USING DEBT METHOD TO ACCOUNT FOR SENIOR ENCUMBRANCE IN HOA FORECLOSURES UPHELD BY SC COURT OF APPEALS
April 13, 2018 | court of appeals
In an appeal arising from the denial of Appellants’ motion to set aside an homeowners’ association (HOA) foreclosure sale, the South Carolina court of appeals affirmed the trial court’s ruling that the Debt Method is the proper method to account for a senior encumbrance. Additionally, the court held that the Respondent Regime’s bid did not shock the conscience of the court—one of two principal grounds necessary to set aside an HOA judicial sale.
In selecting the “Debt Method,” the court explicitly rejected the alternative—the “Equity Method”—when reviewing sales of property sold subject to senior liens. That method was endorsed by Chief Judge Lockemy, who dissented in a separate opinion. In endorsing the alternate analysis method, Chief Judge Lockemy noted that the potential for abuse in HOA foreclosures—those relatively rare situations where an HOA rushes to foreclose and then collects rent from the former borrower while the senior lien moves toward foreclosure—could best be remedied by the General Assembly, South Carolina’s legislative body.
Fortunately, HOA foreclosures in South Carolina are almost always sold subject to senior liens. In his dissent, Judge Lockemy suggested that the General Assembly could mandate that HOA foreclosures could be treated in the same fashion as tax sales in South Carolina. Tax sales, when properly conducted, wipe out senior mortgage liens in the state. The takeaway? HOA foreclosures are alive and well in South Carolina. Lenders and servicers will likely be waiting quite a while before our state legislature takes any action to reign in or otherwise regulate HOA foreclosure abuses.
Winrose Homeowners’ v. Hale, Op. No. 5549 (S.C. Ct. App. filed April 4, 2018) (Shearouse Adv. Sh. No. 14 at 24) is available online.