While real estate practitioners are struggling to implement office procedures to accommodate the reporting requirements of the new Federal Corporate Transparency Act (CTA), one court has held the Act to be unconstitutional.
National Small Business Association v. Yellen, Case 5:22-cv-1448-LCB (U.S. District Court, Northern District of Alabama, March 1, 2024) held that the Constitution does not give Congress the power to regulate millions of entities and their stakeholders the moment they obtain formal corporate status from a state. The government had argued that the foreign affairs power and the Commerce Clause grant the requisite authority because the purpose of the CTA is to prevent money laundering and tax evasion, especially by offshore actors.
The case begins with this language, “The late Justice Antonin Scalia once remarked that federal judges should have a rubber stamp that says STUPID BUT CONSTITUTIONAL.” In other words, the Constitution does not allow judges to strike down a law merely because it is burdensome, foolish, or offensive. This opinion states that the inverse is also true—the wisdom of a policy is no guarantee of its constitutionality. Even in the pursuit of sensible and praiseworthy ends, Congress may enact smart laws that violate the Constitution. This case illustrates that principle, according to the Northern District of Alabama.
We’ll have to wait and see how appellate courts address this issue. In the meantime, we’ll have to comply!
Chicago Title recently published an update on an IRS regulation, and I wanted to make sure readers of this blog have the most current information. Dirt lawyers know that cash payments greater than $10,000 must be reported to the IRS through form 8300.
For a primer on this requirement, review IRS Publication 1544 here. The government’s stated goal in imposing this requirement is to detect money laundering and to catch tax evaders, terrorists and those who profit from the drug trade.
Effective January 1, 2024, the IRS updated its regulations to require businesses that file 10 total information returns (such as 1099, W2 and, now 8300) to files these forms electronically unless the business requests and receives a waiver each tax year. You can view the revised regulations here.
The S.C. State Conference of the NAACP, the S.C. Advocate Program (“Housing Program”) and three prospective nonlawyer volunteers for the Housing Program petitioned our Supreme Court seeking authorization to allow nonlawyer volunteers to provide free, limited assistance to tenants facing eviction in magistrate courts.*
The petition sought a declaratory judgment in the Court’s original jurisdiction that their proposed activities will not constitute the unauthorized practice of law. Dirt lawyers will recognize the Court’s struggle with the UPL issue because it took 18 pages to reach an affirmative answer. More than three pages were devoted to the history of the UPL issue in South Carolina. Many of us can recite that history from memory.
The petitioners argued that the unmet legal needs of tenants facing eviction is an emergency situation justifying immediate action and that 99% of defendants in eviction cases are not represented by lawyers in the proceedings.
Tenants involved in the program will be advised that the volunteers are nonlawyers. The volunteers are required to limit the information they provide to tenants, and they may only:
Confirm that the tenant has a pending eviction;
Advise the tenant that they should request a hearing and, based on the text of the eviction notice and checking relevant court records, explain how and when to do so; and
Provide the tenant with narrow additional advice about the hearing by flagging common defenses, primarily pertaining to notice, that the tenant might be able to raise.
The volunteers will be instructed to avoid conflicts of interest, abide by confidentiality rules, and refrain from revealing any information about the tenant’s situation except to Housing Program staff. The volunteers must refer tenants to legal service providers when issues are beyond the scope of the program, such as when the tenant has a counterclaim, if the tenant does not have a written lease, if the tenant receives a housing voucher or lives in public housing, or when the tenant seeks information in excess of that permitted under the program.
The petition recited that lawyers have reviewed the program and will work closely with the volunteers, evaluating and assisting them.
The petitioners agreed to share data and information about the successes and failures of the program with the Court to allow the Court to weigh the efficacy of the program to determine whether sufficient safeguards are in place to protect the public.
The Court found that the program appears to provide for sufficient training, safeguards, and lawyer supervision so that the volunteers working within the strict limits set forth in the program’s training manual will not engage in the unauthorized practice of law.
The Court approved the program on a provisional, pilot basis for a term of three years, unless extended or terminated by the Court. Petitioners are required to submit annual reports including the date and metrics discussed in the order as well as a written summary of the activities of the program.
*Appellate Case No. 2023-0016089 (February 8, 2024)
On February 7, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking for the stated purpose of combatting money laundering in residential real estate transactions. You can review the proposed rule and a related fact sheet here.
The proposed rule would require certain professionals, including attorneys, involved in real estate closings to report information to FinCEN about cash transfers of residential real estate to legal entities and trusts. The agency’s press release indicates the proposal is tailored to target transfers that are high-risk for money laundering. No reporting would be required for transfers to individuals.
The information to be reported would include:
Beneficial ownership information for the legal entity or trust receiving the property;
Information about individuals representing the transferee legal entity or transferee trust;
Information about the business filing the report;
Information about the real property being sold or transferred;
Information about the seller; and
Information about any payments made.
A Geographic Targeting Order program has been in place for several years requiring this type of reporting in certain high-priced locations. The new rule would replace the Geographic Targeting Order with nationwide reporting.
FinCEN recognizes that the beneficial ownership information required under this proposed rule is also collected under the new Corporate Transparency Act, but states that the information will serve two different purposes.
The proposed rule would require reporting on single-family houses, townhouses, condominiums and buildings designed for occupancy by one to four families. It would also require reporting on transfers on unimproved land that is zoned or permitted for occupancy by one to four families.
Transfers would be reportable regardless of price. Gifts and other transactions where no consideration is exchanged are reportable. Exempted transactions include easements, transfers resulting from the death of the property owner, transfers resulting from divorce, and transfers made to a bankruptcy estate.
The agency encourages written comments in response to the proposed rule for 60 days. Closing lawyers, I encourage you to read the information at the links above and to make comments.
This blog has previously discussed Florida’s legislation that requires regular building inspections for condominium projects of three stores and higher and requires homeowners’ associations to maintain reserves. The act was unanimously passed by both houses, and Governor DeSantis signed the bill into law on June 9, 2023.
Under the new law, inspections are required when a condominium building reaches 30 years of age and every ten years thereafter. For buildings within three miles of the coast, the first inspection is required at 25 years of age.
In addition, mandatory structural integrity reserve studies are required every ten years under the new law, and reserves are required to be maintained based on the studies. The reserves must be fully funded. The power of the HOA to waive reserves will be removed, effective December 31, 2024.
New Jersey has passed similar legislation. These laws apparently attempt to exchange some short-term pain in maintaining reserves for long-term stability.
These laws will require higher assessments in most cases, and that will likely mean lower prices for sellers. Buyers will have to become more discerning as to the long-term financial implications. I’ve also seen the argument made that with the great number of condominium projects in Florida, there may be too few professionals available to accomplish the inspections and repair estimates.
The main downside of such legislation is that it will make condominium living more expensive and may price some retirees and lower-income individuals out of the market entirely. Insurance costs are also increasing.
But, logically, the cost of maintenance should be factored into every residential property purchase. The ability of an owners’ association to waive reserves and thereby kick the maintenance can down the road is a dangerous proposition.
Perhaps older condominium projects will be terminated, and developers will seek to take advantage of financial distress by seeking to develop new condominium projects. New construction will certainly be favored under the new laws.
Should we pass similar legislation in South Carolina? Let me know what you think.
In 2004, Benjamin Franklin Knott executed a will granting each of his daughters, Susan and Betsy, approximately one-half of a 371-acre parcel near Huger in Berkeley County. The property was subject to a conservation easement Mr. Knott had previously granted to Wetlands America Trust, Inc., a non-profit organization affiliated with Ducks Unlimited, Inc.
Conservation easements are creatures of statute in South Carolina and elsewhere. Such easements are defined as nonpossessory interests for the purposes of protecting natural, scenic, and open-space areas, ensuring the availability of property for agricultural, forest, recreation, educational or open-space use, protecting natural resources, maintaining air or water quality, and preserving historical, architectural, archeological or cultural aspects of real property. The grantor of a conservation easement receives a tax benefit.
Mr. Knott died in 2009, and his daughters received deeds of distribution to their respective parcels. The only direct road frontage was Cainhoy Road, adjacent to Betsy’s parcel. There was originally indirect access to Susan’s parcel from Charity Church Road via an easement retained when Susan sold an adjacent parcel, but Susan terminated her easement in 2015.
Three years later, Susan asked Betsy if she could use Betsy’s parcel to access Susan’s parcel. According to Susan, Betsy rejected this request. Susan brought this declaratory judgment action arguing that she had an express access easement under the terms of the conservation easement. The Circuit Court granted a partial summary judgment to Susan. Betsy appealed.
The Circuit Court had concluded that under the terms of the conservation easement, Susan, as owner of approximately half of the property, had the right to use the roads crossing over Betsy’s property to access Susan’s property for all activities permitted under the conservation easement.
Among other rights reserved in the conservation easement was the right to maintain and replace existing roads and to construct new roads.
The Court of Appeals agreed with Betsy that the reservations in the conservation easement did not create rights for Susan to access her property via roads on Betsy’s property. The easement rights granted to the Ducks Unlimited entity did not translate to easement rights in favor of Susan as against Betsy. The Court reasoned that if Susan has the rights to use the roads on Betsy’s property, it logically follows that she must have all the other owner’s rights reserved for the grantor as to Betsy’s parcel.
The Court of Appeals concluded that Susan has no rights in Betsy’s property, and the conservation easement’s language does not convey any new rights to any person who is not the owner of the property over which the conversation easement lies.
The Court of Appeals reversed the partial summary judgment and remanded the case for further action by the Circuit Court.
*Floyd v. Dross, South Carolina Court of Appeals Opinion 6044 (January 17, 2024)
The Belle W. Baruch Foundation (Baruch) owns approximately 8,000 acres of high ground in Georgetown County. Baruch brought a declaratory judgment action* against the State of South Carolina, claiming it also holds title to 8,000 acres of adjoining marshland.
The State answered, asserting its status as the presumptive titleholder of all marshlands, and counterclaimed that the public holds a presumptive easement over the marshlands. Alternatively, the State claimed that the property had been dedicated to the public.
DeBordieu is an upscale private coastal community which shares a boundary with the disputed marshlands.
Anyone familiar with Georgetown County history knows that Belle Baruch was the daughter of Bernard Baruch, a wealthy landowner and statesman who advised President Wilson during World War I and President Roosevelt during World War II.
Baruch owned Hobcaw Barony, a former rice plantation, and surrounding real estate. President Roosevelt famously convalesced during one of his illnesses at the property. Belle Baruch inherited much of the property and donated it to the Foundation as a nature and research preserve.
Hobcaw has relationships with the University of South Carolina and Clemson University for the purposes of conservation and other research. The property is also the location for delightful Lowcountry tours and events like oyster roasts and holiday parties. I learned on one of these tours that Belle Baruch was interested in preserving the real estate, but not the buildings. The funds she left were not intended for the upkeep of the buildings. The Foundation raises money for that purpose.
I highly recommend that locals and tourists take the time to visit Hobcaw. It’s a beautiful property that reminds me of George Washington’s Mount Vernon. If funds had been left to preserve the buildings, Hobcaw would likely be as impressive as Mount Vernon.
According to the lawsuit, DeBordieu’s members have a history of using the marshland for shellfish harvesting, crabbing, wade fishing and similar recreational activities. In the early 1970’s, DeBordieu created a system of creeks and canals allowing its members access to the marshland and to the Atlantic Ocean. DeBordieu has periodically dredged its canals to maintain its access to the marshland.
DeBordieu sought intervention as a matter of right or, alternatively, permissive intervention. The circuit court denied intervention under both theories.
The Court of Appeals reversed, stating that precedent and Rule 24(a) of the South Carolina Rules of Civil Procedure set a liberal standard for intervention. Although the State and DeBordieu similarly claim that if Baruch owns the disputed property, the marshlands are encumbered by the States and/or DeBordieu’s easements, it is not accurate to classify those easement claims as the same interest in the property.
The State’s and DeBordieu’s claims are independent of each other and require different proof, according to the Court.
The Court also addressed the practical effect of denying the motion to intervene. A declaratory judgment must name all parties having a claim or interest in the matter and must not prejudice the rights of persons who are not parties to the proceeding. The Court concluded that a judgment valid against the State but not against others claiming an interest in the marshlands would not be an efficient use of judicial resources.
DeBordieu is allowed to intervene, and the litigation will proceed. We will keep you posted.
*The Belle W. Baruch Foundation v. The State of South Carolina, South Carolina Court of Appeals Opinion 6043 (January 17, 2024.)
This news is only real estate adjacent, but it should be of interest to all of us who represent consumer clients who attempt to qualify for loans.
The Consumer Financial Protection Bureau issued a press release on January 17 proposing to rein in excessive overdraft fees charged by large financial institutions. The agency estimates this rule change would save consumers $3.5 billion or more per year.
You can read the press release here. The press release includes relevant attachments that include the rule, a fact sheet and other documents that should provide the information you need on this topic.
The Truth in Lending Act, enacted in 1968, generally requires lending institutions to disclose the cost of credit to consumer borrowers. But the Federal Reserve Board created an exemption for banks honoring checks when their depositor “inadvertently” overdrew their account.
Originally, overdrafts were infrequent, and overdraft fees were modest. In the 1990s and 2000s, with the rise of debit cards, large banks began raising fees and using the exemption to generate overdraft loans, creating quite the income stream.
The proposed rule would require large financial institutions to treat overdraft loans like credit cards, with all the related disclosure requirements. Alternatively, banks may charge a small fee in line with their costs. The CFPB suggests these fees may be as low as $3.
According to the press release, the agency took action in 2022 against three of the largest financial institutions to curb these fees. As a result, many banks began to voluntarily revise their overdraft policies. This proposed rule is a continuation of the agency’s efforts to control junk fees.
The CFPB is accepting comments on the proposed rule through April 1.
This blog has discussed legislation limiting the purchase of real estate by some foreigners twice. Remember the Chinese surveillance balloon the United States shot down off the coast of the Palmetto State last February?
That incident and other rising tensions between our government and China over several issues (the war in Ukraine, recognition of Taiwan, to name only two) have resulted in politicians proposing to broaden state law bans on foreign ownership of real estate.
Professor Whitman of the DIRT listserv has provided a New Year’s update on the legislation across the country. He said one of the most significant developments of 2023 in the real estate arena was the noticeable increase in restrictions on foreign acquisitions of US property.
Chicago Title published an Underwriting Memorandum on April 5 entitled “Foreign Ownership of Property in South Carolina” to advise agents of the pending legislation in our state.
For your information, here is a link to Professor Whitman’s email. He gives credit for some of the list to Womble Bond Dixon. And I, as always, recommend and give credit to the listserv. Professor Whitman and his colleagues attempt to keep all of us up to speed on real estate law and trends across the country.
If you encounter potential foreign purchasers in your transactions, consult your friendly and intelligent underwriting counsel.
This blog has discussed the new Corporate Transparency Act three times recently. This is a reminder that the CTA goes into effect on January 1, 2024.
For reporting companies formed prior to the effective date, beneficial owner information will need to be reported to FinCEN prior to January 1, 2025.
For companies formed or registered after January 1 2024 and before January 1,2025, reporting is required within 90 days of the acceptance of the company’s formation or registration filing. FOR NEW COMPANIES, YOU HAVE ONLY 90 DAYS TO REPORT!
If you missed the discussion of the Small Entity Compliance Guide FinCEN issued in September, here is the link.
On September 28, FinCEN issued a Notice to extend the deadline for filing beneficial ownership information reports. You can read the notice here.
Please refer to the excellent September 2023 article in SC Lawyer entitled, “The Basic Ins and Outs of the Corporate Transparency Act” by Matthew B. Edwards and D. Parker Baker III.
This article provides an analysis of the basics of the Act, which is intended to help prevent money laundering, terrorist financing, corruption, tax fraud and other illicit activities. Many entities will be required to report information concerning beneficial owners to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), identifying their beneficial owners and providing certain information about them.
The act may apply to virtually every commercial real estate transaction because of the use of multi-tier entity structures to achieve business objectives. Lawyers will need to review clients’ organizational structure charts to determine entity by entity whether an exemption is applicable. If not, organizational documents, stockholder agreements, operating agreements will have to be reviewed to determine beneficial ownership.
Reporting information will include the name, address, state of jurisdiction and taxpayer identification number of every beneficial owner. Other information may be required, such as passports and driver’s licenses. Penalties for failure to comply will include civil penalties of no more than $500 per day, fines of no more than $10,000 and imprisonment for no more than two years. A safe harbor is included for voluntarily and promptly correcting an inaccurate report within 90 days.
Everyone will get through this together, and it’s likely that experts will emerge to help. This blog will keep you posted on new developments.
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