One-day error invalidates mechanic’s lien

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South Carolina’s Court of Appeals has made it crystal clear that our mechanics’ lien statutes must be strictly construed. In a case* refiled December 2, the Court affirmed the Circuit Court’s award of summary judgment because the lien was filed 91 days after the last work was performed, not 90 days, as the statute requires.

The case involved a kitchen remodel job in Columbia. The contractor was a kitchen designer who was paid not by the hour, but by the difference in the wholesale and retail cost of the products she purchased and installed. In this case, she was hired because she was the only dealer for Crystal Cabinets in the Columbia area.

The homeowner’s quote was slightly less than $50,000 plus about $3,000 for cabinet installation, payable in three installments. The homeowners paid two-thirds of the contract price but refused to pay the final installment because they were dissatisfied with the cabinets. The parties and the manufacturer were unable to come to terms. The contractor’s last work, according to its own pleadings, was performed on August 18, 2015, and the mechanic’s lien was served on November 17, 2015, a difference of 91 days. The Circuit Court granted the homeowner’s motion for summary judgment and awarded attorney’s fees, based on the one-day discrepancy.

On appeal, the contractor argued that the work actually extended beyond August 18, but the Court of Appeals held the contractor was bound by the pleadings. The contractor then argued that an amendment to the pleadings could easily cure the “slight discrepancy” between the date alleged in the lien and the actual date of the last work, but the Court held that this issue could not properly be raised on appeal. The contractor should have requested leave of the lower court to amend its pleadings.

The bottom line is that counting correctly is crucial in mechanics’ lien litigation! Be careful out there, lawyers!

* The Kitchen Planners, LLC v. Friedman, South Carolina Court of Appeals Opinion 5738, Refiled December 2, 2020.

Court of Appeals refiles order setting a timing rule on ATI exemption

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The new rule favors the taxpayer

A case* from the South Carolina Court of Appeals on August 26 concerns South Carolina Code Section 12-17-3135 which allows a 25% property tax exemption when there is an “Assessable Transfer of Interest” of real estate. The issue was one of timing, whether a property owner must claim this exemption during the first year of eligibility.

The order was withdrawn by the Court of Appeals, and a new order with the same result was refiled on December 23, 2020**. In comparing the two orders, I could find only one change, the deletion of a sentence that didn’t appear to affect the result. Perhaps someone involved in the case can point out the reason for withdrawing and refiling the order. Regardless, the Court of Appeals lets the result of its prior decision stand.

The Administrative Law Judge had consolidated two cases. In both cases, the property owner had purchased property during the closing months of 2012. Neither taxpayer claimed the ATI Exemption in 2013, but both claimed it in January of 2014. The Dorchester County Assessor denied the requests, but the ALJ decided the exemptions had been timely claimed.

The statutory language in question provides that the county assessor must be notified before January 31 for the tax year for which the owner first claims eligibility. The taxpayers argued that the plain meaning of this language allows them to choose when to claim the exemption. The Assessor argued that the exemption must be claimed by January 31 of the year following the transfers.

The Court looked at taxation of real property as a whole and held that the legislature intended that all purchasers would have a meaningful opportunity to claim the exemption. Under the Assessor’s interpretation, there would be a much less meaningful opportunity for taxpayers who purchase property later in the calendar year.

The Court also stated that the ATI Exemption is not allowed to override the appraised value set in the statutorily required five-year reassessment scheme, so there would be a built-in time limit for claiming the exemption.

* Fairfield Waverly, LLC v. Dorchester County Assessor, Opinion 5769 (August 26, 2020)

** Fairfield Waverly, LLC v. Dorchester County Assessor, Opinion 5769 (August 26, 2020); Withdrawn, Substituted and Refiled December 23, 2020.

Rollback tax law in SC changes effective January 1, 2021

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South Carolina real estate lawyers who represent developers or clients who sell land to developers deal with the issue of rollback taxes routinely. But lawyers who don’t deal with this issue on a regular basis should be aware of it to avoid stepping into what can amount to a very expensive trap.

Rollback taxes are assessed when the use of property that has been taxed as agricultural rate changes. Under prior law, rollback taxes were accessed for a five-year period. South Carolina Code Section 12-43-220 was amended in this year’s shortened legislative session to reduce the lookback period to three years. The amendment is effective January 1, 2021. In the year the use of the property changes, the difference between the tax paid under the agricultural use classification and the amount that would have been paid (typically under a commercial designation) is charged at full fair market value.

How expensive can the difference be? Agricultural use valuation is based upon crop yield and was frozen in 1991. For coastal and many other counties the difference between the agricultural use fair market value and the commercial fair market value can be enormous. In addition, many, but not all, agricultural use properties are taxed at a four percent assessment ratio versus the commercial designation’s six percent assessment ratio, and the millage is different.  This alone can contribute to a large rollback tax. Rollback taxes can easily amount to thousands if not tens of thousands of dollars.

When agricultural property is sold, the rollback tax issue comes into play. There is no norm in South Carolina as to who pays the rollback taxes. If the parties and their lawyers are aware of the issue, payment of the additional tax should be covered by contract. I’ve seen the issue arise for the first time at closing, however, and the typical tax proration contract provisions just don’t do the job to cover this issue. The buyer will argue that the decision to change the use of the property was not the buyer’s concern, and the seller will argue that the buyer had the advantage of the lower tax rate. Negotiations can get heated quickly.

When agricultural property is sold, the purchaser is required to sign an affidavit within thirty days of the sale stating under penalties or perjury that the property continues to qualify as agricultural. If that affidavit is not filed, the assessor will automatically apply rollback taxes. Note that if the issue is not handled at closing, the purchaser will have the ultimate responsibility, and you do not want to be the lawyer who failed to notify your purchaser client of this trap.

Fee-in-lieu completely eliminates rollback taxes and this should be a consideration for any large commercial project. A minimum investment of $2.5 million is required for a fee-in-lieu but many urban counties will not approve a fee-in-lieu for the statutory minimum. As always, contact a tax expert for assistance with these sticky matters.

Will Bay Point Island in Beaufort County be developed?

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Bay Point Island – Image courtesy of The Post and Courier

An interesting development vs. environment saga has been transpiring in Beaufort County for the last few years. In 2016, the town council of Hilton Head voted to accept an application for the annexation of Bay Point Island, a vulnerable barrier island at the mouth of Port Royal sound. But two storms and the knowledge of the historical and ecological significance of the island caused the council to back away, and the island has remained largely untouched.

The island currently has no infrastructure and is only accessible by boat or air.

The island is a refuge for thousands of shorebirds and seabirds and the home of other wildlife, including threatened sea turtles. It also protects fragile marshland and water rich in fish and other marine life. Beaufort County has designated Bay Point a “T1 Natural Preserve”, the county’s most restrictive rural zoning designation.

The county development code states this designation is “intended to preserve areas that contain sensitive habitats, open space and limited agricultural uses. This Zone typically does not contain buildings; however, single-family dwellings, small civic buildings or interpretive centers may be located within this zone.”

A Bangkok, Thailand resort developer seeks to build and operate on Bay Point Island fifty beach bungalows, four spa and wellness centers, several restaurants and areas for listening to music and watching movies.

The developers submitted a special use application for “ecotourism”, but Beaufort County’s Zoning Board of Appeals denied this application on September 24. That denial is being appealed. 

An interesting new development is the entry of The Gullah/Geechee Fishing Association into the dispute. The South Carolina Environmental Law Project issued a press release on November 27 announcing the Association has filed a motion to intervene in the appeal.

According to the press release, the Association seeks to intervene because the livelihoods of its members will be impacted by the development. For generations, the Association’s members have relied on the marshes, beaches and waters surrounding Bay Point to harvest fish and shellfish which support their businesses and their families.

Opponents of the development include Governor Henry McMaster. Environmentalists argue that the damage from the resort would extend beyond the island to the nearby marshes which would be threatened with increased chemical, storm water and septic runoff.  

Ecotourism permits in Beaufort County have been granted for oyster farms, flower farms and kayak operators. This resort development would be a huge leap from those environmentally friendly uses, according to the development’s opponents.

SC Court of Appeals rejects “replacement mortgage” doctrine

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Our Court of Appeals issued an opinion* on November 25 addressing and rejecting a novel foreclosure theory in South Carolina. Let’s look at the facts.

Jimmy and Laura Bailey owned a residence located at 247 Morninglow Drive in Winnsboro. They obtained a $256,500 mortgage loan from Quicken Mortgage in 2009. Later that year, the Baileys obtained an equity line of credit from ArrowPointe in the amount of $99,000. Next, the Baileys obtained a loan from Quicken in the amount of $296,000. The proceeds of this loan were used to pay off the first Quicken mortgage, which was satisfied of record.

At the time of the second Quicken loan, Quicken did not have actual knowledge of the ArrowPointe mortgage, but that mortgage was recorded. The Baileys signed an owner’s affidavit stating there were no outstanding mortgages.

The Baileys defaulted on the ArrowPointe line of credit, and ArrowPointe filed the subject foreclosure action. U.S. Bank (a successor to Quicken) and ArrowPointe filed competing motions for summary judgment, both claiming priority. U.S. Bank first asserted an equitable subrogation argument but abandoned that argument before the hearing and argued the replacement mortgage doctrine instead.

The special referee denied U.S. Bank’s motion, concluding that the replacement mortgage doctrine is not the law of South Carolina and that ArrowPointe’s mortgage had priority. U.S Bank appealed.

The Court of Appeals began its analysis by stating that South Carolina is a race-notice state, that is, the recording statute determines the priority of mortgages, and a mortgage is valid from the date of recording without notice. A subsequent creditor who records first, without notice, is protected by the recording statute.

One exception to the race-notice statute, the Court stated, is the doctrine of equitable subrogation. That doctrine allows a subsequent creditor to obtain priority if it meets the following elements: (1) the lender claiming subrogation has paid the prior debt; (2) that lender was not a volunteer but had direct interest in the discharge of the prior debt; (3) that lender was secondarily liable for the prior debt or for the discharge of the lien; (4) no injustice will be done by allowing the equity; and (5) that lender must not have actual notice of the prior mortgage.

The doctrine of replacement mortgage is also an exception to the race-notice statute, the Court stated. This theory, according to the Restatement (Third) of Property (Mortgages), is described as follows: (a) 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 priority of the predecessor, except (1) 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, or (2) 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.

Courts have adopted three different approaches to equitable subrogation: (1) the majority position holds that a party with actual knowledge of an intervening lien cannot seek equitable subrogation; (2) the minority position holds that a party with actual or constructive knowledge of an intervening lien cannot seek equitable subrogation; and (3) the Restatement approach states that actual or constructive knowledge of an intervening lien is irrelevant and does not bar equitable subrogation.

The Court indicated it is cognizant of a trend toward adopting some form of replacement mortgage doctrine in other states and of our Supreme Court’s dicta in Matrix Financial Services Corp. v. Frazer.** In Matrix, our Supreme Court stated that a lender that refinances its own debt is not entitled to equitable subrogation but specifically did not decide whether a lender that refinances its own debt could succeed under the theory of replacement mortgage.

The Court held that ArrowPoint has priority under our race-notice statute because U.S. Bank had constructive notice of ArrowPointe’s mortgage.

Changing our rule is a matter for the legislature, according to the Court of Appeals. My guess is that our Supreme Court may have the opportunity to weigh in on this issue.

* ArrowPoint Federal Credit Union v. Bailey, South Carolina Court of Appeals Opinion No. 5784 (November 25, 2020).

** 394 S.C. 134, 714 S.E.2d 532 (2011).

Huge Nexton project takes top Home Builders award

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Picture courtesy of Charleston Post and Courier

The Charleston Post and Courier is reporting that the 5,000-acre residential spread between Interstate 26 and U.S. Highway 176 in Berkeley County near Summerville received the Pinnacle Award from the Home Builder Association of South Carolina.

The size of this project, which supports the Boeing plant and related businesses, is staggering. The Post and Courier reports that it will one day have as many residents as Georgetown and Moncks Corner combined. It will also house as many residents as the current populations of Clemson, West Columbia or North Myrtle Beach (between 16,000 and 20,000).  Currently, according to the newspaper, the number of residences is 1,200. At full build-out, the project will encompass 7,000 homes.

The award is for the best master-planned community in the state. It recognizes homebuilders who have achieved the highest standards in customer satisfaction, quality craftsmanship and innovative problem solving.

Just take the trip from Columbia to Charleston to see this huge project. The future of the housing industry in our state is bright!

Rock Hill residential real estate lawyer gets five years in jail

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Thankfully, it has been ten years or more since we’ve heard word “defalcation” used in connection with a South Carolina real estate lawyer. Sadly, we have to use that word in 2020 because a Rock Hill lawyer was arrested in 2019 after funds allegedly went missing from a residential closing.

That lawyer, Thomas Givens, was suspended by the South Carolina Supreme Court on September 25, 2019. Earlier this month, the 67-year old pled guilty for breach of trust and was sentenced to five years in prison, five years’ probation, and restitution. 

The closing took place on July 15, 2019 but the $166,000 mortgage payoff was never made. Two months later, Givens was arrested and charged with breach of trust over $10,000. The arrest warrant reads that Givens failed to make the mortgage payoff and does not have the funds.

We usually do not experience defalcations when the economy is good. With the economic downturn that began in 2007, we learned the difficult lesson that attorneys who are prone to dip into their trust accounts often manage to keep the balls in the air as long as closings continue to occur. They typically steal from one closing to fund another. They rob Peter to pay Paul.

Like a game of musical chairs, when the music (and closings) stop, bad actor attorneys no longer have closings to provide funds for prior transgressions, and the thefts come to light.

This time, the economy was good. There are simply no excuses. It is a very sad commentary, and one I hoped not to see again.

Wire fraud advice from industry insiders

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Dirt Lawyers: educate your clients!

Please take a look at this article by Bill Svoboda of CloseSimple entitled “Wire Fraud in the Wake of COVID-19”. The article quotes some industry insiders, including Rick Diamond of our company. Rick was one of our speakers for our recent seminar and often advises real estate lawyers on issues including how to protect client funds.

The article also quotes Tom Conkright of CertifID, one of our office’s solution partners. CertifID has a proven success rate on protecting client funds, including returning client funds that go missing. We highly recommend that you take a look at what CertifID has to offer. Reach out to your agency representative to ask for a demonstration.

But the main purpose of this blog is to remind you to continually educate your clients about wire fraud. Like the victim in this article, many of your clients are pulling up roots and moving to sunny South Carolina. Many of your clients are retirees. The earlier you can give new clients advice about protecting themselves against fraud, the better. Give them advice in bright red, bold print in your engagement letters. Add bright red, bold print warnings under your email signature lines. If you protect one aging consumer by these methods, the effort will be worth it!

Speaking of aging consumers, many of you have heard that I’m retiring in February. One thing that concerns me about retirement is not being able to keep current on industry advice about fraud. If you hear something next year that I should know, give me a call!

Are you up for some haunted entertainment?

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…or do you think 2020 has been frightening enough?

“It’s got great curb appeal!”

This article entitled “Would You Buy a Haunted House?” by Amanda Farrell at PropLogix caught my eye this morning. A real estate lawyer might face a challenge or two closing a haunted house!

And it’s Halloween week! Let’s entertain ourselves.

If you and your kids are up for some in-person creepy places, try Sweet Dreams Scare House in Easley, Madworld Haunted Attraction in Piedmont, Dark Castle Haunted Attraction in Elgin, Nightmare Haunted House in Myrtle Beach or Ripley’s Haunted Adventure in Myrtle Beach.

If your family prefers to check-out real haunted sites in South Carolina, check out this article.  Even the names of “Greenville Tuberculosis Hospital” and “South Carolina Lunatic Asylum” are menacing!

I grew up in the Low Country (otherwise known as “God’s Country), and the story of Alice Flagg, a ghost in Murrells Inlet, is considered fact.

The story, according to this article, is that in 1849, a wealthy doctor named Allard Flagg moved into The Hermitage and invited his beautiful sister, Alice, to live with him. (They’re always beautiful.) Alice, of course, falls hopelessly in love with an unsuitable man, who is sent away by her brother.

Alice continued to see her suitor secretly. When her brother discovered the assignations continued, he sent sweet Alice off to a boarding school in Charleston. She contracted malaria, and just before she died, her brother brought her home. After her death, he found an engagement ring on a ribbon around her neck and furiously threw it into the marsh. Beautiful Alice has spent the last 150+ years clutching her chest while walking around All Saints Cemetery. 

I bet that story would scare your kids, especially if you tell it after dark in the cemetery!

If you’re like me, though, 2020 has been scary enough. “Casper, The Friendly Ghost” is pretty much the most my family can handle this year. I wish you and your family more treats than tricks this weekend. Stay safe and Happy Halloween!