South Carolina Bankruptcy Law Association

September 2017 Meeting

Topic: Recent Foreclosure and Collections Decisions

Weyman C. Carter McNair Law Firm, P.A.

Greenville, SC Paul D. Harrill

McNair Law, Firm, P.A. Columbia, SC

Columbia, South Carolina September 21, 2017

Procedure-Order of Reference and Demand for Jury Trial South Carolina Community Bank v. Salon Proz, LLC, Op. No. 5481 (S.C. App. April 26, 2017) Summary: The South Carolina Court of Appeals reversed the Master’s order denying a motion to transfer the case to the jury trial docket because the defendant had demanded a jury trial in its answer and the clerk of court lacked authority to refer the case. Background: Salon Proz’ timely Answer in the bank’s foreclosure action asserted counterclaims and demanded a jury trial. The bank filed a 12(b)(6) Motion to Dismiss the counterclaims and thereafter moved to refer the case to the Master in Equity. On the same day, the clerk of court signed and filed an Order of Reference with finality. Salon Proz did not appeal the Order of Reference. Six months later, Salon Proz engaged a new attorney who filed a motion to transfer the case back to the circuit court’s jury trial roster. Salon Proz asserted that its failure to appeal the Order of Reference did not operate as a waiver of its right to a jury trial because there was no evidence in the record that its former counsel received notice of entry of the order. The Master denied the motion to transfer and denied Salon Proz’ Motion to Reconsider. The Master did grant a motion allowing amendment of the pleadings, after which Salon Proz filed an Amended Answer that revised several of its counterclaims. Court of Appeals’ Ruling: The court noted that the Order of Reference affected the mode of trial and was subject to immediate appeal, and that the failure to so appeal would operate as a waiver of a right to jury trial, however, since the right to a jury trial is “highly favored…waivers of the right are always strictly construed and not lightly inferred or extended by implication.” The record contained no dispositive evidence whether Salon Proz or its former counsel received notice of entry of the Order of Reference. The court in a footnote mentions a certificate of service of the motion to refer, but stated that there was no proof of service of the proposed order. A statement made by the attorney for a different defendant to the effect that the order was served on Salon Proz’ former counsel was insufficient evidence to support a finding that Salon Proz had waived its right to jury trial after having asserted that right in its Answer. The court of appeals noted that Rule 53(b) allows the clerk of court (as well as a circuit court judge) to refer the case to a master or special referee (1) where the parties consent; (2) in a default case; or (3) (as is relevant here) in an action for foreclosure, however, the rule goes on to state that on request of a party for a jury trial under Rule 38, that the matter shall be returned to the circuit court. The court also cited Rule 38(b) which allows a party to demand a jury trial by serving a written demand at any time within 10 days after the service of the last pleading, and Rule 38(b) which provides, upon a jury demand under Rule 39(a) that the case is to be designated as a jury action, and trial be by jury unless the parties consent to a non-jury trial or the court determines that no jury trial right exists. Because Salon Proz had made a timely demand in its Answer, the clerk of court lacked the authority to refer the case, and the Master erred in denying Salon Proz’ motion to transfer the case to the jury docket. In a footnote, the court of appeals stated that Rule 53(b) allows a clerk of court to refer a foreclosure action if a party has not yet made a jury demand, subject to the case being returned to the circuit court if a jury demand is made in connection with a counterclaim. The court of appeals next turned to the question of whether Salon Proz indeed had a right to trial by jury on its counterclaims. Since a foreclosure action sounds in equity, neither party is entitled

to a trial by jury on the “main claims”. Wachovia Bank, Nat’l Ass’n v. Blackburn, 407 S.C. 321, 328, 755 S.E.2d 437, 441 (2014). Under Carolina First Bank v. BADD, LLC, 414 S.C. 289, 295, 778 S.E.2d 106, 109 (2015), Salon Proz is only entitled to a jury trial on its counterclaims if those claims are both legal and compulsory; a compulsory counterclaim being one that arises out of the same transaction or occurrence as the bank’s foreclosure claim. The BADD opinion concluded that a guarantor’s counterclaims of civil conspiracy and breach of contract (allegedly occurring two years after the execution of the guaranty agreements) had no “logical relationship” to the bank’s claims under the guaranties and were therefore permissive counterclaims. The court of appeals reached the opposite conclusion as to Salon Proz’ counterclaims for violation of the Unfair Trade Practices Act, breach of contract and the covenant of good faith and fair dealing, breach of contract with fraudulent intent, slander of title, libel and negligent misrepresentation, finding that “at least one” of the counterclaims is legal and compulsory, giving rise to a right to jury trial. By way of example, the court examined the allegations supporting the UPTA claim and determined that the allegations, if true, would have affected the loan’s enforceability (in contrast to the allegations in the BADD case) and therefore constitute a compulsory counterclaim. The court of appeals remanded the case with instructions to return the case to the jury docket for further proceedings, to include a hearing to determine the nature of an remaining counterclaims and any request to refer the equitable claims. Comment: This opinion provides a good summary of recent case law on right to jury trial on counterclaims asserted in foreclosure actions. The opinion does not address waivers of jury trial rights in loan documents; the Blackburn opinion provides guidance on that issue. Disputes about notice to counsel of entry of orders should be less frequent as more South Carolina counties adopt electronic filing. The court did not address the last point raised by Salon Proz: did the Amended Answer (permitted by the Master) have any effect?

Service by Publication; Motion to Set Aside Sale; Statutory BFP Belle Hall Plantation Homeowner's Association, Inc. v. Murray, 419 S.C. 605, 799 S.E. 2d 310 (Ct. App. 2017) Summary: Defective service by publication justified Master setting aside foreclosure decree and vacating sale over the objection of third party purchasers who had received and recorded a Master’s deed. Background: Belle Hall Plantation Homeowners Association filed an action to foreclose an assessment lien on property originally titled to John E. Murray and Gloria C. Murray and later conveyed to John A. Murray as Trustee for the John E. Murray and Gloria C. Murray Family Trust (John A. Murray “Murray” is the son of John E. Murray). Belle Hall filed an Affidavit for Order of Publication with the clerk of court detailing its efforts to locate and serve the property owner John A. Murray as Trustee; a Westlaw search attached to the affidavit showed different addresses for John E. Murray. The clerk of court issued an Order for Service Via Publication reciting that the Defendant-Trustee could not be found within the State and authorized publication of the summons in a newspaper of general circulation in that county. No responsive pleading was filed and the Master held a foreclosure hearing on March 18 and ordered the property sold on April 8, 2014. On March 26, the tenants occupying the property delivered a letter to Murray informing him of the hearing. Murray attempted to contact Belle Hall’s attorney by telephone to offer to pay the amount owed, but got no response. He retained an attorney on May 9; Murray’s counsel checked the court docket, which indicated that the house was not to be sold before May 20 (no explanation was given for the discrepancy). Meanwhile, the Master conducted a foreclosure sale on May 6; Mr. and Mrs. Keys submitted the successful bid of $100,000. The Keys made the required deposit, and the remainder was due within 20 days under the terms of sale. On May 15, Murray moved to vacate the entry of default and to set aside the sale. On that day, Murray’s attorney called a local attorney to discuss the case; in the course of that conversation the second attorney realized that a lawyer in her office was the successful bidder, and the conversation ended (the opinion does not reflect whether the local attorney communicated with Keys). The following day, the Keys complied with their bid; the Keys recorded the Master’s deed on May 23, 2014. The Master heard the motion to vacate on July 3, 2014 and issued an order granting the motion on July 22; the Keys filed a motion to stay the order vacating the sale and filed a Rule 59(e) motion to alter or amend on August 1. They Keys asserted that they were bona fide purchasers, that Murray failed to prove extrinsic fraud, that the Master had no authority to overrule the Order of Publication issued by the clerk of court, and that Murray had slept on his rights. Murray filed his own Rule 59(e) motion and the court held a second hearing on August 18. The Keys acknowledged at the hearing that they had knowledge of Murray’s intention to file a motion to set aside the sale before they paid the remainder of the bid. The Keys attempted to limit Murray’s arguments and submissions at the hearing. The Master issued an amended order finding the Plaintiff’s initial service efforts to be grossly negligent, and determined the judgment to be void due to the defect in service; the court found it unnecessary to rule on the Keys’ assertion of bona fide purchaser status in light of the finding that the foreclosure was void. Another motion to reconsider followed, with the Keys arguing that they had no notice of an adverse claim at the time that the gavel fell at the judicial sale, which was the relevant point in time to determine bona fide purchaser status. The Master denied the motion, and the appeal followed.

Court of Appeals’ Ruling: The court of appeals recognized the general standard asserted by the Keys: the clerk of court’s decision to issue an order of publication is final absent fraud or collusion, however, an exception exists when the supporting affidavit is facially defective and does not comply with the statutory requirements. Caldwell v. Wiquist, 402 S.C. 565, 741 S.E.2d 583 (Ct. App. 2013). Belle Hall’s affidavit in support of its application to serve the Defendant John A. Murray by publication reflects a search for addresses for John E. Murray. Belle Hall’s affidavit therefore failed to comply with the publication statute 15-9-710. The court of appeals further found that the Master properly vacated the sale pursuant to Rule 60(b)(4)-for reason that the judgment is void, even though Murray’s request was to set aside the foreclosure order under Rule 60(b). Due to the lack of personal jurisdiction over Murray, the foreclosure judgment was a nullity. The court distinguished its prior decision in Universal Benefits v. McKinney, in which the court affirmed the circuit court’s denial of Rule 60(b)(4) motion by a plaintiff whose case had been dismissed for failure to prosecute. In regards to the Keys’ position that they are bona fide purchasers, the court held that a party must show three elements: (1) actual payment of the purchase price; (2) acquisition of legal title, or the best right to it, and (3) a bona fide purchase, “in good faith and with integrity of dealing, without notice of a lien or defect”. Further, the purchaser must have satisfied all three conditions before getting notice of a title defect or other adverse claim, lien or interest in the property. Because the Keys obtained notice of Murray’s position before paying the full purchase price, they do not qualify for BFP status. The court of appeals rejected Keys’ argument that decisions of the United States Bankruptcy Court for the District of South Carolina, e.g., In re Watts, 273 B.R. 471 (Bankr. D.S.C. 2000) determining the date of the foreclosure sale to be the “cutoff” for the debtor to cure a mortgage default. Comment: The statute establishing protection for bona fide purchasers at judicial sales, Section 15-39-870, applies to “property told at a judicial sale under a decree of a court of competent jurisdiction…” Does a void judgment satisfy the statutory requirement?

When is a Foreclosure Sale Final? Does the sale render an Appeal Moot? Wachesaw Plantation v. Todd Alexander, Op. No. 5494 (Sup. Ct. Nov 4, 2015) “WACHESAW I” Summary: Supreme Court held that the sale of real property and the execution and recording of a deed in a foreclosure action does not render moot an appeal of the foreclosure sale. Background: Homeowners association (HoA) filed a foreclosure action against Alexander (an out of state owner) for failure to pay regime fees. Alexander was served with the Summons and Complaint. Alexander failed to answer the Complaint, failed to appear in the action in any way, and filed no appeal after the foreclosure order was entered. The property was sold to a third party by the Master on April 29, 2011. No deed was issued initially. Alexander claimed he first learned of the foreclosure action in June 2011. He immediately attempted to tender the past due regime fees which the HoA rejected. Alexander then filed a motion to vacate the sale, which was denied by the Master. Some of the bases for his motion to vacate were that the sale price was inadequate, that the purchaser should not be unjustly enriched, that he timely tendered the regime fees. The timing is unclear, but apparently Alexander filed a timely appeal of the order denying his motion to vacate the foreclosure sale, and subsequently the Master’s deed was issued and recorded. Alexander did not file a bond under SC Code § 18-9-170 to stay the sale or issuance of the deed for the real property. The Court of Appeals affirmed the Master’s order because Alexander did not stay the foreclosure sale under § 18-9-170 and further found his appeal moot based upon the issuance of the Master’s deed. Alexander appealed to the Supreme Court. Supreme Court’s Ruling: The Court addressed the narrow issue of whether “the subsequent issuance of a deed moot a timely appealed order denying a motion to vacate the sale of foreclosed property?” The Court addresses the impact of SC Code § 18-9-170 and the necessity to file a bond to stay an order directing the sale of real property. However, the Court goes on to hold that even if the sale goes forward, a subsequently issued deed from the Master will not render moot an appeal of the foreclosure sale. In support of its holding the Court cites to a number of very old cases in which an appeal was decided despite the issuance of a deed. The case was remanded to the Court of Appeals for hearing on the merits of the appeal regarding the denial of Alexander’s motion to vacate the sale. See Wachesaw II below. Justice Pleicones issued a concurring opinion in which he joined in the decision only because the deed was issued after the appeal was filed. His rationale was that the issuance of a deed was stayed by Alexander’s appeal and should not have been issued because his appeal was of an order refusing to vacate a judicial sale (controlled by SC Code § 18-9-220) rather than an appeal of an order directing the sale of real property (controlled by SC Code § 18-9-170). Comment: It is unclear how narrow this decision is. It appears that a mortgagor that wants to stop a foreclosure sale after the foreclosure order has been issued must still post a bond under SC Code § 18-9-170. If the mortgagor fails to do so, it appears the mortgagee can demand the sale go forward even if an appeal of the foreclosure order is pending. If the sale goes forward a challenge to the sale itself and any appeal that follows will not be moot even if the debtor did not appeal the foreclosure order and even if the Master’s deed is issued thereafter. In this instance Alexander did not appeal the foreclosure order. He only appealed the order denying his motion to vacate the sale.

Wachesaw Plantation v. Alexander, Op. No. 27585 (Ct. App. June 28, 2017) “WACHESAW II” Summary: On remand from the Supreme Court, the Court of Appeals heard the merits of a homeowner’s appeal from the Master’s order denying his motion to vacate the foreclosure sale of his house due to his failure to pay HoA regime fees. The Court of Appeals affirmed the Master’s order declining to vacate the foreclosure sale. The court found that the sale did not “shock the conscience” and was, therefore, not improper for inadequate consideration. The court further held that the homeowner’s attempt to tender the late payments after the sale but before the deed was issued was too later because the equity of redemption expires when the gavel falls on the highest bid. Background: On remand from Wachesaw I, the Court of Appeals considered the appeal of Alexander’s (homeowner’s) appeal of the Master’s order denying his motion to vacate the foreclosure sale. Alexander had not paid his regime fees and did not appear in the foreclosure or appeal from the foreclosure order. He first appeared after the foreclosure sale had occurred but before the Master issued his deed. Alexander moved to vacate the judicial sale alleging: (1) the sales price was inadequate and accompanied by other facts warranting the court’s interference, (2) the sale should be vacated to avoid forfeiture, (3) the sale should be vacated to avoid purchaser unjust enrichment, and (4) he timely redeemed the past due regime fees. The Master denied the motion to vacate and it is the merits of that order that is under appeal and being considered here. Court of Appeal’s Ruling: On Alexander’s first point, the Court of Appeals held that Alexander failed to argue that the sale price “shocked the conscience.” The court cited to Wells Fargo Bank, NA v. Turner, 378 S.C. 147, 662 S.E.2d 424 (Ct. App. 2008) which states that a judicial sale will be set aside when either (1) the sale price is so gross as to “shock the conscience,” or (2) the sale is accompanied by other circumstances warranting the interference of the court. The opinion contains a fairly lengthy discussion of what it requires to “shock the conscience” and a merely inadequate sale price is not sufficient. The court did not address the issues of forfeiture or unjust enrichment because they were not preserved for appeal under Rule 59(e). The court also rejected Alexander’s last argument that he exercised his equitable right of redemption before the deed was issued and, therefore, the sale should be vacated. The court held that the right to exercise the equity of redemption “expired upon the acceptance of the highest bid at the judicial sale.” Comment: This is an important case because it definitively answers the question of when the sale is final for the purposes of the equity of redemption. For state court purposes, the sale is final when the high bid has been accepted and the “gavel falls.” The high bidder becomes the equitable owner and the equity of redemption expires. This opinion also discusses the protections afforded a bona fide purchaser at a judicial sale that has no notice of irregularities and the policy of protecting a good faith purchaser. The opinion also discusses the somewhat arcane law that actual notice need not be provided to a borrower or junior creditor. That is not recommended practice, but the Court of Appeals rejected Alexander’s argument that he did not receive a notice of sale. The court quotes from Peoples Fed. Sav. & Loan Ass’n v. Graham, 291 S.C. 178, 182, 352 S.E.2d 511, 514 (Ct. App. 1987)

that “there is no requirement of law that parties to a suit for foreclosure be given personal notice of a judicial sale.” The court suggests as does Peoples that as long as you comply with the “legal requirement for public notice of the judicial sale” you can withstand a challenge by a party that did not receive personal notice. Always file a Rule 59(e) motion if the court does not rule on one of the bases of your motion if you are going to appeal.

Statute of Limitations; Case Stricken Due to Bankruptcy Goodwin v. Landquest Development, LLC, 414 S.C. 623, 779 S.E. 2d 826 (Ct. App. 2015) Summary: A timely filed action was stricken as a result of a defendant’s bankruptcy filing; following the dismissal of the bankruptcy case, the circuit court erred when it refused to restore the case on grounds that the action was barred by the statute of limitations. Background: Goodwin and Owens brought suit against developer South Bay Property, LLC on July 9, 2009, less than two years after purchasing lots in the subdivision. South Bay filed a bankruptcy petition in June of 2010; when the case appeared on a trial roster in July of 2011, the trial court issued a Form 4 order with the notation “case stricken due to bankruptcy”. The bankruptcy case was dismissed on August 12, 2011. One year later, a foreclosure action was commenced, naming Goodwin and Owens as “stakeholder” defendants. The lot owners initially filed pro se answers; in January of 2013, the lot owners retained counsel and filed a Motion to Restore their 2009 action against the developer and also sought to consolidate the prior action with the foreclosure action. They likewise filed a motion to amend their pro se answers to assert their prior claims as counterclaims and crossclaims. The circuit court denied the Motion to Restore on the basis that the claims were barred by the statute of limitations, and determined that the consolidation motion was moot. The court referred the foreclosure action to the Master and declined to rule on the motion to amend. Goodwin and Owens filed Rule 59(e) motions as to both orders and asked that the Order of Reference be rescinded. The Master recused himself for unrelated reasons, after which the circuit court denied both Rule 59(e) motions. Goodwin and Owens appealed. Court of Appeals’ Ruling: The court of appeals agreed with Goodwin and Owens that the circuit court erred when it refused to restore the 2009 action as time-barred. A statute of limitations governs the time within which an action must be commenced, and Goodwin and Owens commenced their action by filing and serving their summons and complaint within the applicable three-year statute of limitations. The trial court further erred by applying the tolling provision of Bankruptcy Code Section 108(c)-the only time period for commencing or continuing a civil action was the statute of limitations, and the appellants had satisfied that provision prior to bankruptcy by commencing the “lot owners’ action”. The court of appeals similarly rejected the circuit court’s reliance on Rule 40(j) as a basis for refusing to restore the action post-bankruptcy. First, the court of appeals noted that the case was stricken due to the bankruptcy filing of the defendant, not pursuant to Rule 40(j). A claim may be stricken under Rule 40(j) only with written consent of all adverse parties, whereas this case was stricken without consent of the parties or prior notice. The court of appeals further held that Rule 40(j), even if it were at issue, does not set a deadline for restoring a case. The “tolling” provision of the rule, which provides that the statute of limitations is tolled if a party moves to restore the case within one year period after the case is stricken, derives from the treatment of the striking of a case under Rule 40(j) as a dismissal. Otherwise the tolling provision would be unnecessary. Following a petition for rehearing, the court of appeals reissued its opinion with the addition of subsection C. entitled “Petition for Rehearing” in which the court acknowledged the respondents’

argument that Goodwin and Owens waited an unreasonable length of time after the dismissal of the bankruptcy case before filing their Motion to Restore. The court of appeals concludes this section as follows: “We specifically do not address whether the delay in restoring the case provides the circuit court some other basis on which to dismiss the case, such as failure to prosecute or an equitable theory such as laches. We hold simply that the striking of a case from the docket due to bankruptcy does not require the plaintiff to comply with the statute of limitations again upon making a motion to restore.” Comment: There are some interesting observations in the opinion such as, “Our rules of procedure do not address how a circuit court must deal with the automatic stay. However, neither our rules nor 11 U.S.C. § 362 require the dismissal of the action.” Also, “…the striking of a case from the docket due to bankruptcy is not mentioned in our rules at all.”

Unauthorized Practice of Law (UPL) Vance L. Boone, et al. v. Quicken Loans, Inc. et al. Op. No. 27727 (Sup. Ct. July 19, 2017)- Summary: The South Carolina Supreme Court sitting in its original jurisdiction found that the residential loan refinance processes of Quicken Loans do not constitute UPL under SC Law. Background: The Court agreed to hear the matter in its original jurisdiction but referred the case to the Master in Equity for an evidentiary hearing and to make a recommendation. After an “extensive” evidentiary hearing, the Master issued his report recommending that the Supreme Court find that Quicken and its title company had engaged in UPL. The Court respectfully rejected the Master’s recommendation and found that Quicken and its title company had not engaged in UPL. Supreme Court’s Ruling: The Court analyzed the evidence presented before the Master and found that the residential refinance process was adequately supervised by SC attorneys so as not to constitute a violation of UPL. (See, e.g., State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987)). The Court noted that in each step of the loan process (Title Search and Certification, Preparation of the Instruments, the Closing, and Recording and Disbursement) a S.C. lawyer was adequately supervising the process and reviewing the documents. The Court found particularly important that the SC attorney reviewed all materials (including the title documents) and made corrections or refused to proceed if there were discrepancies. The Court also emphasized that the SC lawyers reviewing each step of the process maintain his or her independence from the lender. Ultimately, the Court found that a SC attorney properly and meaningfully supervised each step of the refinancing process, including (1) the Title Search and Certification, (2) the Preparation of the Loan documents, (3) the actual loan closing, and (4) the recording of the instruments and disbursement of funds. Comment: This case contains a very good summary of the cases and analysis of UPL in South Carolina in relation to loan refinancing and loan closings in general. With the rise of UPL counterclaims and defenses in mortgage foreclosure cases, you can expect to see this defense, especially if you are representing an online loan servicer – like Quicken. The Court emphasized that the lawyer must be independent and not be controlled by the lender. The Court disagreed with the Master’s finding that Quicken had engaged in UPL, and found that the supervision by SC counsel in the loan process was “meaningful” in this case. Despite the holding here, the Court stated that the review of UPL in loan closings will be reviewed on a case-by-case basis. Rogers Townsend & Thomas, PC v. Peck, et al., Op. No. 27707 (Sup. Ct. February 22, 2017) Summary: The South Carolina Supreme Court found that an independent entity (Community Management Group, LLC) engaged in UPL when it represented homeowners’ associations in collections actions in magistrate’s court. Background: Community Management Group, LLC (Community Management) was engaged in managing multiple HoAs and condominium associations in the Low Country. As part of its services, Community Management was also taking actions on behalf of the HoAs to record and enforce unpaid assessments. On behalf of HoAs its managed Community Management – without the assistance or involvement of a SC attorney – was preparing and recording liens,

filing actions in magistrate’s court to collect debts, and obtaining and filing judgments against homeowners. Rogers Townsend & Thomas filed an action seeking to enjoin Community Management from such activities and seeking a finding that Community Management was engaging in the unauthorized practice of law. The Supreme Court agreed to hear the matter in its original jurisdiction and referred the case to then circuit Judge McDonald as Special referee. Judge McDonald recommended that the Supreme Court find that Community Management Group was engaged in UPL. Supreme Court’s Ruling: The Supreme Court accepted Judge McDonald’s recommendation and found that Community Management had engaged in UPL. The Court analyzed the actions of Community Management in light of In re Unauthorized Practice of Law Rules Proposed by South Carolina Bar, 309 S.C. 304, 422 S.E.2d 123 (1992) and Magistrate Court Rule 21, which provides that a business “may be represented in a civil magistrate’s court proceeding by a non-lawyer officer, agent, or employee. . .” The Court’s analysis focused on the word “agent” in the in Rule 21 and whether that extended to management companies like Community Management. The Court “clarified” that “’agent’ does not include non-lawyer third party entities or individuals.” The Court further held that “agent . . . includes individuals who are not officers or employees of a business, but who have some nexus or connection to the business arising out of its corporate structure.” The Court identified a board member as a person not an officer or employee that would be considered to have the requisite nexus to the business to be an “agent” under Rule 21. The Supreme Court ultimately held that Community Management had engaged in UPL in (1) representing HoAs in magistrate court, (2) filing magistrate court judgments in circuit court, (3) preparing and recording liens for HoAs, and (4) advertising that it could perform the above legal services for HoAs. Comment: This is an interesting case and certainly goes a long way in protecting the practice of law for licensed SC attorneys. The facts are not completely clear as to what other services, if any, Community Management was providing for the HoAs. If Community Management was simply performing these “legal” functions, then the holding seems imminently reasonable. However, if Community Services was also providing property management functions for HoAs, it calls into questions whether it has the proper “nexus” addressed in this case. It will probably remain open for future decisions what the Court means when it says an “agent” does not include a “third party” entity or individual.

Fraudulent Conveyances (Statute of Elizabeth) First Citizens Bank and Trust v. Park at Durbin Creek, LLC, 419 S.C. 333, 797 S.E. 2d 409 (Ct. App. 2017) Summary: The court of appeals affirmed the trial court’s order setting aside a conveyance of real property as an intentionally fraudulent transfer. Conveyance of both joint owners’ interest in the property by a single deed did not prevent the court from invalidating the transfer of Clifton’s 50% tenant-in-common interest. Background: Clifton and Whiteman owned a 370 acre tract as tenants in common. Clifton was a real estate developer who would purchase investment property in his own name, and transfer the property to an LLC when a property was to be developed. Clifton was indebted to First Citizens Bank on three loans in the total amount of $3,873,000 made to finance various development projects; the loans were not long term loans and the bank continued to renew the loans over the years. In 2008, as the real estate market began to decline, Clifton submitted a personal financial statement to First Citizens in connection with a request to renew two loans that were approaching maturity. Clifton’s statement listed his 50% interest in the property with a value of $1,570,000. The bank stated that it renewed the loans to January 2009 in reliance on the financial statement. Clifton requested an extension on a third loan that was set to mature in July of 2008 and before the bank responded to the request, Clifton and Whiteman conveyed the property to The Park at Durban Creek, LLC (“PDC”), of which Clifton and Whiteman were the members. The bank, without knowledge of the transfer, extended the maturity date of the third loan to January 2009. In that same time frame, Clifton and Whiteman transferred other properties they owned into LLCs. The bank became concerned about Clifton’s ability to repay the loans and ultimately commenced a foreclosure proceeding in February 2009, resulting in a deficiency judgment of approximately $745,000. During the pendency of the foreclosure actions, Clifton entered into an agreement with his daughters in August of 2009 by which Clifton would disassociate from PDC and transfer his membership to Streamline Management, LLC, an entity not yet formed but whose sole members were Clifton’s daughters and ex-wife. Whiteman (the other member of PDC) testified that she did not consent to the assignment of Clifton’s membership interest. First Citizens initiated supplemental proceedings in October 2010 but discovered that all of the assets listed on Clifton’s 2008 financial statement had been disposed of in some manner, leaving Clifton with no remaining assets to satisfy the judgment. The bank commenced an action against PDC, Clifton and Whiteman, seeking relief under the Statute of Elizabeth, SC Code Section 27-23-10. After a one day bench trial, the circuit court entered an order setting aside the conveyance of the property to PDC, inferring fraudulent intent on the part of Clifton. The court also held that Clifton’s subsequent conveyance of his membership interest to Streamline was void because the entity did not yet exist, and further because Clifton failed to obtain the consent of Whiteman to the admission of new members as required under Section 33-44-404(c)(7). Court of Appeals’ Ruling: The court of appeals set forth the circumstances under which courts will set aside a conveyance for an “existing creditor”, such as First Citizens: under the “actual fraud” standard if the transfer was made for valuable consideration, or when the transfer is made without valuable consideration, no actual intent need be shown if the elements of “constructive

fraud” are present. Here the parties agreed, and the court found, that Clifton received valuable consideration in return for the transfer of his 50% interest in the property to PDC (presumably, his membership interest in the LLC). As a result, the “actual fraud” standard was applicable, and First Citizens was required to prove by clear and convincing evidence that Clifton conveyed the property with the intent to delay, hinder, or defraud the bank. Fraudulent intent may be inferred from the presence of “badges of fraud” under Coleman v. Daniel, 261 S.C. 198, 209, 199 S.E.2d 74, 79 (1973). Here First Union established (1) Clifton was indebted to the bank at the time of the transfer; (2) Clifton was a member of the transferee LLC, satisfying the element of a relationship between grantor and grantee; (3) although litigation was not pending or threatened, Clifton knew that litigation would be inevitable if he could not satisfy the bank or negotiate a new extension; (4) Clifton engaged in a secretive course of conduct by transferring the property while negotiating loan renewals and not submitting an updated financial statement; and (5) Clifton retained possession of the property and reserved a benefit in the property after the conveyance. The establishment of badges of fraud gave rise to a rebuttable presumption of fraudulent intent. Clifton maintained that he and Whiteman transferred the property for a legitimate purpose, that is, to address Whiteman’s concerns about possible personal liability because the property was being leased to hunters, however, the trial court, having also heard the testimony of Clifton’s daughter and of Whiteman, found Clifton’s testimony was not credible. The court of appeals concurred with the trial court’s finding. Clifton also challenged the order setting aside the transfer of his interest to PDC, since he and Whiteman conveyed their interest in a single deed, and the court’s order improperly “divided” the deed in the absence that Whiteman acted with fraudulent intent. The court of appeals rejected this argument, finding that as tenants in common, either Clifton or Whiteman had the ability to convey their interest in the property without the other cotenant’s consent or participation. As a result, it was proper to set aside Clifton’s conveyance and that the order did not necessarily invalidate the cotenant’s transfer. Finally, the court of appeals found that Clifton had failed to preserve the evidentiary issue of the admissibility of testimony about Clifton’s assignment of his membership interest to Streamline by failing to object to the earlier introduction of an exhibit and to testimony from Whiteman about the transfer to Streamline. Comment: This case illustrates the importance of presentation of evidence to establish intent by circumstantial evidence.

Fraudulent Conveyances; Expiration of Judgment

Gordon v. Lancaster, 419 S.C. 48, 795 S.E. 2d 857 (Ct. App. 2016) Summary: Judgment creditor’s fraudulent conveyance claim survived the expiration of the underlying judgment since the creditor commenced its action within the ten year life of the judgment. A creditor can set aside transfers that occurred before its claim arose upon a showing of “moral fraud”. Background: Lancaster is the nephew of Drews, who operated a construction business in Charleston for over 40 years. Lancaster worked in the business during high school and college and became close to Drews and his wife. The business and Drews suffered financially after Hurricane Hugo in 1989, resulting in the sales of the business and of the Drewses personal residence. Beginning in 1992 Lancaster and Drews entered into a series of real property transactions, some involving unrecorded documents and others in which mortgages were recorded without the execution of promissory notes. In the interim, in 1996, Gordon paid $50,000 for stock in a hardware store venture started by Drews; the business failed the following year. Gordon filed suit against Drews in 1999, asserting securities fraud and other claims in connection with the sale of stock. Gordon prevailed at trial in December of 2001, receiving a judgment against Drews in the approximate amount of $66,000, which was increased to over $108,000 in March of 2002 by an award of attorneys fees. Drews unsuccessfully appealed the judgment. Additional transactions between Lancaster, Mr. Drews and Mrs. Drews continued until September of 2005. Gordon pursued supplemental proceedings in August and September of 2006; the Master in Equity left the proceedings open because Drews failed to produce documents as ordered. At the hearing, Gordon’s attorney expressed suspicion about transactions involving Lancaster and Mrs. Drews. Lancaster was deposed in February 2010, at which time Gordon became aware of transfers between Drews and Lancaster. Mrs. Drews died the next day before she could be deposed. Gordon filed suit in November 2010 against both Drews estates and Lancaster; the Personal Representatives settled prior to trial. The ten year anniversary of Gordon’s judgment passed before the case was tried nonjury in June of 2013. Lancaster moved for a directed verdict (which the court of appeals agreed should have been styled as a motion for involuntary nonsuit) on the grounds that Gordon’s underlying judgment had expired; the trial court denied the motion and entered an order finding that Gordon had proven the fraudulent nature of all of the fraudulent transfers, including those transfers that occurred prior to the accrual of Gordon’s original cause of action in September 1996 because those prior transfers involved actual moral fraud. The order granted Gordon a money judgment against Lancaster for $211,677.30. This appeal followed denial of Lancaster’s post trial motions. Court of Appeals’ Ruling: The court of appeals first took up Lancaster’s assertion that the expiration of Gordon’s original judgment prevented the continuation of this action against Lancaster. The court recalled its earlier decision in Commercial Credit Loans, Inc. v. Riddle, 334 S.C. 176, 185, 512 S.E.2d 123, 128 (Ct. App. 1999) in which the court held that an attempt to execute on a judgment did not extend the ten year statutory duration. The South Carolina Supreme Court, however, had taken a less rigid stance in The Linda Mc Company v. Shore, 390

S.C. 543, 553-55, 703 S.E.2d 499, 504-05 (2010) by holding that a judgment creditor’s collection effort in supplemental proceedings within the ten year period extended the enforceability of the judgment to when the court issued its order. The court of appeals affirmed the circuit court’s ruling that Gordon was entitled to satisfy his judgment through the present action because that action had been filed within the ten year statutory period of active energy. Gordon’s amended complaint had alleged that the judgment remained unsatisfied and that the 2006 supplemental proceedings had been left open. The court of appeals agreed with the trial court’s determination that the action was filed in aid of execution of the judgment. The dissent disagreed with the majority’s reliance on Linda Mc Company, finding the circumstances of this case are distinguishable. The court rejected Lancaster’s challenge to the trial court’s finding of fraudulent conveyance as to three of the transactions in question. The opinion discusses the standing of subsequent creditors to set aside transfers as set forth in Judy v. Judy, 403 S.C. 203, 208-09, 742 S.E.2d 672, 675 (Ct. App. 2013): that the conveyance is without consideration and was made with a view to future indebtedness or with an actual fraudulent intent

on the part of the grantor to defraud creditors. Subsequent creditors must show “actual moral fraud” rather than legal fraud. Actual moral fraud involves “a conscious intent to defeat, delay, or hinder [one’s] creditors in the collection of their debts.” With a voluntary int[ra]-family transfer, the burden shifts to the transferee to establish that the transfer was valid.

The court examined each transaction in turn, finding ample evidence of “badges of fraud” to support the trial court’s findings of actual “moral fraud”. Comment: The Linda Mc Company case extended the “active energy” of the judgment for that period while the judgment creditor awaited a ruling from the court. The status of that judgment could arguably be determined from a review of the judgment roll. Here the “active energy” was extended by the filing of a separate action. What challenges does this present to those searching the public record to determine whether a judgment has expired?

Tortious Interference

First South Bank v. South Causeway, LLC, 414 S.C. 434, 778 S.E. 2d 493 (Ct. App. 2015) Summary: Bank’s disclosure of otherwise confidential information to a third party did not support a claim for tortious interference if done in proper pursuit of the bank’s contractual rights. Background: This appeal arises out of a contested mortgage foreclosure action in which the circuit court bifurcated trial, presenting the borrower’s counterclaims to a jury and then ruling on the foreclosure action. At the conclusion of South Causeway’s case, the trial judge directed a verdict in favor of First South Bank on counterclaims of breach of contract accompanied by a fraudulent act, fraud, breach of fiduciary duty, negligent misrepresentation and tortious interference with a prospective contract. The jury returned a defense verdict in favor of the bank of the remaining counterclaims of breach of contract, tortious interference with contract, and violation of the SCUPTA. The judge entered a judgment of foreclosure. The evidence supporting the tortious interference with prospective contract included a conversation between FSB’s senior vice president Lovelace and Don Thomas, broker-in-charge of the agency retained by the borrower to sell the undeveloped 19.17 tract at auction. Lovelace informed Thomas that the bank would not accept less than full payment of the loan and that the bank would not be willing to release portions of the tract were it divided. Lovelace also disclosed the amount due on the loan and that the bank did not plan to renew the loan. As a result of the conversation, Thomas' agency increased the minimum sale price for each lot. South Causeway presented testimony from an expert on commercial lending and banking policies and procedures who opined that FSB had disclosed confidential information but on cross examination admitted that the disclosure did not violate any privacy law, banking standard or code of ethics. Court of Appeals’ Ruling: The court of appeals affirmed the trial court’s directed verdict on the tortious interference with prospective contract counterclaim, in part because the disclosure by FSB was not made “for an improper purpose or by any improper method”, which is one of the elements of the cause of action under Eldeco, Inc. v. Charleston Cty. Sch. Distr., 372 S.C. 470, 480, 642 S.E.2d 726, 731 (2007). Instead, the court found that the information was necessary to protect the bank’s contractual rights under the loan documents. Comment: This opinion deals with other important issues not covered in this summary.

Evidence (Hearsay-Business Records) Deep Keel, LLC v. Atlantic Private Equity Group, LLC, 413 S.C. 58, 773 S.E. 2d 607 (Ct. App. 2015)

Summary: The South Carolina Court of Appeals affirmed a judgment of foreclosure over the defendant’s challenge to the Master’s admission of loan documents but reversed the deficiency judgment against the borrower on the grounds that the witness’ testimony as to the loan balance was hearsay. The provision of the order finding the individual guarantors liable for the debt was vacated as outside the authority granted in the order of reference. Background: Lender Community First Bank commenced a foreclosure action against borrower Atlantic and guarantors Rohlfing and Caldwell, seeking a deficiency judgment. While the action was pending, the loan was assigned to Deep Keel, LLC. The action was referred to the Master in Equity for the purposes of the foreclosure action, and on resolution of same, the case would be returned to the circuit court for final disposition as to any issues triable by jury against the guarantors. At the foreclosure hearing, Deep Keel’s sole member, Bynum, testified as sponsoring witness for the loan documents which the Master admitted into evidence over Atlantic’s objection on authentication and hearsay grounds. Bynum’s testimony of the amount due on the loan, which was based on documentation received from the assigning lender, was received over Atlantic’s objection. The Master’s order directed a foreclosure sale of the mortgaged property, established the amount due and granted a deficiency judgment against Atlantic and included findings that Rohlfing and Caldwell had executed guaranties and were liable for the limited principal amounts provided therein. Court of Appeals’ Ruling: Atlantic asserted error in the admission of the loan documents (note, mortgage, assignment of leases, loan modification agreements and partial releases) over its objections of failure to authenticate and hearsay. The court of appeals found that Bynum’s testimony satisfied proponent’s burden under SCRE 901(a), which is “not high”, by testifying that the documents “are what they are claimed to be”. The witness’ testimony that he examined the loan documents at the time he negotiated the note purchase agreement, and that he received the documents from the bank pursuant to the transaction, was sufficient under Rule 901(b)(1). It was not necessary for Deep Keel to present testimony from a witness with knowledge of how the documents were prepared or maintained by the originating bank. Secondly, Deep Keel authenticated the documents under Rule 901(b)(4) based on “appearance, contents, substance, internal patterns, or other distinctive characteristics, taken in conjunction with circumstances”, in that the loan documents (including those recorded in the public record which provides an independent method of authentication) were internally consistent and correctly identified the parties to the loan transaction. Finally, the court of appeals noted that the loan documents are self-authenticating under Rule 902(9), SCRE as “commercial paper, signatures thereon, and documents relating thereto to the extent provided by general commercial law”. The “commercial law” component is found in Section 36-3-308(a), which provides that the authenticity of a signature on an instrument “is admitted unless specifically denied in the pleadings”. Here the defendants’ answer did not contain a specific denial of the genuineness of the signatures, nor did Atlantic offer any evidence at the hearing or argue that the signature on note was invalid. The court of appeals also rejected Atlantic’s challenge to the trial court’s admission of the loan documents over a hearsay objection. The Master’s reliance on the business records exception of SCRE 803(6) was unnecessary because the loan documents were non-hearsay. Instead, the loan

documents were “writings that have independent legal significance” offered to prove the existence of a contractual right or duty and are not hearsay. Although Deep Keel made a “thorough presentation of documents” to establish the existence of the note and mortgage, it did not offer business records to establish the amount due, but instead offered Bynum’s testimony of the principal balance, which was based on documents obtained from the original lender. The court of appeals agreed with Atlantic’s position that since Bynum had no personal knowledge of transaction that occurred before Deep Keel purchased the note, that his testimony, offered to prove the truth of the statements, was hearsay. Although the Master admitted the testimony under the Business Records Exception of Rule 803(6), the plain language of the rule allows for admission of a document, not of testimony describing the document, so that the Master in Equity abused his discretion in admitting the testimony. The court of appeals further found that since Deep Keel could not prove the amount due other than through Bynum’s testimony that Atlantic was prejudiced by the error. Finally, the court of appeals determined that the findings by the Master that related to the guarantor’s liability were preserved, despite the omission of this issue from Rohlfing’s and Caldwell’s Rule 59(e) motion, because the Master’s authority is a question of subject matter jurisdiction. Because the order of reference restricted the Master’s authority to the foreclosure action, and specifically reserved the claims relating to the guarantors for the circuit court, those findings exceeded the scope of the order of reference and were vacated.

Comment: This case provides a primer on evidentiary issues common to foreclosure and collection actions. In uncontested cases it is common practice for the lender to establish the amount due by introduction of an Affidavit of Debt. In the absence of an objection, this is likely acceptable, but a different approach is advisable in other contexts, for example, when the Plaintiff files a Motion for Summary Judgment.

Lender liability – Agency / Breach of Fiduciary Duty / Aiding and Abetting Linda A. Gibson v. Ameris Bank, Op. No. 5488 (S.C. App. Withdrawn, Substituted and Refiled August 23, 2017) Summary: The South Carolina Court of Appeals reversed the Master’s order awarding judgment against Ameris Bank in excess of $2.8 million for breach of fiduciary duty, negligent misrepresentation and aiding and abetting in the breach of fiduciary duty because there was no evidence bank officer working with borrower was an agent of Ameris Bank at the time of the alleged tortious conduct as bank officer was not yet employed by Ameris Bank at the time. Background: Gibson sought to borrow money in order to finance the purchase and renovation of an apartment complex in North Charleston in August 2007. Gibson first sought financing from First Reliance Bank, where she had previously worked and had a prior borrowing relationship with loan officer Zerbst and analyst Lanier relating to a 2005 shopping center loan. Both Zerbst and Lanier had left the employment of First Reliance in early October 2007. She expressed concern that First Reliance was not serving her needs on the desired loan. Zerbst referred her to Lanier who had begun working at Ameris Bank on October 11, 2011. Zerbst ended his employment with First Reliance on October 5, 2007 and was not employed until he accepted a job with Ameris Bank on January 11, 2008. While unemployed in mid October 2007, Zerbst allegedly told Gibson that he thought the apartments were a “good investment” and that the rents would cover the debt. Gibson closed the loan on November 2, 2007. Subsequently, Gibson fired her contractor (Villavicencio) because of mismanagement of the renovations and alleged theft of loan proceeds. Problems ensued at the apartments and they did not generate enough rent to cover the loan payments. Ameris Bank filed a foreclosure. Gibson counterclaimed for Zerbst’s and Ameris’ alleged breach of fiduciary duty and negligent misrepresentation, and for Ameris Bank’s alleged aiding and abetting in the contractor’s breach of fiduciary duty. The Foreclosure was settled by way of a deed in lieu but the counterclaims went forward. The Master found that Zerbst was an agent of Ameris Bank and breached his fiduciary duties and made negligent misrepresentations to Gibson. The Master also found that that Ameris Bank had aided and abetted in the contractor’s breach of fiduciary duty and awarded Gibson $2,913,886.00 against Ameris Bank. Court of Appeal’s Ruling: The court held that Zerbst was not an agent with authority or apparent authority for Ameris Bank because there was no evidence that he was employed by Ameris Bank nor that Ameris Bank had any control over him until January 2008 – three months after the alleged misrepresentations and breach of fiduciary duty AND two months after Gibson and Ameris Bank closed the loan. Interestingly, Zerbst was being sued by First reliance for breaching his covenant not to compete by going to work for Ameris Bank. In that litigation, Zerbst testified that he kept a calendar in 2007. Gibson sought that calendar in her litigation to show that Zerbst had a relationship with Ameris Bank prior to his official hire date in January 2008. Zerbst and Ameris Bank could not produce the calendar and said it was lost. The Master held this against them and essentially treated the lost calendar as a spoliation issue. The Court of Appeals found that the “lost calendar “could not have contained evidence that Zerbst was Ameris’s agent.”

The court also reversed the Master’s finding that Ameris Bank had aided and abetted in the contractor’s (Villavicencio’s) breach of fiduciary duty. The court emphasized that the critical issue in this case was proving Ameris Bank knowingly participated in the breach of fiduciary duty, citing the elements from Vortex Sports & Entm’t v. Ware, 378 S.C. 197, 204, 662 S.E.2d 444, 448 (Ct. App. 2008). The court found that there was no evidence that Ameris employees were aware that Villavicencio was breaching his fiduciary duties to Gibson. One other interesting evidentiary note was that Gibson discovered an email from the Ameris Bank regional credit officer saying that he was concerned that the bank had mismanaged the loan and had potentially aided Villavicencio in siphoning off loan proceeds. The court did not consider this to be evidence of “actual knowledge” of the breach by Villavicencio.