South Carolina BAR Journal
SC Lawyer, January 2011, #4.
Article for South Carolina Lawyer Speak to Your Supervisor: Protecting Lenders and Lawyers under the Attorney Supervision Requirements for South Carolina Real Estate Closings
South Carolina LawyerJanuary 2011Article for South Carolina LawyerSpeak to Your Supervisor: Protecting Lenders and Lawyers under the Attorney Supervision Requirements for South Carolina Real Estate Closings By: Lanneau Wm. Lambert, Jr. and T. Hudson WilliamsDraft Date: 11/12/10
Transactional lawyers are beginning to let themselves believe the real estate market is recovering. Please knock on your nearest piece of wood. Indeed, as money is beginning to trickle back into the market, commercial loans are being refinanced, land is being cleared for new construction and skeletons of developments halted in the midst of "the crash," with walls half-bricked and roofs half-shingled, are being fleshed out as new ownership with fresh money takes over.
Despite these modest signs of recovery, the sense remains that institutional lenders are fairly nervous about lending money due to both the continued instability of the market and the onslaught of new regulations. In South Carolina, recent decisions from both our Supreme Court and Court of Appeals give lenders another reason to be nervous-that their system for closing real estate-backed loans may leave them unable to enforce their mortgages.
In May of last year, the Court of Appeals held that a bank which closed a home equity line of credit without attorney supervision-thereby committing the unauthorized practice of law-was barred from all equitable and legal remedies leaving it unable to pursue foreclosure or sue on its note. Wachovia Bank v. Coffey, 389 S.C. 68, 698 S.E.2d 244 (2010). In August, the Supreme Court recognized the same equitable defense in holding that equitable remedies were unavailable to lenders who commit the unauthorized practice of law in the course of a real estate transaction and come to the court with "unclean hands." Matrix Fin. Services Corp. v. Frazer, Op. No. 26859, 2010 WL 3219472 (S.C. Sup. Ct., Aug. 16, 2010). Matrix even went so far as to imply that once a lender has unclean hands with respect to a transaction, it forfeits all equitable claims concerning that transaction, including those against strangers to the transaction.
Lenders have been aware of the rules for closing real estate transactions in South Carolina for some time, with the seminal case of State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987) articulating the requirements more than 20 years ago. But Coffey and Matrix now show that the consequences to lenders for failing to follow the rules are extremely harsh. The consequences to lawyers for aiding and abetting-or merely acquiescing to-the unauthorized practice of law in real estate closings have been made known through a series of attorney disciplinary cases which have been widely discussed among real estate practitioners for years.
Unfortunately, very little has been developed in response to the attorney disciplinary cases to protect attorneys in a practical sense from assisting the unauthorized practice of law in the course of real estate closings, which the disciplinary cases indicate can happen unwittingly. Now that lenders are aware of the severe risk they face for improperly closing real estate transactions, tools are being implemented in connection with closings aimed at protecting the lender, but have the propitious byproduct of assisting attorneys in closing the transaction so as not to run afoul of the attorney supervision requirements. Of course, the ultimate beneficiary is the borrower/purchaser who is provided with the level of expertise the unauthorized practice of law requirements are intended to provide.
This article discusses the problems lenders face in adapting their systems for closing real estate transactions in other states to the requirements in South Carolina and gives examples from practice of how lenders' are protecting themselves in light of the newly discovered risks they face as revealed by the Coffey and Matrix cases. It also discusses how lawyers benefit from these new implementations and both the positive and negative reactions from various parties to the transaction to the new direction closings are taking.