USA – SOUTH CAROLINA Law and Practice Contributed by: Matt Norton, Parker Havis and Aaron Lay, K&L Gates
This foreclosure action will result in a public auction sale by the court of the mortgaged property. The mort - gage lender may “credit bid” at the sale. Sale of the mortgaged property under a power of sale is not per - mitted; a judicial foreclosure proceeding is required. Likewise, a mortgage lender on default by the borrow - er is not entitled to take possession of the property. Establishing Priority In order to establish the priority of the mortgage over interests of competing creditors, the mortgage lender must record the mortgage in the applicable county’s real property records. Competing creditors claiming an interest in the mortgaged property must be named as defendant parties in the judicial foreclosure action; the public sale will be free and clear of those junior claims and interests. Appointing a Receiver Assuming the loan documents have the necessary provisions, the court may enforce assignments of leases, rent and profits by the appointment of a receiv - er in connection with the foreclosure proceedings. The court may authorise the receiver to collect rents and other profits derived from the property and, after deducting costs of operation of the property and the receiver’s fees, to disburse the remaining proceeds to the lender to be applied to the secured indebted - ness. South Carolina counsel should be consulted at the loan origination stage so that the necessary assignment of rents and receivership provisions are included. Pledged Security Where the equity owners of the real estate entity have pledged that equity as security, the lender is author - ised under the Uniform Commercial Code to sell such equity at public or private sale after due notice to inter - ested parties; no judicial action is required. The lender may credit bid at a public sale but may not bid at all in a private sale. 3.7 Subordinating Existing Debt to Newly Created Debt Existing indebtedness may be subordinated to new indebtedness by a contractual subordination agree - ment. Otherwise, existing secured indebtedness will generally retain its priority. Although advances made
in connection with construction financing will gener - ally maintain priority based on the original filing date of the mortgage, advances made after both the filing and the service of a mechanic’s lien may lose priority to the mechanic’s lien. These priorities are determined in large part by the South Carolina recording acts, which are not straight - forward and leave much to common law doctrine. For example, priority is not necessarily determined by the time of recording. In addition to general priority questions that are deter - mined by ordinary priority rules, in extraordinary cir - cumstances involving lender misconduct, a court may subordinate existing indebtedness under the legal doctrine of “equitable subordination”. Finally, again, in extraordinary circumstances, usually in bankruptcy proceedings, debt may be recharacterised as equity, with the result that the debt is effectively subordinated to claims of other creditors. 3.8 Lenders’ Liability Under Environmental Laws As a general rule, a lender does not become liable under environmental laws by virtue of holding a mort - gage or by virtue of foreclosing the mortgage and tak - ing title to the property for the purpose of reselling it to an ultimate purchaser. A lender may nevertheless become liable if the lender actively participates in the management of the property. “Active participation” by a lender means that the lender exercised decision- making control over environmental compliance with respect to the property or exercised general manage - ment control such as that typically exercised by a manager of the facility or property. A lender may, however, inspect the property, require a borrower to respond to contamination issues, pro - vide the borrower with financial advice, or amend or restructure the mortgage or loan terms – these activi - ties are not deemed to constitute active participation. 3.9 Effects of a Borrower Becoming Insolvent A filing of bankruptcy proceedings by or against a borrower will result in an automatic stay or injunction against all creditors. This automatic stay will prohibit any acts to enforce the mortgage or collect the mort -
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