Carolina First Bank v. BADD, L.L.C. , 414 S.C. 289 ( 2015 )

THE STATE OF SOUTH CAROLINA
In The Supreme Court
Carolina First Bank, n/k/a TD Bank, NA, Petitioner,
v.
BADD, L.L.C., William McKown, and Charles A.
Christenson, Defendants,
of whom BADD, L.L.C. and William McKown are
Respondents.
_________________________
BADD, L.L.C. and William McKown, Third-Party
Plaintiffs,
v.
William Rempher, Third-Party Defendant.
Appellate Case No. 2013-000107
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
Appeal From Horry County
Steven H. John, Circuit Court Judge
Opinion No. 27486
Heard December 10, 2014 – Filed January 28, 2015
REVERSED
Thomas Wm. McGee, III, C. Mitchell Brown, Allen
Mattison Bogan, all of Nelson Mullins Riley &
Scarborough, L.L.P., of Columbia, for Petitioner.
Richard R. Gleissner, of Gleissner Law Firm, L.L.C., of
Columbia, for Respondents.
JUSTICE PLEICONES: In this mortgage foreclosure action, the Court granted
Carolina First Bank's ("the Bank") petition for a writ of certiorari to review the
Court of Appeals' decision in Carolina First Bank v. BADD, L.L.C., 400 S.C. 343,
733 S.E.2d 619 (Ct. App. 2012), which held William McKown1 is entitled to a jury
trial. We disagree and therefore reverse the decision of the Court of Appeals.
Procedural History
BADD, L.L.C. ("BADD"), purchased three warehouse units in Myrtle Beach. To
finance the transaction, BADD executed two promissory notes. A personal
guaranty was also executed by McKown, who was a member of BADD. After
BADD defaulted, the Bank brought this foreclosure action and included McKown
as a party pursuant to S.C. Code Ann. § 29-3-660 (2007) based on his status as a
guarantor.
In McKown's amended answer and counterclaim, he demanded a jury trial because
the Bank sought a money judgment for the breach of a guaranty arrangement.
McKown further sought an accounting and a determination that the guaranty
agreement was unconscionable. McKown then asserted two counterclaims—(1)
civil conspiracy and (2) breach of contract—both based on an alleged conspiracy
between the Bank and William Rempher. Finally, McKown asserted third-party
claims against Rempher.2
1
While BADD also joined McKown in his demand for a jury trial, the Court of
Appeals' decision turns on McKown's right to a jury trial. Therefore, we address
the merits of that decision with respect to McKown.
2
There is no question these third-party claims are permissive and do not entitle
The Bank moved for an order of reference. The circuit granted the motion,
referring the matter in its entirety to the master-in-equity.
The Court of Appeals reversed, holding McKown was entitled to a jury trial
because the Bank's claim on the guaranty agreement was a separate and distinct
legal claim.3 Carolina First Bank, 400 S.C. at 347, 733 S.E.2d at 620.
We granted the Bank's petition for a writ of certiorari to review the Court of
Appeals' decision.
Issue Presented
Did the Court of Appeals err in finding McKown was entitled to a
jury trial?
Standard of Review
Whether a party is entitled to a jury trial is a question of law, which this Court
reviews de novo, owing no deference to the Court of Appeals' decision. See
Wachovia Bank, Nat. Ass'n v. Blackburn, 407 S.C. 321, 328, 755 S.E.2d 437, 441
(2014).
McKown to a jury trial. See N.C. Fed. Sav. & Loan Ass'n v. DAV Corp., 298 S.C.
514, 519, 381 S.E.2d 903, 906 (1989) (holding third-party claims are permissive
and a party waives his right to a jury trial by asserting them in a foreclosure
action).
3
The Court of Appeals also found McKown was entitled to a jury trial based on his
counterclaims, but that finding relied on the threshold holding that the Bank's
action on the guaranty agreement was separate and distinct from the foreclosure
action. See Carolina First Bank, 400 S.C. at 347, 733 S.E.2d at 621.
Law/Analysis
The Court of Appeals held that when a lender exercises its statutory right to join a
guarantor as a party to a foreclosure action in order to seek a deficiency judgment,
the guarantor has a right to a jury trial. The Bank contends this was error. We
agree.
I. Guarantor's Right To A Jury Trial When A Bank Seeks A
Deficiency Judgment Pursuant to § 29-3-660.
The South Carolina Constitution provides that the right to a jury trial shall be
preserved inviolate. S.C. Const. art. I, § 14. Whether a party is entitled to a trial
by jury depends on whether the right to a jury was secured at the time of the
adoption of our state constitution. Mims Amusement Co. v. S.C. Law Enforcement
Div., 366 S.C. 141, 150, 621 S.E.2d 344, 348 (2005) ("The right to a trial by jury is
guaranteed in every case in which the right to a jury was secured at the time of the
adoption of the Constitution in 1868."). "Generally, the relevant question in
determining the right to a trial by jury is whether the action is legal or equitable."
Lester v. Dawson, 327 S.C. 263, 267, 491 S.E.2d 240, 242 (1997). Because a
foreclosure action is one sounding in equity, a party is not entitled, as a matter of
right, to a jury trial. Wachovia Bank, Nat. Ass'n v. Blackburn, 407 S.C. 321, 328,
755 S.E.2d 437, 441 (2014).
McKown was joined as a party to the foreclosure action pursuant to S.C. Code
Ann. § 29-3-660 (2007). Section 29-3-660 provides:
In actions to foreclose mortgages . . . if the mortgage debt be secured
by the covenant or obligation of any person other than the mortgagor
the plaintiff may make such person a party to the action and the court
may adjudge payment of the residue of such debt remaining
unsatisfied after a sale of the mortgaged premises against such other
person and may enforce such judgment as in other cases.
(Emphasis supplied). This statute is derived, in part, from the Act of 1791, which
vests exclusive jurisdiction in courts of equity for foreclosure actions. See, e.g.,
Williams v. Beard, 1. S.C. 309, 324 (1870) (discussing the Act of 1791 and the role
it played in vesting courts of equity with jurisdiction to decide mortgage-related
disputes). The power to render a deficiency judgment is included within the
jurisdiction of courts of equity. See Perpetual Bldg. & Loan Ass'n of Anderson v.
Braun, 270 S.C. 338, 342, 242 S.E.2d 407, 409 (1978) (recognizing that a
deficiency judgment is incidental to the relief sought in a foreclosure action and
that the Act of 1791 integrated the two for purposes of characterizing the action as
equitable); see also 27 S.C. Jur. Mortgages § 103 (1996) ("Mortgage foreclosures
are partly in rem . . . and partly in personam . . . ; however, the strict distinction
between such designations was abandoned by the Act of 1791. . . . The court's in
personam jurisdiction to enter a deficiency judgment does not alter the equitable
character of the [foreclosure] action.").
Here, it is clear the Bank included McKown as a party to its foreclosure action
only for the purpose of collecting a deficiency should one be adjudged. The Bank's
action does not alter the equitable character of the action. See Perpetual Bldg. &
Loan Ass'n of Anderson, 270 S.C. at 342, 242 S.E.2d at 409. Likewise, § 29-3-660
states, in part, that it is for the court to adjudge a deficiency. This statute, with its
origins pre-dating the enactment of our Constitution, illustrates that a party does
not have a right to a jury trial when he is included in the action solely for the
purpose of obtaining a deficiency judgment. See also 27 S.C. Jur. Mortgages §
103 (stating mortgage foreclosure proceedings are regulated by statutes, and those
statutes should be substantially followed). We therefore hold McKown is not
entitled to a jury trial solely based on the Bank's inclusion of him as a party
pursuant to § 29-3-660.
Accordingly, we reverse the Court of Appeals' holding that McKown was entitled
to a jury trial solely based on the Bank's inclusion of McKown as a party to obtain
a possible deficiency judgment. That holding conflicts with § 29-3-660, which
confers upon the court the power to adjudge a deficiency.
Having determined McKown is not entitled to a jury trial for the reason relied on
by the Court of Appeals, we address whether McKown is entitled to a jury trial
based on his counterclaims. We do so in the interest of judicial economy as this
issue was not addressed squarely by the Court of Appeals.
II. McKown's Right To A Jury Trial Based On His Civil Conspiracy
And Breach of Contract Counterclaims.
The Bank argues the Court of Appeals erred because McKown's counterclaims,
while legal, are permissive and thus, McKown waived his right to a jury trial by
asserting them in this equitable suit. We agree.
McKown is entitled to a jury trial on his counterclaims in an equitable action only
if the counterclaims are legal and compulsory. See Rule 13(a), SCRCP. A
counterclaim is compulsory if it arises out of the same transaction or occurrence as
the party's claim. Id. In a foreclosure action, a counterclaim arises out of the same
transaction or occurrence and is thus compulsory, when there is a "logical
relationship" between the counterclaim and the enforceability of the guaranty
agreement. Cf. N.C. Fed. Sav. & Loan Ass'n, 298 S.C. at 518–19, 381 S.E.2d at
905–06 (finding a foreclosure defendant was entitled a jury trial because his
counterclaims that the bank breached subsequent oral contracts to arrange
additional financing were compulsory because they bore a logical relationship to
the enforceability of the note).
Given this framework, we determine whether McKown's legal counterclaims are
compulsory.
a. Civil Conspiracy
McKown's civil conspiracy counterclaim is based on an alleged conspiracy
between the Bank and Rempher. McKown contended that two years after the
execution of the notes and guarantees, Rempher was substituted in Christensen's
place as a member of BADD and began collecting rents from the income-
producing warehouse units. Allegedly, Rempher had an ownership interest in
other warehouse units not purchased by BADD and as a result, conspired with the
Bank to induce BADD's default by directing potential tenants away from renting
the properties. McKown further claimed Rempher intentionally failed to make
payments on the note even though sufficient funds were available because
Rempher wanted to purchase the three warehouse units at a below market value,
foreclosure sale.
Here, the execution of the guaranty agreements was the "transaction or occurrence"
that gave rise to McKown's inclusion in the Bank's foreclosure complaint.
McKown's civil conspiracy counterclaim does not arise out of that transaction or
occurrence because it bears no logical relationship to either the execution or
enforceability of the guaranty agreements. Cf. N.C. Fed. Sav. & Loan Ass'n, 298
S.C. at 518–19, 381 S.E.2d at 905–06; Advance Int'l, Inc. v. N.C. Nat'l Bank of
S.C., 316 S.C. 266, 270–71, 449 S.E.2d 580, 582–83 (Ct. App. 1994), aff'd in part,
vacated on other grounds, 320 S.C. 532, 486 S.E.2d 367 (1996) (finding claims of
fraud, negligence, and unfair trade practices in a foreclosure action were not
compulsory because those claims did not affect the enforceability of the note). In
other words, the civil conspiracy claim presumes the enforceability of the guaranty
agreements because the allegations, if true, would not render the guarantees
unenforceable. We therefore hold McKown waived his right to a jury trial by
asserting the civil conspiracy counterclaim in a foreclosure action because the
claim is permissive as it does not arise out of the same transaction or occurrence as
the execution of the guaranty agreements. See Johnson v. S.C. Nat'l Bank, 292
S.C. 51, 55, 354 S.E.2d 895, 897 (1987) (stating a defendant waives his right to a
jury trial by asserting a permissive counterclaim in an equitable action).
b. Breach of Contract
The breach of contract claim is based on an allegation that Rempher agreed to
obtain financing for the three units BADD mortgaged. The only allegation specific
to the Bank is that the Bank breached its covenant of good faith and fair dealing
implied in the note, mortgage, and guaranty agreements based on the Bank's
purported conspiracy with Rempher. Again, the "transaction or occurrence" for the
purpose of determining the compulsory character of McKown's counterclaim is the
execution of the guaranty agreements. McKown's "breach of covenant of good
faith and fair dealing" claim depends on a purported conspiracy that took place, if
at all, two years after the guarantees had been executed. This claim does not arise
out of the underlying transaction or occurrence because it does not affect the
execution or enforceability of the guaranty agreements. We therefore hold
McKown waived his right to a jury trial by asserting a permissive counterclaim in
the foreclosure action. Cf. Advance Int'l, Inc., 316 S.C. at 270–71, 449 S.E.2d at
582–83.
Conclusion
We reverse the Court of Appeals as McKown is not entitled to a jury trial solely
because the Bank exercised its statutory right to join him as a party in the event of
a deficiency judgment. We further hold McKown is not entitled to a jury trial
based on his counterclaims, which, while legal, are permissive. McKown waived
his right to a jury trial by asserting permissive counterclaims in an equitable action.
Accordingly, the effect of our decision affirms the circuit court's decision, which
referred this matter in its entirety to the master-in-equity.
The Court of Appeals decision is therefore
REVERSED.
TOAL, C.J., BEATTY, KITTREDGE and HEARN, JJ., concur.