South Carolina Court of Appeals

Unpublished Court of Appeals case is instructive in wire fraud arena

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I hate to report that any South Carolina law firm has fallen victim to fraud, but my friend and successor at Chicago Title, Jennifer Rubin, tells me that fraud is a daily challenge for closing attorneys in South Carolina. I am going to discuss this case delicately, because I believe this might happen to anyone who handles closings. I have sympathy for each closing law firm because they remain under constant pressure. But I also believe that everyone needs all the warnings we can collectively muster! This blog is yet another warning.

First, let me thank my friend, Bill Booth, Columbia attorney who keeps me posted on cases he follows. I appreciate being kept informed. This is an unpublished South Carolina Court of Appeals case* Bill brought to my attention. Bill said, “The fraudster was very clever in how he changed the seller’s email by a single letter.” Clever indeed! I stared at the real email address and the fraudulent email address for several minutes and failed to find the discrepancy. I handed the opinion to my husband and asked him to see if he could find it. He did, but it took him awhile.

Here are the two email addresses: mail4marvin@gmail.com vs. mail4rnarvin@gmail.com. Do you see it? The “m” in marvin was changed to “rn”. The Court of Appeals called this discrepancy “cunning”. I’ll say!

At trial, the seller was awarded a $10,306 verdict against the law firm, and the Court of Appeals affirmed. I assume the law firm will appeal to the South Carolina Supreme Court, and we may get further guidance.

Here are the facts. In 2016, Marvin Gipson contracted to sell his property to Clyde and Betty Williamson for $12,000. Gipson lived in Texas, and his local real estate agent recommended the closing firm, which represented both sides. Gipson testified that his only contact with the law firm was by mail, telephone, and email, mostly with an assistant.

Prior to closing, according to Gipson, the assistant told Gipson that she had received wiring instructions. Gipson testified he told her that he had never sent wiring instructions and expected to receive a check. He said he never received a phone call informing him that the closing had been completed and never received the check. He waited eleven days before contacting the law firm to report that he hadn’t received his seller’s proceeds.

Investigation revealed that the assistant had emailed the fraudulent address that the closing had taken place. By return email, she received fraudulent wiring instructions.

At trial, the law firm presented expert witness testimony to the effect that the law firm’s server was not hacked, and that the theft was facilitated by a “man in the middle attack”, wherein the thief was privy to information possibly obtained through a breach of Gipson’s or the real estate agent’s systems or by overhearing information. But the law firm was held liable at the trial level and by the Court of Appeals.

Lawyers, here is my advice. Please give your closing paralegals time. They need time to discover issues. They need time to investigate discrepancies. Please also give them training, not just once but weekly or even daily. They need to know about this case! No amount of training is too much. Talk to your title company. They have resources to assist! Use those resources! Stay up to date yourself! We spent three years in law school learning to spot issues. Apply those skills to your closing practices to spot those difficult issues.

Be very careful out there!

*South Carolina Court of Appeals Unpublished Opinion 2023-UP-324 (October 4, 2023)

South Carolina has another builder arbitration case

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Real estate law never bores me, but our cases may seem particularly mundane considering the Murdaugh prosecution that has gripped our state for more than a month. You may want to put this blog aside until the jury returns its verdict. I’ve seen so many photos on social media of groups of lawyers watching the case together that I am confident real estate is not top of mind!

Huskins v. Mungo Homes, LLC* is a South Carolina Court of Appeals case which was originally issued June 1, 2022, then withdrawn, substituted and refiled February 15, 2023.

The Huskins signed a Purchase Agreement with Mungo in June 2015 for a home in Westcott Ridge subdivision in Irmo. The document consisted of three pages. The first page contained a statutory notice of arbitration, the second page included a paragraph entitled “LIMITED WARRANTY”, and the third page included a paragraph entitled “ARBITRATION AND CLAIMS.”

In 2017, the Huskins filed an action against Mungo alleging the Purchase Agreement violated South Carolina law by disclaiming implied warranties without providing for a price reduction or other benefit to the purchaser for relinquishing those rights. The causes of action included: (1) breach of contract and the implied covenant of good faith and fair dealing; (2) unjust enrichment; (3) violation of the South Carolina Unfair Trade Practices Act, and (4) declaratory relief regarding the validity of the waiver and release of warranty rights and the validity of Mungo’s purported transfer of all remaining warranty obligations to a third party.

Mungo filed a motion to dismiss and compel arbitration. The Huskins’ responsive memorandum argued that the arbitration clause was unconscionable and unenforceable. They asserted that the limitation of warranties provision should be considered as a part of the agreement to arbitrate. The Circuit Court issued an order granting the motion to dismiss and compelling arbitration. In ruling the arbitration clause was not one-sided and unconscionable, the Circuit Court found that (1) the limited warranty provision must be read in isolation from the arbitration clause; and (2) terms in the arbitration clause pertaining to a 90-day time limit were not one-sided and oppressive because they did not waive any rights or remedies otherwise available by law.

The Court of Appeals initially held that the Circuit Court’s order was immediately appealable, stating that our state procedural rules, rather than the Federal Arbitration Act, govern appealability of arbitration orders. While arbitration orders are not typically immediately appealable under South Carolina law, this order had granted Mungo’s Rule 12(b)(6) motion to dismiss, which is an appealable order.

The Court next held that the arbitration clause must be considered separately from the limited warranty provision, citing cases to the effect that arbitration provisions are separable from the contracts in which they are imbedded. A prior D.R. Horton South Carolina Supreme Court case** considered the arbitration and warranty provisions together, in part because the title of the paragraph, “Warranties and Dispute Resolution” signaled that the provisions should be read as a whole. Since the Mungo paragraphs were separated, the Court of Appeals said they should be read separately. In addition, the two provisions did not contain cross references.

The Court next addressed the Huskins’ argument that the limitation of claims provision restricted the statutory limitations period from three years to 90 days and was therefore not severable from the arbitration clause. The Court agreed that the provision that limited the statute of limitations is one-sided and oppressive, but held that the arbitration clause is enforceable because the unconscionable provision is severable.

After concluding that the Huskins lacked a meaningful choice in entering the arbitration clause, the Court of Appeals held that the arbitration clause’s shortening of the statute of limitations violates South Carolina law and is therefore unconscionable and unenforceable.

The Circuit Court’s order was affirmed as modified.

Now …. back to the Murdaugh trial!

*South Carolina Court of Appeals Opinion 5916 (June 1, 2022, Withdrawn, Substituted and Refiled February 15, 2023.

**Smith v. D.R. Horton, Inc., 417 S.C. 42, 790 S.E.2d 1 (2016).

Easements don’t typically lead to criminal contempt charges

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These horrible commercial neighbors have fought (and litigated) for years!

Our Advance Sheet from August 10 contained two Court of Appeals easement cases involving adjoining commercial properties in Murrells Inlet. Last week’s blog discussed the first of the two cases, which involved an award of attorneys’ fees*. This week, we’ll take up the second case. A footnote in the first case indicates the parties were heading to trial again immediately after oral arguments. These neighbors are obviously not getting along!

The litigation involves a restaurant property owned by Gulfstream Café, Inc. and an adjoining property containing a marina, a store and a parking lot owned by Palmetto Industrial Development, LLC. Palmetto’s predecessor in title granted four non-exclusive easements in 1986 and 1990 to Gulfstream. The easements allowed for ingress and egress and vehicular parking. It was anticipated that the marina property would use the parking primarily in the daytime and the restaurant property would use the parking primarily in the evening.

The easements included general warranties, the same language that appears in our normal general warranty deeds: “(A) does hereby bind itself and its successors and assigns, to warrant and forever defend, all and singular, the said easement unto (B), its successors and assigns, against itself and its successors and assigns, and all others whomsoever lawfully claiming, or to claim the same or any part thereof.” This language is consistent with South Carolina Code §27-7-10.

This case actually involves a criminal contempt finding in the Circuit Court for parking a golf cart in front of the easement holder’s delivery gate! The golf cart was parked there on multiple occasions in a normal parking spot. But Gulfstream couldn’t orchestrate efficient deliveries while the golf cart blocked its delivery gate. The parties are obviously horrible neighbors.

The second case reveals an interesting fact. The property owner of the burdened property intended to demolish its building and rebuild a larger building on stilts and extending over the parking lot. The owner of the easement was having none of that!

In 2017, the Circuit Court found criminal contempt and ordered a fine of $3,000 or thirty days in jail. In 2018, the parties proceeded to trial, and a jury awarded Gulfstream $1,000 for interference with the easement. The Circuit Court entered a permanent injunction: “(Appellants) are enjoined from preventing (Gulfstream) from enjoying the right(s) granted to it in the recorded nonexclusive joint easement. (Appellants) are restrained and may not expand the outside boundaries of any new building beyond those previously used. The (c)ourt is specifically not talking about height, only the outside boundaries.”

The parties fought on, seeking to clarify the easement, and seeking another criminal contempt finding. The Court amended the injunction for clarification. The Appellants moved again to clarify the injunction and argued that an injunction should not have been granted because the jury awarded monetary relief. Other arguments related to the building’s construction and that the injunction enlarged the easement. The Circuit Court denied the motions and issued a finding that the Appellants “engaged in criminal contempt of court by deliberate and intentional acts by placement of a golf cart which interfered with the proper use of the non-exclusive easement in this matter and was in direct violation of the (c)ourt’s previous order.” Appellants were fined $5,000.

Skipping a little of the very long procedural history, let’s move on to the appeal. To make a very long story shorter, the Court of Appeals held that the Circuit Court did not abuse its discretion in finding Appellants in criminal contempt. You should read these two entertaining cases. Real estate lawyers don’t often have the pleasure of being entertained by published opinions!

*The Gulfstream Café, Inc. v. Palmetto Industrial Development, LLC, South Carolina Court of Appeals Opinion 5935 (August 20, 2022).

** The Gulfstream Café, Inc., vs Lawhon, South Carolina Court of Appeals Opinion 5936 (August 20, 2022).

Did Columbia destroy an archeological structure?

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Court of Appeals holds the City is not responsible

On November 10, the South Carolina Court of Appeals affirmed a summary judgment order in favor of the City of Columbia concerning the alleged destruction of an archeological and historical bridge abutment during a sewer rehabilitation project*.

The Brinkmans, Colemans, Fosters and Collins (property owners) own real estate on Castle Road on the banks of the Broad River in Richland County. The City of Columbia owns and operates sewer lines that run beneath portions of the property and has a permanent, 15-foot easement across the property for the purpose of maintaining the sewer lines. In 2014, the City began a sewer rehabilitation project which required access to the sewer lines.

According to the property owners, two bridge abutments stood on their property located outside the easement. The owners claim these abutments, which were made of carved rock, were built in the 1700s and were the “oldest existing structures in the Midlands.”

One of the owners testified that he shouted to the City’s contractors and said there was a valued monument on the property. Unfortunately, while the City and the contractors were clearing the land, they destroyed the stones that allegedly comprised the bridge abutments. The City acquiesced to the owner’s request that all work cease, and the property owners brought the subject lawsuit alleging various causes of action, including the destruction of archaeological resources in violation of §16-11-780 of the South Carolina Code.

This statute states that it is unlawful for a person to willfully, knowingly, or maliciously enter upon the lands of another and disturb or excavate a prehistoric or historic site for the purpose of discovering, uncovering, moving, removing or attempting to remove an archaeological resource.

The property owner’s expert testified that he believed the structures were historic abutments from the 1700s or early 1800s and likely to be the “Compty bridge abutment.” He explained that additional excavation and review of other properties across the river would have been the appropriate “next step”.

The property owners submitted an application in 2008 to the National Register of Historic Places, but the Department responded that a great deal more research and archeological investigation was needed before a determination of eligibility could be made.

The record contains a screenshot from the website “ArchSite. The property owner’s expert testified that ArchSite is a multi-agency website that allows access to the archaeological resources database. He explained that when ArchSite receives information about historic sites, it verifies the information and posts it to the website. The image in the record shows a rendering of part of the Broad River and Castle Road, and it includes the notation “Historic Areas: Broad River Ferry and Bridge Site.”

The trial court found no governing preservation or conservation authority had recognized the structures as either archaeological resources or historical structures. In granting the City’s motion for summary judgment, the court found that the City was not liable under the statute.

The Court of Appeals agreed, holding that no evidence exists that the City cleared the land “for the purpose of” discovering, uncovering, moving, removing or attempting to remove an archaeological resource. Clearly, the City was attempting to clear the easement area to access the sewer lines. In addition, the owners provided no evidence that the City had any knowledge of the historic nature of the site.

The owner who shouted at the contractors could not testify that the contractors heard him and did not know whether this incident took place before or after the destruction of the stones. In addition, the Court held that the owners failed to show the City was obligated to consult ArchSite. The Court also questioned whether the entry on ArchSite contained sufficient information to conclude the property is historic because the entry indicates the site is “not eligible or requires evaluation.”

Finally, the Court held that regardless of whether any preservation or conservation authorities designed the structures as archaeological resources, the property owners failed to demonstrate the City had either actual or constructive knowledge of the existence of such resources.

*Brinkman v. Weston & Sampson Engineers, Inc., South Carolina Court of Appeals Opinion No. 5870, November 10, 2021

Borrower sues mortgage lender for violation of attorney preference statute

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Court of Appeals holds lender’s foreclosure action is not a compulsory counterclaim

South Carolina’s Court of Appeals ruled on a noteworthy foreclosure case* in August.

The facts are interesting. In 1998, the borrowers signed a fixed-rate note in the amount of $60,400 at a 9.99% interest rate secured by a mortgage on property in Gaston. The note contained a balloon provision requiring payment in full on July 1, 2013.

On June 27, 2013, days before the note matured, the borrowers brought an action against the lender alleging a violation of South Carolina Code §37-10-102, the Attorney Preference Statute. The complaint alleged that no attorney supervised the closing, that the loan was unconscionable, and that the borrowers were entitled to damages, attorney’s fees and penalties as provided in the Consumer Protection Code. In addition, the complaint asserted a claim under the Unfair Trade Practices Act. All the allegations were premised on the same alleged violation of the Attorney Preference Statute.

The borrowers immediately defaulted on the note, and the lender filed an answer asserting no counterclaims. At trial, the jury found for the lender. About a year later, the borrowers sent a letter by certified mail to the lender requesting that it satisfy the mortgage. The letter included a $40 check to pay the recording fee for the mortgage satisfaction. The lender refused to satisfy the mortgage and returned the check.

The lender brought the present action for foreclosure in October of 2016. The borrowers asserted defenses of res judicata, laches, unclean hands, waiver, and setoff, but admitted no payments had been made on the loan after July 1, 2013. The borrowers then sought a declaratory judgment that the lender held no mortgage on the property, or, alternatively, that the mortgage was unenforceable. They alleged that the lender was liable for failing to satisfy the mortgage and for noncompliance with the Attorney Preference Statute. The lender denied the allegations and argued that the claims under the Attorney Preference Statute were time-barred.

Both parties sought partial summary judgments before the master-in-equity. The master granter the borrower’s motion and denied the lender’s motion. He ruled that the mortgage was satisfied and instructed the lender to file a satisfaction.

On appeal, the lender argued the master erred by finding its foreclosure action was a compulsory counterclaim in the 2013 action. The Court of Appeals agreed, holding that the two claims arose out of separate transactions. The Attorney Preference claim arose from the closing, while the foreclosure arose from the borrower’s default, according to the Court. The Court reversed the master’s award of partial summary judgment to the borrower and remanded the case for further proceedings. Because of its decision on this issue, the Court determined that it did not need to address the remaining issues.

*Deutsche Bank National Trust Company v. Estate of Houck, South Carolina Court of Appeals Opinion 5844, August 11, 2021.

Court decides an interesting, but unpublished, case on the effect of a plat notation

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Unpublished opinions don’t typically get my attention, but my friend, Bill Booth, sent this one* to me because he found it interesting, and I do, too. As a reminder, unpublished opinions have no precedential value, but they sometimes provide insight on how the Court might react in a similar situation, at least under the current makeup of the court.

The issue in this case was whether a notation on a subdivision plat that certain lots were “for agricultural use only” created a valid restriction of the use of the lots. Mikell Scarborough, Master-in-Equity for Charleston County, granted summary judgment, relying on extrinsic evidence to conclude that there was no intent to create a restriction despite the plain language on the face of the plat. That decision was affirmed.

The Court cited familiar cases holding that restrictive covenants are contractual in nature and must be strictly construed in favor of the free use of property. The Court also referred to cases holding that when a deed describes land as shown on a plat, the plat becomes a part of the deed. The interesting twist became whether the plat notation created an ambiguity that would allow the introduction of extrinsic evidence.

The Court found that the language in the plat was not ambiguous, but that the origin of the note created the ambiguity. The surveyor provided an affidavit to the effect that the Charleston County Planning Commission placed the agricultural use restriction on the plat “for the purpose of indicating that Charleston County would not, at that time, approve building permits for the lots because (the lots in question) did not meet current minimum standards for a modified conventional sub-service disposal system.”

When the plat was submitted for approval, the property owners included a letter explaining they were aware that the land possessed poor soil conditions for septic systems. The letter requested that the subdivision be approved with the stipulation that any lot that did not support a septic system would be restricted from becoming a building lot until public sewer service became available.

The case doesn’t make this point clear, but I am assuming the Appellant sued other lot owners who had built on their lots despite the plat notation. In other words, the Appellant wanted the restriction enforced as to other lots, not the lot the Appellant purchased. Interestingly, one house had been built before the Appellant purchased its lot.

A representative of the Appellant claimed he relied on the plat notation and that his title insurance company told him the lots were restricted. The Court found it significant, however, that the property owners who recorded the plat did not intend to restrict the property.

The Appellant argued that the deeds for all the lots specifically state that the property is subject to all restrictions, reservations, easements and other limitations that appear of record, including on the Plat. The Court held, citing 20 Am. Jur. 2d Covenants, Conditions, and Restrictions §151 (2015) that common “subject to” language does not create a restriction where none exists.

The Appellant also argued that an agricultural use exception in the title insurance policy was evidence that the restriction ran with the land, but the Court held that the title insurance company was merely noting the provision was on the plat so that it would not be liable if the Appellant could not build on its lot.  

The Court concluded that the record does not contain a scintilla of evidence to support the imposition of a building restriction on the Respondents’ lots.

Carpenter Braselton, LLC v. Roberts, South Carolina Court of Appeals Unpublished Opinion No. 2021-UP-280.

Court of Appeals decides Hilton Head easement case

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Real estate cases involving property in Hilton Head Island are almost always interesting, and this one* is no exception. I’m sure my friend, Dick Unger, will be discussing it fully in his upcoming revised treatise on easements for the South Carolina Bar. In the meantime, here’s enough of a description to get this case on your radar.

The case involves a welcome center, a gas station and a shopping complex on Palmetto Bay Road near Sea Pines Circle. Enmark owns the gas station which is adjacent to the welcome center. The shopping complex is located behind the gas station and adjacent to the welcome center. The roadway in question covers a portion of the welcome center property and connects the station to the parking lot on the shopping center property.

The roadway initially forked around a small vegetative island located on the shopping center property and had two connections to the parking lot. The shopping center removed the island and placed a trash dumpster in its place. (That doesn’t sound like something that would have been well received in Hilton Head!) The station’s customers use the roadway as an alternative entrance and exit for the station, and the general public uses it to bypass Sea Pines Circle and access the shopping center.

The case outlines the chains of title for the welcome center and gas station properties. When a dispute about the roadway arose, the property owners entered into a tolling agreement in mid-2013, in which they agreed the owner of the welcome center would file a complaint seeking a declaratory judgment to determine each party’s rights as to the roadway.

The welcome center owner then involved the Town of Hilton Head, which wrote a letter stating the roadway violated Hilton Head’s Land Management Ordinances. The town ordered the road to be removed and replaced with a vegetative buffer.  The gas station owner informed the Hilton Head official about the existence of the tolling agreement and of the importance of the roadway to its business and the public. The town stated that its letter was premature and subsequently decided the roadway was grandfathered into the Land Management Ordinances.

The welcome center owner filed a complaint in August of 2013 seeking an order that the gas station owner had neither an express nor a prescriptive easement. The Master-In-Equity found the existence of a prescriptive easement, and this appeal followed.

The Court of Appeals first eliminated the involvement of the town as a determinative factor in its decision, holding that the 2013 letter was not a final decision.

The Court next outlined the elements of a prescriptive easement: (1) continued and uninterrupted use or enjoyment of the right for a period of twenty years; (2) the identity of the thing enjoyed; and (3) the use or enjoyment which is either adverse or under claim of right.

Citing an earlier case, the Court of Appeals said our Supreme Court had clarified the third element, holding “adverse” and “claim of right” are in effect the same thing. The Supreme Court had simplified the elements stating the claimant must identify the thing enjoyed and show his use has been open, notorious, continuous, uninterrupted, and contrary to the burdened property owner’s rights for a period of twenty years.

The welcome center owner argued that the identity of the thing enjoyed was not established because the roadway is an “easement to nowhere”, not terminating on a public road. The Court held that termination on a public road was not required.

Continuous use was established through tacking the periods of use by prior owners in the gas station’s chain of title. The welcome center argued the use was interrupted by three threatening letters (dated 1994, 2008 and 2012, respectively), plus the placement by the shopping center of the garbage bin. The Court held that the letters were too late to interrupt the required twenty-year period, and the placement of the garbage bin was irrelevant because it was not placed by the owner of the burdened estate.

The owner of the welcome center raised multiple arguments as to the lack of adverse use, but it conceded in its post-trial brief that the existence of the easement would not be presumed “only if the use of the (roadway) during the entire prescriptive period was uninterrupted”, an issue upon which the Court had previously ruled.

I give you this case as an interesting discussion of prescriptive easement law in South Carolina and wait with you to hear Dick Unger’s words of wisdom!

 

*Carolina Center Building Corp. v. Enmark Stations, Inc., South Carolina Court of Appeals Opinion 5804 (February 10, 2021).

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.

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).

Newberry land-transaction dispute replete with equitable issues

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We don’t often see current land-transaction dispute cases among South Carolina’s appellate court decisions, but the Court of Appeals handed down an opinion on September 16 that covers the gamut of equitable issues. Not uncommon, though, is that the facts in this equitable case involving real estate, like most, are quite interesting.

The use of the property in the case, Shirey v. Bishop*, is interesting in itself. Mr. and Mrs. Bishop operated a grave digging and burial vault business on the property for more than 30 years. Mr. Bishop died in 2010, leaving his wife to run the business by herself. Mrs. Bishop suffered from depression and anxiety and ultimately determined that she did not want to continue operating the business.

In 2012, Mrs. Bishop entered into a contract to sell the property to her niece, Cassandra Robinson. Although the bank wasn’t consulted, Robinson agreed to assume the mortgage and make the monthly payments until the mortgage was satisfied.

In 2014, however, Mrs. Bishop approached Shirey about purchasing the property, and a contract was signed in 2015 to sell the property to Shirey for $125,000. (Apparently Robinson was late on many mortgage payments.) The closing was to occur between August 3 and August 12, 2015. Time was stated to be of the essence.

On August 12, 2015, Shirey attempted to close by tendering funds to his attorney. After it became apparent that Mrs. Bishop was not going to appear, Shirey’s attorney called Bishop to ask if the closing period could be extended to August 13. Bishop agreed.

On August 13, Shirey arrived at his attorney’s office, but Bishop again failed to appear. Bishop’s doctor sent a note to Shirey’s attorney asking that Bishop be excused from the closing. (I’ve never seen a doctor’s excuse for a closing!) However, that afternoon, Bishop entered into a second contract with Robinson. This contract added a provision that Bishop would indemnify Robinson against “any and all issues of illegality or fraud concerning the transaction.” Bishop executed a deed conveying the property to Robinson, and Robinson recorded the deed the same day.

This lawsuit followed. The special referee ordered specific performance in favor of Shirey and further determined that Shirey was a bona fide purchaser who took free of any interest of Robinson, that Robinson and Bishop were in a confidential relationship, that the phone call from Shirey’s attorney to Bishop was tantamount to an extension of the contract, and that Bishop’s entering into the 2015 contract with Robinson demonstrated an intention to hold Robinson in default of the 2012 contract.

The Court of Appeals affirmed and made the following points:

  1.  Bishop and Robinson waived their statute of frauds argument by failing to plead it or argue it in the lower court.
  2.  Robinson was not entitled to the property under the 2012 contract because the 2015 contract held her in default.
  3.  The equities in the situation favored Shirey.
  4.  Bishop and Robinson were in a confidential relationship, not only because of their familial relationship, which is not sufficient standing alone, but because the facts indicated Bishop trusted Robinson and failed to seek legal advice. Additionally, Robinson drafted her second contract, and Bishop testified she didn’t understand what she was signing.
  5.  Shirey partially performed by tendering funds.
  6.  Shirey was a bona fide purchaser because he did not have notice of Robinson’s claim at the time he attempted to close. The Court held he had the “best right to” the title to the property.
  7.  Shirey was entitled to attorney’s fees because he prevailed under his contract, which provided for the award of attorney’s fees to the successful party.

All these issues are discussed in detail, and I recommend this case to any lawyer who seeks a refresher on equitable questions involving real estate under South Carolina law.

*South Carolina Court of Appeals Opinion 5718 (September 16, 2020).