Abbeville fraud litigation leads to noteworthy arbitration case

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Supreme Court finds arbitration clause unenforceable against nonsignatories

Abbeville, SC

I found it hard to believe the South Carolina Supreme Court took 21 pages to hold an arbitration provision unenforceable against nonsignatories to the contract, but it did! In an April case involving insurance fraud in Abbeville County, the Supreme Court reversed the Court of Appeals, which had relied on an equitable estoppel theory to bind individual insureds to a contract between an insurance agency and the insurance companies*.

The case arose out of numerous lawsuits brought by individual insureds against an insurance agent, Laura Willis, her broker, their agency and six insurance companies for which their offices sold policies. The suits alleged Willis engaged in fraudulent conduct including forging insurance documents and converting cash payments to her own use, resulting in the insureds having no coverage or reduced coverage. Two of the lawsuits were brought by other insurance agents, alleging Willis engaged in illegal business practices that effectively blocked them from the local market, resulting in a substantial loss of clients and revenue.

The other defendants were alleged to have failed to properly investigate, train and supervise Willis, especially after she was fined, publicly reprimanded and place on probation for dishonesty by the South Carolina Insurance Commission in 2011. Alternatively, Willis was alleged to have acted with express or implied permission of the other defendants.

A full year into the litigation, three of the insurance companies filed motions to compel arbitration and dismiss the lawsuits. The arbitration clause in question was contained in a 2010 agency contract signed by the insurance companies and the insurance agency. The theory was that the insureds were third-party beneficiaries to the contract or were equitably estopped from asserting their nonparty status. The Circuit Court denied the motion to compel arbitration, but the Court of Appeals reversed and remanded, holding equitable estoppel should be applied to enforce arbitration against the nonsignatories because the individuals sought to benefit from other provisions in the agency agreement.

The Supreme Court stated that while arbitration is viewed favorably by the courts, it is predicated on an agreement to arbitrate because parties are waiving their fundamental right to access to the courts. The Court held that whether the provision is enforceable is a state law question, and that South Carolina has recognized several theories that could bind nonsignatories to arbitration agreements under general principles of contract and agency law, including (1) incorporation by reference, (2) assumption, (3) agency, (4) veil piercing/alter ego, and (5) estoppel.

The estoppel argument is based on a direct benefits theory in South Carolina. Under that theory, a nonsignatory may be compelled to arbitrate where the nonsignatory knowingly exploits the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement.

In this case, according to the Supreme Court, the plaintiffs did not allege a claim of breach of the contract, and they were not even aware of the existence of the contract until arbitration was sought a year into the litigation. In the Court’s view, the plaintiffs did not knowingly exploit and receive a direct benefit from the agency agreement. The Agreement was purely for the benefit of its parties, outlining their business relationship.

The Court also stated that equitable estoppel is ultimately a theory designed to prevent injustice, and it should be used sparingly. This litigation will continue!

And I’ve reduced the 21-page case to less than 600 words for your reading pleasure. You’re welcome!

Wilson v. Willis, South Carolina Supreme Court Opinion 27879 (April 10, 2019)

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Court of Appeals affirms Circuit Court in “nefarious conduct” Awendaw annexation case

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awendaw

In December of last year, this blog discussed a South Carolina Supreme Court case in which the Court called the Town of Awendaw’s annexation attempt “nefarious conduct”.* The case was remanded to the Court of Appeals, which affirmed the Circuit Court’s decision that the annexation attempt was void ab initio.**

The Town of Awendaw’s annexation of a ten-foot wide, 1.25 mile-long parcel of land within beautiful Francis Marion National Forest was challenged by two individuals and the South Carolina Coastal Conservation League.

The sole question before the Supreme Court last year was whether the challengers had standing to contest the annexation in a case where the “100 percent method” of annexation is used, meaning all property owners petition the municipality to have their property annexed.

The case involved three parcels of land serving as links in a chain necessary to satisfy the contiguity requirement of annexation. The first link is the ten-foot strip managed by the United States Forest Service. The second link is owned by the Mt. Nebo AME Church, and the third link is approximately 360 acres of unimproved real estate surrounded by the National Forest on three sides and owned by Defendant EBC, LLC.

In the fall of 2003, the Town sought to annex the ten-foot strip which required a petition signed by the Forest Service. Town representatives sent the Forest Service four letters seeking approval. Through verbal discussions, the Town learned the Forest Service was opposed to annexations because of their impact on the Service’s ability to conduct controlled fire burns. Additionally, the Forest Service indicated any petition would have to come from Washington, D.C., officials, a process that might take several years.

The Town annexed the property anyway in 2004, relying on a 1994 letter from a Forest Service representative, stating it had “no objection” to annexing several strips of property in the same vicinity. However, the Town had previously stated that it realized this letter was unclear.

In 2009, EBC, LLC requested that Awendaw annex its property, and the Town passed an ordinance annexing that property and simultaneously rezoning it as a “planned development” to permit residential and commercial development. In annexing the EBC property, the Town relied on the ten-foot National Forest strip as well as the church property. Without either component, there would be no contiguity and annexation would be impossible.

In November of 2009, the petitioners filed a complaint against the Town and EBC alleging, among other things, that the Town lacked authority to annex the ten-foot strip of National Forest property because the Forest Service never submitted an annexation petition. The Town and EBC moved for partial summary judgment contending the petitioners lacked standing and that the statute of limitations had run.

At trial, a surveyor testified that the 1994 Forest Service letter referred to a different strip of land. The Town’s administrator responded that the Town had used the 1994 letter at least seven times, and that he believed the letter incorporated the property in question. The petitioners testified they were concerned about potential harm caused by developing the property, including damage to unique species of animals. They testified that they were also concerned that the proposed development would threaten the Forest Service’s ability to conduct the controlled burns necessary to maintain the health of the forest.

The trial court found that the petitioners had standing and concluded that the annexations were void because the Town never received the required petition from the Forest Service. The Court of Appeals concluded that the petitioners lacked standing.

In analyzing the standing issue, the South Carolina Supreme Court discussed its prior cases that held “non-statutory parties” (meaning, non-property owners of the annexed properties) lacked standing to challenge a purportedly unauthorized annexation. Those cases, however, were premised on good faith attempts by annexing bodies, according to the Court.

The Supreme Court did not believe the General Assembly intended in establishing the statutory framework for annexation to preclude standing where there is a credible allegation that the annexing body engaged in “deceitful conduct”. The Court held that a party that can demonstrate the annexing body engaged in “nefarious conduct” has standing to challenge the annexation.

The Court also discussed the public importance exception to the standing rule. This exception states that standing may be found when an issue is of such public importance as to require its resolution for future guidance. The Court stated that the petitioners had satisfied the “future guidance” prong of the public importance exception because the Town had used the 1994 letter numerous times and fully intended to use it again.

The case was remanded to the Court of Appeals to address the Towns’ remaining arguments. The Court of Appeals, apparently noting the Supreme Court’s strong language and robust opinions, reversed course and affirmed the lower court’s ruling that the annexation was void.

 

*Vicary v. Town of Awendaw, South Carolina Supreme Court Opinion No. 27855 (December 19, 2018).

**South Carolina Court of Appeals Opinion No. 5645 (May 1, 2019).

Landlords may have “sweeping” new duty to protect tenants in SC

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Apartments’ courtesy officer program may create liability

It is not uncommon for apartment complex managers to exchange reduced rent for the casual services of resident law enforcement officers. These services may include parking law enforcement vehicles on the property, answering security calls regarding incidents in the complex, and walking the property in uniform. A recent South Carolina Supreme Court case* may have imposed liability on apartment complexes employing these tactics to protect tenants from criminal acts of third parties.

Denise Wright was abducted and robbed at gunpoint by two assailants in the common area of Wellspring apartment complex within the Harbison community near Columbia. The incident took place after Wright left choir practice at her church at around 10 o’clock on a September night in 2008. The assailants were never apprehended. Wright had lived at Wellspring since 2003. She became interested in Wellspring because of its proximity to her job and because of recommendations from several church members. She testified that security was an important factor in her decision.

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Photo courtesy of Facebook.

Wright testified that at the time she signed her lease, a Wellspring manager told her there were security officers on duty. The defendants conceded this fact. Wright testified this representation made her believe Wellspring would be a safe place to live.

An internal Wellspring employee manual stated, “We generally do not provide security for our residents, and employees should never indicate that we do so.” Wellspring had designed a courtesy officer program allowing residents affiliated with law enforcement to receive reduced rent in exchange for spending a minimum of two hours daily of their off-duty time walking the property, answering calls regarding incidents on the property and submitting daily reports to the property manager. The parameters of these agreements were not revealed to other tenants. Wellspring published a “security pager” number in a monthly tenant newsletter. The newsletter also prominently noted that security was a top priority with the complex and advised tenants to call the security pager or Richland County Sheriff’s Department if they saw “anything suspicious”.

There were no courtesy officers at Wellspring on the night of the abduction and robbery; in fact, the last time a courtesy officer had been employed was the previous July. Wellspring had continued to publish the pager number in its monthly newsletter. The tenants were not informed that there were no courtesy officers.

Wright argued, among other things, that Wellspring was negligent in failing to execute its courtesy officer program in a reasonable manner. The defendants argued that they did not owe Wright a duty to provide security and that, even if they did, that duty was not breached, and even if the duty was breached, their alleged negligence was not a proximate cause of the harm. The trial court granted the defendants’ motion for summary judgment. A divided Court of Appeals affirmed. On a writ of certiorari, the sole question before the Supreme Court was whether the Court of Appeals erred in failing to apply section 323 of the Restatement (Second) of Torts, which provides:

“One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of the other person or things, is subject to liability to the other for physical harm resulting from his failure to exercise reasonable care to perform his undertaking, if

  1. his failure to exercise such care increases the risk of harm, or

  2. the harm is suffered because of the other’s reliance upon the undertaking.”

The Supreme Court stated that it is well settled in South Carolina that a landlord generally does not owe an affirmative duty to a tenant to provide security. An “affirmative acts” exception exists, however, where one assumes to act even though under no obligation to do so. Wright’s brief acknowledged that South Carolina case law is not clear as to how the “affirmative acts” exception differs from the “undertaking” exception of the Restatement. The Supreme Court found that Wright’s negligence cause of action invoked the undertaking exception and held that summary judgment should not have been granted. The Court stated that there are questions of fact that a jury must resolve to ascertain whether a duty of care arose in this case.

Justice Kittredge’s strongly worded dissent said that the majority took the common existence of an apartment complex’s security officer program and morphed that limited undertaking into a sweeping duty to protect tenants from unforeseen criminal acts of third parties. The dissent found particularly troubling a lack of proximate cause.

Dirt lawyers who represent owners or managers of apartment complexes should take a careful look at this case with their clients.

*Wright v. PRG Real Estate Management, Inc., South Carolina Supreme Court Opinion 27868 (March 20, 2019)

We have a new attorney preference case

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…and dirt lawyers are not going to like it

The South Carolina Court of Appeals ruled recently in favor of Quicken Loans, Inc. in a foreclosure case where the defendants argued the lender was not entitled to foreclose because it had violated the attorney preference statute during the application process.* My friend and classmate, Special Referee James Martin Harvey, Jr., had granted partial summary judgment in favor of the defendants, and Quicken appealed.

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Quicken telephonically takes information for loan applications from borrowers, according to the recited facts. Quicken’s system prompts Quicken’s banker to ask the borrower: “Will the borrower select legal counsel to represent them in this transaction.” If the borrower responds “no”, the attorney preference form is populated to read, “I/We will not use the services of legal counsel.”  No list of acceptable closing attorneys is provided to borrowers who answer “no” to this question, and the file is sent to Quicken’s affiliate company, Title Source, Inc., which acts as settlement agent in the transaction and subcontracts with attorneys to perform the settlement services.

If the borrower answers “yes”, Quicken’s system populates the attorney preference form to read, “Please contact lender with preference.” The system does not allow an attorney’s name to be entered at this stage of the application process.

The borrowers in this case declined legal representation during the initial telephonic application process.

The Court of Appeals indicated the form used by Quicken is identical to the form promulgated by the South Carolina Department of Consumer Affairs (DOCA) except that Quicken’s form is prepopulated with responses. Like the DOCA form, Quicken’s form states, “I/We have been informed by the lender that I (we) have a right to select legal counsel to represent me (us) in all matters in this transaction relating to the closing of the loan.” Unlike the DOCA form, however, Part 1(a) of the Quicken form is prepopulated to read, “I/We will not use the services of legal counsel.”

Under Part 1(b) the Quicken form, like the DOCA form, initially states, “Having been informed of this right, and having no preference, I asked for assistance from the lender and was referred to a list of acceptable attorneys. From that list I select…” Unlike the DOCA form, which provides blank lines to fill in an attorney’s name and the borrower’s signature, the Quicken form is prepopulated with the response, “Not Applicable.”

Quicken produced the affidavit of closing attorney Carlton D. Robinson, who said it was his practice to explain the legal effect of the attorney preference to borrowers and that he would not have closed if the borrowers had expressed any dissatisfaction with having him act as closing attorney.

The Attorney Preference Statute (S.C. Code §37-10-102(a) provides that when the primary purpose of a loan secured by real estate is for personal, family or household purpose, the creditor must ascertain prior to closing the preference of the borrower as to the legal counsel employed to represent the borrower in the closing. The purpose of this statute is to protect consumers.

DOCA filed an Amicus Brief arguing that Quicken had violated the statute. The Court of Appeals held that Quicken complied with the statute because an agent of Quicken asked the borrowers if they would be using preferred legal counsel and only populated the form after the borrowers responded that they did not have counsel of preference. Quicken sent the form to the borrowers, who signed and returned it without asking further questions.

Will the Supreme Court agree with the Court of Appeals given the opportunity? My guess that the current Justices will agree. My guess would have been different before the retirement of Chief Justice Jean Toal. Will the legislature tighten the language of the statute? That is always a possibility, but we have heard nothing on that front to date. I hate to be the bearer of such bad news for South Carolina real estate practitioners.

*Quicken Loans, Inc. v. Wilson, South Carolina Court of Appeals Opinion No. 5613, January 9, 2019.

Unpublished easement case takes a common sense approach

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Access to Lake Murray must have been intended

Although an unpublished opinion has no precedential value, an easement case* decided by the Court of Appeals on May 16 takes an interesting, common sense approach that may be useful for our analysis of future easement issues.

Hamilton Duncan and Ray and Elizabeth Drasites are owners of two adjacent properties located on an inland cove of Lake Murray. Mr. and Mrs. Drasites’ property abuts the water and is situated between the lake and Mr. Duncan’s one acre parcel. Both parties acquired their respective properties with reference to an easement granting Duncan a right of access over the Drasites’ property to a terminus at the 360 foot contour of Lake Murray.

Lake Murray

Testimony before the Master-in-Equity established that the 360 foot contour is Lake Murray’s high water mark and represents the boundary between the lake, managed by South Carolina Electric and Gas Company (SCE&G), and privately-owned property.

Master-in-Equity Strickland ordered that Duncan has an easement for the purpose of accessing Lake Murray, that Duncan can use the easement to launch small watercraft, and that the Drasites are enjoined from interfering with the easement. The Drasites acknowledged the existence of an easement for a road running generally along the southeastern boundary of their property, but they argued that the length of the easement did not extend to the lake.

The Court of Appeals indicated that common sense and good faith are the leading touchstones in determining the extent of an easement and that consideration must be given to what is essentially necessary to the enjoyment of the dominant property. The Court stated it did not believe it was the grantor’s intent to give the dominant estate a right of access just shy of the lake depending on whether the water level is high or low or for a dirt road traversing the southern boundary of the Drasites’ property but just short of the lake.

The Court held that Duncan is responsible for bearing the cost of maintaining the easement, and any improvements must be subject to the approval of SCE&G. And the Court reminded Duncan that an easement is limited to a use that is reasonably necessary and convenient and as little burdensome to the servient estate as possible. Stated another way, the Court held that the owner of an easement has all the rights incident or necessary to its property enjoyment, but nothing more.

I always prefer a common sense approach. There was apparently little evidence of the extent of the easement since no survey was prepared contemporaneously with it. With the exception of the plats prepared for litigation, all plats in the parties’ chains of title show the easement terminating at the waters of Lake Murray. The Drasites based their argument on a plat outside the chains of title which depicted the road short of the lake. The Court was not impressed with that evidence.

 

* Duncan v. Drasites, Unpublished Opinion No. 2018-UP-211 (May 16,2018)

 

Family squabble leads to promissory estoppel claim

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SC Court of Appeals doesn’t buy it

The facts of a recent Court of Appeals* case involve a dispute between brothers who immigrated from India. Sam Patel moved first, in 1979, and settled in Chicago. Sam’s extended family followed and lived with Sam and his wife. In 1989, Sam moved to Lynchburg, South Carolina, after he purchased a store on Willow Grove Road.

Sam’s family, along with his parents and his younger brother, Kim, followed. The family worked in and lived on the store property. The business grew, and the brothers acquired a store in Sumter. Kim Patel operated the store in Sumter, while Sam Patel continued to operate the store in Lynchburg. Over the years, Sam helped Kim financially.

grocery store country

By 2010, Sam owned three parcels in Lynchburg and operated a liquor store, a grill and a gas station. Sam, himself, faced financial difficulties at this time, and his properties were foreclosed on by First Citizens. At Sam’s request, Kim purchased the properties through the foreclosure in the name of a limited liability company. Sam continued to run businesses on the properties and placed his businesses in the name of another limited liability company.

Sam’s LLC obtained the operating, lottery and alcohol licenses for the properties and made improvements. But Kim’s LLC expended funds for gasoline purchases and property taxes. There was never a lease or written agreement between the brothers or their entities concerning rent and expenses. And when Sam failed to pay rent, Kim’s LLC brought a suit for ejectment and damages. Sam and his LLC counterclaimed, alleging Kim had promised to convey the title to him.

At trial, the brothers gave conflicting accounts of their verbal arrangement. Kim testified that he told Sam he could continue to operate the businesses for six or seven months rent-free so Sam could get back on his feet. After that time frame, Kim expected his brother to pay rent, taxes, insurance and maintenance. Sam testified that Kim purchased the properties in order to convey them back to Sam. Sam intended to repay Kim over three to five years and have title returned to him after repayment.

The special referee’s order stated that Sam owned an equitable interest in the properties and had a right to repurchase them, but that Sam owed Kim approximately $42,000 for expenses.

The Court of Appeals held that Sam’s claim of an equitable interest based on promissory estoppel failed, stating that promissory estoppel is a flexible doctrine that aims to achieve equitable results, but it, like all creatures of equity, has limitations. The court said promissory estoppel is a quasi-contract remedy with four elements:  (1) a promise unambiguous in its terms; (2) reasonable reliance upon the promise; (3) the reliance is expected and foreseeable by the party who makes the promise; and (4) the party to whom the promise is made must sustain injury in reliance on the promise. The court held that Sam’s claim failed on the first two elements.

The testimony of Sam and Kim at trial made it clear, according to the Court, that there was no meeting of the minds as to the terms of the alleged contract. In other words, there was no unambiguous promise to be enforced. And Sam’s reliance was held to be unreasonable in light of the ambiguities of the alleged promise.

The case was remanded to the special referee to conduct the eviction proceeding and to determine rent and expenses between the parties.

 

A&P Enterprises, LLC. v. SP Grocery of Lynchburg, LLC, South Carolina Court of Appeals Opinion 5545 (March 28, 2018).

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)