Dear History, please stop repeating yourself!

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Hurricane Irma is the third disaster in two years for South Carolina

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Hurricane Irma is the third disaster to pummel our beloved state since this blog was launched in 2014. After the 1,000 year flood in October of 2015, Hurricane Matthew struck in October of 2016. Rebuilding is not complete from either catastrophe.

On my way to work this morning, I passed the remains of several businesses that were destroyed when Gills Creek flooded in 2015. Thankfully, I heard recently that Richland County is about to purchase those properties to turn them into green spaces. Other areas in and around Columbia are still in the rebuilding process or have been completely abandoned. Many homeowners have made their homes bigger, stronger and certainly taller. Others have given up and moved away.

Enter Irma. A friend joked on Facebook that we’re lucky here in South Carolina Irma passed us by. You would never know it passed us by from the many feet of water we’re seeing in pictures of Charleston, Beaufort, Hilton Head, Georgetown, Garden City and surrounding areas. And the pictures and video coming from Florida and the Caribbean, not to mention the pictures and video coming from the Hurricane Harvey disaster in Texas and Louisiana, all show unspeakable damage.

Our company’s home office is located in Jacksonville where surrounding streets are under water. Employees with power are trying to work remotely. Others are out of commission.

A wise man in our building here in Columbia said to me this morning that these disasters bring out the best and the worst in folks. There are looters, but there are many more heroes who have rescued their neighbors in boats. There are neighborhoods without power who are gathering in their streets for impromptu block parties. Chainsaws are chopping downed trees. Supplies and helping hands are being donated. Celebrities and charities are raising millions. I’d like to believe that we’re seeing much more good than bad in people.

Our hearts are breaking for those who have lost so much. Rebuilding will take time, resources and patience. Many have lost everything and are without insurance coverage. Millions are without power and water. Many are in shock.

Dirt lawyers are in an exceptional position to support clients who may not be familiar with the assistance available to them. We have all learned a lot in the last few years. I challenge each of us to continue to educate ourselves and to be available to offer the valuable advice our neighbors and others will need in the days ahead. Local, state and federal governments seem better prepared this time around and seem to be working better to coordinate efforts. Here is a link to the South Carolina Bar’s Key Assistance Numbers. South Carolinians are strong and resilient, and we are stronger and more resilient now than we were for the last disaster.

Let’s once again rise to the occasion, real estate lawyers, and provide the best advice available for our clients and friends who will need it as they sort out, clean up and rebuild.

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Feds extend footprint of shell game again

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Will this obligation eventually extend to South Carolina?

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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.

In early 2016, 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.

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.

By order effective August 28, 2016, all title insurance underwriters, in addition to their affiliates and agents, were required to be involved in the reporting process, and the footprint of the project was extended.

The targeted areas and their price thresholds as of August 28, 2016 were:

  • 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.

By order effective September 22, 2017, wire transfers were included, and the footprint of the project will include transactions over $3 million in the city and county of Honolulu, Hawaii.

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. The current order extends through March 20, 2018.

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

The Episcopal Church case is out; It will take more than faith to deed, mortgage and insure church properties

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Today, I am thankful to be a real estate lawyer. As I attempt to decipher the South Carolina Supreme Court’s 77-page opinion involving the Episcopal Church published on August 2,* my mission is limited to the real estate issues.

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, but I am attempting here to boil those issues down to a manageable few words for all of us.

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

 

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.  I assume a petition for rehearing will ensue as well as an appeal to the United States Supreme Court. Nothing is settled at this point. Let’s not try to insure these titles anytime soon.

The controversy began five years ago when 39 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.

Wednesday’s ruling upholds 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. It also orders the breakaway group to return 29 properties to the national church. Seven parishes may maintain their independence.

The position of the properties turns on whether the local parishes agreed to be bound by the “Dennis Canon” which was enacted in 1979 and provided, in effect, that real property of a parish is held in trust for the national church and the local Diocese, subject to the power of the local parish over the property, so long as the parish remains a part of the national church and Diocese. No evidence was found in the records of the seven parishes that those parishes ever agreed to be bound by the Dennis Canon. The other 29 properties were the subject of documentation to the effect that the local churches intended to hold the property in trust for the denomination. The opinion did not uphold the Dennis Canon in and of itself. Explicit recognition of the Canon was required.

That, in short, is the impact of the 77-page opinion on real estate lawyers. We will need to watch for a possible rehearing, appeal periods and a potential settlement. In the meantime, we will sit tight and not involve ourselves in sales and mortgages of these properties.

Now that I’ve had a chance to think about it, I am always thankful to be 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.

The Quicken decision is out

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It’s not what dirt lawyers wanted or expected

The South Carolina Supreme Court never ceases to amaze when it decides real estate cases. Dirt lawyers seldom know what to expect. We read the precedents. We attend the hearings. We listen to the Justices’ questions. We believe we get a glimpse of what they may be thinking. But we miss the mark. Last week, the South Carolina Supreme Court decided the much anticipated Quicken case*, and if I had predicted the top five possible outcomes, I would not have come close to the actual decision.

I fully expected a 3-2 decision in either direction. But it is a 5-0 strongly written decision. It is a decision that was written to dispose of the controversy. It is a decision that was written to deny the possibility of reconsideration.

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This is an unauthorized practice of law case brought in the Court’s original jurisdiction. The case was assigned to Circuit Court Judge Diane Goodstein as Special Referee to take evidence and issue a report. Judge Goodstein held a two-week trial and issued a report finding, essentially, that no South Carolina licensed lawyer quarterbacked (my word) the mostly Internet-based residential refinance closings. In the facts recited in Judge Goodstein’s report, lawyers were peripherally involved in all of the steps required by State v. Buyers Service Co.** and its progeny, but no lawyer was actually involved in a way that the interest of the borrower was protected.

(Summarizing the prior decisions, the steps requiring lawyers are: (1) document preparation; (2) title search; (3) closing; (4) recording; and (5) disbursement.)

The Supreme Court somehow reviewed the same record and found that lawyers were involved and used their professional judgment in each step. The facts recited in the Court’s decision were not recognizable from the facts recited by Judge Goodstein’s report. The Court completely rejected the report and apparently decided that a finding of UPL under the circumstances would “mark an unwise and unnecessary intrusion into the marketplace”. “Simply put,” the Court stated, “we believe requiring more attorney involvement in cases such as this would belie the Court’s oft-stated assertion that UPL rules exist to protect the public, not lawyers.”

Most South Carolina dirt lawyers were hoping the Court would find a South Carolina licensed lawyer must be at the center of each closing, overseeing each step, and insuring that the consumer client’s interests were protected in each step. That is definitely not what we got.

There is, however, some good news in this decision. The Court made the clearest implication to date (without an explicit holding) that Buyers Service and its progeny may not apply in the commercial arena. The Court repeatedly stated that the context of this case is the residential refinance arena. I have discussed this case with several commercial lawyers to ascertain whether they are now comfortable to forego certifications that other South Carolina licensed lawyers are involved in the closing steps that are not under their control. They seem to feel slightly more comfortable, but not comfortable enough to let go of that step. Perhaps the passage of time will help.

Other good news is that, despite the facts recited by Judge Goodstein to the contrary, the Court clearly stated that lawyers were involved and used their professional judgment in each required step. The out-of-state entities who do business here should make sure their processes include this professional judgment in each step of the closing.

After reading this case a dozen times, I’ve decided that no law has changed. Nothing will change in our local processes. Nothing will likely change dramatically in the processes of the out-of-state entities who do business here. If I had not read Judge Goodstein’s report and if I had not attended the Supreme Court’s hearing, I would probably not be shocked with this result.

I would love hear what you think.

*Boone v. Quicken Loans, Inc., South Carolina Supreme Court Opinion 27727, July 19, 2017

** State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987)

The Carolinas are basketball states!

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(And states dealing with a “clarified” boundary)

Congratulations to the University of North Carolina on last night’s win in the Men’s College Basketball National Championship!  North Carolina has always been a basketball state, and our hats are off to you!  Our Gamecocks made it to the Final Four for the first time ever, so both states are proud of their men’s basketball teams!  And congratulations to our Gamecock women who won their National Championship on Sunday!  We love seeing that flag fly over our statehouse! Both Carolinas are apparently now basketball states!

We are also states with a newly defined boundary line between us. The long awaited and much debated legislation “clarifying the original location the boundary” became effective on January 1, 2017, and both states are dealing with the ramifications of the legislation.

Some parcels previously believed to be in South Carolina are now confirmed to be in North Carolina and vice versa. Both legislatures insist that the boundary has not changed, but that since markers have been lost or destroyed by the elements, it was necessary to have the boundary researched and resurveyed. (If they had taken the position that the boundary line was being moved, they would have had to involve Congress.)

South Carolina real estate lawyers have been advised to consult with their title insurance companies for guidance as they deal with affected properties. In North Carolina, however, the Real Property Section of the Bar and the Land Title Association have issued a lengthy memorandum, dated March 20, 2017, to provide guidance to North Carolina lawyers. I thought this memorandum might be useful to point out the various issues to South Carolina lawyers and link it here.

The best advice I can give all of us dealing with issues surrounding this change is to proceed slowly and with due diligence, consulting your title insurance company underwriters every step of the way!

Statute of Elizabeth case provides important reminders

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Conveyance to an LLC is set aside

A recent South Carolina Court of Appeals case* affirmed a Circuit Court order that set aside a conveyance under the Statute of Elizabeth. This is yet another tale of woe from the economic downturn.

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Kenneth Clifton was a successful real estate developer who commonly purchased investment property in his own name. When he developed property, he transferred his interest to a limited liability company (LLC). He organized more than forty LLCs during his career.

In 1993, Clifton and Linda Whiteman purchased approximately 370 acres in Laurens County in their individual names as tenants in common.

Clifton routinely borrowed money from lenders to finance his developments. At issue in this case were three loans from First Citizens Bank totaling around $4 million. These loans were renewed over the years as Clifton made progress payments.

When the real estate market slowed in 2008, Clifton sought additional extensions for two of the loans. First Citizens asked for a personal financial statement. Clifton’s financial statement claimed a net worth of $50 million with real estate comprising over $48 million. The subject 370 acres in Laurens was included. The statement stated Clifton owned a 50% unencumbered interest valued at approximately $1.5 million. Relying on this financial statement, First Citizens renewed the loans to mature in 2009.

Later in 2008, Clifton requested an extension on the third loan. Just prior to receiving the extension, Clifton and Whiteman transferred their interests in the property to Park at Durbin Creek, LLC (PDC). Clifton testified that he and Whiteman chose to transfer this property to PDC over Whiteman’s concern about personal liability because the property was being leased to third parties for recreational hunting purposes. All three loans were extended to mature in 2009.

Clifton failed to make payments, to provide a business plan or to secure additional collateral. First Citizens initiated foreclosure proceedings in February of 2009 and eventually secured a deficiency judgment of $745,000 against him.

During the foreclosure proceedings, Clifton and his daughters entered into an assignment agreement resulting in a transfer by Clifton in PDC to Streamline, an LLC that was nonexistent on the date of the transfer but whose members, upon creation, were Clifton’s daughters and ex-wife.

In 2010, First Citizens initiated supplemental proceedings, but by this time, Clifton had no remaining assets. First Citizens began this case under the Statute of Elizabeth (S.C. Code §27-23-10), alleging causes of action for fraudulent conveyance, civil conspiracy and partition.

court money 2The Circuit Court found sufficient “badges of fraud” to infer Clifton possessed fraudulent intent when he transferred his 50% interest in the property to PDC.

This is the first valuable reminder from this case:  The conveyance to Streamline was held void ab initio because Streamline did not exist at the time of the conveyance. (Dirt lawyers, make sure your entities are properly created before you assist your clients in making conveyances to them!)

A second valuable reminder involves requirements concerning transfers of interests in member-managed LLCs like PDC. When Clifton attempted to transfer his interest in PDC to a separate LLC, he failed to obtain Whiteman’s consent. Section 33-44-404 (c)(7) of the South Carolina code states that, in a member-managed LLC, the admission of a new member requires the consent of all members. The lack of consent in this case would have invalided the transfer to streamline even if the transfer to PDC had been held valid. (Dirt lawyers, make sure you follow statutory procedures when dealing with transfers of interests in entities.)

The case then sets out a simple South Carolina primer on the Statute of Elizabeth. The statute provides:

Every gift, grant, alienation, bargain, transfer and conveyance of lands…for any intent or purpose to delay, hinder, or defraud creditors and others of their just and lawful actions, suits, debts, accounts, damages, penalties, and forfeitures must be deemed and taken…to be clearly and utterly void.

Citing earlier cases, the Court of Appeals stated that this statute can be used to set aside conveyances whether or not consideration is paid.

Where there is valuable consideration, the following element must be established:

  1. The transfer was made with the actual intent to defraud creditors;
  2. The grantor was indebted at the time of the transfer;
  3. The grantor’s intent is imputable to the grantee.

Where there is no valuable consideration, no actual intent to hinder or delay creditors is required. Instead, the transfer will be set aside if:

  1. The grantor was indebted to the plaintiff at the time of the transfer;
  2. The conveyance was voluntary; and
  3. The grantor failed to retain sufficient property to pay the indebtedness to the plaintiff at the time when the plaintiff seeks to collect the debt.

In this case, the Circuit Court found and both parties agreed that valuable consideration was paid. For that reason, First Citizens was required to prove that Clifton transferred the property with the intent to delay, hinder or defraud First Citizens.

Citing earlier cases again, the Court of Appeals stated that when a party denies fraudulent intent, as Clifton did, the creditor must prove “badges of fraud”. One badge of fraud may not create a presumption of fraud, but several badges of fraud does create the presumption.

Nine badges of fraud have been identified by our courts:

  1. The insolvency or indebtedness of the transferor;
  2. Lack of consideration for the conveyance;
  3. Relationship between the transferor and the transferee;
  4. The pendency or threat of litigation;
  5. Secrecy or concealment;
  6. Departure from the usual method of business;
  7. The transfer of the debtor’s entire estate;
  8. The reservation of benefit to the transferor; and
  9. The retention by the debtor of possession of the property.

The Court held that six of the nine badges of fraud were present in this case, resulting in a presumption of fraud. The Court next considered whether Clifton successfully rebutted the presumption. The Court concluded that Clifton wanted to protect the property from creditors, despite offering the legitimate reason for the transfer, that Whiteman was concerned about personal liability on hunting property.

Finally, the Court held that the invalidity of the conveyance of Clifton’s undivided 50% interest in the property does not invalidate Whiteman’s conveyance despite the fact that only one deed was used.

* First Citizens Bank and Trust Company, Inc. v. Park at Durbin Creek, LLC, South Carolina Court of Appeals Case 5469 (February 15, 2017)

Hot off the presses UPL case!

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(But it only affects real estate peripherally)

The South Carolina Supreme Court handed down a UPL decision in a declaratory judgment action in its original jurisdiction on February 22.*

The Court accepted the action to determine whether Community Management Group, LLC and its employees engaged in the unauthorized practice of law while managing homeowners’ associations. The Court found that the respondents did, in fact, engage in UPL. At the outset of the case, the Court had issued a temporary injunction halting the offending activities.

Community Management Group, without the involvement of an attorney, prepared and recorded notices of liens and related documents; brought actions in magistrates’ courts to collect debts; and filed the resulting judgments in circuit courts. The entity also advertised that it would perform these services “in house”.

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In a 1992 administrative order entitled In re Unauthorized Practice of Law Rules Proposed by South Carolina Bar**,  the Court had modified prior case law to allow a business to be represented by a non-lawyer officer, agent or employee. The Court had also promulgated South Carolina Magistrate Court Rule 21, which provides, “A business…may be represented in a civil magistrates’ court by a non-lawyer officer, agent or employee…”

The central question in the action at hand was whether the word “agent” in these authorities includes third party entities and individuals like Community Management Group and its employees. The Court held it does not and was never intended to.

The Court had earlier held that filing claims in probate courts does not amount to UPL, but stated in the present case that it is the character of the services rendered that determines whether the services constitute the practice of law. Filing claims in Probate Court, according to the Court, does not require the professional judgment, specialized knowledge or ability of an attorney. The Court found that the services required to represent a business in magistrates’ courts are not comparable to filing claims in probate courts.

Community Management Group conceded that it prepared a lien document for the purpose of putting a cloud on title so property could not be sold unless the homeowner paid overdue assessments. This stated purpose demonstrated to the Court that the lien documents were “instruments”, that is, written legal documents that define rights, duties, entitlements or liabilities.

Citing a 1987 case near and dear to the hearts of all South Carolina dirt lawyers, State v. Buyers Service***, the Court reminded us that preparing and recording legal documents is the practice of law.

This current case is a Per Curiam decision, but acting Justice Pleicones did not participate. We are holding our collective breath to learn the results of a Quicken Loan case pending in the original jurisdiction of the Court, and the present case may give us at least a small hint.

stay tunedWe have already received an underwriting question about this case in our office. We were asked whether our attorney agents can ignore the liens filed in contravention of this case. The answer is that we can discuss the specifics on a case-by-case basis, but it appears that although the liens may be invalidated by a court, dirt lawyers and title companies should not generally take this risk without the involvement of a court. If you run into this issue in connection with your closings, call your title insurance underwriter to discuss your options!

*Rogers Townsend & Thomas, PC v. Peck, South Carolina Supreme Court Opinion 27707 (February 22, 2017)

**309 S.C. 304, 422 S.E.2d 123 (1992)

***292 S.C. 286, 468 S.E.2d 290 (1987)