Chapter 15 Commercial Foreclosure Process and Alternatives

• Library: Practical Guide to Commercial Real Estate in South Carolina (SCBar) (2024 Ed.)

Chapter 15 Commercial Foreclosure Process and Alternatives

D. Sean Faulkner

Attorneys inevitably will be called upon to advise a client concerning a defaulted mortgage loan to determine what options might be available short of foreclosure. In order to properly advise a client concerning these matters, an attorney must be familiar with the basic foreclosure process. This chapter outlines the basic commercial foreclosure process in South Carolina and some of the options that might be available for resolving a defaulted mortgage loan short of a foreclosure by a lender. Those options may include (i) loan modifications (addressed separately in Chapter 14 of this book), (ii) forbearance agreements, (iii) deeds in lieu of foreclosure, (iv) judgment by confession or (v) a combination of the above.

A. Prior to Filing Suit

1. Document Review

An attorney called upon to represent a party in a mortgage loan foreclosure or loan workout will need to review the loan documents executed in connection with the mortgage loan. This review will at a minimum involve the review of the original loan commitment or term sheet (if any), the promissory note or credit agreement, the mortgage, the security agreement, related guaranties (if any), the lender's policy of title insurance, the original settlement statement, and any prior loan modifications or loan renewal documents. In addition to the foregoing, the attorney will also need to conduct a review of the formation documents for the borrowing entity as part of this process to identify the parties to the transaction. The purpose of this review is to gain an understanding of the agreements currently in place, the collateral that secures the loan, identification of the parties that will need to be involved in the process, and identification of other issues that might need to be addressed as part of the foreclosure or loan workout process. The attorney will also need his/her client to reduce to writing the client's understanding of the events leading up to the defaulted mortgage loan prior to the review of the loan documents in order to assist with identifying the issues to be considered and addressed in the foreclosure proceedings or loan workout process.

2. Demand Letter

The demand letter is the correspondence sent by the lender notifying a borrower that a mortgage loan is in default. It is usually the document that initiates the foreclosure or collection process. In a commercial foreclosure action, the terms of the promissory note will dictate whether or not a demand letter is required,¹ and, if so, the amount of time that a borrower must be given before the lender can call the promissory note due in full. An attorney should review the promissory note involved in the foreclosure to make sure that the demand letter complies with the notice requirements of the promissory note.

3. Lis Pendens

South Carolina Code Ann. Section 15-11-10 states that: "In an action affecting title to real property the plaintiff (a) not more than twenty days before filing the complaint or at any time afterwards . . . may file with the clerk of each county in which the property is situated a notice of the pendency of the action and the description of the property in that county affected thereby."

Actions affecting real property include the foreclosure of a mortgage and the filing of the lis pendens is a requirement to obtain a valid judgment for foreclosure in a foreclosure action, see Ex parte Johnson, 147 S.C. 259, 145 S.E. 113 (1928). The parties listed in the caption of the lis pendens will be the lender, as plaintiff, the borrower and any guarantors, as defendants, and any other parties who may claim a right or interest in the mortgaged property adverse to that of the lender such as a subordinate mortgagee or judgment creditor. The lis pendens should also include the date of the mortgage, the date of recording the mortgage and a description of the property being foreclosed upon. Many times, a lis pendens is filed in advance of the foreclosure complaint at the time that the foreclosing attorney orders a title search of the property to be foreclosed. If the title abstract subsequently reveals that that there are junior liens against the subject property, then an amended and restated lis pendens can and should be filed adding those additional lienholders as defendants in the action.

B. The Suit

1. Complaint

The complaint sets forth the information pertinent to the foreclosure. It lists the lender as plaintiff, the borrower and guarantors as defendants, and any junior lienholders as additional defendants. The complaint is filed in the county where the real property is situated. The complaint typically alleges that the lender is the current holder of the promissory note that is in default, that the promissory note is secured by a valid mortgage lien together with the recording information for the mortgage showing the mortgage has priority as to other liens affecting the subject property, that the lender is seeking to foreclose its mortgage lien on the mortgaged property and whether or not the lender is seeking a deficiency judgment against the borrower and any guarantors.² The complaint should also set forth in detail the principal amount due, together with interest, late charges, advances made by the lender for protection of the property, and whether or not attorney's fees are being sought in the foreclosure action. While it is not necessary that the complaint be verified by the lender, the better practice is to have the complaint reviewed and verified by affidavit of an authorized officer of the lender attached to the complaint before filing.

On May 2, 2011, Chief Justice Jean H. Toal issued an Administrative Order concerning foreclosure actions in South Carolina. The main purpose of the Order was and is to ensure communication between the lender and homeowners during the foreclosure process. The Order is only applicable to foreclosures involving owner-occupied dwellings. Thus, if the foreclosure does not involve property that is an owner-occupied dwelling, the requirements of the Order do not apply, and the foreclosure can proceed in accordance with the standard foreclosure practice in South Carolina. For this reason, the complaint in a commercial foreclosure action should include an allegation that the property securing the loan is not owner occupied and is thus not eligible for treatment under the Order.

2. Service

Service of the foreclosure pleadings is an important part of the foreclosure process. Failure to properly serve a party in a foreclosure action can result in additional cost and delays. Service of process is governed by Rule 4 of the South Carolina Rules of Civil Procedure. While it may be more convenient to serve parties to a foreclosure action by mail as allowed under Rule 4, SCRCP, the better practice is to attempt to have the parties to the action personally served. Careful attention must be made to make sure that the borrower and the guarantors have been properly served. In many instances the borrower will be a corporation or a limited liability company and the guarantors will be the officers, shareholders or members of the borrowing entity. Process servers may believe that they have properly served both the borrower and the guarantors in compliance with Rule 4, SCRCP, when in fact service may be defective as to the borrower or the guarantors. To avoid service of process problems, it is prudent to make sure you provide detailed written instructions to the process server hired to serve the foreclosure pleadings. Detailed instructions should include the address or addresses where the party may be served and time when to attempt service. It is also prudent to personally review the affidavits of service before you file them with the clerk to make sure there are no defects in the affidavits before they are filed with the clerk. It is also important to note that not all judgment creditors need to be personally served with the foreclosure pleadings. See South Carolina Code Ann. Section 15-35-840, which provides that the attorney of record for a judgment creditor is designated as the agent of the judgment creditor for service of process.

3. Service by Publication

There may be instances where a party cannot be personally served and must be served by publication. Service may be made by publication in the situations set forth in S.C. Code Ann. Section 15-9-710. The party seeking service by publication must show to the court that diligent efforts were made to ascertain the whereabouts of the party to be served and that the party cannot be located within the State. This includes confirming that individual defendants are not in the military service of the United States as defined by the Soldiers' and Sailors' Civil Relief Act of 1940. In the event that a process server is unable to serve the party at the last known address or addresses of the party after repeated attempts, service should be attempted at the last known addresses of the party by certified mail, return receipt requested, restricted delivery. If service by mail is unsuccessful, the attorney can then apply by motion to the court for an order of publication. The motion for an order of publication should be accompanied by a Summons and Notice of Filing of Complaint, an affidavit of non-service from the process server, and an affidavit from the foreclosing attorney that diligent efforts have been made to locate and serve the party within the State without success, that a cause of action exists against the party to be served and that the party to be served is a proper party to the foreclosure action. The Motion for Service by Publication, the affidavits in support of the motion and the Summons and Notice of Filing of Complaint should be served on all parties to the foreclosure action at their last known address. The Order issued upon granting of the Motion for Service by Publication will direct that the Summons and Notice of Filing of Complaint...