Court of Appeals holds arbitration clause unconscionable
Photo from PalmettoBluff.com
315 Corley CW LLC v. Palmetto Bluff Development* involves an appeal from Beaufort County arising from the sale of real estate in the Palmetto Bluff Development to homeowners who ultimately became plaintiffs in this case.
Palmetto Bluff is a planned residential community. Purchasers, by accepting deeds, automatically become members in the Palmetto Bluff Club. Club membership is further memorialized by a Club Membership Agreement. The governing terms of the Club are set out in the Club Membership Plan. The Club is a for-profit entity which retains the power, according to the parties, to unilaterally change its fees and policies with no input from Club members.
In 2017, a clause was added to the Membership Agreement stating that disputes surrounding the Membership Agreement will be resolved by mandatory arbitration in accordance with the rules of the American Arbitration Association (AAA), applying the substantive law of South Carolina.
In 2020, several homeowners complained that the Club was planning to make changes that they understood would limit the ability of their short-term tenants to use the Club’s facilities. After failed mediation attempts, this lawsuit was brought in 2022. The plaintiff homeowners then demanded arbitration.
Later in 2022, the homeowners asked the circuit court to stay arbitration and sought summary judgment on the alleged invalidity of the arbitration clause. The defendants moved to compel arbitration. The lower court held that the arbitration clause was invalid because the agreement was unconscionable.
The Court of Appeals agreed that the agreement was unconscionable because the homeowners lacked a meaningful choice in entering the agreement and because the agreement can be unilaterally modified.
The Court cited cases to the effect that whether one party lacks a meaningful choice in entering the arbitration agreement typically speaks to the fundamental fairness in the bargaining process. Courts consider the relative disparity in the parties’ bargaining power, the parties’ relative sophistication, whether the parties were represented by independent counsel, and whether the plaintiff is a substantial business concern. Contracts of adhesion, according to these cases, are standard form contracts offered on a take-it-or-leave-it basis with terms that are not negotiable. However, contracts of adhesion are not per se unconscionable. Instead, adhesion contracts are not unconscionable in and of themselves so long as the terms are even-handed.
The Court of Appeals held that the contract at issue is unconscionable because there is no conceivable potential for bargaining power on the part of those whom the provisions purport to bind. There was an absence of meaningful choice. The Court also held that the agreement was oppressive and one-sided because it limited the award of treble damages, regardless of whether they are construed as compensatory or punitive.
I recommend that South Carolina dirt lawyers read this case in detail and apply its guidelines in drafting documents for developer and builder clients.
*South Carolina Court of Appeals Opinion 6074 (Filed July 24, 2024, Refiled November 13, 2024)
In the Matter of Bush* resulted in a disbarment of a dirt lawyer who used a common “robbing Peter to pay Paul” scheme to steal from clients. The case involved three disciplinary complaints.
The first complaint revolved around the failure to wire $334,000 to a lender to pay off a mortgage in a real estate closing. The lawyer eventually admitted he used the money to replace funds he misappropriated from another closing.
The second complaint arose when the lawyer issued a closing protection letter and a title insurance commitment despite the fact that his title insurance company had suspended him as an agent and his title insurance agency license had expired. The lawyer received funds for this closing but, again, failed to satisfy the prior mortgage. The lawyer eventually admitted he used the funds to pay off the underlying mortgage for the closing described in the first complaint.
After the lawyer was placed in interim suspension by the Supreme Court, he responded to a third client whose mortgage had not been satisfied that, “I am going to plow back in to this and let me talk with some colleagues about a way to get a better resolution quickly.” The lawyer did not tell the third client that he had failed to satisfy her mortgage. Instead, he provided false information to the client regarding the status of the debt. The lawyer finally admitted that he had stolen the funds.
It’s amazing that a few bad apples continue to employ these deceptive techniques that eventually come to light. It is impossible to hide this type of scheme forever because the economy always ebbs and flows. Even a small economic downturn can result in the failure of the next closing to materialize. Without the funds from the next closing, the mortgage from the prior closing is never paid, and the house of cards falls quickly. In this case, the lawyer’s former title insurance company received a claim from one of the lenders who was not paid. A title insurance complaint will also cause the house of cards to fall quickly.
Lawyers, please read this case carefully as a model of what not to do! Be careful out there!
Late in 2023, this blog discussed multiple class action lawsuits across the United States attempting to hold brokerage companies responsible for conspiring to keep residential real estate commissions artificially high. We have a development.
A Federal judge in Missouri said on October 31 that he will approve a $110 million settlement with nine brokerage companies. In May, a similar $208 million settlement was approved. And two more orders are expected in November, when the same judge weighs a pair of settlements against the National Association of Realtors and HomeService of America.
This blog also discussed last November that a similar class action was brought in South Carolina. Dirt lawyers, I would love to know what you are seeing in your markets. Are commissions now being negotiated to avoid the potential liability? I’d love to hear what’s going on out there.
Real estate impersonation scams have “evolved”, it says
In September, the United States Secret Service issued an update to its “Real Estate Scam – Vacant Properties” Advisory (v. 1.1) The original Advisory was issued in Spring of 2022.
The current Advisory warns that the Secret Service has become aware of an increase of instances where criminals are impersonating title companies to steal real estate funds. Remember that “title companies” actually close transactions in many states. In South Carolina, the bad actors would impersonate law firms and banks.
Now more than ever, it is important for everyone involved in a real estate transaction to validate wires before they are sent. The last thing you need is for your law firm to have to provide funds to replace lost closing proceeds!
Often, the perpetrator impersonates the title holder and negotiates to sell unoccupied property to an unsuspecting buyer. Once the contract is signed, the criminal directs the buyer or realtor to the criminal’s account, impersonating a title company or law firm. The perpetrator impersonates the closing office by purchasing fake domains, similar to the closing office’s domain. (Such as me@lawfiirm.com vs. me@lawfirm.com.)
Red flags are identified by the Advisory:
Communications are primarily by email and communications contain poor grammar. (This is from me, not the advisory. If you ever seen the word “kindly”, such as “kindly wire the funds to….” Remember we don’t typically talk that way! Any twisted language or bad grammar may indicate the communication is coming from someone and some place with a first language other than English. Always use common sense!)
Wiring instructions are sent over standard email instead of a secure email platform.
The listing is below market value and the “seller” is looking for a cash buyer or quick closing.
The “seller” wants to use its preferred closing office.
The closing office is outside of the area where the real estate is located.
The Advisory suggests the following avenues of prevention:
Conduct an online independent search of the entity to which the funds are to be wires.
With a known phone number (from a trusted website or previous contact) CALL and verify the wiring instructions and names on accounts.
If possible, visit a local branch of the entity to which the funds are to be wired.
Obtain a government issued ID from each party, and evaluate IDs for abnormalities.
Consider a form of multi-factor authentication with your clients. For example, send an overnight letter to the mailing address on the tax bill asking the property owner to call you with a one-time code embedded within the letter.
Chicago Title sent out a memorandum to its agents on September 27 that I want to bring to the attention of those who read this blog.
South Carolina’s Real Estate Commission has begun to send out enforcement letters to investors the Commission believes are participating in illegal “wholesaling.” One of those redacted letters is attached.
On May 21, Governor McMaster signed into law former bill HB 4754, which requires a real estate broker’s license for those engaging in wholesaling. The new law defines the term “wholesaling” as “having a contractual interest in purchasing residential real estate from a property owner, then marketing the property for sale to a different buyer prior to taking legal ownership of the property.” The definition further states that “wholesaling does not refer to the assigning or offering to assign a contractual right to purchase the real estate.”
The question has become whether an investor can avoid the technicalities of the statute by marketing an assignment of a contract rather than directly marketing the underlying real estate. Investors appear to be taking the position that this activity is not prohibited, but the Real Estate Commission appears to disagree.
Investors are apparently being reported to the Real Estate Commission for potential violations of the new statute, and the Real Estate Commission is purportedly sending out letters to enforce the statute.
It is likely that our courts will become involved in resolving this question.
Anyone who has been involved in attempting to pass legislation will understand that drafting, redrafting, and amending bills often leads to tricky language. My guess is that most dirt lawyers could have drafted a clearer statute, but the bargaining and back-and-forth nature of drafting legislation has likely resulted in the complicated language we have.
Stay tuned as the Real Estate Commission and our courts deal with this issue.
Williams v. Jeffcoat* involved real estate in Charleston owned by Bradford Jeffcoat and Sandra Perkins, a couple who had a roughly two-decade relationship but who never married. In April 2000, Jeffcoat bought a house and lot, and in July 2000, he executed a deed conveying the property to himself and Perkins “jointly with right of survivorship and not as tenants in common.” The two resided together at that location until 2015.
In 2009, Perkins developed dementia. Jeffcoat served as her sole caregiver until he hired an in-home aid. In the spring of 2015, Perkins’ health rapidly declined, and Jeffcoat asked Vanessa Williams, Perkins’ only child, to come to Charleston from her home in Alabama to help care for Perkins. Soon after Williams arrived in Charleston, her name was added to Perkins’ checking account. Williams used Perkins’ funds to pay for Perkins’ medical appointments, but also allegedly used Perkins’ funds to pay Williams’ personal expenses, including closing costs on a mobile home in Alabama, living expenses totaling around $2,200 per month, and Williams’ daughter’s college tuition.
During her five weeks in South Carolina, Williams helped care for Perkins. On June 16, 2015, Williams was scheduled to take Perkins to a doctor in Charleston. Instead, without telling Jeffcoat, Williams took Perkins to live with her in Alabama. Perkins resided with Williams until her death, later that year.
Jeffcoat said Williams shut Jeffcoat out of Perkins’ life and give him no information about her whereabouts or condition despite his repeated efforts to contact them.
Before Perkins’ death, Williams filed a petition for general guardianship and conservatorship in Alabama to “protect and manage the person, assets and financial affairs” of Perkins. The petition did not mention Jeffcoat. The Alabama court granted letters of guardianship and conservatorship. Williams then, acting as Perkins’ guardian and conservator, deeded Perkins’ interest in the Charleston property to herself, individually, for $10.00 and love and affection, thus allegedly severing the joint tenancy between Jeffcoat and Perkins and creating a tenancy in common between Jeffcoat and Williams.
Two days before Perkins’ death, Williams brought this action, individually and as Perkins’ guardian and conservator, against Jeffcoat, in Charleston County, asking the court to compel partition of the property. Jeffcoat answered, asserting affirmative defenses of failure to state a claim, unclean hands, and lack of standing, and counterclaims for fraud, breach of fiduciary duty and slander of title.
Williams amended her complaint to also appear as personal representative of Perkins’ estate. Williams moved for partial summary judgment, arguing a joint tenancy can be severed by a cotenant’s unilateral conveyance to a third party under South Carolina law and that Alabama law permits a conservator to collect, hold, and retain a ward’s property without prior court order. Jeffcoat also moved for summary judgment, arguing that a joint tenancy with right of survivorship cannot be unilaterally severed by conveyance to a third party and that the deed to herself individually was self-dealing contrary to South Carolina and Alabama law. He requested a deed in his name only.
The Master granted Williams’ motion, finding that a joint tenancy may be unilaterally severed without the consent of the other joint tenant and that the deed to herself was lawful. The Court of Appeals affirmed, and the Supreme Court granted Jeffcoat’s petition for a writ of certiorari.
I’m going to skip several issues to concentrate on the joint tenancy issue. The Supreme Court ultimately remands the case, concluding that there were issues of material fact with regard to the unclean hands issue.
As to the joint tenancy issue, Jeffcoat contended that the master erred in finding the joint tenancy could be unilaterally severed, arguing South Carolina Code §27-7-40 prohibits such severance. The Court held that it did not need to decide this issue because the deed was executed prior to the effective date of the statute, (August 17, 2000) and the statute should not be applied retroactively. Under common law, according to the Court, the joint tenancy could be unilaterally severed by conveyance by one joint tenant to a third party. Consequently, Jeffcoat and Perkins own the property as tenants in common, and the sole remaining issue is whether Jeffcoat’s defense of unclean hands will defeat Williams’ demand for partition.
Acting Justice Addy concurred, writing separately to bring attention to issues which may arise under §27-7-40.
The Court of Appeals had correctly stated, according to Justice Addy, that the General Assembly’s primary purpose in passing this statute was to delineate specific language which would conclusively create a joint tenancy with right of survivorship. Although the statute accomplishes that purpose, in light of the legislature history and the holding by the majority opinion, joint tenancies with right of survivorship which were created pursuant to the language of the statute may well remain subject to severance by unliteral conveyance of a joint tenant.
Addy noted that the original bill read: “The fee interest in real estate held in joint tenancy may not be encumbered or conveyed to a third party or parties by a joint tenant acting alone without the joinder of the other joint tenant or tenants in the encumbrance or conveyance. Prior to passage, however, the legislature removed the underlined language. Therefore, because the legislature elected to remove the language prohibiting conveyance by a joint tenant, the Court of Appeals’ holding that even joint tenancies created pursuant to the statute remain subject to severance under the common law may well prove prescient.”
In a footnote, Justice Addy said, “I am sympathetic to the common sense of Jeffcoat’s argument. It makes little logical sense to a unilateral encumbrance by a joint tenant is ineffective and void, but a unilateral conveyance acts to destroy a joint tenancy and create a tenancy in common. However, under a strict reading of the statute’s text and, considering its legislative history, this result appears to have been the intention of the General Assembly.”
I can’t tell you the number of times I’ve unsuccessfully tried to apply logic to this statute! I appreciate Justice Addy’s affirmation of my efforts!
The Concurrence’s other footnote is even more interesting. It reads: “The facts of this case present, at best, a cautionary tale and, at worst, a liability trap to the real estate practitioner. As the court of appeals noted, had the author of the deed in issue created a tenancy in common with right of survivorship pursuant to the language used in Smith v. Cutler, 366 S.C. 546, 551, 623 S.E.2d 664, 647 (2005), Williams’ unilateral conveyance would have been ineffective in severing the tenancy.” (Citation to the Court of Appeals omitted.)
Cautionary tale, indeed! Trap, indeed!
South Carolina Supreme Court Opinion 28236 (September 18, 2024)
In one of the saddest disciplinary cases I’ve read to date, the South Carolina Supreme Court disbarred a real estate practitioner for dipping into his trust account to support his gambling addiction.
In the Matter of Webb, * involved a real estate practitioner who had worked in a law firm for many years. The lawyer opened his own practice in 2020. He self-reported numerous instances of accessing his trust account for personal use in 2022.
When he left his law firm, the lawyer hired his long-time real estate paralegal and gave her access to his real estate trust account. Interestingly, no funds were misappropriated from this account. He subsequently opened another trust account, however, and used this account inappropriately. His paralegal offered to handle and reconcile this account, but he refused, and he never kept proper financial records for this account.
The improper transfers suggest the lawyer was attempting to merely borrow funds. For example, he received a wire of $114,352 to be held in escrow on May 10, 2021. On May 12, he transferred $4,000 of these funds to his operating account. On May 14, he made a cash deposit of $4,000 into the trust account, and on May 18, he transferred the full amount of $114,352 to his client. His records indicate he used some of the $4,000 for personal and business expenses and some to conduct online sports gambling.
Later, the lawyer began to repay funds he had borrowed from one client by using funds held in trust for another client. For example, on August 20, 2021, he received a wire in the amount of $284,150 to be held for a 1031 exchange. Over the course of the next seven months, he converted these funds for his personal use, including to fund gambling activities. When he disbursed the funds to his client in March of 2022, he did so, in part, by using $53,336 held in trust for another client. He delayed disbursement to the second client by three months, and he made that disbursement using funds held in trust for other clients.
He admitted he failed to keep client ledgers and “did a terrible job of keeping financial records.” The case lists funds misappropriated from numerous clients and, in addiction, lists an aggregate amount of more than $500,000.
The sad part of the case is the evidence the lawyer presented in mitigation. He explained that he had struggled with a gambling addiction since 1999, and that addiction escalated between 2014 and 2016, resulted in him taking out numerous mortgages and loans and eventually declaring bankruptcy in 2016. He then sought counselling and attended Gamblers Anonymous meetings, and “quit gambling for the most part” for approximately two years.
He explained that after he opened his own practice, the pressure of managing his business and personal finances triggered a gambling relapse. He was able to leverage assets and borrow additional funds from family members and friends to replace all but $126,000 belonging to five clients. After the self-reported his misconduct, he advised those five clients to file claims with the Lawyers’ Fund for Client Protection, which covered the full amount of losses for all but one client. The lawyer said he borrowed $35,000 from his parents to cover the funds owed to the fifth client.
Following his suspension, the lawyer enrolled in an in-patient gambling recovery program. After returning from that program, he explains he has prioritized healthy activities, including Bible study, church attendance, Gamblers’ Anonymous Meetings, maintaining contact with Lawyers Helping Lawyers, spending time with his children, working out, and working a full-time job and driving part-time for Uber.
The lawyer explained his “decisions and actions cost me my marriage, my law license, friendships, and significant time and experiences with my children.” The Court commended the lawyer for his extensive efforts to address and rehabilitate his gambling addiction, but said the mitigating circumstances in no way excuse the serious misconduct.
On August 13, the Consumer Financial Protection Bureau (CFPB) issued an Advisory Opinion to remind all of us that contracts for deed (also called bonds for title, installment land contracts, land contracts, land sales contracts) on residential property are subject to the Truth in Lending Act (TILA), in the same manner as mortgage loans.
The press release touts the action is intended to stop investors from setting borrowers up to fail. It states that the deals often have little oversight, and investment groups and other sellers can set a series of traps that leave buyers in unlivable homes, on the hook for tax liens and extensive repairs, and at risk for losing their down payments and homes.
The press release further argues that predatory lenders use contracts for deed to target low-income borrowers, particularly those in religious communities, and set them up to fail so the sellers can kick them out and repeat the process with a new family.
The houses are often sold at inflated prices, with high interest rates and balloon payments. The transactions often occur without the benefit of inspections required by mainstream lenders.
TILA applies only to creditors who make five or more loans per year, unless a particular loan is considered “high cost” credit. In that case, a single loan can trigger TILA. If TILA applies to a contract for deed:
The seller has a duty to access the buyer’s ability to repay;
The seller must provide interest rate and other disclosures required by TILA; and
In most cases, balloon payments are prohibited.
South Carolina real estate lawyers familiar with these issues have advised clients for years to avoid buying and selling residential real estate using contracts for deed. And the same lawyers have advised their fellow practitioners to avoid closing these transactions.
Dirt lawyers understand that South Carolina appellate courts will overturn tax sales on the flimsiest of technicalities. Our courts require strict compliance with the tax sale statutory requirements. In an August 21 Supreme Court case*, a tax sale was overturned because the tax collector failed to post the required conspicuous notice.
Alvetta Massenberg inherited a 2.54-acre undeveloped tract of land near the rural community of Alcola in Clarendon County in 1997. She paid taxes through 2015 but failed to pay taxes in 2016. The tax sale process began.
The property is densely forested and triangular in shape. One side faces a two-lane paved secondary road known as Plowden Mill Road. This road is marked with a double-yellow center line and solid white fog lines. The second side of the property faces a one-lane dirt road known as Robert Rees Durant Road. This road has very little shoulder area and the surrounding vegetation crowds the one lane of travel.
The tax collector sent the required “notice of delinquent property taxes” by regular mail to Massenberg’s permanent address in Charlotte and sent another notice by certified mail. The certified mail notice was returned, and the tax collector turned to the required alternative notice of South Carolina Code §12-51-40(c). That subsection requires the tax collector to “take exclusive physical possession of the property…by posting a notice at one or more conspicuous places on the premises.”
The tax collector hired a private contractor to post the notice, but gave the contractor no instruction and no guidance on how to—or ever whether to—post the notice in a “conspicuous” place. The contractor posted a “Notice of Levy” printed on an 8.5 x 11-inch sheet of paper on a tree facing the one-lane road.
Testimony indicated traffic on the paved road would be 100 times more than traffic on the dirt road.
The Master found the posting was appropriate. The Court of Appeals affirmed.
On appeal, the Supreme Court focused on the very narrow question before it, that is, whether the notice was posted in a conspicuous place. The Court stated that the statute does not require that the notice be posted in the most conspicuous place, only that it be posted at “one or more conspicuous places.”
The Court held that the process of selecting a conspicuous place is necessarily comparative and a judgment call. The Court found it critical that the Clarendon County tax collector exercised no judgment at all. Rather, she entrusted the responsibility to a private contractor without instruction. And there was no evidence that the contractor even knew of the “conspicuous place” requirement.
The Court held that the posting was clearly not in a conspicuous place.
*Massenberg v. Clarendon County Treasurer, South Carolina Supreme Court Opinion 28234 (August 21, 2024).
Rule changes resulting from NAR class action settlement discussed
South Carolina real estate lawyers were invited to an excellent Zoom meeting on August 20 sponsored by South Carolina Realtors. The meeting was advertised on the South Carolina Bar’s Real Estate section listserv. Nick Kremydas of that organization and Gary Pickren, founding member of Blair Cato Law Firm, addressed the changes residential real estate lawyers should expect as a result of the National Association of Realtors class action settlement. South Carolina dirt lawyers owe a huge thank you to these two well-informed lawyers who, in addition to speaking and answering questions on the topic, offered their email addresses for the purposes of fielding further questions. *
According to the settlement, as of August 17, NAR affiliated residential multiple listing services can no longer accept listings that indicate the amount or percentage of the seller’s commission that will be paid to the buyer’s broker. There is no requirement that a buyer be represented by a separate broker, and for many years, buyers typically had no representation. But in recent years, buyers’ agents have routinely been employed, and it is clear that some other method must be worked out for their payment.
The speakers initially stated that the MLS entities in South Carolina have complied with the August 17 deadline, but there was a brief mention that Hilton Head may be an exception. Some brokers are drafting “showing agreements” or “touring agreements” to comply with the rule that a buyer must agree to commissions prior to seeing houses.
The implementation of the changes in practice has fallen to the state level, which makes sense because state laws are not consistent on the related issues. Gary Pickren said implementation may be somewhat of a moving target as the market begins to dictate what will occur. It is important to remember, he said, that only sixty percent of real estate agents are NAR-affiliated Realtors, so all agents are not currently required to comply. As a practical matter, however, agents will have to comply because they use the MLS services. In addition, according to Gary, future lawsuits are always a possibility, so that threat will encourage compliance by everyone in the marketplace.
Gary pointed to three ways buyers’ agents may be compensated:
Direct Payment: The seller will pay the seller’s agent and the buyer will pay the buyer’s agent. Gary sees this method being applicable with higher-priced homes. Settlement Statements will simply reflect a charge for the seller and a charge for the buyer.
SC Realtor Form 120: This form is a compensation agreement. The seller will enter into an agreement with the listing agent to pay $X to the listing agent and to authorize the listing agent to pay $Y to the buyer’s agent. The Settlement Statement will reflect both charges to the seller, exactly as we have shown these charges in recent years.
Contract Concessions: In addition to the normal concessions for closing costs, sellers may make concessions for commissions. Settlement Agreements will reflect the seller’s charge for the listing agent’s commission, the buyer’s charge for the buyer’s agent commission, and a credit from the seller to the buyer for the concession. There may be some concern here with regard to appraisals and lender limitations on concessions. Closing attorneys will have pay particular attention to these issues.
In addition to these three methods, some brokers are drafting their own documents to handle commissions in different ways.
Gary questioned how the new rules will be policed and indicated closing attorneys may have additional liability in this regard with no additional payment. We have all seen that our Supreme Court seems to place the liability for the accuracy of closing statements directly on the shoulders of closing attorneys. He said he does not feel closing attorneys will have to review MLS listings, but they may ask to see the Forms 120 and they require have the parties sign separate documents addressing the accuracy of the commissions reflected on the Settlement Statement.
Gary indicated the Real Estate Commission has no jurisdiction to police these issues, but the MLS services and the local Realtor Associations may implement rules with fines, commission forfeitures and even suspensions and bans from using the MLS services.
I want to personally thank Nick and Gary for providing this service for all of us. It appears to me that their thinking and their willingness to educate the Bar may place South Carolina lawyers ahead of lawyers in other states. Based on the reading I’ve done from a national standpoint, it appears the answers to these issues are still very mysterious in some locations.
*I won’t offer up the email addresses, but lawyers know how to find each other!
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