Is it a foreclosure defense in SC that the outstanding debt was only $250? What if the purchaser at the foreclosure sale pays only $3000 for a $128,000 property without assuming the mortgage on the property?
In Winrose Homeowner’s Association v. Hale, the SC Supreme Court reversed a judicial sale under those facts, noting that Regime, the HOA, and the HOA’s attorney were engaging in “questionable business practices” that amounted to a shake-down of the homeowners to force them to buy back their property.
Was there a valid foreclosure defense and what exactly did the HOA and their attorneys do?
Foreclosure Defense: Can an HOA Foreclose on Your House?
An HOA may have the right to foreclose on your home for unpaid HOA fees if you agreed to give them that right. As ridiculous as it sounds, they may have the right to foreclose on a $128,000 home for something as minor as a $250 missed payment.
The “questionable business practices” engaged in by Winrose HOA, their attorney, and Regime may have been grounds to reverse the sale, but the Supreme Court did not rest their decision on this. Although the Supreme Court called them out for what they are doing to homeowners (more below), the Supreme Court reversed the sale because the sale price under the circumstances was so inadequate that it “shocked the conscience” of the court.
Inadequate Sale Price
An inadequate sale price alone is not a foreclosure defense in SC, but the court may reverse a sale when:
- The sale price is so grossly inadequate that it shocks the conscience of the court; or
- The sale price is accompanied by other circumstances from which the court can infer fraud has been committed.
In this case, the SC Supreme Court implied that fraud may have been committed, outlining the questionable business practices that Winrose HOA, their attorney, and Regime were engaged in and noting that “the true nature of this foreclosure action” was not to collect a $250 debt…
Despite this, they rested their decision on the fact that the sale price was so grossly inadequate that it shocked the conscience of the court. In general, a sale price that is below 10% of the value of the home is low enough to be grossly inadequate.
Debt Method or Equity Method?
In many cases, the $3000 sale price paid by Regime would have been adequate. Using the Debt Method of determining the fair market value of the property, the court would first determine that there was an outstanding balance of $66,040 on the homeowner’s mortgage. If the purchaser assumed the homeowner’s mortgage, which is the standard practice, the effective sale price would have been $69,040 which would have been more than adequate.
Under the Debt Method, the outstanding mortgage is considered a “debt” that must be assumed by the foreclosure purchaser before receiving a free-and-clear title, thereby freeing the purchaser to resell the foreclosed property to a third-party.
Using the Debt Method, Regime would have paid over half of the property’s fair market value, which is an adequate sale price…
On the other hand, using the Equity Method, the property’s value is determined by subtracting the amount of debt from the property’s equity to reach the property value. Comparing the sale price to the fair market value using the Equity Method, Regime paid only 4.9% of the property’s value, an amount less than 10% which is grossly inadequate.
Under the Equity Method, the outstanding mortgage is considered a liability that devalues the purchased property, meaning the outstanding mortgage is subtracted from the fair market value of the property rather than added to the winning bid price. Thus, the Equity Method is a ratio comparing the winning bid price to the amount of equity (i.e. the fair market value minus the amount of the outstanding mortgage) in the foreclosed property. Here, using this alternative method of calculation, Regime has only paid approximately 4.9% of the Property’s value—a percentage that falls below the 10% necessary to shock the conscience of the court, which would require us to overturn the sale.
Because Regime did not assume the mortgage and had no intention of assuming the mortgage, it would be ridiculous to use the debt method to determine the fair market value of the property – the Court overturned the sale based on the gross inadequacy of the sale price using the Equity Method without considering the outstanding balance on the mortgage.
Regime Solutions, LLC and Winrose Homeowner’s Association’s Questionable Business Practices
What are the “questionable business practices” that the Court is talking about?
Why would an HOA foreclose on a property for a $250 debt when the filing fees, serving the papers, and attorney fees were more than eight times that amount? Does any rational person pay $2000 to collect $250?
Is there something more going on here?
What is Regime’s Business Model?
According to the Court, Regime’s business model consists of 1) buying foreclosed homes, 2) not assuming the mortgage on the homes or paying the bank, and either 3) allowing the bank to foreclose again, or 4) selling the property back to the original owner:
In fact, the Hales demonstrated that Regime’s business model is not to assume the senior mortgage, instead either (1) allowing the senior lienor to (re)foreclose on the purchased property, or (2) quitclaiming the foreclosed property back to the original homeowners in exchange for a hefty fee. See Pet’r’s Br. at 12 n.4 (“An updated search of the Richland County public records shows that between November 4, 2013 and October 11, 2016: (1) Regime  purchased 38 properties as to which a bank later foreclosed, meaning Regime  did not pay off the [senior] mortgage; (2) Regime  purchased 15 properties that it quitclaimed back to the owners for a profit between $2,911 and $13,984 per property; and (3) Regime  purchased 6 properties of which it is still the owner of record and there is still an open mortgage.”). Regime has not disputed or otherwise responded to these allegations.
In this case, although they did not respond to the initial foreclosure complaint, the homeowner did not receive notice of the foreclosure proceedings or the sale of their home (which may be a foreclosure defense in SC but they did not raise this issue on appeal).
After the foreclosure had been filed but before default judgment was entered, the HOA sent a bill for $250 to the homeowner. They paid it. The HOA’s attorney (the same attorney the Supreme Court says engaged in questionable business practices) sent the homeowner a notice that the lien had been satisfied.
The homeowner’s first notice that the lien was not satisfied was when Regime asked the court to evict them from their home. When the homeowner discovered what had happened and that they were facing eviction, they offered Regime $9000 for their home. Regime demanded a payment of $35,000…
- Homeowner owes HOA $250;
- HOA files a foreclosure action on a $128,000 home for a $250 debt;
- HOA’s attorney tells homeowner their lien is satisfied, even as the attorney is proceeding with the foreclosure action;
- HOA’s attorney does not notify the homeowner of the foreclosure proceedings or sale of their home;
- Regime purchases the $128,000 home for $3000, enough to cover the $250 debt and the attorney’s fees;
- Regime then demands $35,000 from the homeowner for a quitclaim deed to their property.
What Does the SC Supreme Court Think About Regime, the HOA, and the HOA’s Attorney’s Business Model?
The SC Supreme Court says the scheme, engaged in by the HOA, Regime, and the HOA’s attorney amounts to “questionable business practices.”
Regime would not have the opportunity to engage in these questionable business practices but for the HOA’s cooperation (and the HOA’s attorney):
However, Regime would not have had an opportunity to engage in its questionable business practices had the HOA and its attorney not chosen to pursue foreclosure in the first place.
The HOA’s attorney was enabling Regime’s questionable business practices:
Similarly, at the initial hearing on Regime’s rule to show cause, the circuit court commented the HOA’s attorney’s law firm “ha[d] become a pioneer in that whole effort [to treat defaulted regime fees as ruthlessly and quickly as defaulted mortgages] and ha[d] yet to convince anybody . . . that there’s anything wrong with what [it was] doing.” In response, the HOA’s attorney brazenly bragged her firm had already received seven judgments in favor of various HOA clients in their first two to three years of business.
To be clear, according to the Supreme Court, this is an “improper use of foreclosure proceedings:”
A foreclosure proceeding is a last resort, not a business model to be swiftly invoked for the purpose of exploiting property owners. We do not countenance the improper use of foreclosure proceedings by the HOA, its attorney, or Regime.
Regime manipulated the foreclosure proceedings “to engage in strong-arm tactics:”
Here, the settlement negotiations are referenced as evidence of Regime’s manipulation of a foreclosure procedure to engage in strong-arm tactics.
Do I Need a Foreclosure Defense Attorney in SC?
If you intend to let your property go and you understand the financial consequences, you may not want to retain a foreclosure defense attorney.
On the other hand, you may have options that you are not aware of that will allow you to keep your property and hopefully save your credit…
Or you may be the target of unethical, shady, and possibly illegal conduct.
It doesn’t appear that the homeowner in the case above retained a foreclosure defense attorney – an attorney who was familiar with the predatory practices described in the Supreme Court’s opinion could have warned the homeowner, resolved the foreclosure early without the need for a judicial sale, ensured that the homeowner received notice of court hearings and the sale of their home, and prevented the “shake-down” of the homeowner.
The homeowner’s attorney may have been able to turn up further evidence of misconduct though investigation and the discovery process, and there may have been additional remedies available to the homeowner. Depending on the facts of the case and what the attorney’s investigation discovers, what are the possible remedies?
Foreclosure Defense in SC
Common defenses to foreclosure in SC include:
Failure to Mitigate: the lender must mitigate their damages, for example, the lender should attempt a loan modification or other solution before filing a foreclosure action.
Unclean Hands: if the lender is acting unreasonably or engaging in questionable business practices such as fraud, it may be a foreclosure defense in SC; or
Breach of the Duty of Good Faith and Fair Dealing: all parties to any contract have a duty to act in good faith. If the lender is acting unreasonably or committing fraud on the borrower, it may be a foreclosure defense in SC.
In addition to foreclosure defenses, can questionable business practices in a foreclosure action lead to a cause of action for the homeowner?
SC Unfair Trade Practices Act
Although it does not ordinarily apply to foreclosure actions, the SC Unfair Trade Practices Act says that “unfair or deceptive acts or practices in the conduct of any trade or commerce” are unlawful and the victim may be able to recover three times their loss and attorney fees:
(a) Any person who suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment by another person of an unfair or deceptive method, act or practice declared unlawful by Section 39-5-20 may bring an action individually, but not in a representative capacity, to recover actual damages. If the court finds that the use or employment of the unfair or deceptive method, act or practice was a willful or knowing violation of Section 39-5-20, the court shall award three times the actual damages sustained and may provide such other relief as it deems necessary or proper. Upon the finding by the court of a violation of this article, the court shall award to the person bringing such action under this section reasonable attorney’s fees and costs.
Fraud in SC is “an intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to her or to surrender a legal right.”
When a bank, HOA, law firm, or anyone lies to take your money, that is fraud. You must prove:
(1) a representation; (2) its falsity; (3) its materiality; (4) either knowledge of its falsity or a reckless disregard of its truth or falsity; (5) intent that the representation be acted upon; (6) the hearer’s ignorance of its falsity; (7) the hearer’s reliance on its truth; (8) the hearer’s right to rely thereon; and (9) the hearer’s consequent and proximate injury.
Fraud in the Inducement
When someone induces someone to enter a contract through lies, that is fraud in the inducement. You must prove the elements of fraud (above) and:
(1) that the alleged fraudfeasor made a false representation relating to a present or preexisting fact; (2) that the alleged fraudfeasor intended to deceive him; and (3) that he had a right to rely on the representation made to him.
In some cases, when you can prove fraud or another intentional tort, you may be entitled to punitive damages as well as your actual losses…
Abuse of Process
The Supreme Court stated that Regime, the HOA, and the HOA’s attorney improperly used the foreclosure process “for the purpose of exploiting property owners.” The foreclosure action consisted of the “manipulation of a foreclosure procedure to engage in strong-arm tactics.”
What’s another way to say improper use of a judicial proceeding? Abuse of process.
If the homeowner can prove 1) that there was an ulterior motive; and 2) that the HOA, HOA’s attorney, or Regime took some “willful act” that was not “proper in the conduct of the proceeding,” the homeowner may have a lawsuit for damages:
A plaintiff alleging abuse of process in South Carolina must assert two essential elements: 1) an “ulterior purpose,” and 2) a “willful act in the use of the process not proper in the conduct of the proceeding.” Hainer v. Am. Med. Int’l, Inc., 328 S.C. 128, 136, 492 S.E.2d 103, 107 (1997); see LaMotte v. Punch Line of Columbia, Inc., 296 S.C. 66, 370 S.E.2d 711 (1988). “An ulterior purpose exists if the process is used to gain an objective not legitimate in the use of the process.”
SC Foreclosure Defense Attorneys in Myrtle Beach
If you have received notice that a foreclosure action has been filed against you, call the foreclosure defense attorneys at Coastal Law immediately – if you do not respond to the foreclosure complaint before the deadline, you may end up with a default judgment and you may lose your available defenses…
We may be able to help you avoid the foreclosure, minimize the financial consequences if the foreclosure goes forward, determine whether you have defenses to the foreclosure, and file counterclaims or a separate lawsuit if you have causes of action against the lender, HOA, or others.
Call Coastal Law today at (843) 488-5000 or send us a message online to find out how we can help.