Court of Appeals Revises Opinion, but not Result, in Arbitration Case

Standard

It seems the arbitration cases are all over the place in 2016. We’ve discussed three cases so far this year*, and the opinion in one of these cases has been withdrawn, substituted and refiled**, but the result did not change.

The South Carolina Court of Appeals decided to make a few changes in its opinion in One Belle Hall. The earlier opinion, filed June 1, held that an arbitration clause in a roofing supplier’s warranty provision was not unconscionable. The trial court had ruled that the supplier’s sale of shingles was based on a contract of adhesion and that the injured property owners lacked any meaningful choice in negotiating the warranty and arbitration terms, which were contained in the packaging for the shingles.

The Court of Appeals indicated that the underlying sale was a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate terms. The Court found it significant that the packaging contained the notation: “Important: Read Carefully before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The Court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund, and blessed the arbitration provision.

knotted-road-sign

In the later opinion, filed September 28, the Court of Appeals addressed the South Carolina Supreme Court’s July 6, 2016 opinion in Smith v. D.R. Horton (cited in the footnote, below). In D.R. Horton, which this blog discussed on July, 14 the Supreme Court held that a national residential company’s contract contained a number of “oppressive and one-sided provisions”, including an attempted waiver of the implied warranty of habitability and a prohibition of awarding money damages of any kind. The Supreme Court held that the home purchasers lacked a meaningful ability to negotiate their contract, the only remedy through which appeared to be repair and replacement.

The difference in the two cases appears to be the location of the offending provisions. The United States Supreme Court has ruled that an arbitration agreement is separable from the contract in which it is embedded, and the issue of its validity is distinct from the substantive validity of the contract as a whole.*** The arbitration provision in D.R. Horton was construed in its entirety because various subparagraphs addressed warranty information and contained cross-references to each other. In addition, the contract did not contain a severability clause.

In the second opinion in One Belle Hall, the Court of Appeals admitted, as the supplier had conceded, that the agreement at issue was a contract of adhesion, but noted that our Supreme Court has stated that adhesion contracts are not per se unconscionable. The Court recognized that the roofing supplier’s contract continuously used language to the effect that any attempted disclaimer or limitation did not apply to purchasers in jurisdictions that disallowed them. The Court also found it significant that the agreement contained a severability clause.

In other words, since the objectionable provisions of the contract were outside the arbitration provision, and the arbitration provision is severable from the objectionable provisions, the arbitration clause is enforceable. The Court repeated its earlier point that the arbitration provision facilitates an unbiased decision by a neutral decision maker in the event of a dispute.

I believe we will see more of these cases, and I caution lawyers to be extremely careful in their drafting endeavors.

 

*  One Belle Hall Property Association v. Trammel Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1, 2016); Smith v. D.R. Horton, Inc., S.C. Supreme Court Opinion 27642 (July 6, 2016); and Parsons v. John Wieland Homes, S.C. Supreme Court Opinion 27655 (August 17, 2016).

**  One Belle Hall Property Association v. Trammel Crow Residential Company, S.C. Ct. App. Opinion 5407 (September 28, 2016)

***  Prima Paint Corporation v. Flood Conklin Mfg. Co., 388 U.S. 395 (1967)

Advertisements

Another South Carolina Arbitration Case

Standard

Following these cases is like watching a tennis match!

This is the third blog on this topic this summer! The June 7 blog surrounded a South Carolina Court of Appeals case* that held an arbitration clause in a roofing supplier’s warranty provision was not unconscionable. The lower court had ruled that the supplier’s sale of shingles was based on a contract of adhesion and that the injured property owners lacked any meaningful choice in negotiating the warranty and arbitration terms, which were actually contained in the packaging for the shingles.

The Court of Appeals indicated that the underlying sale was a typical modern transaction for goods in which the buyer never has direct contact with the manufacturer to negotiate terms. The Court found it significant that the packaging for the shingles contained a notation:  “Important: Read Carefully Before Opening” providing that if the purchaser is not satisfied with the terms of the warranty, then all unopened boxes should be returned. The Court pointed to the standard warranty in the marketplace that gives buyers the choice of keeping the goods or rejecting them by returning them for a refund, and blessed the arbitration provision.

SCORE:  15- Love in favor of arbitration

tennis ball court

Let’s Talk Dirt on July 14 addressed a South Carolina Supreme Court case that appeared to take the opposite approach. ** A national residential construction company’s contract contained a number of “oppressive and one-sided provisions”, including an attempted waiver of the implied warranty of habitability and a prohibition on awarding money damages of any kind. The Supreme Court held that the home purchasers lacked a meaningful ability to negotiate their contract, the only remedy through which appeared to be repair or replacement.

SCORE:  15-all.

Note that Justices Kittredge and Pleicones dissented, stating that the contract involves interstate commerce and, as a result, is subject to the Federal Arbitration Act (FAA), “a fact conspicuously absent in the majority opinion”. The dissent stated that federal law requires that unless the claim of unconscionability goes to the arbitration clause itself, the issue of enforceability must be resolved by the arbitrator, not by the courts. The majority construed the Warranties and Dispute Resolution provisions of the contract as comprising the arbitration agreement and thus circumvented controlling federal law, according to the dissent.

Since the property owners raised no challenges to the arbitration clause itself, the dissent would have required that the other challenges be resolved through arbitration.

In a case dated August 17***, the majority decision is written by Chief Justice Pleicones with Justice Kittredge concurring. (Do you see a pattern here?) This case involved a residential subdivision that had been built on property previously used as an industrial site. The developer had demolished and removed all visible evidence of the industrial site and removed underground pipes, valves and tanks.

The plaintiffs bought a “spec” home in the subdivision and later discovered on their property PVC pipes and a metal lined concrete box containing “black sludge”, which tested positive as a hazardous substance. The present lawsuit was brought, alleging the developer failed to disclose the property defects. The developer moved to compel arbitration.

Paragraph 21 of the purchase agreement stated that the purchaser had received and read a copy of the warranty and consented to its terms. The purchasers had been provided with a “Homeowner Handbook” containing the warranty.

The circuit court, which was affirmed by the Court of Appeals, found the arbitration clause was enforceable for two reasons:

  1. it was located within the warranty booklet, making its scope limited to claims under the warranty. The Supreme Court held that the plain and unambiguous language of the arbitration clause provides that all claims, including ones based in warranty, are subject to arbitration.
  2. The alleged outrageous tortious conduct of the developer in failing to disclose concealed contamination made the outrageous torts exception to arbitration enforcement applicable. The Supreme Court overruled all South Carolina cases that applied to outrageous torts exception, making that exception no longer viable in South Carolina.

The Supreme Court discussed the heavy presumption in favor of arbitration by the FAA and in the federal courts and the push to place arbitration agreements on equal footing with other contracts and enforce them in accordance with their terms.

SCORE30-15 in favor of arbitration

You won’t be surprised to learn that there was a dissent, this time by Acting Justice Toal, and a concurrence, by Justices Hearn and Beatty.

And remember that the CFPB recently announced a proposed rule that would ban financial companies from using mandatory pre-dispute arbitration clauses to deny consumers the right to join class action lawsuits.

SCORE:  30-all

All of these authorities affect matters involving dirt law. So the tennis match involving arbitration clauses in our area is still being played, and we will continue to watch!

*One Belle Hall Property Owners Association v. Trammell Crow Residential Company, S.C. Ct. App. Opinion 5407 (June 1, 2016)
** Smith v. D.R. Horton, Inc., S.C. Supreme Court Opinion 27643 (July 6, 2016)
*** Parsons v. John Wieland Homes, S.C. Supreme Court Opinion 27655 (August 17, 2016

Feds Extend Footprint of Shell Game

Standard

Will this obligation eventually extend to South Carolina?

Secretly purchasing expensive real estate continues to be a popular method for criminals to launder dirty money. Setting up shell entities allows these criminals to hide their identities. When the real estate is later sold, the money has been miraculously cleaned.

Early this year, the Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasurer issued an order that required the four largest title insurance companies to identify the natural persons or “beneficial owners” behind the legal entities that purchase some expensive residential properties.

shell game

At that time, the reach of the project extended to the Borough of Manhattan in New York City, and Dade County, Florida, where Miami is located. In those two locations, the designated title insurance companies were required to disclose to the government the names of buyers who paid cash for properties over $1 million in Miami and over $3 million in Manhattan. The natural persons behind the legal entities had to be reported for any ownership of at least 25 percent in an affected property.

Now, all title insurance underwriters, in addition to their affiliates and agents, will be involved, and the footprint of the project is being extended effective August 28.

The targeted areas and their price thresholds will be:

  • Borough of Manhattan, New York; $3 million;
  • Boroughs of Brooklyn, Queens and Bronx, New York; $1.5 million;
  • Borough of Staten Island, New York; $1.5 million;
  • Miami-Dade, Broward and Palm Beach Counties, Florida; $1 million;
  • Los Angeles, San Francisco, San Mateo, Santa Clara and San Diego Counties, California; $2 million; and
  • Bexar County (San Antonio), Texas; $500,000.

Although the initial project was termed temporary and exploratory, FinCEN has indicated that the project is helping law enforcement identify possible illicit activity and is also informing future regulatory approaches.

We have no way of knowing whether or when this program may be expanded to South Carolina, but it is entirely likely that expensive properties along our coast are being used in money laundering schemes. We will keep a close watch on this program for possible expansion!

County May Owe Duty to Lot Owners in Failed Subdivision

Standard

Infrastructure regulations were not followed

scales - blue backgroundOn January 6, the S.C. Court of Appeals reversed the Georgetown County Circuit Court’s directed verdict and remanded a case involving failed West Stewart Subdivision.* The developer, Harmony Holdings, LLC, went belly up in 2007, leaving the lot owners without roads and utilities after the County failed to follow its own regulations that provided a safety net for such catastrophes.

The plaintiff owned two lots in the subdivision, and filed a negligence action, arguing that Georgetown County had a “tort-like” duty to lot owners under the plain language of its development regulations. The County denied that it owed a duty to lot owners.

The County attorney explained the administrative issues at trial. He testified that in South Carolina, a developer is generally not allowed to sell lots that do not have infrastructure (roads, water and sewer). County regulations, however, allow the County to accept cash, bonds, financial guarantees or letters of credit to ensure money is available to complete infrastructure in case a developer fails.

Under the regulations in question, the County had discretion to accept a letter of credit equal to 125% of the cost estimate to complete the infrastructure. In this case, the developer posted a letter of credit on May 23, 2006 in the amount of $1,301,705 based on a cost estimate of $1,040,000.

Also under the regulations, the County had the power to approve reductions in the letter of credit upon receipt of an engineer’s certification that a certain amount of the work had been completed and sufficient funds were available for the remaining work. Other technical procedures were also required. The County allowed for a reduction in the letter of credit on July 20, 2006, October 9, 2006 and November 8, 2006, reducing the letter of credit to $553,370. In December of 2006, the County was advised that the estimated cost to complete the infrastructure was $1,153,205, which was higher than the original estimate. Despite this information, the letter of credit was reduced again on March 9, 2007 to $156,704.

The letter of credit expired in May of 2007, and the developer gave the county a check for $140,000. In August of 2007, the developer informed the County that it no longer had the financial means to complete the construction. Then the developer declared bankruptcy.

Repko described his lot as “woods” accessible by a path but inaccessible by a road. He testified that he believes his property is valued at “zero”. He said he pays property taxes on his lot, but the County will not allow him to build because of the absence of basic utilities.

The trial court directed a verdict in favor of the County on the grounds that the regulations do not create a private duty to lot owners. (Other issues were argued that will not be discussed here.) The Court of Appeals agreed with the lot owner that the County owed a special duty to him with respect to the County’s management of the financial guaranty that allowed the developer to sell lots.

inigo montoya memeThe County had relied on a 1993 Hilton Head case.** In that case, the preamble to the development ordinances stated, “The town council finds that the health, safety and welfare of the public is in actual danger….if development is allowed to continue without limitation.” When the development failed, a lot owner sued the Town, claiming it had negligently administered its ordinances. The Supreme Court held that the ordinances did not create a special duty to lot owners because their essential purpose, according to the preamble, was to protect the public from overdevelopment.

The Court of Appeals in the current case held that, unlike the Hilton Head ordinances, the Georgetown County regulations contained no express language declaring their purpose, but reviewing them as a whole, the purpose is to protect lot owners in the event the developer does not complete infrastructure.

I expect we have not seen the end of this case!

* Repko v. County of Georgetown, Opinion 5374, January 6, 2016.

** Brady Development Co. v. Town of Hilton Head Island, 312 S.C. 73, 439 S.E.2d 266 (1993).

A Short Time Ago in a Revenue Office Not Far Away …

Standard

Check them out in DOR Information Letter #15-20

The South Carolina Department of Revenue (DOR) issued a Revenue Ruling and an Information Letter in 2015 addressing deed recording fees and the affidavits that must accompany deeds.

Revenue Ruling #15-3, issued earlier this year, contains a comprehensive treatment of the subject, and Information Letter #15-20, issued on December 11, creates new affidavit forms, the Affidavit for Taxable or Exempt Transfers and the Affidavit for Exempt Transfers. Former affidavits, created in 1996, and using the term “arm’s length transaction” were decertified.

darth vader

“Luke … I am your lawyer.”

Deed recording fees of $1.35 (state) and $.55 (county) per $500 or any fractional part of $500 of the value of the real estate are imposed by §12-24-10 of the South Carolina Code for the “privilege” of recording a deed. This has not changed. Also unchanged is the list of 15 exemptions, and the statement that deeds of distribution and deeds transferring property from a trust to a trust distributee upon the settlor’s death are not subject to the fees.

One statutory change from 2015 was addressed in the Information Letter. Code §2-59-140 was amended in June to provide in subjection (E) that deductions from “value” include “any lien or encumbrance on realty in the possession of a forfeited land commission which may subsequently be waived or reduced after the transfer under a signed contract or agreement between the lienholder and the buyer existing before the transfer.” This change was added to Item 5 of the Affidavit for Taxable and Exempt Transfers.

Real estate practitioners can find the Revenue Ruling and the Information Letter at www.dor.sc.gov. Be sure to use the new forms!

SC Supreme Court Crafts New Foreclosure Law

Standard

foreclosureFailure to file bond does not render appeal moot

In a case decided on November 4*, the Supreme Court of South Carolina interpreted S.C. Code §18-9-170** in a way that may come as a surprise to dirt lawyers.

The case arose from the foreclosure of an HOA lien. The absentee owner defaulted in the foreclosure and did not appeal. Instead, he moved to vacate the resulting sale. When his motion to vacate was denied, the master issued a deed to the successful bidder, and the defaulting owner appealed without filing an appeal bond.

The Court of Appeals dismissed the appeal, holding that the property owner failed to comply with the statute that would have stayed the sale, and, therefore the master-in-equity’s deed rendered the appeal moot.

The Supreme Court reversed and remanded the case to the Court of Appeals for a decision on the merits.

Real estate practitioners have likely read §18-9-170 to mean that failure to file a bond in this situation renders the appeal moot. This case indicates that the failure to file a bond may not be an issue. If no bond is filed, the master may issue the deed to the successful bidder, but the appeal can proceed. By implication, if the appeal is successful, then the purchaser’s deed may be set aside. The Court specifically stated that the master’s deed does not moot the appeal, and the appellate court may reach the merits.

For title examiners and the lawyers who rely on title examinations, this case means that whether or not an appeal bond has been filed, we must pay attention to a case on appeal.

* Wachesaw Plantation East Community Services Association, Inc., v. Alexander, Appellate Case No. 2012-21340, Opinion 27585

** S.C. Code §18-9-170 reads in relevant portion: “If the judgment appealed from directs the sale or delivery of possession of real property, the execution of the judgment shall not be stayed unless a written undertaking be executed….”

Grace Period for TRID Enforcement? Sort of ….

Standard

hourglassOn October 1, Director Richard Cordray of the CFPB, responded to a request* from the American Bankers Association (ABA) for clarification on how the TRID rules will be enforced in the first few months of implementation. The answer was complicated but ultimately signified examiners will initially look at the good faith efforts of lenders to comply.

The letter, which copied 17 industry trade associations, recognized the burden on the mortgage industry to make significant systems and operational changes and engage in extensive coordination with third parties. Initially, according to the letter, examiners will evaluate a lender’s compliance management system, implementation plan, staff training and overall efforts to comply, recognizing the scope and scale of the necessary changes. The letter stated:

 “Examiners will expect supervised entities to make good faith efforts to comply with the Rule’s requirements in a timely manner.”

As a vote of confidence, the letter concluded that this examination process will be similar to the agency’s approach after the January 2014 effective date of several mortgage rules, where the experience was “our institutions did make good faith efforts to comply and were typically successful in doing so.”

No time limit was stated for this initial examination methodology.

On October 6, Fannie Mae and Freddie Mac followed with announcements that they will not conduct routine file reviews for technical compliance with TRID but will evaluate whether correct forms are being used in the closing process. Fannie and Freddie expect lenders to make good faith efforts to comply with TRID. Failure to use the correct forms will be deemed a violation of the good faith effort standard.

Lenders were reminded that Fannie and Freddie have several remedies for a lender’s violation of law that may impair the ability to enforce notes and mortgages. But the announcements stated that the remedies will be used in two limited circumstances in connection with TRID: (1) where the required forms are not used; and (2) where a court of law, regulator or other authoritative body determines that a practice violates TRID and impairs the ability to enforce the note and mortgage or would results in assignee liability

No time limit was placed on this grace period.

On October 16, Federal Housing Administration’s (FHA) Office of Single Family Housing announced that it will not include technical TRID compliance as an element of its routine quality control reviews, except to determine that correct forms were used, until April 16, 2016.

Efforts are underway in Congress to establish a formal grace period until January 1, 2016. The Homebuyer’s Assistance Act has passed in the House and is up for a vote in the Senate.

*The request was made by the ABA to FFIEC, which is comprised of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Comptroller of the Currency, the CFPB, and the State Liaison Committee.