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.

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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)

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Development of precarious beach properties…

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Exciting for developers; problematic for environmentalists

A quick search the Internet for stories on “Captain Sam’s Spit” in Kiawah Island will reveal a treasure trove of news, opinion and case law involving the proposed development of a gorgeous but extremely precarious tract of pristine beach property on South Carolina’s coast. This link contains a picture.

The South Carolina Bar’s Real Estate Intensive seminar in July of 2016 included a field trip to view this property, from a distance at least. (And let me put in a plug for the same seminar to be held in July of 2018. Stay tuned! It will be great!)

Real estate development is my bread and butter, but one quick look told me that property should not be developed. A fellow field tripper, however, pointed out that the south end of Pawleys Island, which has been developed for many years, is just as precarious.

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Image by www.whereverimayroamblog.com

An entity that fights these cases in our state is the South Carolina Environmental Law Project located in Pawleys Island. A recent case* fought by this entity was decided by the South Carolina Court of Appeals on September 27. This case involves a 4.62 acre tract of beachfront property on Kiawah Island, not far from Captain Sam’s Spit.

Here are greatly simplified facts in a very complicated case: the developer and the community association entered into a development agreement in 1994. That agreement covered many issues, one of which was the proposed conveyance from the developer to the community association of a ten-mile strip of beachfront property, basically, the entire length of the island. A deed consummated that conveyance in 1995. All of the property conveyed was undevelopable because of the State’s jurisdictional lines.

I didn’t learn the following fact from the case, but I learned it from one of the lawyers who was kind enough to speak with me. When the jurisdictional lines were redrawn by the State, the 4.62 acre tract became developable. The developer then took the position that the 1994 development agreement and the 1995 deed resulted from a mutual mistake, and that the parties never intended to include that tract.

The Master-in-Equity and Court of Appeals did not see it that way. Both found that the agreement and deed were unambiguous and that parole evidence of the intent of the parties was not allowable.

Simple enough, right? As the football prognosticator, Lee Corso would say, “not so fast, my friends.” If the litigation history of Captain Sam’s Spit is a barometer, litigation may continue for years over the 4.62 acre tract. Captain Sam’s Spit has been argued in the South Carolina Supreme Court four times. I understand one of the justices used the term “weary” to describe the reaction of the court to the most recent round in the battle.

Count on a petition for rehearing and an appeal in this case, at least. I’ll keep you posted!

*Kiawah Resort Associates, L.P. v. Kiawah Island Community Association, South Carolina Court of Appeals Opinion 5517 (September 27, 2016)