USA - SOUTH CAROLINA Law and Practice Contributed by: Matt Norton and Christian Kolic, K&L Gates
3.6 Formalities When a Borrower Is in Default A mortgage lender seeking to enforce its rights after a borrower default first must take any steps required by the loan documents. For example, the lender must give any notice as of right to cure or demand letters as may be required con - tractually. Once these preliminary matters are accomplished, the mortgage lender must bring a judicial foreclosure action in order to realise upon the mortgaged property. This foreclosure action will result in a public auc - tion sale by the court of the mortgaged property. The mortgage lender may “credit bid” at the sale. Sale of the mortgaged property under a power of sale is not permitted; a judicial foreclosure pro - ceeding is required. Likewise, a mortgage lender on default by the borrower is not entitled to take possession of the property. Establishing Priority In order to establish the priority of the mort - gage 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 defend - ant 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 nec - essary provisions, the court may enforce assignments of leases, rent, and profits by the appointment of a receiver in connection with the foreclosure proceedings. The court may author - ise the receiver to collect rents and other profits derived from the property and, after deducting costs of operation of the property and the receiv - er’s fees, to disburse the remaining proceeds to
the lender to be applied to the secured indebt - edness. South Carolina counsel should be con - sulted 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 authorised under the Uniform Commercial Code to sell such equity at public or private sale after due notice to interested 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 subordina - tion agreement. Otherwise, existing secured indebtedness will generally retain its priority. Although advances made in connection with construction financing will generally 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 straightforward 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 determined by ordinary priority rules, in extraor - dinary circumstances involving lender miscon - duct, a court may subordinate existing indebt - edness under the legal doctrine of “equitable subordination”. Finally, again, in extraordinary circumstances, usually in bankruptcy proceed - ings, debt may be re-characterised as equity,
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