in connection with its Homeowner Benefit Program. In return for the payment, the homeowner agrees to use the company’s services as listing agent if the decision is made to sell the property during the term of the agreement. The agreements typically provide that the homeowner may elect to pay an early termination fee to avoid listing the property in question with MV Realty.
In response to numerous underwriting questions on the topic, Chicago Title sent an underwriting memorandum last year to its agents entitled “Exclusive Listing Agreements”. Chicago Title’s position on the topic was set out in its memorandum as follows: “Pending further guidance, Chicago Title requires that you treat recordings of this kind like any other lien or mortgage. You should obtain a release or satisfaction of the recording as part of the closing or take an exception to the recorded document in your commitments and final policies.”
Several states have sued this company or passed legislation making the contracts unenforceable. South Carolina is not one of those states. On September 6, United States Senators Casey, Brown and Wyden (Chairmen of Special Committee on Aging, Committee on Banking, Housing, and Urban Affairs and Committee on Finance, respectively) wrote a comprehensive letter setting out the legal concerns and seeking information. You can read the letter in its entirety here.
Now, MV Realty of South Carolina has filed for Chapter 11 Bankruptcy reporting assets of $1 – $10 million and debts of $1-$50 million.
Dirt lawyers, pay attention to this situation. We will certainly see updates. If you see these contracts in your chains of title in the meantime, contact your underwriting counsel for guidance.
This blog has discussed the new Corporate Transparency Act twice recently. If you missed the discussion of the Small Entity Compliance Guide FinCEN issued in September, here is the link.
I wanted to share an additional piece of information. On September 30, FinCEN issued a Notice of Proposed Rulemaking to extend the deadline for filing beneficial ownership information reports. You can read the notice here.
This notice proposes to change the reporting deadline for new entities formed beginning in 2024 from 30 to 90 days. The press release indicates this extension is intended to reporting companies created or registered in 2024 additional time to understand their regulatory obligations under the new reporting rule. I think this change will be helpful, if implemented.
Please refer to the excellent September 2023 article in SC Lawyer entitled, “The Basic Ins and Outs of the Corporate Transparency Act” by Matthew B. Edwards and D. Parker Baker III.
This article provides an analysis of the basics of the Act, which is intended to help prevent money laundering, terrorist financing, corruption, tax fraud and other illicit activities. Many entities will be required to report information concerning beneficial owners to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), identifying their beneficial owners and providing certain information about them.
The act may apply to virtually every commercial real estate transaction because of the use of multi-tier entity structures to achieve business objectives. Lawyers will need to review clients’ organizational structure charts to determine entity by entity whether an exemption is applicable. If not, organizational documents, stockholder agreements, operating agreements will have to be reviewed to determine beneficial ownership.
Reporting information will include the name, address, state of jurisdiction and taxpayer identification number of every beneficial owner. Other information may be required, such as passports and driver’s licenses. Penalties for failure to comply will include civil penalties of no more than $500 per day, fines of no more than $10,000 and imprisonment for no more than two years. A safe harbor is included for voluntarily and promptly correcting an inaccurate report within 90 days. FinCEN will issue rules prior the effective date.
Don’t panic. We have time. The effective date is January 1, 2024. For companies formed prior to the effective date, the initial report is due January 1, 2025. For companies formed on or after the effective date, the first report is due 30 days following formation. This new rule, if implemented, will change that time-frame to 90 days.
I think everyone’s initial advice as to new entities will be to refrain from forming those entities until the effects of the Act are analyzed. Existing entities will need to be analyzed pursuant to FinCEN’s rules.
Everyone will get through this together, and it’s likely that experts will emerge to help. This blog will keep you posted on new developments.
The new Corporate Transparency Act will apply to you and your clients!
This blog recently discussed the new Corporate Transparency Act. I’m repeating that blog in order to provide you with extra piece of information that should be helpful as you work to get ready for this new obligation of many clients. FinCen has recently published a compliance guide that you can read here.
Please refer to the excellent September 2023 article in SC Lawyer entitled, “The Basic Ins and Outs of the Corporate Transparency Act” by Matthew B. Edwards and D. Parker Baker III.
This article provides an analysis of the basics of the Act, which is intended to help prevent money laundering, terrorist financing, corruption, tax fraud and other illicit activities. Many entities will be required to report information concerning beneficial owners to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), identifying their beneficial owners and providing certain information about them.
The act may apply to virtually every commercial real estate transaction because of the use of multi-tier entity structures to achieve business objectives. Lawyers will need to review clients’ organizational structure charts to determine entity by entity whether an exemption is applicable. If not, organizational documents, stockholder agreements, operating agreements will have to be reviewed to determine beneficial ownership.
Reporting information will include the name, address, state of jurisdiction and taxpayer identification number of every beneficial owner. Other information may be required, such as passports and driver’s licenses. Penalties for failure to comply will include civil penalties of no more than $500 per day, fines of no more than $10,000 and imprisonment for no more than two years. A safe harbor is included for voluntarily and promptly correcting an inaccurate report within 90 days. FinCEN will issue rules prior the effective date.
Don’t panic. We have time. The effective date is January 1, 2024. For companies formed prior to the effective date, the initial report is due January 1, 2025. For companies formed on or after the effective date, the first report is due thirty days following formation.
I think everyone’s initial advice as to new entities will be to refrain from forming those entities until the effects of the Act are analyzed. Existing entities will need to be analyzed pursuant to FinCEN’s rules during 2024.
Everyone will get through this together, and it’s likely that experts will emerge to help.
The new Corporate Transparency Act will apply to you and your clients!
Please refer to the excellent September 2023 article in SC Lawyer entitled, “The Basic Ins and Outs of the Corporate Transparency Act” by Matthew B. Edwards and D. Parker Baker III.
This article provides an analysis of the basics of the Act, which is intended to help prevent money laundering, terrorist financing, corruption, tax fraud and other illicit activities. Many entities will be required to report information concerning beneficial owners to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), identifying their beneficial owners and providing certain information about them.
The act may apply to virtually every commercial real estate transaction because of the use of multi-tier entity structures to achieve business objectives. Lawyers will need to review clients’ organizational structure charts to determine entity by entity whether an exemption is applicable. If not, organizational documents, stockholder agreements, operating agreements will have to be reviewed to determine beneficial ownership.
Reporting information will include the name, address, state of jurisdiction and taxpayer identification number of every beneficial owner. Other information may be required, such as passports and driver’s licenses. Penalties for failure to comply will include civil penalties of no more than $500 per day, fines of no more than $10,000 and imprisonment for no more than two years. A safe harbor is included for voluntarily and promptly correcting an inaccurate report within 90 days. FinCEN will issue rules prior the effective date.
Don’t panic. We have time. The effective date is January 1, 2024. For companies formed prior to the effective date, the initial report is due January 1, 2025. For companies formed on or after the effective date, the first report is due thirty days following formation.
I think everyone’s initial advice as to new entities will be to refrain from forming those entities until the effects of the Act are analyzed. Existing entities will need to be analyzed pursuant to FinCEN’s rules during 2024.
Everyone will get through this together, and it’s likely that experts will emerge to help.
Last week, this blog discussed a real estate dispute between a developer and a 93-year-old great-great-grandmother in Hilton Head who said her husband’s family has owned the property since the Civil War. This week, we turn to a similar story in St. Helena Island.
NPR reported on August 3 that residents of St. Helena Island have banded together to protect the culture of the Gullah Geechee people from a golf course development. You can read NPR’s story here.
The story reports that St. Helena Island has a decade’s old zoning ordinance that bans golf courses, resorts and gated communities, which the Gullah Geechee people say threaten their existence. Direct descendants of slaves have farmed and fished St. Helena Island for nearly 200 years, using their own language, culture and traditions.
NPR reports that developer Elvio Tropeano purchased 500 acres and wants to build a golf course despite the zoning ordinance. He contends the golf course would benefit the community by allowing public access and attracting visitors who would become educated about the Gullah Geechee people and spend funds that would support their culture. If he is unable to build the golf course, he threatens to build more than 160 luxury homes. According to the NPR story, some locals believe the subdivision would be worse than the golf course. They prefer to have the land sustained the way it is, unspoiled and resilient.
These stories are certainly not the first South Carolina tales we have heard about disputes between locals and developers and pressures on “heirs property” and other undeveloped, pristine real estate. The pressures seem to be building!
On July 12, South Carolina’s Court of Appeals issued an opinion* in favor of multiple property owners in a railroad abandonment case.
The properties at issue abutted a 24-mile railroad line extending from McCormick County to Abbeville County. In 1878, the State chartered the Savannah Valley Railroad Company (SVR) to construct the railroad. Prior title holders granted SVR easements to allow the construction and operation of the railroad. The documents stated the easements would be void in the event the railroad was not erected and established. Each successive title holders’ deed was subject to the easements. SVR conveyed its interest to Seaboard Coastline Railroad Company.
In the late 1970’s Seaboard decided to close the track and seek permission from the Interstate Commerce Commission (ICC) to abandon the line. The ICC granted the request in 1970. The company wrote a letter to the ICC dated February 25, 1980, indicating the track was abandoned as of February 15, 1980.
Calhoun Falls and Savannah Valley Trails (SVT) were the ultimate owners of the railroad’s interests. When SVT began to construct a walking trail on the former line, property owners adjoining the line in McCormick County filed suit in 2016 seeking a declaratory judgment that the properties reverted to them when the track was abandoned. Abbeville County property owners filed a similar suit in 2018.
The trial court issued two orders finding (1) the railroad abandoned the line; (2) when the railroad abandoned the line, the easements were terminated, and the property rights reverted to the adjoining title holders; and (3) the doctrine of laches did not bar the property owners’ claims.
SVT argued on appeal that the trial court lacked subject matter jurisdiction because the abandonment failed to follow the details of the ICC order. The Court of Appeals disagreed, holding that SVT had the burden of proving the railroad’s abandonment was incomplete and failed to meet that burden.
SVT also argued on appeal that laches barred the property owners’ claims. The Court of Appeals noted that SVT failed to plead laches as an affirmative defense, and that the trial court could have declined to address the issue. But, ultimately, the appeals court agreed with the lower court that SVT failed to present evidence that would equip the trial court to make a finding of prejudice to support the laches claim.
Finally, SVT argued that the trial court erred in finding the railroad had abandoned the line. The Court of Appeals noted that the railroad ceased operations, sought permission for abandonment from the ICC, removed the tracks, and transferred its property interests. Further, nothing in the record showed that the railroad failed to comply with the requirements of the ICC. Citing prior cases, the Court stated that to rule otherwise would gut the longstanding rule that an easement is extinguished when the railroad abandons the right of way for railroad purposes.
As a dirt lawyer, I like this opinion! If you run into railroad abandonment issues in your chains of title, consult your friendly, intelligent title company underwriters.
*Myers v. Town of Calhoun Falls, South Carolina Court of Appeals Opinion 5998 (July 12, 2023)
In May, this blog discussed Ani Creation, Inc. v. City of Myrtle Beach,* a case where the South Carolina Supreme Court upheld an ordinance that imposed a zoning overlay district intended to bolster the “family friendly” nature of Myrtle Beach’s historic downtown area. The ordinance targeted smoke shops and tobacco stores and the merchandizing of tobacco paraphernalia, products containing CBD, and sexually oriented material.
The opinion begins, “The City of Myrtle Beach (the city) is a town economically driven and funded by tourism.” The facts indicate that the city received frequent criticism from tourists and residents that the proliferation of smoke shops and tobacco stores repelled families from the area. The city passed a comprehensive plan that aimed at increasing tourism and concluded that all businesses needed to encourage and support a “family beach image”. The city passed an ordinance which created a zoning overlay district known as the Ocean Boulevard Entertainment Overlay District that encompassed the historic downtown area.
The prohibited uses in the district were declared immediately nonconforming when the ordinance was passed on August 14, 2018, but an amortization period was allowed which gave affected businesses until December 31, 2019, to cease the nonconforming portions of their businesses.
The zoning administrator issued citations to the nonconforming businesses. Nine of the 25 affected stories appealed to the Board of Zoning Appeals which found (1) it did not have jurisdiction to declare the ordinance unconstitutional; (2) it could not grant a use variance because it would allow the continuation of a use not otherwise allowed in the district; and (3) the businesses were engaged in one or more of the prohibited uses. On appeal, the circuit court affirmed the Board’s opinion, finding the appellants’ 25 grounds for challenging the ordinance meritless. The businesses appealed directly to the South Carolina Supreme Court.
The appellants raised a “host” of constitutional and procedural challenges, all of which fell on deaf ears at the Supreme Court. The Court held that the ordinance was a valid exercise of the city’s police powers. According to the Court, municipal governing bodies clothed with authority to determine residential and industrial districts are better qualified by their knowledge of the situation to act upon such matters than are the courts, and they will not be interfered with in the exercise of their police power to accomplish their desired end unless there is a pain violation of the constitutional rights of the citizens.
The Appellants petitioned for a rehearing and in an opinion re-filed on June 28, the court again affirmed the Court of Appeals.
A comment on the Dirt Listserv said, “S. Carolina is OK with cancel culture after all.” A store selling sexually oriented materials was removed from Garners Ferry Road in Columbia (about three miles from my house) using similar legal arguments. I was delighted to see that store torn down before I had to explain it to my grandchildren! But I do understand the “cancel culture” argument. What do you think?
Court of Appeals reverses Circuit Court on this issue
In Rivers v. Smith*, South Carolina’s Court of Appeals reversed Orangeburg County’s Circuit Court order affirming a magistrate’s order of eviction.
Rufus Rivers and Merle Rivers have lived on property once owned by Jessie Mae Smith since 2009, although there was no record of a written lease. In 2013, Jessie Mae Smith signed a power of attorney in favor of her son, James Smith. In 2014, James Smith conveyed his mother’s property to himself by quitclaim deed using the power of attorney.
(The opinion contains no discussion of whether the conveyance of the property by the attorney in fact to himself was a valid transfer, but that would have been my first question.)
Jessie Mae Smith died in 2016. In 2018, James Smith sent the Rivers a letter demanding they vacate the property within 30 days. The Rivers refused. They asked James to cease and desist his efforts to displace them. They argued that James had an invalid power of attorney and alleged he had breached fiduciary duties. Competing lawsuits followed.
The Rivers’ lawsuit in the Circuit Court challenged James’ ownership of the property and alleged constructive fraud, unjust enrichment and other causes of action. The Rivers amended their complaint, alleging that James used an invalid power of attorney and that Jessie Mae Smith had orally given or promised the property to the Rivers.
James filed the subject case in the magistrate court, seeking eviction. The Rivers made various arguments to the magistrate opposing the eviction, including alleging that Jessie Mae Smith had promised the property to them. The Rivers also alerted the magistrate of their claims against James Smith in the circuit court.
James Smith’s main argument to the magistrate centered around the statute of limitations because the alleged gift would have occurred more than three years before the lawsuits were brought. The magistrate ruled that James Smith was the lawful owner of the property and ordered eviction.
On a motion by the Rivers to reconsider, the magistrate found that the case did not involve a question of title and that she had jurisdiction to hear the case. The circuit court affirmed, and this appeal followed.
The issue on appeal was whether South Carolina Code §22-3-20(2), which bars a magistrate from hearing a case when title to the property is in question, prohibited the magistrate from hearing this case.
The Court of Appeals acknowledged that Smith has defenses to Rivers’ claims, and that those defenses may be valid ones, but held that the magistrate’s jurisdiction ended as soon as it became clear that there was a challenge to title. The opinion further stated that the case may end in a second and successful eviction, but they refused to say that outcome is certain.
I will be curious to learn what the future holds in the litigation between these parties. I hope the property is worth the litigation, and I note with interest that the Rivers represented themselves pro se in the subject case.
*South Carolina Court of Appeals Opinion 5992 (June 21, 2023)
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