South Carolina: Court of Appeals Uses Debt Method to Determine Whether Foreclosure Sale “Shocks the Conscience”

By John S. Kay
Hutchens Law Firm – USFN Member (SC)

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 South Carolina Court of Appeals 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 S.C. April 4, 2018) the Court of Appeals decided the appropriate method to use was the Debt Method and, based upon this method, the bid entered at the homeowners’ association foreclosure sale by a third party bidder did not shock the conscience and the Court upheld the judicial foreclosure sale.

In Winrose, the homeowners association for the neighborhood pursued a foreclosure action against the owners (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 parties had previously agreed that the fair market value of the property was $128,000.00. Thus, the owners 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 Appellants, the former owners of the property, 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 Appellants argued that the sales price was so low when compared to the amount of equity in the property that the third party sales 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 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 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 to weigh the Debt Method and the Equity Method and establish a preferred method when the facts involved a senior mortgage encumbrance. The Appellants 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 Respondents 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. 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.

Published by John S. Kay on May 18, 2018.