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South Carolina Supreme Courts Uses Equity Method to Determine Whether Foreclosure Sale "Shocks the Conscience"

Posted By USFN, Tuesday, February 18, 2020

by John S. Kay, Esq.
Hutchens Law Firm
USFN Member (SC)

In May 2018, the readership was informed of an opinion issued by the South Carolina Court of Appeals (
South Carolina: Court of Appeals uses "Debt Method" to Determine whether Foreclosure Sale Price "Shocks the Conscience"), where the Court held that the Debt Method was the appropriate method to use in determining whether a successful bid at a foreclosure sale was grossly inadequate in amount as to “shock the conscience,” thus requiring the sale to be overturned. In Winrose Homeowners’ Association, Inc. and Regime Solutions LLC v. Hale, (Op. No. 5549 S.C. April 4, 2018) the Court of Appeals applying the Debt Method, affirmed the trial court’s decision that the bid entered by a third-party bidder at a homeowners’ association foreclosure sale did not shock the conscience and upheld the judicial foreclosure sale.       

The South Carolina Supreme Court granted the homeowners’ petition for a writ of certiorari in the case, and reversed the decision of the South Carolina Court of Appeals. In Winrose Homeowners’ Association, Inc. and Regime Solutions LLC, v. Devery A. Hale and Tina T. Hale, (Op. 27934 S.C. December 18, 2019), the South Carolina Supreme Court declined to use the Debt Method utilized by the Court of Appeals and instead used the Equity Method.

Historically, South Carolina courts will not set aside a judicial sale except under certain limited circumstances. One of these circumstances is when a judicial sale price is so grossly inadequate as to shock the conscience. In Winrose, the homeowners association for the neighborhood pursued a foreclosure action against the homeowners (Hale) for non-payment of association dues. The HOA foreclosure was subject to a senior mortgage in the amount of $66,004.00 and the HOA and the homeowners had previously agreed that the fair market value of the property was $128,000.00. Thus, the Hales had an equity cushion in the property of approximately $62,000.00.  At the homeowners association foreclosure sale, a third party, Regime Solutions, LLC, purchased the property with a successful bid of only $3,036.00. The Hales argued that the Court should use the Equity Method and compare the successful bid at the foreclosure sale of $3,036.00 to the existing equity in the property of $62,000.00. Using this method, the Hales argued that the sales price was so low when compared to the amount of equity in the property that the third-party bid did shock the conscience and requested that the sale be overturned.

The third-party bidder argued that the outstanding mortgage balance due to the senior mortgage should be added to the successful bid to calculate the bid price to be considered by the Court. This method of calculation is known as the Debt Method. Under this method, 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 with a balance of $66,004.00.  The lower court had determined that the correct calculation was to combine the successful bid of $3,036.00 with the senior mortgage balance of $66,004.00 to create what the Court called an “effective sale price.” This calculation resulted in a bid of $69,040.00 for the property which was 54% of the fair market value of $128,000.00. Based upon this “Debt Method” of calculating the effective sale price, the trial court and the Court of Appeals found that the bid price at the foreclosure sale did not shock the conscience. 

The Court of Appeals noted that there had been no previous cases in South Carolina which established a preferred method when the facts involved a senior mortgage encumbrance.  The Hales argued that the Equity Method was the method the Court should adopt because under this method, the sales bid was only 4.89% of the equity. The calculation using the Debt Method espoused by the third-party bidder resulted in a sales bid that was 54% of the fair market value of $128,000.00.  The Court of Appeals adopted the Debt Method as the more reasonable method, 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.

The Supreme Court reversed the Court of Appeals based upon facts in the case. Generally, a judicial foreclosure sale will not be set aside unless (1) the price was so grossly adequate as to shock the conscience of the court; or (2) an inadequate - but not grossly inadequate – price at the sale is accompanied by other circumstances from which the court may infer fraud has been committed.

The Supreme Court noted that South Carolina courts have never established a bright-line rule for what percentage of the sale price must be met with respect to the actual value of the property in order to shock the conscience of the court. However, the Court indicated that “only when judicial sales are for less that [10%] of a property’s actual value have our courts consistently held the discrepancy to shock the conscience of the court.” Winrose, citing Bloody Point Prop. Owners Ass’n, Inc. v. Ashton, 410 S.C. 62, 70 762 S.E. 2d 729, 734 (Ct. App. 2014).   

The Debt Method of calculation takes into consideration the amount of debt a foreclosure purchaser must incur before obtaining free-and-clear title to the property. This was the method used by the Court of Appeals because the homeowners’ association was foreclosing its lien subject to a senior mortgage on the property. However, the Supreme Court noted that the business model utilized by third party bidder was to never pay the senior mortgage on the properties it purchased at foreclosure sales and to either allow the senior mortgage to foreclose, or to quit-claim the property back to the original owners for a large sum. At the same time, the original homeowners had kept their mortgage current and remained current throughout the appeals process.

The Court explained that in cases where there is a senior mortgage that would remain a lien on the property after the foreclosure sale, the Debt Method would be used. However, the Court specifically rejected an across the board application of the Debt Method in cases where the facts are similar to the case at hand where the third party made no attempt to pay the senior lien.  Utilizing the Equity Method, the third party bidder’s bid covered only 4.9% of the value of the foreclosed property, which was much less than the 10% threshold amount South Carolina courts have used in the past. The Supreme Court then concluded that the foreclosure bid was grossly inadequate and was insufficient enough to shock the conscience of the Court. It is clear from the Court’s opinion that the conduct of the third party bidder was a primary factor in the decision. The Court also counseled that a foreclosure proceeding is a serious event and expressed displeasure that it was being utilized as a business model by the third party bidder for the purpose of exploiting property owners. 

In the end, the Court expressed misgivings about the foreclosure proceedings in the case, including the fact that the homeowners had not been provided notice of the final hearing and the foreclosure sale, but did not address it specifically as the notice issue was not raised on appeal. The South Carolina law does not require notice of the final foreclosure hearing and sale to be sent to defendants that are in default; however, most of the judges that hear foreclosure cases require such notice to be provided to all parties to the court action. In cases involving foreclosures by junior lien holders in South Carolina, the foreclosing party and any third party bidders need to make certain that their bid at sale complies with the Debt Method in the event the bidder does not plan on paying the debt owed to the senior lien holder.

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