Will 2023 be a “normal” year in real estate?

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The “Greenville Business Magazine” published an article on January 27 that should interest all dirt lawyers. The article, written by David Caraviello, is entitled, “Leaving the Frenzy Behind: Could 2023 Be a More ‘Normal’ Year in South Carolina’s Real Estate Market?” You can read the article in its entirety here.

The article outlines the frenzy of the 2022 real estate market in South Carolina which culminated in an acute inventory shortage. While industry leaders budgeted for 2023, they wondered whether home prices would plummet because of rising interest rates. The national picture may be bleak because of these factors, but the article points out that experts do not foresee a gloom-and-doom scenario for South Carolina.

I’ve seen several news sources recently, including this one, pointing out that South Carolina is a primary destination for consumers looking for milder winters and following jobs at BMW, Volvo, and other companies. The market does not look dismal for us.

Please take a minute to read the article. To some real estate professionals, it says, the scenario entering 2023 sounds “refreshingly normal,” although we may have forgotten what normal is.

Perhaps 2023 will return to the ordinary seasonal ebbs and flows to which law firms can adapt from a staffing and other cost standpoint. Maybe everyone will be able to take a vacation this year. Let’s hope so! Good luck out there!

MV Realty sued by Florida Attorney General

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This blog has previously discussed MV Realty PBC, LLC. South Carolina title examiners report they are discovering “Homeowner Benefit Agreements” or “Exclusive Listing Agreements” filed in the public records as mortgages or memoranda of agreement. The duration of the agreements purport to be forty years, and quick search revealed hundreds of these unusual documents filed in several South Carolina counties. The documents indicate that they create liens against the real estate in question.

The company behind these documents is MV Realty PBC, LLC which appears to be doing business in the Palmetto State as MV Realty of South Carolina, LLC. The company’s website indicates the company will pay a homeowner between $300 and $5,000 in connection with its Homeowner Benefit Program. In return for the payment, the homeowner agrees to use the company’s services as listing agent if the decision is made to sell the property during the term of the agreement. The agreements typically provide that the homeowner may elect to pay an early termination fee to avoid listing the property in question with MV Realty.

In response to numerous underwriting questions on the topic, Chicago Title sent an underwriting memorandum to its agents entitled “Exclusive Listing Agreements”. Chicago Title’s position on the topic was set out in its memorandum as follows: “Pending further guidance, Chicago Title requires that you treat recordings of this kind like any other lien or mortgage. You should obtain a release or satisfaction of the recording as part of the closing or take an exception to the recorded document in your commitments and final policies.”

Googling MV Realty results in a great deal of information. Real estate lawyers should familiarize themselves with this company and its program to advise clients who may question whether the program makes sense from a financial and legal perspective.

In December, Florida’s Attorney General sued the company calling the venture a “deceptive scheme”. The lawsuit seeks an injunction, preventing enforcement of the contracts with consumers, preventing future deceptive and unfair trade practices, and returning funds to consumers.

News sources report that the company is active in 23 states, including South Carolina, and that Attorneys General in several other states are investigating the activities of this company. News sources also report numerous lawsuits against consumers seeking to enforce these contracts. U.S. Senator Sharrod Brown (D-Ohio) has indicated the company could face scrutiny from the Senate Committee on Banking, Housing and Urban Development.

Dirt lawyers, pay attention to this situation. We will certainly see updates.

Second real estate case of the year rejects replacement mortgage doctrine

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SC Supreme Court discards arguments of ALTA and PLTA

Real estate cases can be absent from our Advance Sheets for months, but we have seen two cases already in 2023. In ArrowPoint Federal Credit Union v. Bailey* our Supreme Court was asked to adopt a novel replacement mortgage doctrine, but the Court deflected the question, deferring to the legislature, even though American Land Title Association and Palmetto Land Title Association filed amicus briefs in favor of the doctrine.

This is a real estate mortgage priority dispute between two institutional lenders concerning a residential property in Winnsboro.  Jimmy and Laura Bailey mortgaged their residence at 247 Morninglow Drive to Quicken Loans in the amount of $256,500. The mortgage was recorded on October 20, 2009. One week later, the Baileys closed an equity line of credit with ArrowPoint Federal Credit Union in the amount of $99,500. The second mortgage was recorded on November 4. ArrowPoint had record notice of the Quicken mortgage. On November 23, the Baileys refinanced the Quicken mortgage with Quicken, this time in the amount of $296,000.

In connection with the refinance, the Baileys executed an interesting document entitled “Title Company Client Acknowledgment”, which stated the only outstanding lien on the property was the prior Quicken mortgage. This statement was false. The Court stated that there was no clear explanation as to whether Quicken had the title searched at this point.

The Baileys used $257,459 from the refinance to pay off the first mortgage. On December 15, Quicken released the first mortgage and recorded the refinance mortgage. Quicken assigned the mortgage to U.S. Bank, the petitioner in this case.

(If these facts make you break out into a cold sweat, then you were around doing real estate closings at the break-neck speed we suffered during this time frame.)

The Baileys defaulted on the line of credit, and ArrowPoint filed this action seeking a declaration that its line of credit had priority over the Quicken refinance mortgage. Both lenders moved for summary judgment. U.S. Bank claimed it had priority under the replacement mortgage doctrine. The special referee and Court of Appeals agreed with ArrowPoint, and the Supreme Court affirmed. Both appeals courts concluded that adopting the replacement mortgage doctrine is a question for the General Assembly.

Dirt lawyers are intimately familiar with South Carolina’s race-notice statute (S.C. Code §30-7-10) which prioritizes liens based on notice and the recording date.

The Supreme Court recited that it had recognized the equitable subordination doctrine as an exception to the race-notice statute. The Court noted the right of subrogation is essentially a creation of the court of equity, which allows a person who is secondarily liable for a debt, upon paying the debt, to assume by law the place of the creditor whose debt is paid.  Decades later, the Court declined to recognize the doctrine for a lender that refinanced its own mortgage but failed to discover an intervening mortgage. The Court said in the case at hand that it had previously warned lenders of their duty to search titles!**

The Court noted that the replacement mortgage doctrine is another exception to the race-notice statute, and many jurisdictions either recognize the doctrine or follow its logic. Cases from other jurisdictions were cited, and the Restatement (Third) of Property was quoted. According to the Restatement, the replacement mortgage doctrine provides:

  • If a senior mortgage is released of record and, as a part of the same transaction, is replaced with a new mortgage, the latter mortgage retains the same priority as its predecessor, except
  • To the extent that any change in the terms of the mortgage or the obligation it secures is materially prejudicial to the holder of a junior interest in the real estate, or
  • To the extent that one who is protected by the recording act acquires an interest in the real estate at a time that the senior mortgage is not of record.

The Court said that it was required to respect the authority of the legislature on public policy matters and declined to sit as a “superlegislature” to second-guess the General Assembly’s decisions. The Court differentiated the equitable subrogation doctrine from the replacement mortgage doctrine by saying that the “race” begins with the original mortgage in the equitable subrogation situation, and the intervening lender suffers no loss. Under the replacement mortgage doctrine, on the other hand, the original first mortgage is satisfied of record and replaced with a new mortgage that is recorded after the intervening mortgage.

The Court also criticized the replacement mortgage doctrine because it dilutes the importance of title examinations. Lenders who seek to refinance their own mortgages, as Quicken did in this case, can easily search the title to discover the intervening lien. The last words of the case state, “Finally, we emphasize parties must conduct diligent title searches to protect their interests under the race-notice statute.”

I, for one, will not argue with that final statement. It now appears that if ALTA and PLTA want a replacement mortgage doctrine in South Carolina, they need to approach the legislature.

*South Carolina Supreme Court Opinion 28129, January 11, 2023.

**All the citations are omitted but are set out in detail in the subject case.  

Happy New Year dirt lawyers

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2023’s first real estate case is both humorous and sexy!

If real estate lawyers weren’t easily amused, our profession might live up to the common misconception that it’s boring. But the first South Carolina real estate case of 2023 is both funny and sexy. I’ll explain the funny part shortly. Sadly, the only thing sexy about this case* is that the property is occupied by two strip clubs. But let’s agree to be entertained where we can.

This is a specific performance case involving property in Charleston County. Clarke owned a strip club located at 2015 Pittsburgh Avenue in Charleston. The defendant’s predecessor in title owned a strip club across the street at 2028 Pittsburgh Avenue. The Supreme Court called the property at 2028 Pittsburgh Avenue the subject property, so we will, too. The subject property includes buildings and a parking lot.

In 1999, Clarke entered into a lease which permitted him to share the parking spaces on the subject property with the property owner. The lease contained the following language: “Right of First Refusal: Lessor grants the Lessee the right of first refusal should it wish to sell.”

Before we discuss what the Supreme Court had to say about this language, let me throw in my two cents. Don’t use the terms “lessor” and “lessee” when you draft leases. Use the terms everyone can understand, “landlord” and “tenant”. And please pay attention to prepositions. In this language, which party is “it”?  A drafter of real estate documents cannot be too precise!

Back to the case. I often read cases by starting with the dissent or concurrence. With complicated cases, the minority opinion often explains the holding quickly. This case isn’t complicated, but Justice Few really cut to the chase in his concurrence. And this is the funny part. Justice Few quips, “This instrument says nothing, does nothing, restrains nothing.” (Remember I admit to being easily amused.)

Justice James’ majority opinion goes into more detail.

When Clarke learned that his landlord had conveyed to subject property to Fine Housing for $150,000, he initiated this action for specific performance. Interestingly, the closing attorney failed to raise the lease and the right of first refusal with the purchaser, but Fine Housing admitted it had record notice of both.

The trial court ruled the right of first refusal is enforceable as to the entire property and ordered Fine Housing to convey title to Clarke upon his payment of $350,000. There is no explanation for this figure. Appraisals must have been involved. The Court of Appeals reversed, holding the right of first refusal is an unreasonable restraint on alienation and is therefore unenforceable.

The Supreme Court affirmed, stating that whether a right of first refusal is enforceable turns on whether the right unreasonably restrains alienation. The Court agreed with The Restatement (Third) of Property: Servitudes §3.4 and held that the factors to be considered include: (1) the legitimacy of the purpose of the right; (2) the price at which the right may be exercised; and (3) the procedures for exercising the right. The Court further held that these factors are not exclusive, and in this case, agreed to address another point raised by Fine Housing—the lack of clarity as to what real property the right encumbers.

Clarke argued that the lease provides the right applies to all the property, the price should be determined by the seller, and South Carolina law requires that the right should be exercised within a reasonable time.

Fine Housing argued that the lease merely identifies the location of the leased parking spaces, and the remaining language does not provide the clarity needed to identify the property intended to be encumbered by the right. The Supreme Court agreed, holding that the uncertainty as to what property is encumbered supports the conclusion that the right is an unreasonable restraint on alienation.

The Court also agreed with Fine Housing that the failure of the right to determine a price and the procedures for its exercise also created an unreasonable restraint on alienation.

The bottom line is that the Court held the language to be so imprecise as to be unenforceable. While real estate lawyers are always interested in obtaining the best deal for clients, the second most important aim of drafting real estate documents should be clarity.

Always keep in mind how Justice Few dismissed the language that says nothing, does nothing and restrains nothing! You never want language you draft to be dismissed so easily!

*Clarke v. Fine Housing, Inc., South Carolina Supreme Court Opinion 28126 (January 4, 2023)

Cybersecurity Breach affects SC county offices

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Chicago Title’s South Carolina state office sent out a memorandum on December 29 announcing that Cott Systems, Inc. has suffered a cybersecurity breach. I wanted to make sure the readers of this blog have access to this important information.

Cott Systems provides many services to county offices, including electronic recording, record storage, online searching, and court case management. Chicago Title has been told that Cott Systems provides services to at least the following counties: Darlington, Florence, Marlboro, Oconee, and Union. Other counties may be involved.

Apparently, this company took its services offline upon discovery of the breach. As of December 29, the company was unable to estimate when service may be restored but reported that it is working diligently to address the problem. As of mid-day on January 4, we were told that at least two counties were back online. I hope all of them are up and running at this point.  

If title abstracting and recording services are ever unavailable in the counties where you do business, please contact your title insurance company for assistance. Your friendly underwriters should be able to talk with you to resolve your issues, depending on the dates of your prior title work, dates of closings, etc.  Please be careful out there!

Happy New Year!

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Let’s make 2023 a great year!

2022 has been a difficult year for lots of dirt lawyers and their staff members. Everyone has been way too busy! 2023 promises to be a little slower. I remember my first slow-down in private practice many years ago. I was panicking a little, and my senior partner advised me to take a breath, clean up my desk and old files, and by the time I was through, the economy would have improved. He was right! And I have given that same advice to many people, including my now adult children, many times through the years.

Abraham Lincoln said, “Most folks are as happy as they make up their minds to be.”  My guess is that he used the qualifier “most” because he recognized that outside forces might lead to unhappiness for some people, but I couldn’t agree more with our 16th president that happiness is usually a matter of choice.

Here in the Bible belt of the South, some may believe that faith leads to happiness, but experience suggests that people of faith don’t always choose happiness. Experience also suggests that affluence does not create happiness. In fact, it seems that the opposite may be true in many instances.

I write this blog* for South Carolina real estate lawyers and their staff members, and my goal is to keep us all up to date on real estate issues that may affect our practices.

Early in my career, I decided to focus on real estate law because I chose happiness. I found real estate law to be a happier choice than litigation, especially the domestic litigation I tried for about five minutes. If the economy is good, then everyone should be satisfied at the end of the closing process. The seller should walk away with funds. The buyer should have a new piece of real estate to inhabit, rent or develop. The lender should have a nice income stream. And the players in the marketplace should be paid fairly for their services in connection with the closing.

Those of us who weathered the recent real estate peak are well aware that practicing real estate law does not lead to similar happiness when things are moving too quickly and fraud is so prevalent that it is hard to catch our collective breath. Kudos to all who have survived this challenging season.

Another realization I made early in my career is that to make money, lawyers must work very hard, often at a speed and pressure that do not benefit their health and happiness. And if lawyers have to work under those circumstances, then their staff members do as well.

So how do we choose happiness in a pressure-filled real estate practice that is dependent on the economy?

I offer Jon Gordon’s “20 Tips for a Positive New Year” as a suggestion. Jon Gordon is a motivational business speaker I enjoy following. Many of his tips for a positive 2023 focus on choosing to be happy. (But I particularly like his tip #8, “Get More Sleep”) You can download this excellent advice in poster format to keep at your desk or post in your workroom.

I am going to try to follow Abraham Lincoln’s and Jon Gordon’s advice in 2023. And I invite you to join me!

* Thanks to the readers of this blog! I began writing weekly very late in 2014. Readership has increased from just under 2,000 in 2014 to just over 40,000 in 2022. I’d like to take the opportunity of a new year to thank Martha McConnell and Jennifer Rubin, excellent lawyers, who help me with ideas, redirect my thinking, keep me out of trouble and proofread my work. And I’d like to thank Cris Hudson, IT guru extraordinaire, who handles technical issues. It is a team effort, and I am blessed with a great team!

What should you do when faced with a letter from the ODC?

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This disciplinary opinion clearly sets out what not to do!

I’ve blogged before about Mike Goodwin, the “Bow Tie Comedian” based here in Columbia, who entertained us during lunch at Chicago Title’s seminar several years ago. I highly recommend Mike if you need a comedian suitable for a family audience. A joke that bubbled up through his very funny presentation was a line his mother used to keep him on the straight and narrow during his childhood, “what you NOT gonna do is…..” 

For example, she would say, what you NOT gonna do is to stand there and hold that refrigerator door open while you try to decide what you want to eat. During one lull in the laughter, Mike said to us, “what you NOT gonna do is sit there and not laugh at my jokes.” (So we laughed.)

Mike’s tag line came to mind when I read a recent disciplinary case* involving a real estate lawyer. This lawyer did exactly what he should not have done when the ODC contacted him.

This lawyer had been previously disciplined for financial misconduct in 2011. In that case**, he was given a public reprimand. He did not learn from his mistake.

In 2016, a client gave the check in the amount of $8,969. Just prior to the deposit of this client’s check, the balance in the lawyer’s trust account was $0.15. The lawyer negotiated nine checks to himself totaling $365. Then he issued a check to the client’s seller in the amount of $8,969. This check was returned as unpaid for insufficient funds, and the bank notified the ODC. The client also filed a complaint with the ODC.

Later, he misappropriated trust funds by writing checks to himself in amounts totaling just over $8,000.

What did the lawyer do in response to the ODC? Nothing!

  • He failed to respond to notices of investigation, despite being served with reminder letters.
  • He failed to respond to the court-appointed receiver after he was placed on interim suspension.
  • He failed to cooperate with the receiver and failed to produce client files and trust account files after being ordered to do so.
  • He failed to file an answer to formal charges.
  • (The Court didn’t say this, but his worst mistake may have been failing to hire a lawyer experienced in disciplinary matters.)
  • He failed to appear at his hearing.
  • He failed to file a brief taking exception to the report issued subsequent to the hearing, thus accepting the findings of fact, conclusions of law, and recommendations.

The Court, siting the central purpose of the disciplinary process is to protect the public from unscrupulous and indifferent lawyers, disbarred the lawyer. Learn well from this lawyer’s lack of action!

*In the Matter of Griffin, South Carolina Supreme Court Opinion 28124 (December 14, 2022).

**In the Matter of Griffin, 393 S.C. 142, 711 S.E.2d 890 (2011).

Beware of recent seller imposter fraud

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Fraudsters are creative, changing their schemes to meet the current market at every turn! Seller imposter fraud has been an issue for several years, but we’re hearing new reports in South Carolina. My favorite title insurance company and former employer, Chicago Title, sent out its third memorandum about seller imposter fraud on December 8. I wanted to make sure all readers of this blog are aware of the new efforts by fraudsters.

Several dirt lawyers in Charleston have reported variations in the seller imposter fraud arena in the last month.

Here are warning signs Chicago Title’s memo highlights:

  • The property involved is often unimproved.
  • The property is often advertised for sale through internet-based listing services.
  • The property is often listed at a price less than fair market value.
  • Contact with the imposter seller is often only by email.
  • The purported seller declines any requested in-person contact.
  • The purported seller supplies identification only by photocopy or teleconference.
  • The purported seller suggests executing documents outside of closing.
  • The purported seller suggests acting via power of attorney.

If you see any of these factors in your closings, pay particular attention to the identity of the seller. Advise your staff of these matters and advise them to allow a second set of eyes to review any questionable practices suggested by sellers.

As the excellent underwriting staff of Chicago Title reports, most of these attempts to steal are entirely preventable by paying attention to documents and taking extra steps to verify the identities of the parties involved in your closings.

South Carolina lawyers have prevented these fraud attempts by using the following tactics:

  • They carefully review documents for irregularities and inconsistencies.
  • They verify seller identity through contact information available in the public records or through other trusted sources.
  • They verify foreign identities and notarizations by contact with appropriate embassies.
  • They confirm witnesses and notorizations with the notary whose signature appears on the documents.
  • They compare package tracking information and wiring instructions to the purported location of the seller.

Please be careful out there and advise your staff members of these issues.

Fifth Circuit addresses short-term rental challenge

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This blog has previously discussed challenges by various cities, including cities in South Carolina, to short-term rentals in residential areas.

Vrbo and Airbnb are two go-to websites to find interesting short-term rentals in vacation locations. Sometimes a cabin or house seems much more appropriate and fun than a hotel room for a family get-away. Having a kitchen and room for dining is often a plus.

Arguments against such rentals often focus on noise and parking problems in otherwise quiet residential subdivisions.

Rules vary greatly in the cabins and houses we’ve rented, but a common theme seems to be that parties are not allowed. I’ve also seen limits on the number of cars that can be accommodated and, of course, the number of people permitted. Pets may or may not be allowed.

The Fifth Circuit Court of Appeals recently addressed such a challenge in Hignell-Stark v. City of New Orleans, 46 F. 4th 317 (August 22, 2022). Thanks to Professor Dale Whitman of the University of Missouri at Kansas City Law School via the Dirt Listserv for information on this case.

An ordinance in the City of New Orleans required an owner to be a resident of the city to obtain a license to become a landlord allowing short-term rentals. When the plaintiffs challenged this ordinance using a “takings” theory, the Fifth Circuit held that theory to be inapplicable because permission to make short-term rentals of a residential unit is not a property interest. It is instead, according to the Court, a privilege.

The plaintiffs also argued that the ordinance was an undue burden on interstate commerce, and the Court agreed, stating that an ordinance that discriminates against interstate commerce is per se invalid unless there are no available alternative methods for enforcing the city’s legitimate policy goals. The ordinance in question was a blanket prohibition against out-of-state property owners’ participation in the short-term rental market. The Court pointed out that the ordinance doesn’t just make it more difficult for non-residents to compete in the market for short-term rentals in residential neighborhoods; it forbids them from participating altogether.

The Court pointed to alternative methods for achieving the city’s legitimate goals of preventing nuisances, promoting affordable housing, and protecting neighborhoods’ residential character. More aggressive enforcement of nuisance laws, increased penalties for nuisance violations, increased taxes on short-term rentals, requiring an operator remain on the property during night hours, and capping the number of short-term rentals licenses in particular zoning district might be alternatives.

The ordinance was held unconstitutional and void because the city’s objectives could be addressed in other ways that did not burden interstate commerce.

What do you think? Would you be comfortable with short-term rentals in your neighborhood?

All the Rules of Professional Conduct are not intuitive

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…but this one is: be honest!

Some of the rules we learned in our professional responsibility classes in law school were problematic because they didn’t seem intuitive. I found the advertising rules to be particularly prickly. The rules surrounding financial recordkeeping require extreme attention to detail in accounting, and we went to law school because we aren’t strong in math, right? Even the rules surrounding competency require careful study for each practice area.

But Rule 407’s requirement of honesty is identical to the directive our parents imposed and, for that reason, absolutely intuitive. As lawyers, we must be honest in our professional relationships.

One lawyer learned this lesson the hard way according to a November 23 attorney disciplinary opinion from the South Carolina Supreme Court. *

This lawyer worked as a law clerk for a firm after graduation and became an associate attorney when he was admitted to practice in November 2017. He was paid on an hourly basis. The firm used computer software to track working hours in real time, and throughout 2018, the lawyer used software to clock in and out during times when he was not in the office or otherwise working to inflate his hours and increase his pay.

Fortunately, the lawyer did not bill clients directly, so no client overpaid because of his misconduct. At tax time, though, the lawyer’s supervising attorney discovered the discrepancy and confronted the associate. The total overpayment was just short of $18,000. After confronting the lawyer, the firm allowed the associate to self-report. His report included a signed restitution agreement in which he agreed to repay the law firm in full. 

The lawyer also filed an affidavit in mitigation, in which he expressed remorse and explained that his preoccupation with financial security arose from his disadvantaged upbringing. He said he was desperate to prove his personal worthiness and to achieve financial security. Those goals eclipsed his better judgment. He also stated he has worked with counselors to understand why he committed this misconduct.

He entered into an agreement for a six-month suspension, which the Court accepted. He was also required to complete the Legal Ethics and Practice Program Ethics School and to pay the costs incurred by the ODC in investigating and prosecuting the matter.

Stay honest out there, lawyers, and take the time to mentor young lawyers with regard to their ethical responsibilities.

*In the Matter of Jacob, South Carolina Supreme Court Opinion No. 28122 (November 23, 2022).