Lawyer disciplined for involvement in investment scheme

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The SEC is not “another jurisdiction” for the purpose of reciprocal discipline

On June 27, the South Carolina Supreme Court suspended a lawyer for eighteen months based on Securities and Exchange Commission (SEC) charges*. While this case has nothing to do with dirt law, I bring it to the attention of South Carolina lawyers because they often find themselves in the position of forming and representing limited liability companies (LLCs).

SECThe South Carolina lawyer, John Kern, helped form and served as general counsel for Ventures Trust II LLC and Face-Off Acquisitions, LLC, two of the LLCs used in a fraudulent investment scheme perpetrated by Craig Berkman. Berkman fraudulently raised around $13.2 million from approximately 120 investors by selling memberships in the LLCs he controlled. Unfortunately for these investors, Berkman was subject to a $23 million judgment in Oregon, in connection with another fraudulent investment scheme, and was also facing bankruptcy in Florida. Berkman began to use some of the funds from his new ventures to pay his bankruptcy obligations in Florida, and the SEC got involved.

In 2014, Kern signed an offer of settlement and consented to an entry by the SEC of an order imposing sanctions against him. SEC findings included that (1) Kern willfully aided and abetted the fraudulent conduct of Berkman; (2) Kern was ordered to disgorge fees of around $235,000 and to pay a fine of $100,000; (3) Kern was barred from associating with brokers and investment advisors; and (4) Kern consented to being denied the privilege of practicing law before the SEC.

South Carolina’s Office of Disciplinary Counsel (ODC) filed formal charges in 2016 and argued that the SEC is “another jurisdiction” under the Rule 29(e), which deals with conclusiveness of misconduct adjudications against lawyers in other jurisdictions. The Supreme Court found that the SEC is not a jurisdiction for the purposes of reciprocal discipline, but found that Kern was guilty of providing false information in statements to others.

Kern falsely assured Berkman’s bankruptcy attorney that none of the funds used to settle Berkman’s bankruptcy obligations were derived from Ventures II. Kern also issued a false memorandum to investors in Ventures II to the effect that their funds were secure and were not part of a Ponzi scheme orchestrated by Berkman.

Kern’s primary defense in his South Carolina disciplinary proceedings was that he was totally unaware of Berkman’s malfeasance, and that as soon as he became aware, he resigned as general counsel for the LLCs and encouraged a principal in the companies to act as a whistleblower to the SEC. Kern argued that he had no dishonest or selfish motive, did not profit from his misconduct and showed remorse for the harm caused to investors. The Court said that it took these mitigating factors into consideration in imposing sanctions.

Professor John Freeman, who taught ethics to many of us, was qualified as an expert in the case and testified that when a lawyer acts as general counsel for a private securities company, he or she must exercise due diligence to ensure money is invested for the represented purposes.

Despite the fact that the SEC is not considered by the South Carolina Supreme Court to be a jurisdiction for the purposes of reciprocal jurisdiction against attorneys, this attorney was suspended for eighteen months because of his conduct that led to charges before the SEC.

The lesson to us is clear. Be careful in forming and representing LLCs and use proper due diligence in statements made to the investors in those entities. Lacking a dishonest motive is not enough to protect lawyers from discipline.

*In the Matter of Kern, South Carolina Supreme Court Opinion 27820 (June 27, 2018)

SC Supreme Court holds email provides sufficient written notice

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….for at least one purpose

This blog is about dirt, but from time to time, dirt lawyers should review the rules our brother and sister litigators follow. Why? Sometimes those rules bleed over into our world, and sometimes, unfortunately, the transactions we handle are subject to litigation. And in this “ever changing world in which we live in”*, we should pay particular attention to changing rules involving technology. This is one of those changes.

The South Carolina Supreme Court held on February 28 that an email that provides written notice of entry of an order or judgment, if sent from the court, an attorney or record, or a party, triggers the time to serve a notice of appeal under Rule 203(b)(1) of the South Carolina Appellate Court Rules (SCACR)*.  And the Court held that this is such a novel question of law that its holding applies only prospectively, and not to the case at hand.

Here’s the background. On December 15, 2014, the master-in-equity denied the foreclosure defendants’ petition for an order of appraisal. That same day, the master’s administrative assistant emailed a signed and stamped copy of the order and Form 4 to the bank and the defendants. Three days later, the defendants received a copy of both documents in the mail.

Believing the time to appeal began on the day they received the documents in the mail, the defendants served notice of appeal on January 15, 2015, which was thirty-one days after the email and twenty-eight days after they received the documents in the mail.

The Court of Appeals held that the email triggered the time to serve notice of appeal. On appeal to the Supreme Court, the petitioners did not dispute that the email constituted written notice of entry of the order or judgment. But they argued that the time to serve notice of an intent to appeal is only triggered when written notice is received by mail or hand delivery according to Rule 5 of the South Carolina Rules of Civil Procedure (SCRCP). The Supreme Court held that the SCRCP do not apply to appellate procedure.

The Supreme Court examined Rule 203(b)(1), SCACR, which requires that a notice of appeal must be served within thirty days after receiving written notice of entry of the order or judgment and held that there is no requirement of service. All that is required, according to the Court, is that the parties receive notice. Further, there is nothing in the appellate court rules suggesting that the manner in which a party may receive notice is limited to the methods used to effectuate service.

Got it, dirt lawyers?  It’s technical, but this holding suggests that our Court is gradually accepting the technology we use every day as sufficient for notice purposes. One lesson for us is that we should be careful what we say in our emails as we handle our transactional practices! Another lesson for us is that we should all check our spam and junk email files to make sure we receive all communications that may create responsibility or liability for us.

*…with sincere apologies to Sir Paul McCartney.

**Wells Fargo Bank, N.A. v. Fallon Properties South Carolina, LLC, South Carolina Supreme Court Opinion 27773, February 28, 2018.

The Quicken decision is out

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It’s not what dirt lawyers wanted or expected

The South Carolina Supreme Court never ceases to amaze when it decides real estate cases. Dirt lawyers seldom know what to expect. We read the precedents. We attend the hearings. We listen to the Justices’ questions. We believe we get a glimpse of what they may be thinking. But we miss the mark. Last week, the South Carolina Supreme Court decided the much anticipated Quicken case*, and if I had predicted the top five possible outcomes, I would not have come close to the actual decision.

I fully expected a 3-2 decision in either direction. But it is a 5-0 strongly written decision. It is a decision that was written to dispose of the controversy. It is a decision that was written to deny the possibility of reconsideration.

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This is an unauthorized practice of law case brought in the Court’s original jurisdiction. The case was assigned to Circuit Court Judge Diane Goodstein as Special Referee to take evidence and issue a report. Judge Goodstein held a two-week trial and issued a report finding, essentially, that no South Carolina licensed lawyer quarterbacked (my word) the mostly Internet-based residential refinance closings. In the facts recited in Judge Goodstein’s report, lawyers were peripherally involved in all of the steps required by State v. Buyers Service Co.** and its progeny, but no lawyer was actually involved in a way that the interest of the borrower was protected.

(Summarizing the prior decisions, the steps requiring lawyers are: (1) document preparation; (2) title search; (3) closing; (4) recording; and (5) disbursement.)

The Supreme Court somehow reviewed the same record and found that lawyers were involved and used their professional judgment in each step. The facts recited in the Court’s decision were not recognizable from the facts recited by Judge Goodstein’s report. The Court completely rejected the report and apparently decided that a finding of UPL under the circumstances would “mark an unwise and unnecessary intrusion into the marketplace”. “Simply put,” the Court stated, “we believe requiring more attorney involvement in cases such as this would belie the Court’s oft-stated assertion that UPL rules exist to protect the public, not lawyers.”

Most South Carolina dirt lawyers were hoping the Court would find a South Carolina licensed lawyer must be at the center of each closing, overseeing each step, and insuring that the consumer client’s interests were protected in each step. That is definitely not what we got.

There is, however, some good news in this decision. The Court made the clearest implication to date (without an explicit holding) that Buyers Service and its progeny may not apply in the commercial arena. The Court repeatedly stated that the context of this case is the residential refinance arena. I have discussed this case with several commercial lawyers to ascertain whether they are now comfortable to forego certifications that other South Carolina licensed lawyers are involved in the closing steps that are not under their control. They seem to feel slightly more comfortable, but not comfortable enough to let go of that step. Perhaps the passage of time will help.

Other good news is that, despite the facts recited by Judge Goodstein to the contrary, the Court clearly stated that lawyers were involved and used their professional judgment in each required step. The out-of-state entities who do business here should make sure their processes include this professional judgment in each step of the closing.

After reading this case a dozen times, I’ve decided that no law has changed. Nothing will change in our local processes. Nothing will likely change dramatically in the processes of the out-of-state entities who do business here. If I had not read Judge Goodstein’s report and if I had not attended the Supreme Court’s hearing, I would probably not be shocked with this result.

I would love hear what you think.

*Boone v. Quicken Loans, Inc., South Carolina Supreme Court Opinion 27727, July 19, 2017

** State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987)

How to employ a suspended lawyer

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Supreme Court offers guidance

Have you ever wanted to hire your suspended lawyer buddy?  What if your best friend from law school gets suspended and is desperate for work?  What if she is a great title abstractor? Now you can, under limited circumstances, hire her, and if you’re careful, you’ll keep your own license safe.

In February of 2015, the South Carolina Supreme Court softened its long-standing rule barring lawyers from employing disbarred or suspended lawyers, directly or indirectly, in any capacity. Under the former version of Rule 34* a lawyer without a current license could not be employed as a paralegal, investigator or in any capacity connected with a law practice.

Rule 34 was amended in 2015 to allow the employment of a lawyer suspended from practice for less than nine months under limited circumstances. The new version of Rule 34 allows these suspended lawyers to engage in:

  • Clerical legal research and writing, including document drafting, library or online database research, and searching titles, including obtaining information in the recording office; and
  • non law-related office tasks, including but not limited to, building and grounds maintenance, personal errands for employees, computer and network maintenance, and marketing or design support.

These suspended lawyers who are employed by a lawyer or law firm are forbidden from:

  • Practicing law in any form;
  • Having contact or interaction with clients, former clients or potential clients;
  • Soliciting prospective clients;
  • Handling client funds or trust accounting;
  • Holding himself or herself out as a lawyer; or
  • Continuing employment with the lawyer, law firm, or any other entity where the misconduct resulting in the suspension occurred.

The suspended lawyer must be supervised by a lawyer in good standing, and the two must submit a written plan to the Commission on Lawyer Conduct to outline the scope of the employment, anticipated assignments and procedures in place to insure no further misconduct.

After the amendment of Rule 34, the South Carolina Bar filed a petition with the Supreme Court to amend Rule 5.1 of the Rules of Professional Conduct, to detail the responsibilities of a supervising lawyer who elects to employ a suspended lawyer. By its order dated May 17, 2017, the Court adopted the Bar’s proposal and amended Rule 5.3 in addition to Rule 5.1.  You can read the entire order here.

If you have a heart of gold and want to help out a friend down on his luck, you now have the Court’s blessing and guidance. But, use caution and meticulously follow the rules to avoid finding yourself in your friend’s unfortunate position!

Court decides timeshare owners can sue developers

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Real Estate Commission does not have exclusive jurisdiction

The South Carolina Supreme Court, answering questions certified to it by the Federal District Court, held last week that the South Carolina Real Estate Commission (REC) does not have exclusive jurisdiction to determine violations of the South Carolina Vacation Time Sharing Plans Act.*

The Court also stated that the REC’s determination of a violation of the Time Act** is not a condition precedent to a private cause of action to enforce the Act and that the determinations of the REC are not binding on the courts.

These questions arose from two sets of litigation in the federal court involving individuals who entered into contracts with developers to purchase timeshare interests.

One set of plaintiffs, the Fullbrights, brought a purported class action against a timeshare developer, Spinnaker Resorts, Inc., seeking the return of money paid under a contract to purchase, plus interest, as well as a declaration that the contract was invalid.

The other set of plaintiffs, the Chenards, brought suit against another timeshare developer, Hilton Head Island Development Co., LLC, alleging fraud, negligent representation and violations of the Unfair Trade Practices Act as well as violations of the Timeshare Act.

In answering the questions, the Supreme Court stated that it was not taking any positions on the merits of the cases, which remain under the jurisdiction of the federal court.

The Court found that §27-32-130 unambiguously allows for lawsuits by stating that the provisions of the Act do not limit the right of a purchaser to bring a private cause of action. The developers had argued that this statute is ambiguous and that public policy evidenced by the Timeshare Act as a whole requires the REC’s jurisdiction to be exclusive.

These determinations will no doubt clear the way for class action lawsuits against timeshare developers.

 

* Fullbright v. Hilton Head Island Development Co., LLC, South Carolina Supreme Court Opinion No. 27220 (May 17, 2017).

** S.C Code §27-32-10 et seq.