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)

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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)

Can you be sure your real estate agent is not a serial killer?

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Maybe not! A recent South Carolina arrest brings this terrifying issue to light. Consumers visit houses accompanied only by real estate agents in South Carolina every day. Is this practice safe?

In November, Todd Kohlhepp was arrested in connection with the deaths of three individuals whose bodies were found on his property in Woodruff. Investigators were on his property near Wofford Road when they heard banging. They found a kidnap victim alive inside a large metal container “chained like a dog”. The victim had been missing for two months.

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Todd Kohlhepp – photo by myfox8.com

Kohlhepp was charged with three counts of murder, three counts of possession of a weapon during the commission of a violent crime, and one count of kidnapping. Kohlhepp is also alleged to be connected with four slayings in 2003 at Superbike Motorsports in Spartanburg.

Kohlhepp was a South Carolina licensed real estate agent. Real estate agents in South Carolina are licensed by the Department of Labor, Licensing and Regulation (LLR). A November 7 “Housing Wire” article asks how Kohlhepp got his license. The article quotes a prior article in “FOX Carolina” to the effect that LLR had stated Kohlhepp applied for a real estate license in 2006.

A background check was not required for the application. LLR’s website indicates an applicant who has been convicted or a crime must reveal that fact on the application and that the Real Estate Commission may review the application and conduct an investigation which may result in a delay in processing.

Kohlhepp had, in fact, been convicted of a 1986 kidnapping and rape in Arizona and had served 15 years in prison. But on his LLR application, according to FOX Carolina, he explained:

“I entered into a verbal agreement with my girlfriend who was also 15 at the time. I was charged with felony kidnapping due to the fact that I did have a firearm on me.”

He obtained the license and eventually established a firm of twelve agents and a reputation for being successful, professional, out-going and hard working. He was called a great salesman. He looked the part! He dressed well. He drove expensive cars.

What’s the lesson here? Consumers should eunderstand that a real estate agent’s license is no indication that the person who shows a home is honest and trustworthy.  Paying proper respect to the many, many wonderful real estate agents I know, however, it should be noted that we have seen cases in other parts of the country where real estate agents were harmed by their clients.

Unfortunately, for both sides of this equation, caution should be exercised in these situations of one-on-one contact with strangers in confined locations. Ask your friends for referrals. Do some on-line digging about the person you are about to meet. Take a business associate. Take a friend. Take your scary-looking cousin. Shoot, take your whole family. Schedule meetings during daylight hours. Let your business associates, friends and family know where you are, who you are with and how long you should be there. Keep your cell phone in your hand.

The good news is that this particular former real estate agent, who has confessed to the crimes, is likely to be off the streets permanently.

A little mundane, but useful, information for your New Year

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York County’s Register of Deeds office recently informed local dirt lawyers that it will begin using a new system on January 23. The new system will require labels containing recording information to be attached to recorded documents.

This County will require a three-inch margin at the top or bottom of the front page of each recorded document. Documents that do not meet the margin requirement may be rejected because the label may conceal a portion of the document.

I am confident York County lawyers are informed of this development but wanted to get the word out to the remainder of the state to benefit lawyers who may handle a transaction in that County from time to time.

SC residential tax breaks are “two ships in the night”

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“Ships that pass in the night, and speak each other in passing, only a signal shown, and a distant voice in the darkness”  – Longfellow

Tax cases can be complicated, but this one seems relatively simple. The South Carolina Court of Appeals held in late December that the homestead exemption and the primary residence (4%) classification are two entirely separate matters*.

The taxpayer, Frank Mead, turned sixty-five in 2004 and received the homestead exemption from 2005 to 2010 on his home located in beautiful Hilton Head Island. In 2011, he had a brilliant idea and rented his home for 138 days during which he traveled part of the time and stayed in a rental apartment the remainder of the time.

The Beaufort County Tax Assessor didn’t approve of Mr. Mead’s brilliant idea. She revoked the homestead exemption for 2011 on the theory that he no longer qualified because he rented his home for more than fourteen days.  Mr. Mead believed the fourteen-day limitation applied only to the primary residence (4%) classification and appealed to the Beaufort County Tax Equalization Board.

He lost in that forum but then appealed to the Administrative Law Court. The ALC found for Mr. Mead and determined that the homestead exemption and the primary residence classification are “two ships in the night” with different requirements. The Tax Assessor appealed to the Court of Appeals.  The issue was whether the homestead exemption under §12-37-250 of the South Carolina Code is available only to property that also qualifies for the preferential residential assessment ration set out in §12-43-220(c).

Section 12-37-250 provides for a homestead exemption for a person sixty-five or older when that person has been a resident of South Carolina for at least one year. Section 12-43-220(c) provides for a special property tax assessment ratio of 4% (as opposed to the normal 6%) for owner occupied legal residences.

To make the matter a little more complicated, but more advantageous to the taxpayer, the assessment ratio statute further provides that the owner-occupant of a legal residence is not disqualified from receiving the 4% classification if the requirements of Internal Revenue Code §280A(f)[2] as defined in section 12-6-40 (A), meaning the property may be rented for less than fifteen days.

The Court of Appeals noted that nothing in the homestead exemption statute makes reference to the primary residence classification statute and that the 14-day rule applies only to the four percent assessment ratio. Simple, right? Not quite so simple: interestingly, the Department of Revenue had taken the same position in a 1997 memorandum that the Tax Assessor in this case took, but withdrew that memorandum two years later.

For now, the rules are separate and distinct, and the taxpayer wins!