Chicago Title Insurance Company

Old McDonald Had a Farm

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South Carolina Court of Appeals says partition actions in probate court require an open estate; sends action back to circuit court.

The South Carolina Court of Appeals held last week that probate courts in South Carolina have subject matter jurisdiction over partition actions only where open estates are involved.*

The dispute involved a farm in Darlington County originally owned by S.W. Byrd. Mr. Byrd died in 1923, and his estate was probated in Darlington County and finally closed in 1948. The estates of several of Mr. Byrd’s heirs were not subsequently probated, and in April of 2012, E. Butler McDonald filed an action for partition and the determination of heirs in the Darlington County Probate Court.

At that time, more than ten years had passed since the deaths of Mr. Byrd’s original heirs. Since §62-3-108 of the South Carolina Code establishes a time limitation of ten years after death for the administration of an estate, these estates could not be probated at the time Mr. McDonald filed his action.

farmlandThe Probate Court determined the heirs of S.K Byrd and their percentages of ownership. The Probate Court also found that no interested party had expressed a desire to purchase the property and that physical partition of the farm was impractical. The farm was ordered to be sold at a public auction, and Mr. McDonald’s reasonable attorneys’ fees were ordered to be paid.

On appeal by the other heirs, the Circuit Court affirmed. On appeal to the Court of Appeals, the appellants made several arguments, but the Court of Appeals focused on subject matter jurisdiction. Section 62-3-911 of the South Carolina Code establishes the jurisdiction for probate courts and specifically states that an heir may petition the probate court for partition prior to the closing of an estate. Since it was clearly established at trial that S.K. Byrd’s estate was closed in 1948, an action to partition his farm should have been brought in the circuit court, according to the Court of Appeals. The probate court’s determination of heirs and their percentages of ownership was affirmed, but the order was vacated as to the remaining issues.

*Byrd v. McDonald, S.C. Court of Appeals Case 5409 (June, 8, 2016)

Upscale Mt. Pleasant Condo Project Subject of Arbitration Clause Dispute

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Court of Appeals sides with roofing supplier

The South Carolina Court of Appeals handed down a decision on June 1 that will delight the drafters of corporate contracts who imbed arbitration clauses within their warranty provisions.  Whether the South Carolina Supreme Court will approve remains to be seen.

The dispute arises over the construction of One Belle Hall, an upscale condominium community in Mt. Pleasant. Tamko Building Products, Inc. was the supplier of the asphalt shingles for the community’s four buildings, and placed a mandatory binding arbitration clause within its warranty provision. The warranty purported to exclude all express and implied warranties and to disclaim liability for all incidental and consequential damages.

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At some point after construction was completed, the owners’ association determined that the buildings were affected by moisture damage, water intrusion and termite damage, all resulting from various alleged construction defects. The developer contacted Tamko to report a warranty claim on the roof shingles, contending they were blistering and defective.  Tamko sent the developer a “warranty kit”, requiring the claimant to provide proof of purchase, samples of the allegedly defective shingles and photographs. The developer failed to respond.

Two years later, the owners’ association filed a proposed class action lawsuit on behalf of all owners, alleging defective construction against the community’s various developers and contractors. Tamko filed for a motion to dismiss and compel arbitration.

Circuit Court Judge J. C. Nicholson, Jr. denied the motion and ruled that Tamko’s sale of shingles was based on a contract of adhesion and that the condominium owners lacked any meaningful choice in negotiating the warranty and arbitration terms. The trial court held the arbitration clause to be unconscionable and unenforceable because of the cumulative effect of several oppressive and one-sided terms in the warranty.

The Court of Appeals begged to differ. It held that the circuit court erred in finding the arbitration clause in the warranty was unconscionable. It stated that our supreme court has made it clear that adhesion contracts are not per se unconscionable. The underlying sale of Tamko’s shingles was stated to be a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate warranty terms.

The court found it significant that the packaging contained a notation: “Important: Read Carefully Before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund.

The appellate court also found it significant that the arbitration clause did facilitate an unbiased decision by a neutral decision maker and that the arbitration clause was separable from the warranty.

Consider the exact opposite approach of the CFPB’s recently-announced proposed rule that would ban financial companies from using mandatory pre-dispute arbitration clauses to deny consumers the right to join class action lawsuits. That proposed rule can be read here and is the subject of a May 12 blog entitled “CFPB’s proposed rule would allow consumers to sue banks”.

It’s interesting to see such different approaches by two authorities on an issue affecting consumers in the housing arena. I wouldn’t be surprised to see more to come from either ruling.

* One Belle Hall Property Owners Association, Inc. vs. Trammell Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1,2016)

SC Court Effectively Extends Statute of Limitations for Legal Malpractice

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Epstein case is overruled

SC Supreme Court LogoA car dealership case against a law firm provided the South Carolina Supreme Court the opportunity to reverse its prior ruling on the point in time the three-year statute of limitations begins to run in a legal malpractice case. Interestingly, retired Chief Justice Toal’s dissent in the earlier case was adopted. The new bright-line rule in South Carolina is that the statute of limitations does not begin to run in a legal malpractice case that is appealed until the appellate court disposes of the action by sending a remittitur to the trial court.

The current case, Stokes-Craven Holding Corp. v. Robinson*, involved a negligence suit against a law firm that was dismissed at summary judgment based on the expiration of the three-year statute of limitations.  The automobile dealership had been sued by a consumer who discovered the vehicle he purchased had sustained extensive undisclosed damage prior to his purchase.  After an adverse jury verdict which was affirmed on appeal, the dealership sued its lawyer, arguing that the lawyer, among other matters, failed to adequately investigate the facts in the case, failed to conduct adequate discovery, and failed to settle the case despite the admission by the dealership that it had “done something wrong”.

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The lower court, following precedent, found that the dealership knew or should have known it had a legal malpractice claim against its trial counsel on the date of the adverse jury verdict.  A 2005 South Carolina Supreme Court case, Epstein v. Brown **, had held just that, despite the fact that the claimant in the earlier case, like the current case, had filed an appeal.

Epstein represented a minority position in the country, according to the current case. A majority of states have adopted the “continuous-representation rule”, which permits the statute of limitations to be tolled during the period an attorney continues to represent the client on the matter out of which the alleged legal malpractice arose.  In Stokes-Craven, our Court continued to reject the continuous-representation rule, finding that rule to be problematic because its application may be unclear under some factual scenarios.  Our Court looked to existing appellate court rules to the effect that an appeal acts as an automatic stay as to the judgment in the lower court. In other words, if the claimant appeals the matter in which the alleged malpractice occurred, any basis for the legal malpractice cause of action is stayed while the appeal is pending.

The Court stated that its new bright-line rule is consistent with the discovery rule which states that an action must be commenced within three years of the time a person knew or by the exercise of reasonable diligence should have known that he or she had a cause of action.  A client either knows or should know that a cause of action arises out of the attorney’s alleged malpractice if an appeal is unsuccessful.

Chief Justice Pleicones dissented, stating he would adhere to the discovery rule adopted in Epstein and reverse the trial court’s order granting summary judgment because there are unresolved genuine issues of material fact making that relief inappropriate.

* South Carolina Supreme Court Opinion 27572 (May 24, 2016)

** 363 S.C. 381, 610 S.E.2d 816 (2005)

Beware of Cyberattacks on Free E-mail Services

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Think a client won’t sue for misdirected funds?  Think again!

domain securityE-mail services, even those with the tightest security possible, can be hacked. We have heard local stories, as close as Rock Hill and Charleston, of funds being misdirected by cybercriminals through intercepting e-mails and sending out fraudulent wiring instructions.

Law firms have taken action: encrypting e-mails, adding tag lines to emails warning that wiring instructions will not be changed, adding warning paragraphs to engagement letters, in addition to normal security efforts. Many offices now require confirmation of all wiring instructions by a telephone calls initiated internally. No verbal verification?  No wires!

Last month, an attorney in New York was sued by her clients in a cybercrime situation. This time, the property was a Manhattan co-op, and the funds amounted to a $1.9 million deposit. The lawsuit alleged that the attorney used an AOL e-mail account that welcomed hackers. The complaint stated that had the attorney recognized the red flags or attempted to orally confirm the proper receipt of the deposit, the funds would have been protected.

The old phrase “you get what you pay for” is definitely applicable in these situation. Attorneys who continue to use free email services are putting themselves and their clients at greater risk for cyberattacks. Criminals understand that free email services have low security against cyber-intrusion, so they naturally gravitate to those accounts for their dirty work.

I heard one expert say that free e-mail services are not only not secure, they are also unprofessional! Surely, lenders will soon look at this issue as they decide who will handle their closings.

Buried in the Dirt

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Are you sure your IOLTA account was properly established?

A Charleston lawyer just shared a bit of an Interest on Lawyer Trust Accounts (IOLTA) horror story with us, and I’m passing it along for the benefit of all South Carolina practitioners to prevent at least one surprise in future certification attempts.

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This lawyer was being vetted by a third-party vendor for the purposes of staying on the good side of a lender. The vetting company advised that the lawyer’s IOLTA account had been set up incorrectly using his firm’s Taxpayer Identification Number (TIN).  The lawyer called The South Carolina Bar Foundation and learned that the account should have been set up using the Foundation’s TIN: 23-7181552. In order to make this change, the bank required the lawyer to open a new account…with all that entails.

As a review, here are some IOLTA facts.

  • These accounts must be used for client funds that are small in amount or expected to be held for a short time, so that the funds cannot practically be invested for the client because they won’t provide a positive net return.
  • Funds that do not meet the nominal or short-term fund requirements of an IOLTA account should be deposited in a separate demand account to earn interest for the benefit of the client, and the client’s TIN should be used.
  • Some financial institutions waive all fees for IOLTA accounts. If reasonable and customary fees are charged, those fees may be deducted from interest. Other fees and service charges are the responsibility of the attorney.
  • There should be no tax consequences for the attorney or client for IOLTA accounts.
  • The Bar Foundation maintains a list of eligible financial institutions on its website.
  • Rule 1.15(h) of the SC Rules of Professional Responsibility mandates that all lawyers with trust accounts must file a written directive with their bank requiring the bank to report any non-sufficient funds (NSF) transactions. This mandate applies to IOLTA accounts.

Check your IOLTA accounts and make sure you’re in compliance before the vetting companies arrive on the scene!

CFPB’s Proposed Rule Would Allow Consumers to Sue Banks

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Arbitration clauses would be limited

At a hearing on May 5, Consumer Financial Protection Bureau Director Richard Cordray announced that the agency has issued a proposed rule that would ban consumer financial companies from using mandatory pre-dispute arbitration clauses to deny their customers the right to join class action lawsuits.

The proposed rule can be read here, and is also found on CFPB’s website. When the proposal is published in the Federal Register, the public will have 90 days to comment.

pen mightier than swordDirector Cordray stated in his comments last Thursday that this rule is a benefit to consumers because it will discontinue the practice of entities inserting arbitration clauses into contracts for consumer financial products and services and literally “with the stroke of a pen”, blocking any group of consumers from filing class actions. He said the CFPB’s research indicates that these “gotcha” clauses force consumers to litigate over small amounts ($35 – $100) acting alone against some of the largest financial companies in the world.

Some authorities are arguing that consumers will not be benefited by the proposal because of the high cost of class actions and the fact that it is often lawyers, not consumers, who benefit financially from them. The proposal does seems contrary to the Federal Arbitration Act and legal precedent and also demonstrates the power of the agency, the power that has already been challenged in several lawsuits nationwide. Some might suggest that the agency is the entity that acts “with the stroke of a pen.”

The proposed rule does not reach to title insurance and real estate settlement services. The rule applies to products and services that extend, service, report and collect credit.

One fact seems certain. The CFPB has not completed its efforts to shake up the market!

CFPB Announces TRID Clarity in the Works

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Cordray signals notice of new rule expected late July

cfpb-logoIn an April 28 letter addressed to several industry trade groups and their members, Director Richard Cordray of the Consumer Financial Protection Bureau, said his agency has begun drafting a notice intended to provide “greater certainty and clarity” in the Know Before you Owe Rule.

The letter stated the CFPB is working hard to understand industry concerns and recognized there are places in the regulation text and commentary where adjustments would be useful.

In a press release, also dated April 28, American Land Title Association said its primary goal for the proposed adjustments is to insure consumers receive clear information about their title insurance costs on the Closing Disclosure. As we have all experienced, TRID requires a very odd negative number as the cost for owner’s title insurance in most situations. ALTA has been arguing against this strange result for many months.

The Director’s letter stated that the Bureau has begun drafting a Notice of Proposed Rulemaking (NPRM) that should be available for comments in late July. It also suggested that one or two meetings will be arranged with industry participants before the NPRM is issued. In the meantime, the letter encouraged continued feedback.

The text of the letter can be accessed here.

SC Supreme Court Warns Closing Attorneys

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Don’t be used as a “rubber stamp” or “rent” your name and status as an attorney!

businessman nametag for rentIn a disciplinary case filed on April 20,* the South Carolina Supreme Court publicly reprimanded an attorney for failing to properly supervise the disbursement aspect of a residential refinance closing. In a three-two decision, the Court pointedly seized the opportunity to warn residential closing lawyers.

The disciplined attorney worked as an independent contractor for Carolina Attorney Network, a management service located in Lexington, that provides its services to, among other entities, Vantage Point Title, Inc.  Vantage Point Title was described as a non-lawyer owned title company based in Florida. The attorney testified that 99.9% of his business comes from Carolina Attorney Network and that he had no direct contact with Vantage Point Title.

The attorney had previously been suspended for thirty days by the Court for failing to properly maintain his trust account. He stated in oral arguments in the current case that the suspension caused him to lose his ability to perform closings in the normal manner because he lost his status as an agent for a title insurance company. As a result, he said he was forced to handle closings through the management service.

The attorney testified that he didn’t recall the closing at issue, but he described the process. He said he receives closing documents via e-mail and reviews the title opinions. He verifies that a South Carolina licensed attorney completed the title opinions. He also reviews the closing instructions and the closing statements. He does not review the title commitments nor verify the loan payoff amounts. He conducts the closings and returns the closing packages with authorizations to disburse. Vantage Point disburses the funds, records the documents and issues the title insurance policies. Vantage Point then sends the lawyer disbursement logs showing how closing funds are disbursed. The lawyer reviews the disbursement logs to ensure they have a zero balance. He or an employee of Carolina Attorney Network reviews the online records of the ROD to verify that the mortgages are properly recorded.

The loan at issue had been “net funded” and the disbursement log did not “zero out”. The log showed a credit of approximately $100,000, and a disbursement of approximately $800. The Court stated that the disbursement log was inaccurate, and that the lawyer did not even know at the time of closing that the loan had been net funded.

The HUD-1 Settlement Statement in the closing at issue showed Vantage Point received approximately $800 for “title services and lender’s title insurance”, but attorney’s fees were not reflected. In fact, Vantage Point paid Carolina Attorney Network $250, and Carolina Attorney Network paid the attorney $150.

Vantage Point maintains a national trust account for all fifty states, but at some point, it opened “for unknown reasons”, according to the Court, a SC IOLTA account. Two checks were written on the IOLTA account for the closing at issue. When those two checks were returned for insufficient funds, the investigation by the Office of Disciplinary Counsel was triggered. Ultimately, all checks cleared, and no one sustained harm.

Doe v. Richardson is the controlling case. In this 2006 seminal case, the S.C. Supreme Court held that disbursement of funds in a residential refinance is an integral step in the closing and constitutes the practice of law. Richardson further held that although the attorney must supervise disbursements in residential closings, the funds do not have to pass through the supervising attorney’s trust account.

The Court stated the current case presents a situation where the lawyer conducted his duty to supervise disbursement in name only. He “rented” his name and status as an attorney to attempt to satisfy the attorney supervision requirement. There is no question, according to the Court, that the lawyer’s cursory review of the disbursement log did not satisfy the duty to supervise disbursement. The Court stated in furtherance of its concern that attorneys are being used as “rubber stamps” to satisfy the attorney supervision requirement in low cost real estate closings, and it took the opportunity in this case to expand upon Richardson.

The Court clarified that an attorney’s duty to oversee the disbursement of loan proceeds in residential closings is nondelegable. To fulfil this duty, the attorney must ensure: (a) that he or she has control over the disbursement of loan proceeds; or (b) at a minimum, that he or she receives detailed verification that the disbursement was correct.

The Court stated that, in practice, an attorney may find that utilizing his or her trust account and personally disbursing funds provides the most effective means to fulfil this duty. The Court stood by the Richardson holding, however, that residential closing funds are not required to pass through the supervising attorney’s trust account. It held that the attorney’s verification of proper disbursement, via sufficient documentation or information received from the appropriate banking institution, in addition to the disbursement log, is acceptable to fulfil this duty.

In essence, according to the Court, the lawyer was used as a “rubber stamp” for a non-lawyer, out-of-state organization with no office in South Carolina, whose involvement was not disclosed to the clients. The Court stated that it has insisted on lawyer-directed real estate closings in order to protect the public. The lawyer’s method of handling his client’s business was stated to provide no real protection and was held to be a “gross abandonment” of his supervisory authority.

Former Chief Justice Toal wrote the opinion for the Court. Justices Kittredge and Moore concurred. Current Chief Justice Pleicones dissented in a separate opinion in which Justice Hearn concurred.

The dissent characterized the case as a situation that through an error by a title company, the ODC became aware of a single closing where the attorney failed to explain the nature of a “net funding” transaction to clients who suffered no harm. Nothing in this single instance justifies a public reprimand, according to the dissent, nor justifies a modification of Richardson, adopting a non-delegable duty to oversee loan disbursements through “detailed verification” or through the receipt of “sufficient documentation or information” in addition to the disbursement log.

The dissent said that the majority neither explains what this means nor how more oversight could have prevented the title company from issuing checks drawn on the wrong account. In a footnote, the dissent accused the majority of imposing a “new, vague requirement on residential real estate closings”.

The real question becomes….what in the world will the next case on this topic hold?

*In the Matter of Breckenridge, S.C. Supreme Court Opinion No. 27625, April 20, 2016.

Lender Challenges CFPB’s Constitutionality

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cfpb-logoOn July 30, this blog discussed State Bank of Big Spring v. Lew, a case in which the U.S. Court of Appeals for the District of Columbia ruled on July 30 that a small Texas bank had standing to challenge the constitutionality of the Consumer Financial Protection Bureau (CFPB).

The same court was asked on August 5 by mortgage lender PHH Corporation to stay a final decision of the CFPB on constitutionality grounds.

The latter case follows the CFPB’s final decision in an enforcement action against PHH requiring the lender to pay $109 million in disgorgement. The lender was accused of illegally increasing consumers’ closing costs by requiring them to pay reinsurance premiums to PHH’s in-house reinsurance company. The CFPB classified the reinsurance payments as kickbacks.

The court granted the stay, holding PHH “satisfied the stringent requirements for a stay pending appeal.”

PHH argues the CFPB is unconstitutional because Director Richard Cordray has the sole authority to issue final decisions, rendering the CFPB’s structure to be in violation of the separation of powers doctrine. The petition states, “Never before has so much authority been consolidated in the hands of one individual, shielded from President’s control and Congress’s power of the purse.” The petition argues that the Director is only removable for cause, distancing him from the power of the President, and is able to fund the agency from the Federal Reserve System’s operating expenses, distancing him from Congress’s power to refuse funding.

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The court issued a one paragraph stay order, and it is not clear whether the motion was successful based on the constitutionality argument because PHH had also argued that Director Condray misinterpreted settled law on mortgage reinsurance and on how disgorgements are calculated.

The stay is in place pending the appeal. It will now be interesting to see whether the Court of Appeals will reach the constitutionality issue or decide the case on the legal interpretation issues. And, of course, it will be interesting to see whether future constitutionality challenges continue with regard to this powerful agency that is changing the rules for residential closings.

Good News From ALTA

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CFPB said lenders can’t “unilaterally” shift TRID liability

lane shiftIn news that will be well received by South Carolina residential closing attorneys, ALTA reported on April 8 that CFPB Director Richard Cordray stated that lenders may not unilaterally shift liability for errors on TRID mortgage disclosures to third parties.

The report indicates that U.S. Senator Robert Corker of Tennessee had written a letter to Director Cordray asking whether creditors, acting alone, may shift liability to settlement agents for Closing Disclosure errors. Director Cordray responded in writing, “While creditors may enter into indemnification agreements and other risk-sharing arrangements with third parties, creditors cannot unilaterally shift their liability to third parties and, under the Truth in Lending Act, alone remain liable for errors on the Know Before You Owe mortgage disclosures.”

ALTA’s report further states that Director Cordray wrote that lenders and settlement agents are free to decide how to divide the responsibility and risk when implementing the new requirements through contracts.

stay tunedWe have heard from closing attorneys across South Carolina that lenders are taking varying approaches in their attempts to shift or share TRID liability with closing attorneys. We caution closing attorneys to read letters and closing instructions carefully and to negotiate or strike objectionable provisions. Pay particular attention to provisions that would violate attorney ethical obligations. Don’t agree, for example, that client confidences will be revealed to creditors.