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South Carolina: Court of Appeals uses “Debt Method” to Determine whether Foreclosure Sale Price “Shocks the Conscience”

Posted By USFN, Tuesday, May 15, 2018
Updated: Tuesday, May 8, 2018

May 15, 2018

by John S. Kay
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Historically, South Carolina courts will not set aside a judicial sale — except under certain circumstances. One of these circumstances is when a judicial sale price is so gross as to “shock the conscience.” In a recent case, the appellate court found itself deciding the appropriate method to use in calculating a sales bid price when a senior encumbrance is involved.

In Winrose Homeowners’ Association, Inc. and Regime Solutions LLC v. Hale, Op. No. 5549 (Apr. 4, 2018), the Court of Appeals decided that the appropriate method to use was the “debt method” and, consequently, the bid entered at the homeowners association (HOA) foreclosure sale by a third-party bidder did not shock the conscience, and the court upheld the judicial foreclosure sale.

Background
In Winrose, the homeowners association pursued a foreclosure action against the owners (the Hales) for nonpayment of association dues. The HOA foreclosure was subject to a senior mortgage in the amount of $66,004 and the parties had previously agreed that the fair market value of the property was $128,000. Thus, the owners had an equity cushion in the property of approximately $62,000.

At the HOA foreclosure sale, a third party (Regime Solutions, LLC) purchased the property with a successful bid of $3,036. The appellants (the former owners of the property) asserted that the court should use the “equity method” and compare the successful bid at the foreclosure sale of $3,036 to the existing equity in the property of $62,000. Using this approach, the appellants contended that the sales price was so low in relation to the amount of equity in the property that the third-party’s sale bid did shock the conscience and requested that the sale be overturned.

The third-party bidder maintained that the outstanding mortgage balance owed to the senior mortgagee should be added to the successful bid in calculating the bid price to be considered by the court; this is known as the debt method. Under this reasoning, any senior encumbrance that the purchaser at a sale would need to pay in order to obtain clear title must be included in the bid determination. The third party purchased the property subject to the senior mortgage.

The trial court had determined that the correct calculation was to combine the successful bid of $3,036 with the senior mortgage balance of $66,004 to arrive at an “effective sale price.” This computation resulted in a bid of $69,040 for the property, which was 54 percent of the fair market value of $128,000. Based upon this debt method of computing the effective sale price, the trial court found that the bid price at the foreclosure sale did not shock the conscience.

Appellate Analysis & Conclusion
The Court of Appeals noted that there had been no previous South Carolina cases expressly weighing in on the debt method versus the equity method — and establishing a preferred method when the facts involved a senior mortgage encumbrance. The appellants argued that the equity method should be adopted by the court, with the sales bid then only 4.89 percent of the equity. The calculation using the debt method, espoused by the respondents, resulted in a sales bid that was 54 percent of the fair market value of $128,000.

The Court of Appeals adopted the debt method as the more reasonable because the bidder in the case at hand would still be required to satisfy the senior encumbrance prior to obtaining the property free and clear of liens. Accordingly, in determining a bid for a property subject to a senior encumbrance in South Carolina, counsel should be able to consider the debt owed on that senior encumbrance in deciding on a bid that will not result in an amount that may shock the conscience of the court, and subject the sale to being overturned.

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Note for consideration of the USFN Award of Excellence: This article is not a "Feature."

 

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