In a case that was expected to turn on issues involving the unauthorized practice of law (“UPL”), Wachovia Bank v. Coffey, Shearouse Adv. Sheets Op. No. 2010-174086 (July 10, 2013), the South Carolina Supreme Court affirmed a South Carolina Court of Appeals ruling that a bank was barred from foreclosing on a mortgage where a husband gave the mortgage on property titled solely in his wife’s name—without reaching the UPL issues raised by the Court of Appeals.

The Court of Appeals had affirmed the trial court’s decision to grant summary judgment, holding that the foreclosing bank engaged in UPL when it closed a home equity line of credit (“HELOC”) without a lawyer’s supervision. The bank thus was barred from obtaining any equitable relief against the wife because it had “unclean hands.” The Supreme Court did not address the UPL or “unclean hands” issues on appeal, finding instead that the mortgage was invalid because the husband did not own the property. The Court’s ruling, based solely on the invalidity of the mortgage, disposed of the bank’s foreclosure claim and its other equitable claims.

Factual Background

Husband obtained a $125,000 HELOC without Wife’s knowledge, even though the home was titled solely in Wife’s name. The bank did not perform a title search to determine ownership of the property and closed the transaction without the participation or supervision of a licensed attorney.

Husband purchased a sailboat using the HELOC and died four years later. Wife discovered the loan after her husband’s death. Wife then made payments, but she eventually sold the boat, netting approximately $100,000. A yacht broker told Wife that the boat was not subject to a lien or mortgage, and Wife kept the proceeds for herself.

The bank filed an action to foreclose on the mortgage and to recover the proceeds of the boat sale.[1] The master-in-equity granted summary judgment to Wife, holding that the bank was the “architect of its own problem” due to its failure to use a licensed attorney and perform a title search. The South Carolina Court of Appeals affirmed, holding that the bank’s actions constituted UPL and its claims were barred because of its unclean hands.

The South Carolina Supreme Court began its analysis by observing that the controlling issue in the case was not whether the foreclosing party’s actions constituted UPL: “Instead, the pertinent inquiry is whether Petitioner may foreclose on an invalid mortgage.” The Court held that since the husband did not own the mortgaged property, the bank never possessed a valid mortgage. Consequently, the bank could not “pursue an action against Wife related to that mortgage.”

The dissent expresses the view that the bank’s other equitable causes of action should not be barred. Instead, the dissenting justices would remand the case to the Court of Appeals to consider issues relating to claims that went unaddressed. They also would vacate the part of the Court of Appeals’ decision stating that UPL bars both equitable and legal remedies. Finally, the dissenting justices opined that the majority’s decision prevents a foreclosing party from obtaining equitable relief when “it made a mistake.”

The majority, in a lengthy footnote, addressed the dissent’s position on equitable relief. According to the majority, equity should not be used to place responsibility for the bank’s mistake onto Wife. The majority further stressed that “sophisticated financial institutions that prepare mortgages purporting to encumber a customer’s property must ensure that the customer in fact holds a legal interest in that property so as to protect all pertinent interests.”

Conclusion

The Supreme Court’s approach to the case necessarily results in an opinion that sheds little light, if any, on the UPL issues raised by the Court of Appeals’ decision. Moreover, the Supreme Court’s holding that a bank may not foreclose on an invalid mortgage breaks no new ground. On the other hand, the majority’s summary disposition of the other equitable theories on the basis of the defective instrument raises questions about the consequences of an invalid mortgage.