HOA foreclosures are being challenged on multiple levels in SC

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The HOA won in a recent Court of Appeals case

In January, I blogged about a Federal class action lawsuit filed in Charleston seeking to invalidate non-condo foreclosures by owners’ associations. You can read that blog here but the short version is that the suit challenges foreclosures on the grounds that these non-profit corporations don’t have the power to create liens for unpaid assessments prior to obtaining judicial judgments. Condominium associations established through the Horizontal Property Regime Act have statutory authority to create liens, but the power of non-condo projects is created by restrictive covenants. We’ll have to wait and see how that suit turns out, but if the plaintiffs there are successful, foreclosure practice will change drastically in South Carolina.

gavel house

Our Court of Appeals decided a case* on April 4th that could have made drastic changes in another way. In fact, Richland County’s Master-in-Equity, Joseph Strickland, stated in his order that “the practice of homeowners’ association foreclosures would effectively be eradicated if (the Plaintiffs’) position came to bear.”

This appeal was handled by the law office of my friend, Brian Boger, a Columbia lawyer and well-known champion of consumers’ rights. The appeal argued that the $3,036 successful bid “shocked the conscience” and violated equitable principles. The parties agreed that the home was valued at $128,000. There was a mortgage balance of $66,004, leaving equity of $61,996. The Hales did not argue that there were irregularities in foreclosure process, but instead argued that the low bid should have encouraged the Master to use his gavel to “do equity”.

Comparing the successful bid to their equity using the “Equity Method”, the Hales argued that the bid amounted to 4.8% of the fair market value of the property. The HOA argued, using the “Debt Method”, that the bid must be added to the senior mortgage balance to judge its sufficiency because the successful bidder would have to pay the senior mortgage to have good title. In this case, using the Debt Method, the bid amounted to 54.94% of the fair market value. The Court of Appeals agreed that the Debt Method was the proper method for considering a senior encumbrance in a foreclosure.

The Court found no South Carolina cases that expressly weighed the two methods of judging a bid, but pointed to prior cases that considered the amount of a senior mortgage in the determination and found a 3.15% bid sufficient. One reason the Court of Appeals prefers the Debt Method is that it will result in “fewer set asides”.  In other words, the Court of Appeals is not interested in upsetting the foreclosure practice applecart at this point.

Justice Lockemy dissented, stating that he thought it improper to give a judicial sale buyer credit for assuming a debt it is not legally required to pay. He said the Court’s decision could create a perverse circumstance where a judicial sale bidder purchases property for a de minimis amount simply to capitalize on rental revenue until the senior lienholder forecloses. The majority called this argument a solution in search of a problem because there was no evidence that the successful bidder in this case was engaged in such a scheme and because the successful bidder must satisfy the mortgage to obtain clear title.

Foreclosure practice in South Carolina remains the same…for now.

* Winrose Homeowners’ Association, Inc. v. Hale, South Carolina Court of Appeals Opinion 5549 (April 4, 2018)

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Federal class action seeks to invalidate non-condo HOA foreclosures

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Is there authority for these foreclosures under SC law…or not?

On January 9, a lawsuit was filed in the Federal Court in Charleston seeking to certify a class of plaintiffs who have faced foreclosure in situations where the Horizontal Property Regime Act was not involved. In other words, the properties are not condominiums and are not subject to the statutory scheme that establishes lien and foreclosure rights in owners’ associations. The power to foreclose these properties is supported only by restrictive covenants, that is, only by contract.

subdivision

The complaint refers to a good faith estimate that one-third of all South Carolinians own property subject to restrictive covenants establishing owners’ associations, and those associations manage more than $100 billion in assets. Many of the properties are separate lots of land in contrast to “slices of air” in condominium projects.

The defendants in this class action suit include five homeowners’ associations in various counties in South Carolina, four law firms who represent the associations in their foreclosure actions, and five management companies who manage the business of the associations in various counties in South Carolina. All are said to be representative of the associations, law firms and management companies who do business across the state.

The class intends to exclude all associations governed by the Horizontal Property Regime Act. It also excludes employees, owners, officers, partners and management of the law firm and management defendants. The law firm and management defendants are alleged to be agents of the owners’ associations.

The main issue in the suit is whether non-condominium associations have the right to file liens and prosecute foreclosures for unpaid property assessments under South Carolina law. Underlying issues include whether the defendants have violated the Fair Debt Collection Practices Act, whether they have interfered with the plaintiffs’ contracts with their mortgage holders, and whether they have the power to lawfully evict homeowners for unpaid assessments.

The owners’ associations are typically established as non-profit corporations, and the suit questions whether non-profit corporations have the power to create liens for unpaid dues or assessments prior to obtaining judicial judgments.

The suit accuses the defendants of seeking to use the equitable remedy of foreclosure in actions that seek monetary damages for contractual breaches. The inability to use equitable remedies to collect money damages is well established in South Carolina law, according to the complaint. The complaint further states that the remedy of foreclosure is used to frighten the plaintiffs to settle their claims to avoid losing their homes.

The law firm defendants were accused of violating Professional Conduct Rule 3.3 by making deceitful arguments to courts. The law firms were also accused of demanding fees that are not proportionate to the hours devoted to the files in violation of Rule 1.5.

Threatening communications and pressure tactics are allegedly used to settle claims, typically without the advice of counsel because the amounts in controversy are often so small that the homeowners are unable to obtain legal counsel on a cost-effective basis. Typically, according to the complaint, holders of first mortgages are not named in the HOA foreclosures. The homeowners continue to be obligated to make their mortgage payments despite being evicted from their homes by their owners’ associations.

The first cause of action is violation of the Fair Debt Collection Practices Act on the theory that there is no right to use pre-suit liens or the equitable remedy of foreclosure by owners’ associations to collect damages in the form of past due assessments. The use of unjustified liens and foreclosures is alleged to constitute false, deceptive or misleading representations to collect debts.

The second cause of actions seeks a declaratory judgment that the activities of the defendants are unlawful. One point raised in this cause of action is that the homeowners are denied their statutory homestead exemption rights by the defendants’ actions.

The third cause of action is for intentional interference with the contractual relationship with the homeowners’ mortgage companies. The mortgage holders have a right to be named in actions that attempt to impair their interests in the subject properties, according to the complaint.

The complaint seeks actual, compensatory and consequential damages, in addition to punitive damages and attorneys’ fees. I can’t wait to see what happens with this one!

Despicable Acts: Absentee property owners can be targets of fraud

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Despicable acts

And real estate lawyers may be the best minions to prevent these crimes!

Imagine this scenario: Lucy Wilde’s family owns a farm in rural Orangeburg County, South Carolina. Since the sudden death of Lucy’s husband, Felonius Gru in 2007, no one has farmed the property. The fields are sitting fallow awaiting the opening of the estate and the division of the property among and Felonius’ heirs, including Lucy. The relatives have all fled small-town living to join the Anti-Villain League, so no one is available to literally mind the farm, and no one is in a hurry to settle the estate.

Enter Balthazar Bratt, a fraudster from Miami who sees the vacant property, searches the public records and learns the property is owned by the late Felonius Gru. Bratt also learns the property is ripe for development because it is located near the prime corridor between Charleston and Columbia, and very near Interstate access.

How can Bratt take advantage of this scenario while the Anti-Villain League employed family members are not paying attention? Absentee owners of real property are often the targets of criminals who pose as true owners offering the property for sale or as collateral for a new loan. These fraudsters may sell or refinance the property and abscond with the sale proceeds or strip any equity in the property with a new loan. The true owner has no idea the property is the subject of a real estate transaction.

In our fictional account, if Bratt was able to ascertain through the public records that Felonius Gru was deceased, a good title examiner should be able to use the same sleuthing methods.  If rural Orangeburg County is not your stomping grounds, as we say in the South, you might hire a title examiner who does have experience in the locale. In small towns in South Carolina, people know each other!

Another tip to fight criminals like Bratt is to compare the mailing address provided by the seller or borrower to the tax bill. While this step may not help in an estate situation, it may very well reveal an absentee owner located in a different address than the one provided by the fraudster.  If the address is different from the address provided to you or the lender, send a letter to the address shown on the tax bill. Your letter might simply suggest that you are happy to be of service to the buyer in the transaction and that if the seller is unaware of the situation, he should have his attorney contact you. That letter should get the attention of an absentee and clueless property owner.

Another tip is to compare signatures of the seller or borrower against documents in the public records. While we are not expected to be handwriting experts, we can spot obvious forgeries. I remember a war story from long ago where one person signed in seven spots in a deed, for the five owners and the two witnesses. The alert closing attorney called an immediate halt to the potentially disastrous real estate transaction!

A well-known and well-used technique that often works is to obtain and carefully review picture identifications for everyone who signs documents in your office. Also, do not accept an assignment of proceeds. Make sure proceeds are paid to the seller or borrower of record only.

And finally, give yourself and your staff members permission to carefully and slowly consider every aspect of your closings. Staff members should be encouraged to be cautious and suspicious and to discuss their concerns with each other or with an attorney in the office.  If the closing attorney needs a sounding board, she should call her friendly title insurance company lawyer.  I can’t count the number of times someone has called me, explained a situation, and before I could even respond, said, “oh, that’s a problem, isn’t it?”

minions

Sometimes just explaining the situation out loud to another person makes the problems crystal clear!

Be careful out there!

Court of Appeals Refuses to ‘Horse Around’ with Zoning Appeals Decision.

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Will some Charleston carriage horses be evicted?

Condominium projects take on all shapes and sizes in beautiful, historic, downtown Charleston, where the population of tourists and residents increases daily.

An old historic house may maintain its white-columned exterior while housing four or six residential condominium units. The stately carriage house out back may be a separate unit. An office building may look like any other brick-façade four-story building from the exterior, but the interior may contain a courtyard complete with fountains, and each office may be an owned separately as a condominium unit. A residential lot may be subject to a restriction covenant that prohibits subdividing, but a creative developer may use a Horizontal Property Regime to create multiple units anyway.

But in a case decided on June 29, the Court of Appeals drew the line at a horse stable condo project that would have been created to resolve a zoning issue.*

horse carriageThe Charleston Board of Zoning Appeals had denied the application of Arkay for a special use exception to operate a carriage horse stable at 45 Pinckney Street in the historic City Market District. The property was located within 93.5 feet of a residential district, and the special exception required a separation of 100 feet.

To separate the “stabling activity” from the residential district, Arkay proposed an HPR to divide the building into two units. The rear portion of the building would house Unit A which would consist of six stalls in which the horses would be fed, groomed and stored. The front portion of the building would house Unit B which would consist of two offices and would be subject to an appurtenant easement for the benefit of Unit A for ingress and egress to Pinckney Street. Unit B would also be subject to a restrictive covenant prohibiting the use of that space as a stable.

Units A and B would be separated in the middle of the building by a common area consisting of two tack rooms, two restrooms, an area for customer waiting, and an area for customer loading and unloading. Because its horse stalls would be located 119 feet from the nearest residential zone, Arkay contended the stabling activity complied with the zoning ordinances separation requirement.

Arkay’s argument was based on the premise that the zoning ordinance’s use of the word “stable” described a use and not a physical structure. In rejecting this argument, the Board noted that only one building occupies 45 Pinckney Street, and the proposed HPR did not alter that circumstance. On appeal, the Circuit Court held that the separation requirement applied to the use, not the physical structure.

The Court of Appeals agreed with the Board, stating that the ordinance did not describe “uses” for the property but rather established prerequisites on how a stable must be configured and how it must operate to receive a special use exception. Because the building that would keep the horses encompasses the entire lot, the Court found that it is a stable for the purposes of the ordinance. Even though the horses would be kept in the rear of the building—and would be separated from the street by areas for customers, tack rooms, restrooms and offices—this does not change the building’s status as a stable, according to the Court.

Maybe the Supreme Court will see it another way, because who doesn’t love a horse-drawn carriage ride in historic Charleston?

 

*Arkay, LLC. v. City of Charleston, South Carolina Court of Appeals Opinion 5419, June 29, 2016.

Trulia’s Blog Paints a Rosy Picture of Housing in SC for 2016

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Charleston is identified as the second hottest market in the country! Columbia is seventh!

_SC FlagIt’s budget time for me and for many real estate professionals. We are reading everything we can uncover on economic forecasts, and for me, the focus is real estate in South Carolina. Today, an interesting blog entitled “Housing in 2016—hesitant households, costly coasts, and the bargain belt” popped up in my newsfeed in Facebook. The blog, dated December 3, was written by Ralph McLaughlin of Trulia, the online residential real estate site for buyers, sellers, renters and real estate professionals.

As a part of its annual forecast for housing, Trulia commissioned Harris Poll to conduct a survey in November of about 2,000 Americans concerning their hopes and fears on housing. The survey indicated that the American Dream of home ownership is alive and well and continues its resurgence since the economic downturn.  The blog states that the percentage of Americans who dream of owning a home is up 1 point to 75% and up 2 points among millennials to 80%. But 22% of Americans believe it will be harder to get a mortgage in 2016.

Hesitant households in the title of the article is a reference to the obstacles consumers perceive to buying a home:  down payments, credit history, qualifying for a mortgage and increasing home prices are the top four.

Costly coasts are the expensive metro markets in the West and Northeast. Trulia is expecting those markets to cool because affordability has decreased, homes are staying on the market longer, and saving for a down payment is taking decades. In addition, consumers in those markets are pessimistic about housing.

The good news for us in The Palmetto State is that we are located in the so-called bargain belt, the highly affordable markets in the Midwest and South, where the survey shows consumers are upbeat about housing and where Trulia is expecting growth housing.

Trulia also identifies ten markets with the strongest potential for growth in 2016, and two of them are ours:

  1. Grand Rapids, Wyoming
  2. Charleston, South Carolina
  3. Austin, Texas
  4. Baton Rouge, Louisiana
  5. San Antonio, Texas
  6. Colorado Springs, Colorado
  7. Columbia, South Carolina
  8. Riverside-San Bernardino, California
  9. Las Vegas, Nevada
  10. Tacoma, Washington

Everyone paying attention is aware that the Federal Reserve has expressed a commitment to raising interest rates either by the end of the year or early in 2016, and we have seen the stock market respond each time Janet Yellen speaks on this topic. But if this projection and others that indicate the market in South Carolina will be strong in 2016 are correct, we should expect a strong 2016. Perhaps by the end of the first quarter, we will begin to feel the worst of the TRID transition is behind us, and we will be ready to embrace the growth we are anticipating.  Let’s all look forward to the ride!