In August 2010, the South Carolina Supreme Court announced a rule that prevented a mortgage lender from obtaining equitable relief if the lender violated the state’s unauthorized practice of law[1] rules when it closed the mortgage loan.  The case was decided on principles of equity, with the court finding that the lender’s UPL violation meant that it came to court with unclean hands and thus could not obtain an equitable remedy.  On Monday, August 8, 2011, following a petition for rehearing, the court withdrew its August 2010 opinion and substituted a new opinion in which it reached the same result without relying on the doctrine of unclean hands.  Matrix Fin. Servs. Corp. v. Frazer et al., Op. No. 26859 (S.C. Sup. Ct. filed Aug. 8, 2011) (Shearouse Adv. Sh. No. 26).

Without explanation, the majority jettisoned the “unclean hands” rationale:  “We do not believe the doctrine of unclean hands is the appropriate basis for resolution of this case.”  Id. at 18.  The court noted that since 1987 it had required attorney supervision of four key steps in the residential mortgage loan process, State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987), and that in 2003 it made clear that this rule applies to refinancing as well as purchase money mortgages, Doe v. McMaster, 355 S.C. 306, 585 S.E.2d 773 (2003).  South Carolina requires lawyer involvement in mortgage loan closings, said the court, “for the protection of the public.”  Matrix, Adv. Sh. No. 26 at 20.  Thus, in the majority’s view, “[e]nforcing this requirement will come as no surprise to any lender.”  Id.  The court was emphatic: “We take this opportunity to definitively state that a lender may not enjoy the benefit of equitable remedies when that lender failed to have attorney supervision during the loan process as required by our law.”  Id.

The court’s decision, the first in a long line of UPL decisions to afford mortgagors a defense or remedy based on UPL violations, applies only prospectively: “We apply this ruling to all filing dates after the issuance of this opinion.”  Id.  Justice Kittredge joined in the result “because of its prospective-only application.”  Id. at 21 (Kittredge, J., concurring).  Justice Pleicones dissented.

[1] From time to time, the abbreviation UPL will be used to refer to the unauthorized practice of law.

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For more information or questions about the Matrix decision, contact Mr. Smith at 803.255.9492 or John Moore at 803.255.9415.

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