Caveat Jurista Y'all: Is the Mortgage Securing your Property in South Carolina Enforceable?

Posted by Chirag B. Kabrawala on February 15, 2012

The South Carolina Supreme Court’s ruling in Matrix Financial Services Corp v. Frazer, et al, may have a significant impact on lenders and borrowers operating directly or indirectly within the State.  In Matrix, the Court confirmed that a lawyer is required in all loan closings “for the protection of the public,” and the failure to use a South Carolina licensed attorney constitutes the unauthorized practice of law and will result in the lender not being able to foreclose a recorded mortgage. 

The Matrix court considers the following items to constitute the practice of law, and therefore requires a South Carolina licensed attorney:  

  • Performing a title search,
  • Preparing title and loan documents (deeds, notes, and other instruments)
  • Closing a loan
  • Recording the instruments
  • Disburse proceeds 

In Wachovia Bank, N.A. v. Coffey, the South Carolina Court of Appeals came to the same result as the Matrix court, where a lender engaged in the unauthorized practice of law will result in its inability to enforce any rights under the transaction. In Wachovia Bank, the bank processed a line of credit secured by a mortgage on real estate without the involvement of a lawyer. The bank later sought to foreclose the mortgage. Finding the bank's actions to be the unauthorized practice of law, the Court of Appeals held that the bank could not pursue any legal or equitable remedies arising out of the transaction.

Given the sweeping ruling of the Matrix and Coffey courts, we caution our readers – whether they’re lenders, borrowers or any party having a secured interest – to avail themselves of a South Carolina licensed attorney when dealing with a financing in the state. 

Thank you Morris Ellison, Esq. Womble, Carlyle, Sandridge & Rice PLLC for bringing to our attention the subject matter of this post.

Getting Prepped for ICANN's Domain Rush

Posted by Dave Waller on February 09, 2012

By now, you likely know that ICANN is accepting applications for new gTLDs through April 12, 2012.  This post is intended to help those in the hospitality industry charged with monitoring the opportunities and risks associated with ICANN’s initiative.    

What’s Going On Now?

After 7 days, ICANN announced that there were “25 successful registrants in the online TLD Application System.”  However, that same press release stated that ICANN would not provide a running total of applicants or reveal the gTLD’s being applied for. 

But this being the Internet, others are trying to provide the information ICANN won’t.  These include .nxt and www.newgtldsite.com.  Both indicate that there has been an application for .hotel, but no specific hospitality brand has applied for a .brand according to these sites. 

What is Going to Happen in the Next Several Months?

ICANN anticipates that some new gTLDs will be ready for delegation in early 2013. Between the close of the application window and the end of the year, ICANN’s schedule looks like this:

  • The Big Trickle - In May, ICANN will begin posting the “public portions of all applications considered complete and ready for evaluation within two weeks of the close of the application submission period.”  However, the “big reveal” will actually be a “big trickle” as the posting process may stretch over 8 weeks or more. 
  • Comment Period Opens - Once an application is publicly posted, ICANN will open a 60-day comment period.  During this period, comments may be submitted on the posted application for review by the applicable evaluation panel. These comments are generally limited to concerns regarding whether: (a) the applied-for gTLD string may cause security or stability problems, including problems caused by similarity to existing gTLDs or reserved names; and (b) the entity applying for the gTLD has the requisite technical, operational, and financial capabilities to operate a registry. The comment period may be extended “should the volume of applications or other circumstances require.” 
  • Formal Objection Period - Separate from the open comment period, a formal objection process will also be available to trademark owners.  Formal objections may be made on the following grounds: String Confusion Objection, Legal Rights Objection, Limited Public Interest Objection, Community Objection. The objection filing period will open after ICANN posts the application “and will last for approximately 7 months.”

What May Change? 

  • It is hoped that the Trademark Clearinghouse service provider will be identified before the end of February. This mechanism is intended to provide clear notice to the prospective registrant of the scope of a trademark holder’s rights and could prove to be an effective alternative to a formal objection.
  • In January, ICANN appeared confident in proceeding according to its plan despite opposition from various governmental and business groups. However, it could still bow to pressure and revise its procedures to address concerns about cybersquatting and the cost of defensive action.  For example, ICANN may follow the Commerce Department’s reasonable request to phase in new gTLDs after the application window closes.

Worthy Read - Dashboard or Dartboard: How Much Do You Really Know About Your Marketing Analytics?

Posted by Dave Waller on February 02, 2012

Before the resort real estate depression, there was a broad concensus that shared ownership companies were allocating a significant portion of their sales revenue to marketing and sales expenses without clearly understanding what actually "worked."  

With things improving, this article in Perspective Magazine explains simply and concisely how the industry can get a handle on the ROI of marketing dollars:

  • Get real - your customers are looking at your website no matter how you initially contacted them
  • Take advantage of this fact and realize efficiencies by integrating website analytics into a campaign plan
  • Manage your lead generation efforts across all channels so that they yield actual information that helps you identify both the hits and misses

The author, Steve Tassler, gets into more detail as to strategies that will help timeshare and fractional developers manage cash flows and budgets through the sales process.  However, developers should also consider how the suggested techniques can yield management efficiencies after the customer becomes an owner. Nothing like stretching the useful life of an investment.  

Fight Fire with Fire: Major Hotel Chains Respond to OTA Tax Inequity by Launching Room Key Website

Posted by Chirag B. Kabrawala on January 30, 2012

As we reported previously, the relationship between online travel agencies (“OTA”s) and hotels has been a strained one.  Hotel owner and operators argue that they are at a significant competitive and fiscal disadvantage by exempting OTAs from paying taxes to state and local governments on the total guest room revenues they receive for online bookings.  In fact, the uncertainty involving taxation of OTAs in Florida recently led to Florida State Representative Jason Brodeur and Senate Majority Leader Andy Gardiner filing identical bills (HB 1393 and SB 1888) that would make clear that OTAs do not have to pay a disputed portion of bed taxes.

Earlier this month, Choice Hotels International, Wyndham Hotel Group, Marriott International, Hyatt Hotels, Hilton Worldwide and InterContinental Hotel Group joined together to form the Room Key website.  The stated mission of Room Key is to “offer travelers direct access to a broad network of hotels around the globe, provide accurate and comprehensive information, make it easy for travelers to discover what’s right for them.”  Essentially, Room Key cuts out the OTA middleman and drives consumer traffic to the six partner hotel websites. 

Apparently, the idea isn’t a novel one, as several hotel chains previously looked into forming a similar platform.  The idea was dismissed, however, because of the purported appearance that the hotel participants would be engaged in anti-competitive price-fixing activities.  According to The Room Key model avoids anti-competitive behavior, apparently, by requiring the customer to finalize reservations on each hotel’s website, rather than on the Room Key platform. 

At last week’s ALIS conference, several panelists debated whether or not Room Key will be met with any success.  Amongst the main criticisms was the belief that other OTAs have a significant head start and market penetration and the inability for customers to package other aspects of their travel, including rental car and airline tickets.

Worthy Read - ARDA's Survey of HOA Controlled Timeshare Resorts

Posted by Dave Waller on January 27, 2012

The ARDA International Foundation has recently released an interesting study focused exclusively on resorts controlled by home owner associations.  The three academics behind this first-of-its-kind report were looking to "identify those factors that effectively contribute to success or failure in HOA controlled resorts."   

The survey focused on the following broad topics for this important timeshare subgroup:

  • Identification of basic resort characteristics
  • Governing Board structures and characteristics
  • Financial metrics (including reserve funds)
  • Rental, resale and exchange

A couple of the more interesting findings:

  1. Financial metrics suggest that, on the whole, resort operations are in fairly good shape. Notably, recent maintenance fee increases were not reported as "significant," a position which seems to be supported on a historical basis.  However, readers of this section of the report should probably also check out this article in the January edition of Developments:  Benchmarking Study Shows Tough Times Ahead for HOAs.   
  2. Confirming something we touched on previously, owners are generally not getting much assistance with rentals or resales.  Only 54% of participating resorts had a rental program for owners, and the average nightly rate was $90, or less than 60% of the rate reported for the timeshare industry as a whole.  Worse, only 28% had a resale program to help owners sell their timeshares.    

Colorado Breaks New Ground - Timeshare Relief Company Regulation

Posted by Dave Waller on January 23, 2012

Last week, Representative Carole Murray introduced HB 12-1116, which has the title "Concerning Deceptive Trade Practices Related to Timeshare Resale Transactions."

With respect to regulation of the traditional resale business, the Colorado bill is similar to the Florida timeshare resale bill that we discussed in a prior post (but thankfully without Florida's "ratio" disclosure requirement).  However, the Colorado bill is unique in that it is the first legislation to specifically regulate timeshare relief companies.  It does so through three basic steps:

  1. Creating specific disclosure requirements for "time share resale transfer agreements"
  2. Specifically applying Colorado's 5-day cancellation right to these transactions 
  3. Delaying any consumer payment until after the relief company provides its transfer services  

These steps obviously benefit the consumer.  But from a resort management perspective, HB 12-1116 comes just in time as it is becoming increasingly obvious that other efforts regarding relief companies are likely ineffective:

  • Fraudulent Transfer Theories
    • In December, a Colorado Court of Appeals confirmed that, under UFTA, an asset does not include "property to the extent it is encumbered by a valid lien."  Because most timeshare HOAs benefit from a statutory lien created at the time a project declaration is filed, it follows that an HOA would be foreclosed from using UFTA to challenge relief company transactions.
    • As discussed in this article, approaches using UFTA may create significant problems in collecting past due assessments.
    • An Eagle County timeshare association relying on UFTA as the basis for withholding transfer approval was sued by the company seeking the approvals (Fireside Registry).  The association decided the better course was to settle, and in the end approved the transfers and paid Fireside's legal costs and expenses.   
  • Deed Acceptance & Delivery Theories:
    • In a petition for declaratory judgment, a Summit County timeshare association has argued that the transfer company did not accept the timeshare deed, or alternatively did not have the requisite capacity to accept the deed.  The petition cites support from decisions in Florida, Arkansas and Illinois, but not Colorado.  Even more curious, the petition does not address the relevant statute under which an acknowledged and recorded deed creates the presumption of effective delivery.
    • The association could simply be pinning its hopes on a default judgement as the transfer company may not want to incur the costs necessary to respond to the petition.  However, what would happen to the association's arguments if the transfer company simply paid the assessment (which, for this resort, are at the lower end of the spectrum)?

Hospitality Companies Get Green Light On Arbitration

Posted by Dave Waller on January 17, 2012

Our last blog post pointed to the importance of an upcoming decision by the U.S. Supreme Court in CompuCredit Corp. v. Greenwood.  Specifically, we wondered whether the Court would extend the reasoning in AT&T Mobility v. Concepcion so that the Federal Arbitration Act would apply to federal statutes as well as state law?  Or would the decision in effect create a class of nonarbitrable federal claims? 

We got the answer (sooner than this blogger expected).  The Court ruled, in an 8-1 decision, that if federal statute provides for a private right of action and even for class actions, but is silent as to whether these claims can proceed in arbitration, the FAA is not trumped.   

In so ruling, the Court was not persuaded by plaintiffs’ arguments that the federal statute at issue - the Credit Repair Organizations Act, 15 U.S.C. § 1679 et seq.

  • Required defendant’s to specifically disclose to consumers “You have a right to sue a credit repair organization that violates the Credit Repair Organization Act.” 
  • Stated that “Any waiver by any consumer of any protection provided by or any right of the consumer under this subchapter—(1) shall be treated as void; and (2) may not be enforced by any Federal or State court or any other person.”

Writing for the majority, Justice Scalia stated that the notice language fell short of giving the plaintiffs’ a specific right to be in court, and, in any event, noted that “we have repeatedly recognized that contractually required arbitration of claims satisfies the statutory prescription of civil liability in court.”  Justice Scalia then wrote:

Because the CROA is silent on whether claims under the Act can proceed in an arbitrable forum, the FAA requires the arbitration agreement to be enforced according to its terms.

This holding is a significant companion to the decision in AT&T Mobility v. Concepcion.  The most immediate impact may be on the NLRB’s decision in D.R. Horton and Michael Cuda, as the NLRA does not contain any provision that expressly bars the use of arbitration agreements.

With the CompuCredit decision on the books, hospitality companies should strongly consider the broader use of arbitration clauses in their contracts with both consumers and employees.  Failure to make such changes could prove to have a significant downside, as demonstrated by our post on the result in Jock v. Sterling Jewelers. 

NLRB Arbitration Ruling Raises Stakes of Decision in CompuCredit for Hospitality Industry

Posted by Dave Waller on January 11, 2012

The enforceability of class action waivers was one of the bigger stories in 2011.  To illustrate, our sister blog – The Employment Class Action Blog – had at least 10 posts last year on developments involving the application of the Supreme Court’s decision in AT&T Mobility v. Concepcion.  As you may recall, that 5-4 decision held that California’s Discover Bank rule was preempted by the Federal Arbitration Act and, as a consequence:

Courts must place arbitration agreements on an equal footing with other contracts, and enforce them according to their terms.

While encouraging hospitality companies to adopt class action waiver provisions after Concepcion, we also anticipated that the holding would be challenged through various means, including the introduction of legislation, agency rulemaking, and plaintiff lawyers’ arguing for the equivalent of “pre-existing legislative overrides.”  With respect to the latter, we pointed out that the Supreme Court had already granted certiorari in CompuCredit Corp. v. Greenwood.  In that case, the Ninth Circuit held that an arbitration agreement could not be enforced under the FAA because another federal law (the Credit Repair Organization Act) provided that a plaintiffs' right to sue in court could not be waived. 

The importance of the yet-to-be-issued decision in CompuCredit was highlighted by the National Labor Relations Board’s January 6 ruling in D.R. Horton and Michael Cuda, a decision that impacts both union and non-union workforces.  As reported by John Lewis at The Employment Class Action Blog, the NLRB found that Section 8(a)(1) of the National Labor Relations Act was violated because the company required that all employment-related disputes be resolved through individual arbitration.  According to the NLRB, “an individual who files a class or collective action regarding wages, hours, or working conditions, whether in court or before an arbitrator, seeks to initiate or induce group action and is engaged in conduct protected by Section 7" of the National Labor Relations Act. "Such conduct is not peripheral but central to the act's purposes."  “If the [NLRA] makes it unlawful for employers to require employees to waive their right to engage in one form of activity, it is no defense that employees remain able to engage in other concerted activities.” 

We have reported previously on the hospitality industry’s struggles with tip claims and employee classification claims - these would seem to support the protective use of class action waivers and arbitration by employers.  However, the effectiveness of such provisions may ultimately be determined by the Supreme Court’s decision in CompuCredit v. Greenwood.  That decision may favor employers by setting an impossibly high standard for how clearly a federal statute must express an intent to nullify arbitration agreements.  Alternatively, that decision could create an exception loved by the plaintiffs bar. 

Hospitality Investment - Accredited Investor Rules Amended

Posted by Dave Waller on January 09, 2012

Time to revise your form investment documents - as of February 27, 2012, the Securities and Exchange Commission's new accredited investor rule will take effect.  Affirming accredited investor status is crucial in determining whether an investment falls under the Regulation D safe harbors and qualifies for exemption from some of the more onerous and expensive disclosure obligations otherwise required by the Securities Act. 

Overview of the Changes

The change is substantially consistent with the proposed rules Jason Brady discussed in his blog from February 2011.   As dictated by Dodd-Frank, the calculation as to whether of person's net worth (or joint net worth with spouse) exceeds $1M must exclude the value of that person's primary residence, but indebtedness secured by that residence will not count as a liability (to the extent the debt does not exceed the fair market value of the residence).  In other words, positive equity will not count, but negative equity will. 

The SEC did address two new issues in the final rule as a result of comments received on the proposed rule:

  • Indebtedness secured by a primary residence in the 60 days preceding the purchase of securities will reduce net worth, irrespective of the residence's fair market value, unless such debt was incurred in connection with the acquisition of the residence.  This provision was added to reduce any temptations on the part of investors or salespersons to "game" the calculation rules by artificially inflating net worth.
  • Cognizant that some current investors would no longer qualify as accredited under the new rule, the SEC also added "grandfathering" provisions.  First, binding investment obligations made prior to Dodd-Frank will be judged using the old rules.  In addition, the old rules will apply to follow-on investments (i.e., exercise of pre-emptive rights) if the investor: (a) acquired a right to purchase prior to July 20, 2010; (b) qualified as an accredited investor at the time the right was acquired; and (c) held securities of the issuer (other than the right in (a)) at that same time. 

With respect to the above, note that the SEC declined to engage in the complexity of defining "primary residence" as that term has "a commonly understood meaning as the home where a person lives most of the time."          

Looking Forward

Dodd-Frank also required the SEC to undertake a review of the definition of "accredited investor" every 4 years from the enactment of Dodd-Frank.  However, the SEC has chosen to delay any action on this obligation until after the Comptroller General completes its related Dodd-Frank obligation - a report on "the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds."  According to the SEC, this study, due before the end of 2013, "will be taken into account in any rulemaking that takes place in this area."    

Hard Lessons in the Importance of Due Diligence in Hotel, Timeshare, and Resort Property Acquisitions

Posted by Jonathan Langer on January 05, 2012

The legal battle spanning from 2004 to 2011 involving Midsouth Golf, LLC and the Fairfield Harbour residential community in North Carolina illustrates what can happen to buyers who do not perform the due diligence to justify their optimistic projections. 

Midsouth Golf, LLC purchased the amenities associated with Fairfield Harbour in 1999, which includes two golf courses, with the expectation of making money operating the facilities and selling golf and social memberships to residents and members of the general public. It ended up obligating itself to maintain the two golf courses and associated amenities despite a greatly  diminished ability to collect amenity fees from the Fairfield Harbour property owners.

When Midsouth bought the Fairfield Harbour amenities, it was aware of a set of 1993 covenants which purported to obligate the timeshare owners to pay an amenity fee at a rate over five times that paid by the single family and condominium owners. However, pursuant to a 1998 settlement agreement, the predecessor owner of the amenities agreed that it would not charge timeshare owners amenity fees at a rate above that charged to other owners.

Proper due diligence would have likely uncovered the 1998 settlement, as well as the risk that  the 1993 covenants may not fall within the timeshare owners’ chain of title.  With this knowledge, Midsouth could have structured the acquisition to account for the associated risks, or at least walked away from the deal.  Instead, Midsouth trusted that the Fairfield Harbour amenities, and the crucial legal documents providing for amenity fees from property owners, were in good shape. It bought the amenities and started to make changes with the intent of increasing its profits, effectively doubling down on its bets.

Since the timeshare owners were using the amenities more than other owners, and because it had the 1993 covenants in hand, Midsouth determined it wanted to increase the assessments against the timeshare owners to reflect this heavier use. To accomplish this, Midsouth filed suit against the timeshare owners seeking to increase the assessments against them to the amount contemplated by the 1993 covenants.

The court, however, did not increase the fees. Instead, it held that the amenity fees were unenforceable against the timeshare owners because of flaws in the 1993 covenants.

Not surprisingly, many Fairfield Harbour owners stopped paying amenity fees after this decision. Midsouth closed the two golf courses due to insufficient funds.  Following a another trial, a North Carolina court determined that, despite the fact that property owners were not obligated to pay fees, Midsouth was obligated by the real property covenants to maintain the amenities. Midsouth had to pay damages to the property owners and reopen the golf courses and other amenities.