McCullough v. Goodrich & Pennington

• Decision Date: 09 April 2007
• Docket Number: No. 26303.,26303.
• Citation: 644 S.E.2d 43
• Court: South Carolina Supreme Court
• Parties: Ralph C. McCULLOUGH, as Plan Trustee for the Estates of HomeGold, Inc., HomeGold Financial, Inc., and Carolina Investors, Inc., Plaintiff, v. GOODRICH & PENNINGTON MORTGAGE FUND, INC., Advanta Mortgage Corp., USA, and Chase Home Finance, LLC, Defendants.

644 S.E.2d 43

Ralph C. McCULLOUGH, as Plan Trustee for the Estates of HomeGold, Inc., HomeGold Financial, Inc., and Carolina Investors, Inc., Plaintiff, v. GOODRICH & PENNINGTON MORTGAGE FUND, INC., Advanta Mortgage Corp., USA, and Chase Home Finance, LLC, Defendants.

No. 26303.

Supreme Court of South Carolina.

Heard March 20, 2007.

Decided April 9, 2007.

Richard G. Gleissner and William R. Padget, both of Finkel Law Firm, of Columbia, for Plaintiff.

Frank Langston Eppes and Jason James Andrighetti, both of Eppes and Plumblee, of Greenville, for Defendant Goodrich & Pennington.

Suzanne Taylor G. Grigg, of Nexsen Pruet, of Columbia, and Laura E. Krabill and Timothy E. Stauss, both of Wolf, Block, Schorr and Solis-Cohen, LLP, of Philadelphia, PA, for Defendant Advanta Mortgage Corp. USA.

C. Mitchell Brown, of Nelson Mullins Riley and Scarborough, of Columbia, William Stevens Brown, of Nelson Mullins Riley & Scarborough, of Greenville, and Gregory T. Parks, Jami Wintz McKeon, and John C. Goodchild, III, all of Morgan, Lewis and Bockius, LLP, of Philadelphia, PA, for Defendant Chase Home Finance, LLC.

Chief Justice TOAL.

This certified question asks whether South Carolina recognizes a secured creditor's right to bring a claim against a third party for causing a reduction in the value of the secured party's collateral. After giving the question full consideration, we answer "no."

FACTUAL/PROCEDURAL BACKGROUND

Beginning 1997, Goodrich & Pennington Mortgage Fund, Inc. ("G & P"), an originator of mortgage loans, entered into an agreement with Advanta Mortgage Corp., USA ("Advanta"), in which Advanta agreed to service G & P mortgages.¹ Under a series of separate agreements, G & P was entitled to payments from Advanta related to the servicing of G & P's mortgage loans. In 2001, Advanta appointed Chase Home Finance, LLC ("Chase") as Advanta's attorney-in-fact for servicing the G & P mortgages.

In 1999, G & P entered into a series of loans with HomeGold Financial, Inc. ("Home-Gold"). As collateral for the loans, G & P granted HomeGold a security interest in G & P's contractual right to receive payments under G & P's agreements with Advanta. G & P informed Advanta of this security interest and HomeGold ultimately loaned G & P one million dollars pursuant to the loan agreements.

G & P defaulted on the loan with Home-Gold and in December 2005, HomeGold's bankruptcy trustee ("Trustee")² filed a complaint in the United States District Court for the District of South Carolina. The complaint alleged breach of contract against G & P, and negligent/wrongful impairment of HomeGold's security interest in G & P's contractual right to receive payments against Advanta and Chase. Specifically, the Trustee alleged that G & P's default was a result of the negligent servicing of the mortgage loans by Advanta and Chase which failed to generate revenue for G & P so that G & P could fulfill its obligations to HomeGold.

The district court granted Advanta and Chase's motions to dismiss the Trustee's claim on the grounds that South Carolina did not recognize a cause of action for negligent/wrongful impairment of collateral. The Trustee moved the district court to reconsider the ruling and to certify the issue for review, and the district court granted the Trustee's motion for the limited purpose of certifying the question to this Court pursuant to Rule 228, SCACR.

This Court accepted the following certified question from United States District Judge G. Ross Anderson, Jr. Does South Carolina law recognize a secured creditor's right to bring a claim for negligent/wrongful impairment of collateral where a third party's negligence or other actions caused the erosion, destruction, or reduction in value of the secured party's collateral?

STANDARD OF REVIEW

In answering a certified question raising a novel question of law, this Court is free to decide the question based on its assessment of which answer and reasoning would best comport with the law and public policies of the state as well as the Court's sense of law, justice, and right. Peagler v. USAA Ins. Co., 368 S.C. 153, 157, 628 S.E.2d 475, 477 (2006).

LAW/ANALYSIS

This certified question asks whether South Carolina law recognizes a secured creditor's independent right to bring a claim against a third party for causing the reduction in value of the secured party's collateral. We answer "no."

In order for liability to attach based on a theory of negligence, the parties must have a relationship recognized by law as providing the foundation for a duty to prevent an injury. Huggins v. Citibank, N.A., 355 S.C. 329, 333, 585 S.E.2d 275, 277 (2003). An affirmative legal duty may be created by statute, a contractual relationship, status, property interest, or some other special circumstance. Madison v. Babcock Ctr., Inc., 371 S.C. 123, 136, 638 S.E.2d 650, 656-57 (2006). However, this Court will not extend the concept of a legal duty of care in tort liability beyond reasonable limits. Huggins, 355 S.C. at 333, 585 S.E.2d at 277 (holding that the relationship between banks and potential victims of identity theft was too attenuated to establish a duty giving rise to a cause of action for negligent enablement of imposter fraud). With these principles in mind, we turn to the issue of whether South Carolina recognizes a legal duty between a secured creditor and a third party.

1. Duty arising from a contract

The Trustee contends that the contractual duties between G & P and Advanta provide the basis for the imposition of a duty of care running from Advanta to G & P's creditor, HomeGold. We disagree.

To support his claim, the Trustee relies on several South Carolina cases where this Court has found that a contractual relationship between the tortfeasor and one party formed the basis of a relationship giving rise to liability for injury to a third party. See Dorrell v. SCDOT, 361 S.C. 312, 605 S.E.2d 12 (2004) (holding that a subcontractor hired by SCDOT to repave a roadway owed a duty to motorists using the road); Barker v. Sauls, 289 S.C. 121, 345 S.E.2d 244 (1986) (holding that an insurance broker who contracted to sell workers' compensation coverage to an employer was liable to the employee who was denied workers' compensation benefits because the broker failed to procure coverage on behalf of the employer); Terlinde v. Neely, 275 S.C. 395, 271 S.E.2d 768 (1980) (holding that a contract between a homebuilder and homeowner extended to future home purchasers because, by placing his product into the stream of commerce, the builder owed a duty of care to the product's users); Edward's of Byrnes Downs v. Charleston Sheet Metal Co., 253 S.C. 537, 172 S.E.2d 120 (1970) (holding that in performing a contract with a building owner for the installation of a roof, the roofer owed a duty of due care to the occupant of the adjacent building to which the work was being performed). According to the Trustee, a contract for services between a debtor and another party—such as that between Advanta and G & P—establishes a relationship giving rise to the other party's liability for injury to a secured creditor who later acquires a security interest in the debtor's rights under the contract

In the cases relied on by the Trustee, this Court held that a tortfeasor may be liable for injury to a third party arising out of the tortfeasor's contractual relationship with another, despite the absence of privity between the tortfeasor and the third party. Where there is such a contractual basis for a legal duty to a third party, this Court has determined that the tortfeasor's liability exists independently of the contract and rests upon the common law duty to exercise due care to foreseeable plaintiffs. See, e.g., Dorrell, 361 S.C. at 318, 605 S.E.2d at 15. In Terlinde, which addressed the duty of a homebuilder to future homeowners, the Court articulated several public policy considerations upon which it's opinion was based; specifically, that the ordinary buyer was not in a position to discover latent defects in a structure, and that the lapse of time before which latent defects manifest themselves created unequal bargaining positions between the subsequent purchaser and the builder. 275 S.C. at 397-98, 271 S.E.2d at 769.

Turning to the instant case, we find that the circumstances under which a secured creditor obtains a security interest in contract rights is distinguishable from situations in which this Court has established a contractual basis for a legal duty to a third party. For example, in Barker, the employee was an identifiable third party beneficiary of a contract between the employer and an insurance agent providing workers' compensation coverage. See 289 S.C. at 122, 345 S.E.2d at 244. In contrast, this case involves a security interest in rights to payment created by a prior contract for services between the debtor and a third party. The contract was neither executed for the purpose of providing collateral for any future loan, nor was the secured creditor otherwise an identifiable beneficiary of the contract at the time of execution. It would be inconsistent with both Barker and Huggins for this Court to find a duty to a secured creditor based on such an attenuated beneficial relationship to a contract for services between a debtor and a third party.

This Court's decisions in Dorrell, Terlinde, and Edward's of Byrnes Downs are similarly distinguishable. Each case involved the negligence of homebuilders and contractors in carrying out their contractual duties which created a significant risk of physical injury to foreseeable users of the tortfeasor's end product. In our opinion, a secured creditor is not a foreseeable "user" of rights created pursuant to a contract for services between a debtor and a third party.³ Furthermore, the policy concerns discussed in Terlinde are not at issue where the allegedly injured party is a sophisticated creditor for whom acquiring security interests is typically a...