Court of Appeals affirms Circuit Court in “nefarious conduct” Awendaw annexation case

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In December of last year, this blog discussed a South Carolina Supreme Court case in which the Court called the Town of Awendaw’s annexation attempt “nefarious conduct”.* The case was remanded to the Court of Appeals, which affirmed the Circuit Court’s decision that the annexation attempt was void ab initio.**

The Town of Awendaw’s annexation of a ten-foot wide, 1.25 mile-long parcel of land within beautiful Francis Marion National Forest was challenged by two individuals and the South Carolina Coastal Conservation League.

The sole question before the Supreme Court last year was whether the challengers had standing to contest the annexation in a case where the “100 percent method” of annexation is used, meaning all property owners petition the municipality to have their property annexed.

The case involved three parcels of land serving as links in a chain necessary to satisfy the contiguity requirement of annexation. The first link is the ten-foot strip managed by the United States Forest Service. The second link is owned by the Mt. Nebo AME Church, and the third link is approximately 360 acres of unimproved real estate surrounded by the National Forest on three sides and owned by Defendant EBC, LLC.

In the fall of 2003, the Town sought to annex the ten-foot strip which required a petition signed by the Forest Service. Town representatives sent the Forest Service four letters seeking approval. Through verbal discussions, the Town learned the Forest Service was opposed to annexations because of their impact on the Service’s ability to conduct controlled fire burns. Additionally, the Forest Service indicated any petition would have to come from Washington, D.C., officials, a process that might take several years.

The Town annexed the property anyway in 2004, relying on a 1994 letter from a Forest Service representative, stating it had “no objection” to annexing several strips of property in the same vicinity. However, the Town had previously stated that it realized this letter was unclear.

In 2009, EBC, LLC requested that Awendaw annex its property, and the Town passed an ordinance annexing that property and simultaneously rezoning it as a “planned development” to permit residential and commercial development. In annexing the EBC property, the Town relied on the ten-foot National Forest strip as well as the church property. Without either component, there would be no contiguity and annexation would be impossible.

In November of 2009, the petitioners filed a complaint against the Town and EBC alleging, among other things, that the Town lacked authority to annex the ten-foot strip of National Forest property because the Forest Service never submitted an annexation petition. The Town and EBC moved for partial summary judgment contending the petitioners lacked standing and that the statute of limitations had run.

At trial, a surveyor testified that the 1994 Forest Service letter referred to a different strip of land. The Town’s administrator responded that the Town had used the 1994 letter at least seven times, and that he believed the letter incorporated the property in question. The petitioners testified they were concerned about potential harm caused by developing the property, including damage to unique species of animals. They testified that they were also concerned that the proposed development would threaten the Forest Service’s ability to conduct the controlled burns necessary to maintain the health of the forest.

The trial court found that the petitioners had standing and concluded that the annexations were void because the Town never received the required petition from the Forest Service. The Court of Appeals concluded that the petitioners lacked standing.

In analyzing the standing issue, the South Carolina Supreme Court discussed its prior cases that held “non-statutory parties” (meaning, non-property owners of the annexed properties) lacked standing to challenge a purportedly unauthorized annexation. Those cases, however, were premised on good faith attempts by annexing bodies, according to the Court.

The Supreme Court did not believe the General Assembly intended in establishing the statutory framework for annexation to preclude standing where there is a credible allegation that the annexing body engaged in “deceitful conduct”. The Court held that a party that can demonstrate the annexing body engaged in “nefarious conduct” has standing to challenge the annexation.

The Court also discussed the public importance exception to the standing rule. This exception states that standing may be found when an issue is of such public importance as to require its resolution for future guidance. The Court stated that the petitioners had satisfied the “future guidance” prong of the public importance exception because the Town had used the 1994 letter numerous times and fully intended to use it again.

The case was remanded to the Court of Appeals to address the Towns’ remaining arguments. The Court of Appeals, apparently noting the Supreme Court’s strong language and robust opinions, reversed course and affirmed the lower court’s ruling that the annexation was void.

 

*Vicary v. Town of Awendaw, South Carolina Supreme Court Opinion No. 27855 (December 19, 2018).

**South Carolina Court of Appeals Opinion No. 5645 (May 1, 2019).

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SC Supreme Court “debars” two lawyers for UPL violations

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Mortgage modification practices get out-of-state lawyers in trouble

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On April 24th, two out-of-state lawyers were debarred by the South Carolina Supreme Court.* If the word “debar” isn’t familiar to you, don’t feel alone. Miriam-Webster indicates the definition of the word, used in a legal sense is, “to bar from having or doing something.” Our Supreme Court uses the word to mean to preclude a lawyer from another state from practicing law or seeking any form of admission to practice law in South Carolina, including pro hac vici admission, without first obtaining an order of the Supreme Court.

What did these two lawyers do to cause the wrath of our Court? They were both involved in mortgage modification schemes in multiple states. Naderi was licensed in California and provided legal services operation as the Pacific National Law Center (PNLC).

Ochoa was previously licensed in Florida but was disbarred in 2018 for misconduct involving lack of competence, failure to keep clients’ property safe, and conduct involving dishonest, fraud, deceit, or misrepresentation. He operated a solo practice and entered into an agreement with a non-attorney owned company (NVA) to market his legal services on the internet. Through NVA’s advertisements, he specifically targeted South Carolina residents seeking to negotiate modifications of their home loans.

Let’s look at just one example of the activities of these lawyers from the Naderi case. The Court refers to this scenario as “The J. H. Matter.” In December of 2013, Naderi was hired by J.H. a South Carolina resident, homeowner and veteran, to assist him in negotiating a modification of his home loan. Individuals from PNLC assured J.H. that the firm could get his loan modified and decrease his mortgage payments by securing both a balance reduction and a lower interest rate. J.H. was promised that the firm would work diligently and return his telephone calls within 48 hours.

J.H. signed several forms provided by PNLC staff members, including an “Attorney Client Retainer Agreement” and a “Third Party Authorization and Release Form”. The release form permitted the lender to discuss the loan with PNLC. Naderi was specifically named as the individual permitted to discuss the loan on behalf of J.H., but, interestingly, the form listed Naderi’s title as “Paralegal”.

The retainer agreement provided that, in exchange for $2,995, PNLC would provide “legal services” including “representation…for negotiation and resolution of disputes with current lender(s) regarding the subject real property and mortgage loan(s).” But litigation services were excluded from the scope of representation.

The agreement also provided that the fees were not conditioned on the outcome of the case and restricted J.H.’s ability to cancel the agreement and seek a refund after five days. Disputes arising after five days were to be handled by the guidelines and standards adopted by the California Bar.

In January, February and March of 2014, J.H. made payments totaling $2,995 via counter deposits into PNLC’s bank account. PNLC staff members told J.H. not to worry, that the law firm would secure the loan modification, and his lender would not take his home. Shortly after making his last payment, J.H. began experiencing difficulties reaching anyone at PNLC. PNLC never obtained a loan modification or offered J.H. any other solutions.

J.H. received notice of a foreclosure hearing, but he was unable to reach anyone at PNLC. J.H. appeared by himself and eventually hired another lawyer to file bankruptcy.

J.H. testified that he was unaware of any contact PNLC made with his lender. He believed he had been scammed and thought the wrongdoer should be in jail or disbarred.

Other matters were similarly described in both cases. It sounds as if the services were to collect fees only, and not to, in fact, perform legal work. The fact that these schemes cause delays when homeowners are in trouble with their loans make them particularly egregious. Dirt lawyers who are legitimately licensed by the South Carolina Supreme Court should be aware of these schemes and should be in a position to advise clients to avoid them with a vengeance!

 

* In the Matter of Naderi, South Carolina Supreme Court Opinion 27881 (April 24, 2019); In the Matter of Ochoa, South Carolina Supreme Court Opinion 27881, (April 24, 2019).

Dirt Lawyers: beware of these assessor antics

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and be aware of a tool for fighting back!

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The South Carolina Bar maintains a great listserv for members of the Real Estate Practices Section through which lawyers can ask questions and share information via email. I recommend that South Carolina real estate practitioners join the section and the list. Both provide opportunities for staying in touch with fellow practitioners and keeping up with news and trends.

Recently, the list contained this entry from a wonderful practitioner in Myrtle Beach whose name I’m withholding from this blog:

“Good morning Listmates,

Is every County going through the same audit of principal residence discounts for their taxpayers? Or is it just in Horry County? I have run into multiple back-charged properties and even ran into one where it was back-charged between when we did the title search and when we recorded the Deed. (And, yes, the Assessor refused to abate the new bills for the new owner.)

So what we have now is that on any given day the assessor can back charge multiple years’ worth of taxes (and you know how big the discount is, so these bills aren’t tiny!) regardless of whether or not we have searched the title, whether the property is in foreclosure, or even whether or not the property owner is dead. (Yes – my situation involved a deceased person in foreclosure – who do I go after for that tax bill payment??)

Add to this that our title abstractors who update the title work prior to recording are looking for judgments, liens, Deeds, Mortgages….but they are not looking for new tax bills, because tax bills come out in the Fall, right? Not anymore.

I imagine the buyers who get stuck with these bills could make a title insurance claim, but ultimately that will come back to the attorney because we “missed it” and then the E&O premiums go up and the client is lost to us because we look incompetent.

I guess the moral of this story is to instruct your abstractors to check for taxes before recording any Deeds. If you have a seller on the hook at least you can get the taxes paid at the closing. (Or if you have a deceased foreclosed party, at least you’ll know before the next tax year…)”

Horry County is, of course, a vacation haven. Many, many homeowners use Horry County properties as second homes and investment properties. Primary resident discounts amount to the difference in a 6% and a 4% mileage rate, so, as the astute lawyer suggested in her e-mail to fellow real estate practitioners, the differences are “not tiny”. Thus, all the coastal counties are vigilant about policing the discounts for primary residents.

(I know a guy who lives in an interior county in North Carolina and owns a second home in the Outer Banks. He votes where his beach house is located and has his mail delivered there, resulting in multiple trips to retrieve the mail. I don’t know exactly how the North Carolina statute on the primary residence discount reads, but I don’t recommend this tactic without the advice of a tax expert.)

Luckily for us in South Carolina, the Palmetto Land Title Association worked on this problem several years ago. Teri Callen of our office was Legislative Chair of PLTA at a time when the Association lobbied to “fix” the situation outlined above.

The Association, through intense lobbying efforts, was able to obtain a statutory amendment to the effect that a tax bill is final and that a “surprise” change in the 4% eligibility would only result in a personal liability so as not to affect title to the real property.

Most buyers are protected because they are bona fide purchasers for value without notice. (The lawyer’s problem, above, with the deceased property owner in foreclosure might not see the benefit of the statute.) The amendment went into effect in 2016, and counties will typically withdraw their surprise tax bills when they are provided with the statutory language.

Section 12-43-220(c)(2)(vii) of the South Carolina code now reads:

“(A) if a person signs the certification, obtains the four percent assessment ratio, and is thereafter found not eligible, or thereafter loses eligibility and fails to notify the assessor within six months, a penalty is imposed equal to one hundred percent of the tax paid, plus interest on that amount at the rate of one-half of one percent a month, but in no case less than thirty dollars nor more than the current year’s taxes. This penalty and any interest are considered ad valorem taxes due of the property for the purposes of collection and enforcement.

(B) If property had undergone an assessable transfer of interest as provided pursuant to Section 12-37-3150 and the transferee is a bona fide purchaser for value without notice, penalties assessed pursuant to subsection (vii)(A) and the additional property taxes and late payment penalties are solely the personal liability of the transferor and do not constitute a lien on and are not enforceable against the property in the hands of the transferee…”

Thanks to Teri Callen and Palmetto Land Title Association for this statutory “fix”! If you are faced with the problem outlined in the email above, provide your assessor’s office with the statute and remind them that the Code does not allow a “re-do” of tax bills that affect third party purchasers.

Also, consider joining Palmetto Land Title Association. It fights for us!

Tax lien legislation signed by Governor McMaster

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Tax liens will no longer be filed locally when the system is implemented

tax-lien.jpgSouth Carolina Governor Henry McMaster signed tax lien legislation on March 28 that may change the way titles are examined.

The legislation, an amendment to South Carolina Code §12-54-122, is intended to allow the Department of Revenue (DOR) to implement a statewide system of filing and indexing tax liens centrally, that is, “accessible to the public over the internet or through other means”. Once the new system in in place, the clerks of court and registers of deeds will be relieved of their statutory obligation to maintain newly filed tax liens.

The stated effective date of the legislation is July 1, 2019, but nothing in the legislation sets a deadline for the DOR to act, and, in fact, the statute indicates the DOR “may” implement a statewide system.

The new law states that it is not to be construed as extending the effectiveness of a tax lien beyond ten years from the filing date, as set out in South Carolina Code §12-54-120.

When the new system is implemented, the law requires a notice to be posted in each county where liens are generally filed providing instructions on how to access the DOR’s tax lien database.

Interested in buying a pristine SC island near Charleston?

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The price is $15 million; and the buyer may not be able to develop it

The Charleston Post and Courier reported on March 9 that Long Island, a large, private island between James Island and Folly Beach off the coast of South Carolina is for sale. You can read the article here and the listing here.

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Long Island, SC. (Photo credit: The Post and Courier)

According to the article, the current owners would like to find a buyer who would put the land under a conservation easement.  This easement would purportedly fit well with Folly Beach’s recent efforts to stem development in vulnerable areas.

The listing indicates the size of the island is about 4,600 acres, including approximately 147 acres of high land, and touts views of Morris Island Lighthouse and the Arthur Ravenel, Jr. Bridge.

Called a once-in-a-lifetime opportunity for outdoor enthusiasts to own a unique slice of coastal paradise, the purchase would include an archaeological site eligible for The National Register of Historic Places featuring Civil War artifacts. On the west end of the island is Star Battery, an earthen fort used by Union Forces during the Civil War. The remains of a causeway that leads to nearby Oak Island and dates back to the Civil War, is said to be dry during low tide.

The listing states that the high land is potentially developable and would be an outdoor paradise for fly fishing, wildlife viewing, kayaking and paddle-boarding.

A 2014 article in Forbes states that the island contains an interior roadway providing access to all parts of the island including the archeological site, but it can only be reached by boat. This article indicates the price was $29 million in 2014. The Post and Courier article says the island is almost entirely undisturbed, with no electricity, water service or roads.

The Post and Courier article states that there was an attempt by a builder to develop this island in 1999 into more than 200 home sites. But the proposal would have required a new bridge, the plan for which was rejected.

A challenge now would be to convince a conservation organization to participate, considering the high price tag. The current owners would like to recoup as much of their investment as they can, while protecting the island, if possible, according to the article. It sounds like quite a challenge!

SC Court of Appeals takes a deep dive into developer duty case

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Was I’On Village’s developer obligated to convey specific amenities to the HOA?

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Photo courtesy of Iioncommunity.com

This case was called “convoluted” by our Court of Appeals, and I couldn’t agree more with that characterization! The February 27 decision involved I’On Village in Mt. Pleasant. * The community, founded in 1995, was named for the first mayor of the Town of Sullivan’s Island, Jacob Bond I’On and is a mixed use “new urbanist development”, meaning it consists of charming walkable neighborhoods containing a wide range of housing and job types.

At the heart of the case is the developer’s alleged promise to convey certain amenities in a residential community to the homeowners’ association. Specifically, homeowners allege the developers promised to convey a community dock and creekside park on a lot containing a boat ramp to the owners’ association but instead sold those amenities to a third party. The developers alleged that they promised to convey and did convey a “generic” community dock and creekside park to the association, but not the specific ones located on the boat ramp lot.

This blog will attempt to stay out of the weeds of this 27-page case in an effort to point out only those decisions of the Court that may be of interest to real estate practitioners.

Does a developer have a fiduciary relationship with the homeowners’ association and its members requiring it to convey common areas?

The Court’s answer is “yes”, but the duties of the developer should be determined by a careful reading of the restrictive covenants.

The developer had argued that the “business judgment” rule would control, and that absent a showing of bad faith, dishonesty or incompetence, the judgment of the developer should not be set aside in a judicial action. The Court rejected the argument that the business judgment rule precludes the existence of a fiduciary relationship. Citing an earlier case, the Court stated that the business judgment rule is compatible with the good faith requirement for fiduciaries.

The Court said a confidential or fiduciary relationship exists when one reposes a special confidence in another, so that the latter, in equity and good conscience, is bound to act in good faith with due regard to the interests of the one imposing the confidence.  Citing a second case, the Court said anyone acting in a fiduciary relationship shall not be permitted to make use of that relationship to benefit his own personal interests, specifically, a developer in control of an owners’ association may not make decisions that benefit the developer’s own interest at the expense of the association and its members.

However, the Court held, South Carolina precedent does not impose on developers a generic fiduciary duty to convey title to a subdivision’s common areas to the owners’ association in every case. Rather, the restrictive covenants of the subdivision controls. The Court decided that the record in the case did not support the duty of the developers to convey to the association the specific amenities demanded.

Does the after-acquired property doctrine apply to a recreational easement in South Carolina?

The Court’s answer is “no”.

In February of 2000, the developer conveyed to the owners’ association a “Recreational Easement and Agreement to Share Costs”. Curiously, the developer did not obtain title to the property in question until six months later. At trial, the circuit court issued an order declaring the document invalid and void ab initio.

The developer argued on appeal that the after-acquired property doctrine would have acted to ratify the easement when title was obtained, but the Court of Appeals, finding no South Carolina authority for the proposition that this doctrine applies to the grant of an easement, declined to apply the doctrine to the recreational easement in question.

 May a derivative action be filed by property owners when a developer-controlled owners’ association fails to protect the interests of the owners?

The Court’s answer is “maybe”, but only if the complaint properly outlines the efforts made by the owners to obtain the action sought from the board of directors of the association and the reasons for failure to obtain the action or for not making the effort. The pleadings in this case did not satisfy the “demand requirement” to the Court’s satisfaction nor did they allege facts indicating a demand on the board of directors would have been futile. So the Court rejected the derivative action.

Litigators may find fascinating long discussions about statutes of limitations in various causes of action, abuse of process, amalgamation of parties and awards of attorney’s fees, but I’m opting to spare dirt lawyers any discussion of those issues. Read the case if you find those issues captivating. This litigation is not over as the Court of Appeals remanded the case for consideration of several issues by the trial court. My guess is that we will probably visit this case again.

 *  Walbeck v. The I’On Company, LLC, South Carolina Court of Appeals Opinion 5588 (February 27, 2019)

We have a new attorney preference case

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…and dirt lawyers are not going to like it

The South Carolina Court of Appeals ruled recently in favor of Quicken Loans, Inc. in a foreclosure case where the defendants argued the lender was not entitled to foreclose because it had violated the attorney preference statute during the application process.* My friend and classmate, Special Referee James Martin Harvey, Jr., had granted partial summary judgment in favor of the defendants, and Quicken appealed.

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Quicken telephonically takes information for loan applications from borrowers, according to the recited facts. Quicken’s system prompts Quicken’s banker to ask the borrower: “Will the borrower select legal counsel to represent them in this transaction.” If the borrower responds “no”, the attorney preference form is populated to read, “I/We will not use the services of legal counsel.”  No list of acceptable closing attorneys is provided to borrowers who answer “no” to this question, and the file is sent to Quicken’s affiliate company, Title Source, Inc., which acts as settlement agent in the transaction and subcontracts with attorneys to perform the settlement services.

If the borrower answers “yes”, Quicken’s system populates the attorney preference form to read, “Please contact lender with preference.” The system does not allow an attorney’s name to be entered at this stage of the application process.

The borrowers in this case declined legal representation during the initial telephonic application process.

The Court of Appeals indicated the form used by Quicken is identical to the form promulgated by the South Carolina Department of Consumer Affairs (DOCA) except that Quicken’s form is prepopulated with responses. Like the DOCA form, Quicken’s form states, “I/We have been informed by the lender that I (we) have a right to select legal counsel to represent me (us) in all matters in this transaction relating to the closing of the loan.” Unlike the DOCA form, however, Part 1(a) of the Quicken form is prepopulated to read, “I/We will not use the services of legal counsel.”

Under Part 1(b) the Quicken form, like the DOCA form, initially states, “Having been informed of this right, and having no preference, I asked for assistance from the lender and was referred to a list of acceptable attorneys. From that list I select…” Unlike the DOCA form, which provides blank lines to fill in an attorney’s name and the borrower’s signature, the Quicken form is prepopulated with the response, “Not Applicable.”

Quicken produced the affidavit of closing attorney Carlton D. Robinson, who said it was his practice to explain the legal effect of the attorney preference to borrowers and that he would not have closed if the borrowers had expressed any dissatisfaction with having him act as closing attorney.

The Attorney Preference Statute (S.C. Code §37-10-102(a) provides that when the primary purpose of a loan secured by real estate is for personal, family or household purpose, the creditor must ascertain prior to closing the preference of the borrower as to the legal counsel employed to represent the borrower in the closing. The purpose of this statute is to protect consumers.

DOCA filed an Amicus Brief arguing that Quicken had violated the statute. The Court of Appeals held that Quicken complied with the statute because an agent of Quicken asked the borrowers if they would be using preferred legal counsel and only populated the form after the borrowers responded that they did not have counsel of preference. Quicken sent the form to the borrowers, who signed and returned it without asking further questions.

Will the Supreme Court agree with the Court of Appeals given the opportunity? My guess that the current Justices will agree. My guess would have been different before the retirement of Chief Justice Jean Toal. Will the legislature tighten the language of the statute? That is always a possibility, but we have heard nothing on that front to date. I hate to be the bearer of such bad news for South Carolina real estate practitioners.

*Quicken Loans, Inc. v. Wilson, South Carolina Court of Appeals Opinion No. 5613, January 9, 2019.