Are RON closings now allowed in South Carolina?

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After a tease from our Supreme Court on Friday, the answer is still “no”

For about 15 minutes on Friday afternoon, May 1, those of us involved in real estate transactions in South Carolina got excited. An Order* from the South Carolina Supreme Court hit our in-boxes. The order was entitled “RE: Participation in Closings of Real Estate Transactions”. We collectively thought South Carolina may have moved into the 21st Century with an authorization for Remote Online Notarization (RON) closings.

Then we read the order.

You can read it here.

By way of preamble, the Court said, “we find that the public health emergency created by COVID-19 requires changes in the usual operation of the Rules of Professional Conduct in terms of the normal functioning of real estate transactions.”

Then the order stated that until August 1, lawyers may “participate in and supervise the closing of a real estate transaction by way of a video conference.”

Fair enough, but I think most South Carolina transactional lawyers believed they could already ethically handle closings via video conference.

Most lawyers definitely believed they can ethically handle “mail away closings.” Were we wrong? Ethics Advisory Opinion 05-16 states that an attorney may ethically conduct real estate closings by mail as long as it is done in a way that: (1) ensures that the attorney is providing competent representation to the client; (2) all aspects of the closing remain under the supervision of an attorney; and (3) the attorney complies with the duty to communicate with the client so as to maintain the attorney-client relationship and be in a position to explain and answer any questions about the documents sent to the client for signature.

To meet this test, according to the EAO, clients must have reasonable means to be in contact with the attorney, by telephone, facsimile, or electronic transmission. The EAO further states that there is no legal requirement that a client attend the closing, but that it must be the client’s decision not to attend the closing.

Ethics Advisory Opinions are, of course, not binding on the South Carolina Supreme Court. But if we rely on the EAO and handle mail-away closings, why can we not also handle closings via video conference, as long as we comply with all of our ethical obligations to properly represent our clients? Technology has changed since 2005!

Setting that issue aside, let’s look at the real problem. The primary obstacle to any closing that is not conducted strictly in the presence of the lawyer is the proper notarization of the recordable documents. According to South Carolina Code §26-1-5, the notary must be in the physical presence of the signatory. For this reason, clients and their lawyers must employ notaries in the client’s location when the client and the lawyer are not in the same location.

Did the May 1 Supreme Court order fix the notary problem at least temporarily? Lawyers who have spent the last four days debating this question via listserv and Facebook have decided that it does not. But did the Court try to help? Maybe.

The Order goes on to say, “necessary persons to a real estate transaction may, under the direction of the supervising attorney, similarly participate in the real estate closing by way of a video conference, provided any necessary person so consents; further, the supervising attorney shall ensure that the attestation of a recordable instrument is accomplished, which may be satisfied by use of real-time audio-visual communication technology, provided the identity of the necessary person is confirmed and a notary attests the signature of any necessary person.” (Emphasis added.)

Giving the Court the benefit of the doubt, perhaps the Justices did not attempt to fix the notary problem but, instead, believed they must address the professional responsibility aspects of the closing process to allow the legislature and governor address the statutory notary issue.

I think I am going to go with that interpretation. Otherwise the Order is useless.

And, I have another concern. Anyone of us who has read and struggled with the facts in the notorious Quicken** case knows that the Court by implication blessed dividing the various aspects of the closing that must be handled by an attorney among many attorneys. But the final sentence of this Order reads, “This order does not suspend any other provisions of the Rules of Professional Conduct, and nothing in this order is intended to relieve an attorney of his or her obligation to assume the full professional and direct responsibility for the entire transaction.” (Emphasis added.)

I am so confused!

 

*Order 2020-05-01-01, South Carolina Supreme Court.

**Boone v. Quicken Loans, Inc., 420 S.C. 452, 803 S.E.2d707 (2017).

Padding legal bills leads to suspension of South Carolina lawyer

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The South Carolina Supreme Court meted out discipline to a lawyer in terms of a definite three-year suspension on January 22.* Three straightforward reasons for the suspension are highlighted by the very short opinion:

  1. The lawyer fell behind on his billable hours and falsified his time;
  2. The lawyer was not always truthful with clients regarding their cases in an attempt to cover for his uncompleted work; and
  3. The lawyer falsified expense reports. Specifically, he altered hotel and airline bills to receive reimbursement for trips that were not made and client dinners that did not occur.

The opinion details that the lawyer padded his time by more than 35 hours and his expense reports by more than $5,000.

I don’t know about you, but I find these sums shockingly small. I don’t mean the lawyer should not have been disciplined. The punishment clearly fits the crime in my mind. Rather, it seems to me that putting a license to practice at law at risk for such minor sums is a colossal act of inanity.

The time and effort each of us puts into obtaining the privilege to practice law should encourage all of us to follow the rules. Some of the rules are not intuitive. Some of them are indisputably difficult to understand and remember. But the rules this lawyer broke are the simplest of all and breaking them can be described by one word: dishonesty.

I remember the first time I handled a closing for more than $20 million way back in the 1980s. I joked that I knew then that I would never dip into my trust account. In retrospect, that was a terrible joke. None of us should ever think for a moment that we can “borrow” from our trust accounts, no matter how small or how large the number.

But facing a three-year suspension for $5,000 and 35 billable hours is inconceivable.

Be smart and safe out there, lawyer friends!

 

*In the Matter of Sloan, South Carolina Supreme Court Opinion 27936 (January 22, 2020)

Recent HOA foreclosure case leads to new rule in Beaufort County

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Master imposes rule based on Chief Justice Beatty’s concurring opinion

foreclosure notice

This blog recently discussed the remarkable homeowners’ association foreclosure case, Winrose Homeowners’ Association, Inc. v. Hale, South Carolina Supreme Court Opinion 27934 (December 18, 2019.) You can read the earlier blog here.

The case focused on the inadequacy of the foreclosure sales price and the business model of a third party to leverage a nominal debt to secure an exorbitant return from homeowners who fear eviction. I believe the case will require HOA foreclosure attorneys to rethink their approach going forward.

In his concurring opinion, Chief Justice Beatty said he would go a step further than the majority opinion and adopt the equity method of determining an adequate sales price for residential property in a foreclosure. The equity method compares the winning bid price to the equity in the property. The alternative debt method compares the total debt on the property to its fair market value.

The majority opinion stated that our courts have not established a bright-line rule for what percentage “shocks the conscience”, but a search of our South Carolina’s jurisprudence reveals that our courts have consistently held a price below ten percent definitely does. In this case, the debt method would have resulted in a ratio of 53.9 percent, while the equity method would have resulted in a ratio of 4.9%.

The new rule of the Beaufort County Master-in-Equity Marvin Dukes focuses on a totally separate issue in the case. The homeowners, who were in default, did not receive a notice of the date and time of the foreclosure sale. Judge Dukes’ office disseminated a message to foreclosure attorneys requiring new wording in foreclosure orders.

The new required wording entitled “Special Default Foreclosure Order and Sale Notice Service Instructions” reads as follows:

That, in addition to all notices to the property owner(s) which are required by the  SCRCP or other law, in a case involving property owner’s SCRPC 55 default, or any other case or circumstances where property owner(s) would not ordinarily receive a copy of the Order of Foreclosure and/or Notice of Sale, the party seeking foreclosure (Foreclosing Party) shall, within 5 (five) days of the execution of this Order cause this Order and Notice of Sale (if available) to be served by US Mail upon said property owner(s).

An affidavit of such service shall be filed with the Clerk of Court expeditiously.

In cases where the Notice of Sale is executed later in time than the Order, service shall be accomplished separately, and shall be sent no later than 5 (five) days from receipt by the Foreclosing Party.”

I suspect additional guidance will be coming from our courts about whether the Winrose case will have broad application in foreclosure cases or be limited to its facts. I’m confident foreclosure attorneys feel they need more information.

SC Supreme Court may have eradicated HOA foreclosures

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Third party bid was held grossly inadequate

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On December 18, the South Carolina Supreme Court decided a case that will force homeowners’ association attorneys to carefully consider whether they will initiate foreclosure actions in the future*. This blog discussed the Court of Appeals case last April. You can read that blog here but the very short version is that the Court of Appeals did not upset any apple carts and left the foreclosure process status quo.

The facts are simple. Mr. and Mrs. Hale bought their home in Richland County in 1998 for $104,250. In the next 20+ years, they built up $60,000 in equity, and the property now has a fair market value of $128,000.

In 2011, the Hales fell behind on their homeowners’ association payments. The HOA initiated a foreclosure complaint seeking a sale of the property in exchange for $566.41 in principal and interest. The Hales defaulted.

Interestingly, after the affidavit of default was filed, the HOA sent the Hales a bill for $250, which they paid. Also interestingly, the law firm representing the HOA sent the Hales a notice that the lien had been satisfied.

Three months after the HOA filed the affidavit of default, the Master entered a default judgment, calculating the amount due to the HOA as $2,898.67, comprised of $250 in principal, $80.87 in interest, $542.80 in litigation costs and $2,025 in attorneys’ fees. The property was sold at auction two weeks later to a third party, Regime Solutions, LLC.

This is the Hale’s explanation of the facts in their motion to vacate the sale:

“When we were served with the lawsuit to take away our home, I put the papers in a drawer and forgot about them. Some time after that, we received a bill from the HOA asking for the $250.00. I paid that without a problem. In November, we received a letter from the law firm of (the HOA) telling us that the Lien had been Satisfied…I thought that everything was OK after that. The next thing I know, someone is knocking on my door telling me that they bought my home and that me and my family were being evicted.”

The Master denied the Hales’ motion and adopted the position that the “effective sales price” was $69,040, consisting of the successful bid plus the balance of the mortgage. In his order, Richland County’s Master-in-Equity, Joseph Strickland, stated that “the practice of homeowners’ association foreclosures would effectively be eradicated if (the Hale’s) position came to bear.”

The 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 bid “shocked the conscience” and violated equitable principles.

The Court of Appeals affirmed.  Chief Justice Lockemy dissented, saying:

“A buyer at a judicial sale in which a senior lienholder is not a party takes the property subject to that lien, but the buyer is not responsible for its payment. The evidence in this cases shows (the Hales) have continued to pay the mortgage for a home for which they have no title because they will suffer the severe consequences of default if they do not. The buyer (Regime) has paid nothing. I do not believe it proper to give a judicial sale buyer credit for assuming a debt which is not legally required to pay.”

The Supreme Court seemed truly troubled by Regime’s business model. In a footnote, the Court stated that Regime either allows the senior mortgagee to (re)foreclose on the property or quitclaims the property to the original homeowners for a hefty fee. The Court seemed to be disturbed by Regime’s failure to assume mortgages in the ordinary course of its business.

The Court discussed two methods to calculate whether a bid price is so grossly inadequate as to shock the conscience. The debt method is a ratio comparing the total debt on the property to the fair market value. Under the debt method, Regime would have paid 53.9% of the value of the property. The equity method is a ratio comparing the winning bid price to the equity in the property. Under the equity method, Regime would have paid 4.9% of the value of the property.

The Court stated that our courts have not established a bright-line rule for what percentage “shocks the conscience”, but that a search of our jurisprudence reveals our courts have consistently held a price below ten percent definitely does.

The Court stated that when the foreclosure purchaser assumes the mortgage, the debt method should be used. But the court rejected the blind application of the debt method because of the facts in this case. Under these facts, the Court stated, applying the equity method is the only logical option.

The Court expressed concern about the foreclosure proceeding itself, stating that it morphed in to “a proxy to capitalize on a small debt”. The Court said it was especially troubled by Regime’s participation in a foreclosure proceeding to accommodate its business model of leveraging a nominal debt to secure an exorbitant return from homeowners who fear the prospect of an eviction. The Court said, “We do not countenance the improper use of foreclosure proceedings by the HOA, its attorney or Regime.”

The decision should not be read as a shift toward providing relief to homeowners despite their own poor choices, according to the Court. The Court said the case would have turned out very differently if the HOA and Regime had pursued “foreclosure in the normal course and made affirmative efforts to assume the Hales’ mortgage”. And that under the “unique facts of this case”, the Hales have demonstrated Regime’s bid was grossly inadequate.

I am quite sure my foreclosure lawyer friends are deciding how to change their practices in light of this case. I’m not sure the Court is correct about the normal course of foreclosures. I also doubt that the facts in this case are unique.

Justice Beatty concurred in a separate opinion, stating that he would adopt the equity method generally. That approach would certainly provide more clarity. Justice Beatty also said, “homeownership is the quintessential American dream. Purchasing a home is the largest investment that most South Carolinians will make. To allow the hard-earned equity to be confiscated by a bidder’s minimal investment is unconscionable. This is especially troubling when the foreclosure sale is the result of an HOA lien.”

For many reasons, I am glad today that I am not a foreclosure lawyer!

*Winrose Homeowners’ Association, Inc. v. Hale, South Carolina Supreme Court Opinion 27934 (December 18, , 2019).

SC Supreme Court rule change affects every lawyer with a trust account

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Make one simple change to stay in compliance

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On October 23, our Supreme Court implemented several changes to the South Carolina Appellate Court Rules dealing with lawyer and judicial disciplinary rules enforcement procedures. If things go well in our respective practices, most of us will never have to study the rule changes.

But one change affects every lawyer with a trust account.

Rule 1.15(h) of the Rules of Professional Conduct has been amended to state that every lawyer maintaining a trust account must file a written directive requiring his or her financial institution to report to the Office of Disciplinary Counsel, rather than to the Commission on Lawyer Conduct, when any properly payable instrument is presented for payment against insufficient funds.

In other words, NSF checks must now be reported by your bank to the ODC.

The Court recognized in a footnote that these written directives will take time to update and that lawyers whose written directives currently require reporting to the Commission on Lawyer Conduct are not in violation of the rule. The Court stated that lawyers should update these directives at their earliest convenience.

Most dirt lawyers pay close attention to detail, and I would recommend paying attention to this one sooner rather than later.

South Carolina Supreme Court abolishes common law marriage

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Maybe we’ll get a “Big Chill” sequel

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The Big Chill” is one of my husband’s favorite movies, in fact, it’s up there with “Braveheart” and “Casablanca”. Several years ago, we celebrated a milestone birthday by inviting two couples who were friends from law school to the mountains for a “Big Chill Weekend” of eating great food, playing great music* and reminiscing about the old days. We did agree to eliminate drugs and spouse swapping from the Big Chill agenda.

Last week, the South Carolina Supreme Court abolished common law marriage in South Carolina.** This rule will be prospective only. Parties may no longer enter into a valid marriage in South Carolina without a license.

Hang on. I will explain how the movie and common law marriage in South Carolina connect for those too young to remember the news. (And the connection has nothing to do with our Big Chill weekend.)

When the movie was being filmed in the winter of 1982-83 in Beaufort, actor William Hurt was living with Sandra Jennings, a former dancer in the New York City Ballet. Ms. Jennings became pregnant with Mr. Hurt’s son, Alexander Devon Hurt, who was born in 1983. The couple lived together in New York and on the road from 1981 – 1984.

When the couple split, Ms. Jennings brought suit in New York claiming a share of Mr. Hurt’s substantial assets, based on the theory that they had established a common law marriage during the few months they lived in South Carolina. She sought a divorce. Child support was not an issue because Mr. Hurt was paying $65,000 per year to support the couple’s son. Common law marriages hadn’t been recognized in New York since 1933, so the claim was based on South Carolina law and the short time the couple lived together in Beaufort.

Ms. Jennings was not successful in the law suit, but litigation is very expensive and the story got lots of mileage in South Carolina. The standing line was that actors had to be careful in this state! Maybe the cast can finally return for a sequel.

The Supreme Court stated that the time has come to join the overwhelming national trend, despite our legislature’s failure, to abolish common law marriage. The court said, “The paternalistic motivations underlying common-law marriage no longer outweigh the offenses to public policy the doctrine engenders.”  I know some other outdated ideas I’d like to see abolished in South Carolina.

* Favorite lines from the movie which demonstrate, in part, why it’s a favorite: Michael:  “Harold, don’t you have any other music, you know, from this century?” Harold: “There is no other music, not in my house.”  There is no other music in the Manning house either.

Favorite movie trivia: The dead guy, the corpse being dressed for his funeral in the opening scenes, was played by none other than Kevin Costner. There were plans to have flash-back scenes to the characters’ college antics, but those scenes were later eliminated.

** Stone v. Thompson, South Carolina Supreme Court Opinion 27908 (July 24, 2019).

Abbeville fraud litigation leads to noteworthy arbitration case

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Supreme Court finds arbitration clause unenforceable against nonsignatories

Abbeville, SC

I found it hard to believe the South Carolina Supreme Court took 21 pages to hold an arbitration provision unenforceable against nonsignatories to the contract, but it did! In an April case involving insurance fraud in Abbeville County, the Supreme Court reversed the Court of Appeals, which had relied on an equitable estoppel theory to bind individual insureds to a contract between an insurance agency and the insurance companies*.

The case arose out of numerous lawsuits brought by individual insureds against an insurance agent, Laura Willis, her broker, their agency and six insurance companies for which their offices sold policies. The suits alleged Willis engaged in fraudulent conduct including forging insurance documents and converting cash payments to her own use, resulting in the insureds having no coverage or reduced coverage. Two of the lawsuits were brought by other insurance agents, alleging Willis engaged in illegal business practices that effectively blocked them from the local market, resulting in a substantial loss of clients and revenue.

The other defendants were alleged to have failed to properly investigate, train and supervise Willis, especially after she was fined, publicly reprimanded and place on probation for dishonesty by the South Carolina Insurance Commission in 2011. Alternatively, Willis was alleged to have acted with express or implied permission of the other defendants.

A full year into the litigation, three of the insurance companies filed motions to compel arbitration and dismiss the lawsuits. The arbitration clause in question was contained in a 2010 agency contract signed by the insurance companies and the insurance agency. The theory was that the insureds were third-party beneficiaries to the contract or were equitably estopped from asserting their nonparty status. The Circuit Court denied the motion to compel arbitration, but the Court of Appeals reversed and remanded, holding equitable estoppel should be applied to enforce arbitration against the nonsignatories because the individuals sought to benefit from other provisions in the agency agreement.

The Supreme Court stated that while arbitration is viewed favorably by the courts, it is predicated on an agreement to arbitrate because parties are waiving their fundamental right to access to the courts. The Court held that whether the provision is enforceable is a state law question, and that South Carolina has recognized several theories that could bind nonsignatories to arbitration agreements under general principles of contract and agency law, including (1) incorporation by reference, (2) assumption, (3) agency, (4) veil piercing/alter ego, and (5) estoppel.

The estoppel argument is based on a direct benefits theory in South Carolina. Under that theory, a nonsignatory may be compelled to arbitrate where the nonsignatory knowingly exploits the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement.

In this case, according to the Supreme Court, the plaintiffs did not allege a claim of breach of the contract, and they were not even aware of the existence of the contract until arbitration was sought a year into the litigation. In the Court’s view, the plaintiffs did not knowingly exploit and receive a direct benefit from the agency agreement. The Agreement was purely for the benefit of its parties, outlining their business relationship.

The Court also stated that equitable estoppel is ultimately a theory designed to prevent injustice, and it should be used sparingly. This litigation will continue!

And I’ve reduced the 21-page case to less than 600 words for your reading pleasure. You’re welcome!

Wilson v. Willis, South Carolina Supreme Court Opinion 27879 (April 10, 2019)