Law Office of Gem McDowell, P.A, Author at Gem McDowell

Partnership Representatives: What Partners and LLC Members Need to Know Now

Are you a member of a partnership or a multi-member LLC that’s taxed like a partnership? If so, you need to know about partnership representatives.

A partnership representative is an individual or entity that represents a partnership in front of the IRS in all matters including audits.

The term and role are relatively new. Partnership representatives (PR) went into effect in 2018 after being created in the Bipartisan Budget Act of 2015 (BBA), which repealed and replaced the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). It replaces the role of the “tax matters partner” in TEFRA, though the two are not exactly the same (more on that below).

Importantly, the BBA also changed the way that the IRS can assess and collect taxes from a partnership due after an audit. Previously, those taxes were collected from the individual partners; now, they are collected at the partnership level – unless the partnership has opted out (more on that below, too). This process is more streamlined for the benefit of the IRS and may benefit partnerships, too.

All partnerships that file US tax returns and multi-member LLCs that are taxed as partnerships are affected. (For the sake of expediency, we’ll just use the term “partnership” throughout the rest of this blog as a shorthand for “partnerships and multi-member LLCs that are taxed as partnerships.”)

If your business is affected, here’s what you need to know.

Partnership Representatives

What is the role of the partnership representative?

In the IRS’s own words: “The partnership representative has the sole authority to act on behalf of the partnership for purposes of Bipartisan Budget Act (BBA) partnership audit procedures. The partnership and the partners are bound by the actions of the partnership representative under the BBA.” (Emphasis added.)

The IRS lists the following actions as things that a PR can do, noting that this list is not exhaustive:

Entering into a settlement agreement
Agreeing to a notice of final partnership adjustment (FPA)
Requesting modification of an imputed underpayment
Extending the modification period by agreement
Waiving the modification period
Agreeing do adjustments and waiving the FPA
Extending the statutory periods for making adjustments by agreement
Making a push out election

Ideally, the PR will have nothing to do, because as a business owner you want to have as little to do with the IRS as possible. But if your partnership is audited by the IRS, you want to be sure your PR is competent, honest, and trustworthy, because they have a lot of power to make binding decisions for the partnership and its partners.

Who can be a partnership representative?

A PR can be any individual or entity (including the partnership itself) that has a “substantial presence” in the US. An entity that’s a PR must appoint a designated individual to act on the entity’s behalf.

A “substantial presence,” as defined by the IRS for these purposes, is an individual or entity that has a US taxpayer identification number, a US street address, and a phone number with a US area code, and who is able to meet with the IRS in person in the US “at a reasonable time and place as determined by the IRS.”

A partnership must designate a PR on its tax return (IRS Form 1065 or 1066) each taxable year, as the PR does not carry over year to year. The designated PR can be changed in between tax returns by filling out IRS Form 8979.

Alternatively, eligible partnerships may opt out; more on that below.

Is a Partnership Representative the Same as a Tax Matters Partner?

A partnership representative is similar to a tax matters partner (TMP), but the two are not exactly the same.

What are the differences between a partnership representative and a tax matters partner?

Both a TMP and a PR represent a partnership in audits and other matters with the IRS. However, there are some important differences.

A TMP was required to be a partner of the partnership (or member of the LLC), while a PR can be any individual or entity that meets the requirements listed above. This is the most obvious difference between the two. This change allows partnerships to choose a different party, like a tax attorney or accountant, as their PR.

Also, a TMP represented the partnership to the IRS, but they did not have exclusive authority to do so; other partners could take part, too. A PR, on the other hand, has the sole and exclusive authority to do so.

Finally, the partnership and the partners are bound by the actions and decisions of the PR, as mentioned above. Previously, a TMP could bind the partnership but not the individual partners.

What this means for you, as a partner or member in LLC

If you’re a partner in a partnership or a member in a multi-member LLC that’s taxed as a partnership, here are some things to know and to consider.

You (may) have the option to elect out

Some partnerships are eligible to “elect out of the centralized partnership audit regime for a tax year,” to use the IRS’s words. By making the election to opt out, it means that any adjustments found during an audit will be processed at the partner level. By not electing to opt out, these adjustments will happen at the partnership level, which is now the default state.

To be eligible, a partnership cannot have more than 100 partners, each of which must be an individual, C corporation, foreign entity that would be treated as a C corporation if it were domestic, S corporation, or estate of a deceased partner.

A partnership that has opted out and then is notified of an audit may revoke their decision with the approval of the IRS.

Some advantages and disadvantages of opting out

The advantage of taking part in the BBA centralized partnership audit regime, i.e., not opting out, is that the situation is more streamlined for both the IRS and the partnership. Because an audit (or other matter) happens at the partnership level, individual partners do not have to (and cannot) deal with the IRS directly and do not have to amend their individual tax returns.

One disadvantage is that, depending on the nature of your partnership and your partners’ individual financial situations, it’s possible that assessing additional taxes at the partnership level could cost more than if it were done at the partner level.

Another disadvantage was mentioned before: the PR has a lot of power. In their role, they are authorized to make binding decisions unilaterally, which could lead to a situation that’s unfavorable to the partnership or some or all of the partners. The PR’s decision is binding, and individual partners do not have a right to appeal the PR’s decision(s) to the IRS.

Furthermore, under the BBA, the IRS only has to notify the partnership and partnership representative when initiating an administrative proceeding and thereafter only notify the PR. So it’s possible for an audit to occur without individual partners being aware it happened, even if in the past under TEFRA they would have known. (You can read more about the IRS’s BBA partnership audit process here.)

Discuss with the other partners/members and ensure your partnership agreement/operating agreement is updated

Some of the issues mentioned above can easily be handled by updating the partnership’s governance documents. This would allow your partnership to take part in the centralized partnership audit regime and designate a PR while providing more protections to the individual partners via your partnership agreement/operating agreement. For example, you could include a provision that the PR must notify all individual partners of audit proceedings, even if the IRS doesn’t require it.

Some issues to discuss:

Whether the partnership (if eligible) will opt out or how that will be decided each year
How the partnership will choose a PR each tax year
Whether the PR must inform individual partners of audit proceedings, findings, decisions, etc., and how
Whether and how partners have any say on decisions relating to an audit or other matter
What to do if disputes between partners arise during or after an audit or other matter

Discuss these issues with your business attorney and make changes, as needed, to your partnership agreement or operating agreement.

Choose your partnership representative wisely

If your partnership accepts the default and does not opt out (or is not eligible to), then be very judicious about whom you designate as your PR. Hopefully, you will never need one, but if that day comes, you’ll want someone you can trust with the future of your business.

Call Business Attorney Gem McDowell for Help and Legal Advice

Gem has over 30 years of legal experience in South Carolina and he is ready to help you and your business. He can advise you on how to handle the issue of partnership representatives in your partnership or LLC and help you think through potential difficult situations that you may not have thought of.

Gem and his team not only help business owners with corporate governance documents like partnership agreements and operating agreements, they can help your business grow and thrive, all while keeping your assets protected. Call Gem and his team at the Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

What is “Unconsionability” in the Law?

UPDATE 03.04.25: The discussion below centers on the Court of Appeals of South Carolina’s 2022 decision in the Huskins v. Mungo Homes case. Since then, the Supreme Court of South Carolina took up the case and rendered its decision in 2024. It skirted the issue of unconscionability entirely, stating that because the contract terms were found to violate public policy, they were unenforceable and the issue of whether they were unconscionable was moot. Read more about the 2024 Huskins decision and what it means here on our blog.

For a relatively recent Supreme Court of South Carolina case that discusses unconscionability (again in the context of a home builder’s one-sided contract), read the Damico v. Lennar Carolinas, LLC (2022) decision here.

Originally published Jan. 23, 2023:

What is “unconscionability” in the law, and how is it viewed by the high courts in South Carolina? In this blog we’ll look at the definition of unconscionability, its elements, and what unconscionability looks like in real-life cases, including the 2022 SC Court of Appeals case Huskins v Mungo Homes, LLC.

“Unconscionability” in the Law

“Unconscionability” is used by courts most often in the context of contract law. It refers to terms that are so egregiously unjust or one-sided that they are unreasonable and may shock the conscience of the court. Typically, it’s the party with greater bargaining power that creates a contract favoring themselves to the detriment of the other party. When a contract or one of its terms are found unconscionable, it is unenforceable.

“Unconscionable” is also used by courts to describe a party’s grossly unfair conduct. A party that behaves unconscionably may not benefit from their conduct.

Elements of Unconscionability in South Carolina

“Unconscionability has been recognized as the absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them.” – South Carolina Court of Appeals quoting the SC Supreme Court decision Carolina Care Plan, Inc. v United HealthCare Servs., Inc. (2004) in the Huskins decision (emphasis added).

From this understanding of unconscionability, South Carolina courts look for two elements to determine whether something is unconscionable or not:

Absence of meaningful choice
Oppressive and one-sided terms

What would constitute a “meaningful choice” in the eyes of the court, and when are contract terms considered “oppressive and one-sided”? Let’s look at unconscionability in some real-life South Carolina cases.

Unconscionability in Real Life: Huskins v Mungo Homes, LLC

We’ve run into the concept of unconscionability in previous blogs:

To describe bad conduct in the context of minority member oppression (squeeze out/freeze out) in Wilson v Gandis (SC Supreme Court, 2019) (blog here)
Whether a prenuptial agreement in Hudson v Hudson (SC Court of Appeals, 2014) was unconscionable (blog here)
Whether an arbitration agreement in Arredondo v SNH SE Ashley River Tenant (SC Supreme Court, 2021) was unconscionable (blog here)

The 2022 SC Court of Appeals case Huskins v Mungo Homes, LLC (read the decision here) also looked at unconscionability in regards to an arbitration clause.

Briefly, a couple (the Huskinses) bought a house from Mungo Homes, LLC (Mungo), entering into a purchase agreement that included an arbitration clause and a limited warranty. Two years later, in July 2017, the Huskinses filed an action against Mungo over issues they had with the purchase agreement. (They did not allege any problem with the home itself.)

Mungo filed a motion to dismiss and to compel arbitration. The Huskinses argued that the arbitration clause was unconscionable and unenforceable. The appeals court looked at the two elements described above to determine unconscionability.

Element 1: Absence of Meaningful Choice

The appeals court found that the Huskinses did have an absence of meaningful choice. It found that the Huskinses:

Were average purchasers of residential real estate
Were not represented by independent counsel
Were not a substantial business concern to Mungo and therefore had no more bargaining power than the average homebuyer

The Huskinses did not have a viable alternative to the arbitration agreement in the purchase agreement; if they wanted Mungo to build their home, they had to sign it and agree to its terms.

Element 2: Oppressive and One-Sided Terms

The Huskinses argued that the arbitration agreement was unconscionable, in part, because of its last two sentences: “Each and every demand for arbitration shall be made within ninety (90) days after the claim, dispute or other matter in question has arisen, except that any claim, dispute or matter in question arising from either party’s termination of this Agreement shall be made within thirty (30) days of the written notice of termination. Any claim, dispute or other matter in question not asserted within said time periods shall be deemed waived and forever barred.”

South Carolina law provides a statutory period of three years for such claims, which is drastically different from 30 or 90 days.

Still, the circuit court found these limited terms were not one-sided and oppressive. The appeals court disagreed, citing SC Code Section 15-3-530(1), which provides a three-year statute of limitations for such claims, and Section 15-3-140, which explicitly states that no contract provision attempting to shorten the statutory period shall bar any such actions from being brought.

Furthermore, the appeals court states that while in theory the clause applies equally to both the Huskinses and Mungo, in reality it would disproportionately affect the Huskinses. The appeals court also found that it was not “geared towards achieving an unbiased decision by a neutral decision-maker,” as the Fourth Circuit Court of Appeals directs courts to consider when it comes to arbitration agreements.

The SC Court of Appeals therefore found that due to an absence of meaningful choice and the presence of oppressive and one-sided terms, this section of the arbitration agreement was unconscionable and unenforceable. (The court also found this section was severable, meaning the rest of the arbitration agreement and purchase agreement stood, and the circuit court’s order compelling arbitration was affirmed.)

Contract Law in South Carolina

Would your contracts hold up to such scrutiny in court? You need to know what’s in every contract you write and sign as a business representative and as an individual and to avoid terms that could be construed as unconscionable.

For help creating and understanding contracts, contact attorney Gem McDowell. He and his team at the Gem McDowell Law Group can help ensure your contracts are clear, fair, honest, enforceable, and don’t violate SC code or public policy. Call Gem at his Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

Risks for Personal Representatives: When Distributing Assets Becomes a Breach of Fiduciary Duty

Oftentimes, a personal representative (executor) in charge of settling a decedent’s estate is also a named heir who may be entitled to assets under the terms of the will. In real life, this looks like a daughter settling the estate of her deceased father, or a husband handling the estate of his deceased wife, or something similar.

This can lead to potentially complicated situations. A personal representative has a fiduciary duty to the estate, meaning they are legally required to act in the best interest of the estate and its heirs. But they may be faced with the possibility of distributing assets to themselves in a way that benefits them to the detriment of another beneficiary, which would be a breach of their fiduciary duty. (To learn more about the rights, roles, responsibilities, and risks of being a personal representative in South Carolina, read more on our blog here.)

How does a personal representative know if the way they are distributing the estate’s assets is fair or if they are giving themselves an advantage in breach of fiduciary duty? Sometimes it’s not entirely clear. This was the central issue in the 2022 South Carolina Supreme Court case Bennett vs Estate of James Kelly King (read here). The court ultimately went against the conclusions of the probate court, circuit court, and appeals court. How did that happen, and what does it mean for personal representatives in South Carolina?

The Background: A Blended Family, a Valid but Old Will, and Complications

This case is admittedly convoluted, but it’s important to get into the details of the background and the will itself in order to understand the law and the way the courts interpreted it.

Testatrix Jacquelin K. Stevenson (Testatrix) died in September 2007, leaving behind six children: two sons and two daughters from her marriage to Thomas Stevenson, a son by former marriage, and a stepdaughter.

The practical question at the heart of this case is who should receive ownership of the family’s vacation house in Lake Summit, NC. The parties are Testatrix’s two daughters from her marriage to Thomas Stevenson, Jacquelin S. Bennett and Kathleen S. Turner (Petitioners), and her stepdaughter Genevieve Stevenson Felder (Respondent).

The intended distributions of the will

Testatrix had a valid will dated October 1996 that directed distributions of her existing assets at the time in the following way:

The house on Wadmalaw Island, SC to her two daughters with Thomas Stevenson (Petitioners)
The house in Lake Summit, NC to her two sons with Thomas Stevenson
A bequest of $400,000 to her son James Kelly King
A bequest of $400,000 to her stepdaughter (Respondent)
Any property in the residuary estate to be divided “in equal shares” among the six children

Clear enough. But complications arose quickly afterwards.

First, her sons with Thomas Stevenson, Thomas Stevenson III and Daniel Stevenson II, stole millions from the estate as co-trustees from 1996 to 2006. As a result, the Petitioners were named co-personal representatives, the sons were cut out from receiving anything from the estate including the Lake Summit house, and there wasn’t enough cash in the estate to pay the bequests of $400,000 each to King and Petitioner. (King’s interest in the residuary estate was later bought out by Petitioners and Respondent, which is why he is not involved in this action.)

Additionally, Testatrix had acquired two more properties since she executed her will in 1996, one on Edisto known as “Bailey’s Island” and one in Mt. Pleasant known as “Paradise Island.” Both of these properties were undeveloped at the time of her passing.

The terms of the will

Section 10 of the will gives broad discretion to the personal representatives to make distributions “[w]ithout the consent of any beneficiary… in cash or in specific property, real or personal, or an undivided interest, or partly in cash and partly in such property… without making pro-rata distributions of specific assets.” In other words, as long as the distribution was fair according to the will, the personal representatives could distribute the assets as they saw fit without permission from the heirs.

The residuary clause stated “[a]ll the rest, residue and remainder of my property and estate… I give, devise and bequeath to [all six children] in equal shares.” The two properties acquired after the execution of the will (Bailey’s and Paradise) went into the residuary estate, as did the Lake Summit property, since the two sons were barred from inheriting it after stealing from the estate. The Wadmalaw Island went to the Petitioners, as originally directed in the will.

The proposed distribution by Petitioners

As personal representatives, Petitioners had the estate’s properties appraised and made the following distribution proposal for the assets in the residuary estate:

Lake Summit, NC appraised at $1,100,000, to split between the two Petitioners
Bailey’s Island appraised at $725,000, to split between Petitioners and Respondent, with Respondent owning the majority of it
Paradise Island appraised at $390,000, to split between Petitioners and Respondent

No parties dispute the appraised values of the properties or that the proposed distribution would give equal monetary value to the heirs. Instead, Respondent objected to the way the Lake Summit property was distributed, with ownership going to Petitioners and no share going to Respondent.

Probate Court, Circuit Court, and Appeals Court

The matter went before three lower courts before going before the supreme court. All three came to the same ultimate conclusion that the proposed distribution was not fair and equitable and must be altered.

Probate Court

The matter first went before a probate court, where Respondent argued that the proposed distribution was not fair and equitable. Respondent argued that Petitioners needed to take certain intangibles into account when deciding how to divide the assets, such as the fact that the Lake Summit property was both a family vacation home that had been in the family for decades and a rental property that produced income, while the Bailey’s Island and Paradise Island properties were undeveloped lots.

The Petitioners argued that the appraised values of the properties already took these facts into account, that the proposed distribution was equal, and that Section 10.6 of the will explicitly gave them broad powers to distribute the estate’s assets as they saw fit.

The probate court ruled that each of the three parties should receive an equal ownership in all three properties. It relied on the language in the residuary clause that stated property should be distributed “in equal shares,” interpreting this to mean that all parties should have equal ownership. Petitioners made a motion to reconsider, arguing that 10.6 gave them broad discretionary powers, which the probate court denied. It interpreted Testatrix’s intention as section 10 giving those broad powers only to the distribution of specific assets, not assets in the residuary estate.

Circuit Court

The circuit court upheld the probate court’s finding. It stated that even considering the broad powers granted by section 10 of the will, Petitioners had to treat all beneficiaries fairly and equitably, and they must take “non-economic considerations such as sentimental value, utility, and other intangible factors” into their proposed distribution. It also stated that the proposed distribution “fails the test of equity and good faith” because the Petitioners were favoring themselves by “cherry pick[ing]” the assets they wanted, rather than distributing them equally. It held that the Petitioners were in breach of fiduciary duty.

Appeals Court

The appeals court affirmed the circuit court’s decision. In an unpublished opinion, it held that a “plain reading of the Will supports the probate court’s contention that Article 10.6 referred to the Will’s grant of specific property, not the Residuary Estate.”

The Supreme Court of South Carolina Reverses and Remands

The case went before the SC Supreme Court, which went against the probate court, circuit court, and appeals court, ultimately reversing and remanding to the probate court.

The issue before the court was “Whether the court of appeals erred in affirming the probate court’s decision to reject the personal representative’s proposal and instead dividing the Lake Summit property in pro-rata ownership shares?”

The court’s discussion centered around two issues: Testatrix’s intentions and how Section 10.6 applies to the will; and breach of fiduciary duty.

Testatrix’s intentions and how section 10.6 applies

The court states that rather than picking out and reading individual provisions in a will “in isolation” or “elevating” them above the rest, the entire document should be read in a way such that disparate sections are “harmonized.”

In this case, that means that Section 10.6 is “equally important and must be honored,” and it remains in effect even for assets that go through the residuary estate. The probate court’s conclusion that section 10.6 applied only to specific bequests and not to assets in the residuary estate is “exactly backwards,” says the court. Nothing in the will nor in South Carolina’s jurisprudence limits these powers to specific bequests only.

Further, it’s in the distribution of the residuary estate assets where section 10.6 would matter most, since the personal representatives were bound to carry out the specific bequests as directed and would only be able to exercise their broad discretionary powers distributing other assets. “Indeed, section 10.6 would be meaningless if the broad powers of the personal representatives did not apply to the residuary estate,” writes the court.

The language of the will is clear in giving personal representatives broad powers to carry out its terms, including the ability to make distributions “without the consent of any beneficiary” and “without making pro-rata distributions” (i.e., equal shares) “of specific assets.”

Ultimately, Petitioners here have the power to make the distributions as proposed, and “absent a breach of fiduciary duty, their proposed distribution should be upheld.”

So the next question is, was there a breach of fiduciary duty?

Breach of fiduciary duty

The supreme court says no.

First, the court notes that none of the three courts were specific in what constituted the breach of duty on the part of Petitioners.

The burden of proof is on the party bringing a claim of breach of fiduciary duty. But, the court says, the burden of proof was (incorrectly) reversed in this case, when the circuit court affirmed the probate court, and then when the appeals court stated that the proposed distribution “would be inequitable because there is no reasonable purpose for their proposal.”

But it is not up to Petitioners to prove they have a “reasonable purpose” for their proposal; instead, the supreme court writes, “the burden was on the Respondent to show that the proposed distribution was unfair or inequitable, which she did not do and likely could not do in light of her stipulation that the proposed distribution was of equal monetary value.” It states that Respondent was “entitled to nothing more than a monetary equal distribution of the residual estate.” This is a different interpretation than the lower courts had of the phrase “equal share” in the will’s residuary clause.

The court also notes that the behavior of the Petitioners here “looks nothing like” that of personal representatives who have been found to be in breach of fiduciary duty. It cites two such cases: Turpin v Lowther, 2013, in which a personal representative secretly negotiated with a third party to purchase a property which beneficiaries had an interest in; and Moore v Benson, 2010, in which a trustee took funds from her father’s retirement account and used it to buy his property.

Finally, the court says it doesn’t accept the argument that sentimental value and other intangibles must be taken into consideration when distributing an estate’s assets, as “this would place an untenable burden of personal representatives and provide an unworkable framework going forward.”

But it says that even if the court accepted that argument, the claim still fails – Respondent (Testatrix’s stepdaughter from her second husband’s prior marriage) was an adult when the family acquired the Lake Summit property, while Petitioners (daughters of Testatrix and her second husband) spent summers there growing up. If sentimental value accounted for anything, it would favor Petitioners over Respondent.

In conclusion, the supreme court reverses the appeals court and remands to probate court to approve the Petitioners’ proposed distribution.

Key Takeaways: Good Lessons for Personal Representatives and Testators

There are some good lessons here in the supreme court’s decision for personal representatives in South Carolina.

Do not take intangibles into account when distributing assets. Attaching a monetary value to things like sentimental value is not necessary and creates an untenable burden for personal representatives, the supreme court found.

Adhere to the terms of the will when distributing assets to yourself. As a fiduciary, you can be found in breach of fiduciary duty if you give yourself an advantage to the detriment of another beneficiary when distributing assets to yourself. Reduce the likelihood of a claim against you by being even-handed and above board and by following the terms of the will to the letter.

Act in good faith. It is possible to be found in breach of fiduciary duty due to an innocent mistake, but it’s much more likely in instances of malicious intent. Act in good faith in your dealings as a personal representative and never forget your duty to do what is in the best interest of the estate and its heirs.

South Carolina testators can learn some lessons here, too.

Keep your will current. Update your last will after major life events like the birth of a child, death, or divorce; after acquiring significant property; and after relevant changes in the law. An entirely new will is often not needed, as many matters can be addressed in a codicil to the will. (Had Testatrix directed where the Bailey’s Island and Paradise Island properties should go in her will, this entire situation might have been avoided.)

Be specific to ensure your will reflects your wishes. The more specific the language in your will is, the less the courts have to guess what your intentions were, if it ever goes to court. (What did Testatrix mean by “equal shares” in the residuary clause? Did she mean equal ownership, as the lower courts interpreted it, or would equal monetary value suffice, as the supreme court interpreted it?)

Create or Update Your Last Will in South Carolina

If you don’t have a current will, now is the time to get one. A last will is a gift to your family that can help avoid conflict once you’re gone, and it ensures that your estate will be settled according to your wishes rather that the state’s procedures.

Call estate planning attorney Gem McDowell. He and his team at the Gem McDowell Law Group help people in South Carolina create estate planning documents including last wills, trusts, and powers of attorney. He can advise you on how best to protect your assets and maintain family relations after you’re gone. If you need help settling an estate in South Carolina, Gem is an experienced probate attorney as well. Call Gem at his Mt. Pleasant office at 843-284-1021 today.

I’m a Personal Representative – Now What? Rights, Roles, Responsibilities, and Risks

An important part of creating a last will is naming a personal representative (executor) to handle matters once the testator or testatrix has died.

But what does a personal representative in South Carolina do? If you’ve been named a personal representative in a last will in South Carolina, or someone has asked if you’d be willing to take the role, you should know what’s expected.

Personal representatives have certain rights, roles, and responsibilities under the law, and face potential risks, which we’ll cover here. But first, we’ll look at when you may want to hire a probate attorney to help you perform your duties.

Do I Need to Hire a Probate Attorney in South Carolina?

In South Carolina, there is no legal requirement for a personal representative to hire an attorney in order to settle an estate. However, you may want to.

Settling the decedent’s estate may be a small, straightforward job or a long, complicated one. If you’re the personal representative of a small estate with few heirs, you may feel comfortable completing the job yourself.

But if the estate is large and complex, or if there are several heirs and beneficiaries with contentious personalities and relationships, you should strongly consider working with a probate attorney to help you carry out all the duties listed below. A probate attorney knows what to do, saves you time, and helps you avoid mistakes that could be costly to the estate or even to you, personally (more on that below). And if you expect family drama, a probate attorney can help keep familial relations congenial while acting as a “buffer” between you and the conflict.

Since probate attorneys are paid out of the estate, it doesn’t cost you anything out of pocket; however, it does also mean the value of the estate will be diminished somewhat.

Learn more about probate in South Carolina here.

Rights of the Personal Representative in South Carolina

The personal representative has many more responsibilities than rights, but one right they do have under South Carolina law is the right to compensation paid out of the estate. SC Code § 62-3-719 states that a personal representative is entitled to a minimum of $50, regardless of the estate’s value, up to a maximum of 5% of the estate’s value. In some cases, the court may approve additional compensation “for extraordinary services.” The personal representative may waive their right to compensation.

The personal representative also has a right to be reimbursed for expenses they incur settling the estate.

Role of the Personal Representative

The role of the personal representative is to distribute the estate of the deceased person according to the terms of their will. (If there is no will, the court appoints an administrator to handle the estate. Read more about dying intestate – without a will – in South Carolina here.)

The tasks for a personal representative in South Carolina to carry out include:

Locating and listing decedent’s assets including bank accounts, securities, and real property
Settling outstanding debts and giving notice to potential creditors of the decedent’s death
Paying outstanding taxes and bills, including funeral expenses
Distributing assets according to the terms of the will to heirs and beneficiaries
Filing lawsuits if necessary
Closing out the estate

To an extent, the will may partially define the role of the personal representative. It may be very prescriptive in how the personal representative is in carrying out their role, or it may give them more leeway in how to distribute assets. But regardless of how much leeway the will gives a personal representative, the tasks they must carry out remain the same.

Responsibilities and Risks of the Personal Representative

All personal representatives have a legal responsibility to act in the best interests of the estate and its heirs and beneficiaries rather than themselves. A personal representative is a fiduciary, with a fiduciary duty to the estate and its heirs and beneficiaries.

Since the personal representative is often an heir to the estate, this can lead to sticky situations where they are responsible for distributing assets to themselves in a way that’s fair and doesn’t benefit themselves at the expense of another heir.

When is a personal representative within their rights to distribute desirable assets to themselves, and when does that cross over into the territory of breach of fiduciary duty? That’s a judgment call that sometimes must be decided by the court. See this blog on the SC Supreme Court case of Bennett vs Estate of King, 2022, for a real-life example.

Breach of fiduciary duty encompasses clearly wrong actions like intentionally stealing money from the estate. But there need not be malicious intent; something like failing to pay outstanding taxes on time or distributing assets before all creditors are paid can be considered a breach of fiduciary duty, too.

A beneficiary or unpaid creditor who has suffered a loss from the personal representative’s actions or mismanagement of the estate may bring a civil claim against them. A personal representative may be found personally liable for damages caused, meaning you as the personal representative could be responsible for using your own money to make up for any mistakes and mismanagement. For this reason alone, working with a probate attorney is a good idea, since it minimizes your risk of personal liability.

Estate Planning in South Carolina

For help settling an estate in South Carolina, contact estate planning and probate attorney Gem McDowell. Gem and his team at the Gem McDowell Law Group help people across South Carolina with probate and estate planning, including creating last wills, trusts, and powers of attorney, for estates large and small. Call Gem at his Mt. Pleasant office at 843-284-1021 today.

What Are Enterprise Goodwill and Personal Goodwill and Are They Marital Assets in SC?

The value of a business is determined by a number of factors, including its income, physical assets like buildings and equipment, and intangible assets like goodwill.

But what exactly is “goodwill” in business, and what’s the difference between personal goodwill and enterprise goodwill? And is goodwill subject to division as marital property in divorce proceedings (as discussed by the SC Court of Appeals in Bostick v Bostick, 2022)?

Personal Goodwill vs. Enterprise Goodwill

“Goodwill” is an intangible business asset. Goodwill can encompass many things, depending on the nature of the business, including branding and brand recognition, customer relations, employee relations, and intellectual property (trademarks, copyrights, patents, and trade secrets).

Goodwill can be divided into two types, personal and enterprise.

Personal goodwill is inextricably tied to an individual or individuals, often the business owner(s). The individual’s exceptional knowledge or skills, experience, reputation, and relationships with customers, employees, and suppliers may all be factors in a company’s personal goodwill valuation.

Enterprise goodwill is tied to the business itself rather than to an individual, such as its brand, location, convenience for customers, unique offerings, intellectual property, and the like.

Say a highly regarded chef sells one restaurant and leaves to start another. If the regular customers follow the chef to the new restaurant, that’s an example of personal goodwill. Once the chef has gone, the restaurant has lost that intangible asset (the personal goodwill tied to the chef) that brought in business and made money. But it still boasts a great location, convenient opening hours, and a unique menu, all of which will outlast the presence of the founding chef and continue to bring in revenue; that’s enterprise goodwill.

Determining the dollar value of a company’s personal goodwill and/or enterprise goodwill can be a challenge for business owners.

Is Goodwill a Marital Asset Divisible in Divorce? Bostick v Bostick Background

Another issue some business owners face is whether their company’s personal goodwill and enterprise goodwill are marital assets that can be divided in a divorce. This varies by state. The South Carolina Court of Appeals weighed in on the issue in the case Bostick v Bostick in March 2022 (read the opinion here).

Josie M. Bostick and Earl A. Bostick, Sr., were married in 1971 and began divorce proceedings in 2017. During their marriage, Earl was a dentist with a successful practice in two locations, Ridgeland and Bluffton. Earl retired before the divorce was finalized and sold the Ridgeland practice to the Bosticks’ son for $569,000 plus $51,113.15 in accounts receivable. The contract divided the $569,000 in two parts: $144,860 for purchased assets and $424,140 for goodwill. The contract also required Earl to be available for up to 60 days after the sale to help transition, and it contained a covenant not to compete.

How this money should be divided in the divorce was a point of disagreement. The family court determined that the hard assets and accounts receivable were marital assets to be divided 50/50, as the Bosticks had previously agreed. But it held that the goodwill was a nonmarital asset because it was personal goodwill and was therefore Earl’s alone. The court based this decision on Moore v Moore (2015), which ruled that enterprise goodwill is a marital asset subject to division, while personal goodwill belongs solely to the professional and is not subject to division.

Josie contended the family court erred in this decision. The appeals court agreed.

Was it Personal or Enterprise Goodwill?

The SC Court of Appeals notes that if the dental practice were an “ongoing concern,” then “the majority, if not all” of the goodwill would be personal, but it was known that Earl was leaving the practice and the profession altogether. The court does note that the agreement for Earl to be available for 60 days after the sale and the covenant not to compete do weigh in favor of personal goodwill but concludes that there was no evidence that the entire amount should be considered personal goodwill.

Plus, Earl had previously sold his Bluffton location, and the revenue from that sale – which also included a goodwill portion – was put on his side of the ledger for purposes of equitable distribution. The court says it sees no reason to treat the sale of this second location any differently.

“Therefore, we conclude the family court erred in not treating the entirety of the sales price as marital property,” says the court.

(Note that there is a possibility this decision could be appealed and go to the SC Supreme Court.)

Buying, Selling, and Growing Your Business in South Carolina

No matter what stage of business ownership you’re in, you can use the guidance and advice of an experienced business attorney like Gem McDowell. With over 30 years of experience helping clients in South Carolina, Gem is a problem solver who is ready to help you whether you need advice and assistance buying or selling an existing business, starting up a new one, or helping your business thrive while protecting your interests.

Call Gem and his team at his Mt. Pleasant, SC office at 843-284-1021 to schedule a free consultation.

Same-Sex Marriage in South Carolina After Obergefell

The US Supreme Court made history with the 2015 decision Obergefell v Hodges, ruling that same-sex couples have a right to marry under the Fourteenth Amendment of the Constitution.

Before the Obergefell decision, states made their own laws regarding same-sex marriage. After the decision, all states were required to allow same-sex couples to marry and to recognize such unions that were performed in other states.

This is the background to the 2021 South Carolina Supreme Court decision in Swicegood v Thompson (read the court’s short decision here) regarding same-sex common law marriages and whether Obergefell applies retroactively.

The SC Court of Appeals Cites SC Law Prohibiting Same-Sex Marriage Post-Obergefell

Swicegood v Thompson first went before a family court in 2014 which ultimately found that the Obergefell decision does apply retroactively, and that that Cathy J. Swicegood and Polly A. Thompson, who were domestic partners for over 13 years, did establish a common-law marriage.

When the case came before the SC Court of Appeals in 2020, it found that Swicegood and Thompson had failed to establish a common law marriage because:

South Carolina Code Section 20-1-15 prohibited same-sex marriage, which prevents the formation of a common law marriage between same-sex couples, and
Swicegood and Thompson did not have the intent and mutual agreement necessary to enter a legally binding common law marriage.

As to the first point, the appeals court did recognize that the Obergerfell decision must be applied retroactively. Still, it found that SC Code Section 20-1-15 constituted a “pre-existing, separate, independent rule of state law, having nothing to do with retroactivity,” which formed an “independent legal basis” for the finding that Swicegood and Thompson didn’t establish a common law marriage.

The appeals court’s decision is significantly longer than the supreme court’s and contains the background of the case and its discussion of the law. You can find that here.

The SC Supreme Court Declares the SC Law Void

Upon appeal, the SC Supreme Court vacated in part and affirmed in part the appeals court’s decision.

It noted that in Obergefell, the US Supreme Court held that “same sex couples may exercise the fundamental right to marry,” and all state laws challenged in that case were “invalid to the extend they exclude same sex couples from civil marriage on the same terms and conditions as opposite sex couples.”

The Obergefell decision rendered SC Code Section 20-1-15 void ab initio (“void from the beginning”) and should be treated like it never existed. That means it cannot serve as an impediment to the recognition of a same-sex marriage predating Obergefell, so that part of the appeals court’s decision was vacated. However, the supreme court did affirm, without further discussion, that no common law marriage was established between Swicegood and Thompson.

The State of Same-Sex Marriage and Common Law Marriage in South Carolina

While the law prohibiting same-sex marriage is still on the books in South Carolina, as of the Obergefell decision by the US Supreme Court and the Swicegood decision discussed here by the SC Supreme Court, the right to same-sex marriage in the state of South Carolina is protected.

Common-law marriage, on the other hand, was abolished in South Carolina in July 2019. Read more about that here.

At-Will Employment in South Carolina: New Supreme Court Rulings

You may know that South Carolina is an at-will employment state. But what does that really mean?

In an at-will employment state, work is presumed to be at-will unless otherwise defined by contract. In an at-will employment arrangement, both the employer and the employee have the right to end the arrangement without notice and for any reason, without incurring liability. (There are a few exceptions to this, mentioned below.)

The South Carolina Supreme Court recently accepted three certified questions asked by the US District Court for the District of South Carolina to clarify state law on at-will employment matters. Here are the three questions put to the SC Supreme Court in Hall v UBS Financial Services Inc, 2021 (find it here) with more discussion on each issue below.

Are terminable at-will employment relationships contractual in nature as a matter of law?
Does the implied covenant of good faith and fair dealing arise in the context of terminable-at-will employment relationships, and can an employer’s termination of an at-will employee constitute a breach of the relationship such that it may give rise to a claim by the former employee against the employer for breach of the implied covenant of good faith and fair dealing?
Can an employer’s termination of an at-will employee, which results from a third-party employee’s report to the employer, constitute a breach of the relationship such that it may give rise to a claim by the former employee against the third-party employee for tortious interference with a contractual relationship?

The SC Supreme Court discusses the law rather than the particular facts of the case, but here’s some quick background before we delve into the court’s legal reasoning behind its answers:

Curt O. Hall sued his former employer, UBS Financial Services Inc., and a former co-worker, Mary Lucy Reid, after he was fired by UBS. Hall was a manager of the Greenville branch of UBS, and in September 2017 he organized a happy hour that a number of employees, including Reid, attended. Reid said she was scared to go home because of issues with her boyfriend, and Hall offered to let her stay at his home for the night. At the end of the night, Reid’s friend drove Hall home after the three of them had gone to dinner, with Hall and Reid sitting in the backseat together. Before getting out of the car, Hall again asked Reid if she was okay, then gave her a “European-style consolatory cheek kiss” (in the words of the district court) before getting out of the car. He texted her later that same night repeating his offer to let her stay, which she ignored. Soon after, Reid reported the incident to the HR department, and HR questioned Hall about his version of events. He was fired a few weeks later.

Hall brought a claim against UBS for breach of implied covenant of good faith and fair dealing and a claim against Reid for tortious interference with contractual relations, among other claims.

Question 1. Are terminable-at-will employment relationships contractual in nature as a matter of law?

The Supreme Court of South Carolina says yes.

The answer lies in general contract law. The court quotes itself in Prescott v Farmers Tel. Coop., Inc., 1999, in which it said “[T]o prove the existence of a definite contract of employment, the employee must establish all of the elements of a contract. The elements are: 1. A specific offer, 2. Communication of the offer to the employee, and 3. Performance of the job duties in reliance on the offer. The court says in Hall, “We agree with the majority of jurisdictions that have addressed this issue, and we hold those elements are present in every at-will employment arrangement.”

However, the court cautions that answering yes doesn’t “light a path” to make valid breach of contract claims when an employee is terminated. “[O]ur recognition that at-will relationships are contractual does not alter the established rule allowing an employer to discharge an at-will employee for any reason without incurring liability. That is because under South Carolina law, the right to fire the employee at any time and for any reason is an integral term of the at-will contract.”

(Note that there are exceptions that can impose liability on the employer for terminating an employee, such as termination in violation of the terms of the employee handbook or in violation of public policy, but here the supreme court answers the district court’s questions on the assumption that there are no exceptions.)

Question 2 Part A. Does the implied covenant of good faith and fair dealing arise in the context of terminable-at-will employment relationships?

The Supreme Court of South Carolina says yes.

“There exists in every contract an implied covenant of good faith and fair dealing,” says the court quoting Adams v. G.J Creel & Sons, Inc., 1995.

The court admits that both the SC Supreme Court and the SC Court of Appeals have previously found on occasion that the covenant doesn’t arise in at-will employment relationships. However, having answered a definitive “yes” to the first question, rationales denying the existence of the covenant in at-will employment relationships are no longer valid. “The implied covenant of good faith and fair dealing exists in all at-will employment contracts,” says the court in Hall.

Question 2 Part B. Can an employer’s termination of an at-will employee give rise to a claim by the former employee against the employer for breach of the implied covenant of good faith and fair dealing?

The South Carolina Supreme Court says no.

This question implies that breach of the implied covenant of good faith and fair dealing could be the basis for a cause of action. The SC Court of Appeals has held that it is not a cause of action separate and distinct from a cause of action for breach of contract. As answered in Part A, because every contract includes this covenant, then if the covenant has been breached then so has the contract, and the cause of action would be breach of contract.

In a separate opinion from the majority, Justice Few further explains the issue well, stating that while contracts have the covenant implied, the law superimposes over that the express provision that the employer may terminate an employee “at any time, for any reason or for no reason at all” (quoting Prescott). “This includes a reason that may not be in good faith,” writes Justice Few. “Stated differently, the implied promise to act in good faith does not protect the employee from being fired – no matter the reason – because the law specifically provides that the contract of employment permits any firing, even if it is not in good faith” (emphasis added).

In the majority opinion, the court answers Question 2 in its entirety as follows: “The implied covenant of good faith and fair dealing exists in an at-will employment contract; however, the employer’s termination of the employee cannot form the basis of a claim that the employer breached the covenant of good faith and fair dealing.”

Question 3. Can an employer’s termination of an at-will employee, which results from a third-party employee’s report to the employer, give rise to a claim by the terminated employee against the third-party employee for tortious interference with a contractual relationship, even when the termination itself was not a breach of the at-will contract?

The SC Supreme Court says yes.

The question the court poses and answers here is different from the one posed by the district court as stated at the top. The court revised the question because, it explains, the viability of a tortious interference claim brought by a terminated employee doesn’t depend on whether the termination was a breach of the at-will contract, but whether the third-party employee, without justification, made a report to the employer which led to the termination.

From Eldeco, Inc. v Charleston Cty. Sch. Dist., 2007, the elements of a claim for tortious interference with contractual relations are: 1. The existence of a contract, 2. Knowledge of the contract, 3. Intentional procurement of its breach, 4. The absence of justification, and 5. Resulting damages.

The court states that the majority of jurisdictions addressing this issue find that there can be a cause of action against a third party for tortious interference, even if there is no underlying breach of contract. It concurs, recognizing the validity of such a claim, and holds that “the absence of an underlying breach by the terminating employer does not shield the third party from liability when she intentionally and unjustifiably procures the termination of an at-will employee.”

Help with Contracts, Employment Matters, and Business in South Carolina

For help with contracts, corporate governance documents, starting or selling a business, and insightful advice from a legal perspective, contact business attorney Gem McDowell of the Gem McDowell Law Group. Gem has over 30 years of experience working with individuals and businesses in South Carolina, and he and his team can help you grow your business and protect your assets. Call the Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

Civil Conspiracy Claims in South Carolina After Abolishing the Todd Rule

The South Carolina Supreme Court has done away with the so-called Todd rule.

This comes from the court’s 2021 decision in Paradis v Charleston County School District (find the opinion here), in which Leisel Paradis asserted a civil conspiracy claim against Robert Bohnstengel and Stephanie Spann, the principal and assistant principal, respectively, of James Island Charter High School. The circuit court dismissed the claim because, among other things, it found that Paradis did not plead special damages; the SC Court of Appeals affirmed.

On appeal, the Supreme Court of South Carolina granted a writ of certiorari on one issue: whether to abolish the requirement of pleading special damages for civil conspiracy claims.

This requirement of pleading special damages to advance a civil conspiracy claim in South Carolina has been informally referred to as the “Todd rule” for decades. It comes not from statute but from legal precedent and is named after the 1981 SC Supreme Court case Todd v South Carolina Farm Bureau Mutual Insurance Co.

In this blog we’re going to look at what civil conspiracy is, what led to the Todd rule in the first place, what made the SC Supreme Court decide to overturn it, and what that means for civil conspiracy claims in South Carolina going forward.

What is Civil Conspiracy? Elements of a Civil Conspiracy Claim

First, let’s look at what civil conspiracy is. In the Paradis decision, the court quotes itself from the 1939 case Charles v Texas Co. (aka Charles I): “[A] definition of conspiracy has been given as the conspiring together to do an unlawful act to the detriment of another or the doing of a lawful act in an unlawful way to the detriment of another.”

It also quotes law professor Francis M. Burdick’s 1907 book Conspiracy as a Crime, and as a Tort, for a definition of civil conspiracy that includes its elements: “A combination between two or more persons to accomplish a criminal or unlawful purpose, or some purpose not in itself criminal or unlawful by criminal or unlawful means, subjects the confederates to criminal prosecution; and, if injury ensues to an individual therefrom, it subjects them to a civil action by their victim.”

To summarize, the essential elements of a civil conspiracy claim that the court describes as “fairly universal in contemporary tort law” and are recognized by most states under common law are:

An agreement between two or more individuals,
To do an unlawful act or to do a lawful act in an unlawful way,
Resulting in injury to the plaintiff inflicted by one or more of the conspirators, and
Pursuant to a common scheme

Point #3 is important. In what’s referred to as Charles II, a lawsuit with the same parties as Charles I three years later in 1942, the SC Supreme Court pointed out that it’s a “well known principle” that resulting damages are the basis of a civil conspiracy claim. An unexecuted conspiracy cannot be the basis for a civil conspiracy action since it does lead to injury of the intended victim. Instead, there must be an “overt act” that results in injury. This distinguishes civil conspiracy from criminal conspiracy, in which the very act of conspiring is a crime in and of itself.

What Led to the Todd Rule in the First Place

Now we come to the Todd rule. In 1981, the Supreme Court of South Carolina issued its decision for Todd v SC Farm Bureau Mutual Insurance Co., which has been interpreted as creating a new element for civil conspiracy claims in SC, the requirement that a plaintiff plead special damages.

In Todd, Petitioner John Wendell Todd alleged five causes of action following from the termination of his employment:

Intentional interference with contractual relations
Extreme and outrageous conduct
Bad faith termination of the employment contract
Invasion of privacy
Conspiracy to so damage the plaintiff

The court considered whether #5 was a claim for civil conspiracy. It reaffirmed Charles I, stating that that “conspiracy in and of itself is not a civil wrong”; there can only be a civil conspiracy claim if damage to the plaintiff results. Since the court found that Todd did not plead overt acts in furtherance of the conspiracy, the complaint failed as a matter of law.

It stated: “The only alleged wrongful acts plead are those for which damages have already been sought.” Essentially, the court barred Todd from recovering additional damages for the cause of action #5 because it simply restated the first four causes of action and did not assert any other acts related to the conspiracy that led to injury.

You can’t get damages for the same thing twice, in other words.

But cases after Todd interpreted this to mean that special damages must be pleaded. In Lee v Chesterfield Gen. Hosp., Inc., 1986, the SC Court of Appeals listed the required elements of a civil conspiracy claim as follows:

A combination of two or more persons,
for the purpose of injuring the plaintiff,
which causes him special damage

Oddly enough, the court notes in Paradis, Lee and similar cases that followed including Island Car Wash, Inc. v Norris and Yaeger v Murphy didn’t cite Todd as the basis of this three-part definition that included the special damages requirement, but it still became known as the Todd rule. It would have been more aptly named the Lee rule.

In any event, for the next several decades, it was seen as a requirement to plead special damages to forward a civil conspiracy claim in the state. Actions that did not expressly plead special damages were dismissed.

The Supreme Court’s Ruling in Paradis Abolishing the Todd Rule

In the current case, Paradis argued that the requirement to plead special damages for civil conspiracy was a misreading of the law in the US legal encyclopedia Corpus Juris Secundum and therefore should be abandoned.

The Supreme Court of South Carolina agreed that the Todd rule should be abolished. It found that the relevant section of CJS (Section 33, Conspiracy) is about barring duplicative recoveries, not about establishing a requirement for pleading special damages. It also suggested that in addition to a possible misinterpretation of the Todd decision, the Todd rule could have arisen from differing interpretations of “special damages.”

Todd intended to address the issue of pleading an overt act that resulted in injury, not to require the pleading of special damages, the court says. “As a result, we overrule Todd and cases relying on Todd or other precedent, such as Lee, to the extent they impose or appear to impose a requirement of pleading (and proving) special damages.”

Requirements for a Civil Conspiracy Claim in South Carolina Going Forward

The SC Supreme Court goes on to clarify exactly what a plaintiff asserting a claim for civil conspiracy in South Carolina must establish in light of the Paradis v Charleston County School District decision. The elements are:

The combination or agreement of two or more persons,
To commit an unlawful act or a lawful act by unlawful means,
Together with the commission of an overt act in furtherance of the agreement, and
Damages proximately resulting to the plaintiff

By overruling Todd, the court says “we are returning not only to our historical roots, but also to the traditional elements of a civil conspiracy claim as they have been similarly defined by the majority of jurisdictions.”

Legal Help in South Carolina

Though the legal history and reasoning behind the Todd rule and why it was overturned may not be of much interest to people outside of the legal profession, the fact is that decisions of the South Carolina Supreme Court and Court of Appeals do have direct and tangible impacts on everyday people and will for years to come. Read more on our blog for recent decisions out of the SC Supreme Court and the Court of Appeals that affect business owners, families, property owners, and other South Carolinians.

For help with estate planning, business matters, and commercial real estate law in South Carolina, contact attorney Gem McDowell at the Gem McDowell Law Group. He and his team can help you plan for the future and avoid problems by looking ahead and staying on top of the latest in SC law. Schedule a free consultation to talk over your matter with Gem by calling the Mt. Pleasant office at 843-284-1021 or filling out this form.

How is Joint Tenants with Rights of Survivorship Created and Severed in South Carolina?

One of the key benefits of holding property with someone as joint tenants with rights of survivorship is that when one cotenant dies, his/her share in the property automatically passes to the surviving cotenant(s). The property doesn’t pass through probate and it’s not subject to the decedent’s last will.

This makes joint tenancy with rights of survivorship (JTWROS) a popular choice for married and partnered couples. A common scenario is when one spouse dies, the surviving spouse stays in the home they had shared together, which is what most couples intend.

But JTWROS is no guarantee that this scenario will play out. If the joint tenancy is severed, the surviving cotenant automatically loses his/her rights of survivorship. He/She may even find himself/herself forced out of the home he/she shared for years with his/her partner/cotenant, if a court orders the partition and sale of the property.

That’s exactly what happened to Bradford Q. Jeffcoat, Jr., as described in Williams v Jeffcoat (find it here) which went before the South Carolina Court of Appeals in 2021. It’s an interesting case that delves into how JTWROS can be created and severed in South Carolina. If you currently own, or plan to own, property with another person as joint tenants, you should be aware of the court’s ruling in this case.

Williams v Jeffcoat Background

Jeffcoat and Sandra P. Perkins were domestic partners for twenty years. Together, they owned some real estate in Charleston that they held “jointly with right of survivorship, and not as tenants in common,” as per the deed. They lived there together from 2000 to 2015.

Starting in 2009, Perkins began suffering advanced dementia. By 2015, her condition had deteriorated to the point where Jeffcoat asked Perkins’ only child, Vanessa Williams, for help. Williams cared for her mother and took her back with her to her home in Alabama in June 2015.

Williams petitioned the Alabama Probate Court to appoint her conservator and guardian of her mother, which it did in September 2015. (Perkins had previously made Williams her agent in a durable power of attorney and a health care power of attorney.)

In November, Williams transferred her mother’s one-half interest in the Charleston property to herself in her capacity as her mother’s conservator. She then sought the partition and sale of the property. Her mother died this same month.

Both Williams and Jeffcoat filed motions for summary judgment. The case was heard by a master who granted Williams’ motion for summary judgment in June 2018 compelling the partition and sale of the Charleston property. Jeffcoat appealed.

Two issues were up for review: One was whether the Alabama Probate Court had subject matter jurisdiction to appoint Williams guardian and conservator for her mother; the SC Court of Appeals affirmed that it did. We won’t go into that issue further here, since our focus is joint tenancy with rights of survivorship. The other issue was whether the master erred in granting Williams’ motion for summary judgment compelling partition and sale.

To answer this second issue, the SC Court of Appeals went into detail in its opinion on how JTWROS are created and severed in South Carolina.

Creating Joint Tenancy with Rights of Survivorship in South Carolina

Joint tenancy can be established in SC either through statute or common law, states the SC Court of Appeals in the Williams v Jeffcoat opinion. People or parties that wish to own property together as joint tenants can do so by including the following words in the deed after their names: “as joint tenants with rights of survivorship, and not as tenants in common.” (“Tenants in common” is the other main way to hold property jointly in South Carolina, and there is also a third, less used alternative called “tenants in common with a right of survivorship” which you can read about on our blog here.)

Ending or Severing Joint Tenancy with Rights of Survivorship Under Statute in South Carolina

A joint tenancy with rights of survivorship can be severed in a number of ways under South Carolina law. Here are relevant parts of in SC Code 27-7-40 (and the full text is copied at the bottom of this blog post for reference as well):

(a) In addition to any other methods for the creation of a joint tenancy in real estate which may exist by law, whenever any deed of conveyance of real estate contains the names of the grantees followed by the words “as joint tenants with rights of survivorship, and not as tenants in common” the creation of a joint tenancy with rights of survivorship in the real estate is conclusively deemed to have been created. This joint tenancy includes, and is limited to, the following incidents of ownership:

(i) In the event of the death of a joint tenant, and in the event only one other joint tenant in the joint tenancy survives, the entire interest of the deceased joint tenant in the real estate vests in the surviving joint tenant, who is vested with the entire interest in the real estate owned by the joint tenants.

[…]

(v) If real estate is owned by only two joint tenants, a conveyance by one joint tenant to the other joint tenant terminates the joint tenancy and conveys the fee in the real estate to the other joint tenant.

[…]

(vii) Any joint tenancy in real estate held by a husband and wife with no other joint tenants is severed upon the filing of an order or decree dissolving their marriage and vests the interest in both the parties as tenants in common, unless an order or decree of a court of competent jurisdiction otherwise provides.

(viii) The interest of any joint tenant in a joint tenancy in real estate sold or conveyed by a court of competent jurisdiction where otherwise permitted by law severs the joint tenancy, unless the order or decree of such court otherwise provides and vests title in the parties as tenants in common.

(ix) If real estate is owned by two or more joint tenants, a conveyance by all the joint tenants to themselves as tenants in common severs the joint tenancy and conveys the fee in the real estate to these individuals as tenants in common.

[…]

(c) Except as expressly provided herein, any joint tenancy severed pursuant to the terms of this section is and becomes a tenancy in common without rights of survivorship. Nothing contained in this section shall be construed to create the estate of tenancy by the entireties. Nothing contained in this section amends any statute relating to joint tenancy with rights of survivorship in personal property but affects only real estate. The provisions of this section must be liberally construed to carry out the intentions of the parties. This section supersedes any conflicting provisions of Section 62-2-804.

In short, death, divorce, or sale/conveyance of a joint tenant’s interest in the property are the ways in which a JTWROS can be severed under SC law. The joint tenancy then converts to tenancy in common (if multiple cotenants remain) or sole ownership (if just one owner remains).

The Williams v Jeffcoat Decision Allows JTWROS to be Severed Under Common Law in South Carolina

In South Carolina, JTWROS can also be severed under common law, ruled the SC Court of Appeals in Williams v Jeffcoat.

Jeffcoat argued that SC Code 27-7-40 prohibits one cotenant from conveying his/her interest in the property to a third party, which would mean that the joint tenancy he shared with Perkins was not extinguished and that the master erred in granting Williams’ motion for summary judgment.

If you read the above statute closely, you might have noticed that conveyance of a joint tenant’s interest to a third party was not one of the methods for severing a joint tenancy listed under subsection (a). Furthermore, the last line of subsection (a) states “This joint tenancy includes, and is limited to, the following incidents of ownership” (emphasis added).

The SC Court of Appeals concedes that the statute does contain “limiting language” but finds that this “does not prohibit common law methods of severance but rather addresses the language below detailing a cotenant’s rights in the property upon a cotenant’s death and subsequent to any conveyances between the cotenants themselves.” In its decision, the court stresses the need to interpret language not in isolated phrases but as part of the whole statute and in light of the intent of the General Assembly. The court also relies on precedent set previously by the South Carolina Supreme Court in Smith v Cutler (2005), in which it stated, “Unlike a tenancy in common with a right of survivorship, a joint tenancy with a right of survivorship is capable of being defeated by the unilateral act of one joint tenant.”

Under common law, the court writes, a JTWROS requires the four unities to be valid: the unities of interest, title, time, and possession. Unity of interest means all joint tenants have an equal interest in the property. Unity of title means all joint tenants are made cotenants and owners by the same document. Unity of time means all joint tenants receive their interest in the property at the same. Unity of possession means all joint tenants have a right of possession of all parts of the property without restriction.

If one of those elements is destroyed, so is the joint tenancy – and the rights of survivorship along with it.

Therefore, under common law, when a cotenant conveys their interest in the property to a third party, the joint tenancy is severed. Williams’ conveyance of her mother’s one-half interest in the Charleston property did sever the joint tenancy and extinguish Jeffcoat’s rights of survivorship, and the SC Court of Appeals affirmed the master’s decision to grant Williams’ motion for summary judgment compelling the partition and sale of the Charleston property.

Note that this is a decision from the South Carolina Court of Appeals, and so there is still a possibility that it could be appealed to the South Carolina Supreme Court.

Protecting Your Interests with Smart Estate Planning

Smart estate planning can help you protect your assets now and ensure that your wishes are carried out once you’re gone. One challenge is to think through all the possible ways things could go wrong in the future and protect against them now. It’s probable that Jeffcoat assumed he would inherit Perkins’ half of the property they shared together, and he never considered the possibility of her interest in the property being conveyed away before her death. Otherwise, he might have been able to take steps to protect against that happening.

For smart estate planning in South Carolina, call estate planning attorney Gem McDowell. He and his team at the Gem McDowell Law Group can help you with important estate planning documents like last wills, trusts, powers of attorney, and more, all tailored to you and your specific circumstances. More importantly, he’s a problem solver who can help you understand difficulties that could arise in the future and what can be done now to avoid them. To schedule a free consultation, call Gem at his office in Mt. Pleasant, SC at 843-284-1021 today.

Addendum: Full Text of SC Code 27-7-40 Creation of joint tenancy; filing; severance

(ii) In the event of the death of a joint tenant survived by more than one joint tenant in the real estate, the entire interest of the deceased joint tenant vests equally in the surviving joint tenants who continues to own the entire interest owned by them as joint tenants with right of survivorship.

(iii) The fee interest in real estate held in joint tenancy may not be encumbered by a joint tenant acting alone without the joinder of the other joint tenant or tenants in the encumbrance.

(iv) If all the joint tenants who own real estate held in joint tenancy join in an encumbrance, the interest in the real estate is effectively encumbered to a third party or parties.

(vi) If real estate is owned by more than two joint tenants, a conveyance by one joint tenant to all the other joint tenants therein conveys his interest therein equally to the other joint tenants who continue to own the real estate as joint tenants with right of survivorship.

(b) The surviving joint tenant or tenants may, following the death of a joint tenant, file with the Register of Deeds of the county in which the real estate is located a certified copy of the certificate of death of the deceased joint tenant. The fee to be paid to the Register of Deeds for this filing is the same as the fee for the deed of conveyance. The Register of Deeds must index the certificate of death under the name of the deceased joint tenant in the grantor deed index of that office. The filing of the certificate of death is conclusive that the joint tenant is deceased and that the interest of the deceased joint tenant has vested by operation of law in the surviving joint tenant or tenants in the joint tenancy in real estate.

Source: South Carolina Legislature website

What is Inverse Condemnation? How Is It Different from Eminent Domain?

Let’s say a government agency undertakes a construction project that affects your ability to fully enjoy your property and reduces its value, which constitutes a “taking” on the part of the government. If the government acknowledges this taking before beginning construction and pays you just compensation for the use of your property, it has exercised its powers of eminent domain.

But what if the government doesn’t acknowledge the taking and doesn’t pay just compensation? This is where you might have a claim for inverse condemnation.

The concept of eminent domain – wherein the government has the right to use and take private property for the public good – is widely known. Less well known is the related concept of inverse condemnation. But property owners should be aware of what inverse condemnation is and when they may have a claim for it.

What is Inverse Condemnation? How is Inverse Condemnation Different from Eminent Domain?

“An inverse condemnation occurs when a government agency commits a taking of private property without exercising its formal powers of eminent domain,” in the words of the South Carolina Court of Appeals as quoted by the SC Supreme Court in Ray v City of Rock Hill, the case discussed below. (Find it here.)

In both eminent domain (also called condemnation) and inverse condemnation, the government takes or uses private property for the public good. The difference is that in eminent domain, the government initiates the process and pays the property owner just compensation for the taking. In inverse condemnation cases, the property owner initiates an action against the government agency because it did not declare a taking nor compensate the property owner accordingly.

What Forms the Basis of an Inverse Condemnation Claim? Examples of Inverse Condemnation

The classic example of eminent domain is when the government takes a piece of land in order to build a highway or public utility on it. But the taking doesn’t have to be physical to form the basis for an inverse condemnation claim. In fact, in inverse condemnation claims, it often isn’t.

The two most common broad categories of inverse condemnation claims are physical takings and regulatory takings. Physical takings include physical intrusion, damage to the property, and restriction of access, in addition to outright seizure. Regulatory takings involve government regulations and zoning ordinances that hamper a property owner’s ability to fully use and enjoy their property.

Examples of bases of inverse condemnation claims include:

The city builds a sewage plant on the lot next to the property, reducing its value
Government aircraft regularly flying so low that it disturbs the property
DOT removes the property’s access to a highway it depends on for business
A government project that leads to runoff, contaminating the property
Noise pollution from a freeway built next to the property
Restrictive zoning ordinances that prevent the property’s owner from developing it to its fullest potential

In inverse condemnation claims, the burden of proof is on the property owner. The property owner will sue the government agency and try to prove to the court that a taking did occur. If the court agrees, the property owner can then seek damages.

Inverse Condemnation in South Carolina

Property owners are entitled to just compensation when the government takes private property for public use. This protection is found in the Fifth Amendment of the US Constitution – “nor shall private property be taken for public use, without just compensation” – as well as in Article I, Section 13 of the South Carolina Constitution and in South Carolina Code Title 28.

Previous court cases in the state have established the following criteria for showing inverse condemnation:

An affirmative, positive, aggressive act on the part of the governmental agency;
A taking;
The taking is for public use; and
The taking has some degree of permanence”

The expression “affirmative, positive, aggressive act” is key here. It is not enough for the government to simply not act; it must take action that constitutes a taking of the property.

The issue of whether the City of Rock Hill in South Carolina committed an “affirmative, positive, aggressive act” was central to the case of Ray v City of Rock Hill, which the SC Supreme Court heard in 2021.

Ray v City of Rock Hill Background

In 1985, Lucille H. Ray bought a house and lot in Rock Hill on College Avenue (the Property). Before the house was built in the 1920s, someone installed a 24-inch terra cotta pipe (the Pipe) underground on the Property. In addition, three City of Rock Hill stormwater pipes nearby collect and transport water from the neighborhood and bring it to a catch basin located directly in front of the Property on College Avenue. The Pipe is connected to this catch basin, and it channels stormwater from the catch basin to the back of the Property. It has done this for approximately 100 years since the Pipe was installed.

Unsurprisingly, all of this water has affected the Property over time. Ray reported that she saw her gardener fall into a sinkhole up to the waist in 1992, and later she became aware of bending and movement in her home’s roof frame and hired a contractor to fix the problem in 1995 and again in 2007. In 2008, Ray noticed that her front porch steps were sinking. She contacted the City about it and an employee told her about the Pipe. (The court notes there was no record of an easement for piping water under the Property.)

Did the City Commit an Affirmative, Positive, Aggressive Act?

It wasn’t until November 6, 2012 that Ray sued the City for inverse condemnation. She alleged that the Pipe was deteriorating and the water running through it, which came from the catch basin, was the cause of her home’s foundation problems. Coincidentally, right around this time the City began a sewer maintenance project (the Sewer Project). The City dug up part of College Avenue in front of the Property and severed the three stormwater pipes connected to the catch basin in order to reach a sewer line underneath.

Ray’s attorney then wrote to the City demanding that the City not reconnect the three stormwater pipes it had severed during the Sewer Project. That action would begin bringing water flowing again into the catch basin, which would be funneled to the back of the Property by the Pipe.

But the City did reconnect the three pipes. Ray believes this was an “affirmative, positive, aggressive act” by the City. The SC Supreme Court agreed.

The Twist in This Case

The City argued that Ray missed the three-year statute of limitations to bring a claim. In 2008, she noticed her front porch steps sinking and called the City about it, but it wasn’t until 2012 that she filed suit. The court agree that Ray should have reasonably known in 2008 that she had a claim. That means that she missed the three-year cutoff because she didn’t initiate a claim by 2011.

But here’s the twist in the case, as the court calls it. The Sewer Project happened to commence soon after Ray filed her lawsuit against the City. When it reconnected the three pipes, it began the flow of water from the catch basin via the Pipe onto the Property anew. The court determined that Ray can only recover compensation for damage done to the Property after the City reconnected the three stormwater pipes. The SC Supreme Court remanded the case back to circuit court to determine whether such damage did occur.

Help with Commercial Real Estate

Inverse condemnation claims can be challenging to win. You can see that in the case above, it went all the way to the Supreme Court of South Carolina as each court came to different conclusions about whether the claim was legitimate or not. But sometimes bringing an inverse condemnation claim is the only way to get just compensation for a government’s taking of your property.

Real estate law is complex. For help with legal commercial real estate issues, contact attorney Gem McDowell of the Gem McDowell Law Group. He helps businesses in South Carolina with a variety of legal matters including acquisition and sales, financing, land use planning and development, title search review, and regulatory, zoning, and environmental issues review. (Note that Gem advises on matters of inverse condemnation but does not handle such cases start to finish.) Call Gem and his team at the office in Mt. Pleasant, SC to schedule a free consultation today at 843-284-1021.

What Powers Does a Power of Attorney Give Me?

A power of attorney (POA) is a document that authorizes a person (the “agent” or “attorney in fact”) to act on behalf of another person (the “principal”). Different kinds of POAs grant different kinds of authority. (For more on the basics of the financial power of attorney, the health care power of attorney, and the difference between limited, general, durable, and springing powers of attorney, check out this blog.)

If you’ve been named as an agent in a power of attorney, or if you are the principal, you might be wondering exactly what powers a power of attorney grants.

The answer is that it depends. The exact powers you have as an agent, or grant as a principal, depend on the wording of your power of attorney. That’s why it’s important to know exactly what’s in your POA(s). Sometimes the powers granted come down to the interpretation of just a word or two, as one woman who signed a document on behalf of her father discovered in a recent South Carolina Supreme Court case, Arredondo v. SNH SE Ashley River Tenant, LLC (read the opinion here). That case is discussed in detail below to show just how important the language in your estate planning documents can be.

But first, here are some examples of powers that POAs commonly grant to agents.

Powers Commonly Granted by a Power of Attorney

Different types of POAs grant different types of powers. Here are some examples.

A health care power of attorney, also called a medical power of attorney, may include the power of the agent to:

Make decisions about the principal’s treatment, medication, surgery, pain relief options, and other care
Discharge the principal from the hospital or other facility
Access the principal’s medical records
Sign documents related to the principal’s care

A financial power of attorney (which may be “general” or “durable”) may include the power of the agent to:

Open, close, and access bank accounts and other financial accounts
Buy and sell the principal’s property, like their house or stocks and bonds
Collect debts owed to the principal and settle debts owed by the principal
Financially care for principal’s family with assets from the principal’s estate
Sign legal documents

Note that these lists are not exhaustive.

Both types of POAs typically include language to the effect that the agent must act in the best interest of the principal. Generally, the agent is not held liable for mistakes made in good faith when carrying out their role as agent.

Words Matter: Close Reading of Powers of Attorney in Arredondo

Remember that the bullet points above are just examples of the types of powers that POAs can grant. Because POAs are not standardized documents, it means that the exact powers granted depend on the exact wording in an individual power of attorney. Arredondo v. SNH SE Ashley River Tenant, LLC is a case in point. At the heart of the matter is whether a woman was authorized under a POA to sign an arbitration agreement on behalf of her father.

We’re going into detail here in order to show just how important individual words and phrases can be in legal documents. It’s also an interesting look at the way different courts in South Carolina interpret the same language to come to different conclusions.

The Background

In October 2012, Thayer W. Arredondo placed Hubert Whaley, her 84-year-old father suffering from dementia, into an assisted living facility in Charleston owned by the Respondents in the case. At the time her father was admitted, Arredondo had authority to act as her father’s agent under two separate powers of attorney, a General Durable Power of Attorney (GDPOA) and a Health Care Power of Attorney (HCPOA).

As her father’s agent, she signed several documents when they first arrived at the facility. She signed more a while later, including an arbitration agreement. The agreement waived the right to a trial by judge or jury and required arbitration for claims over $25,000, barred appeals, prohibited punitive damages, limited discovery, and gave Respondents the unilateral right to amend the agreement.

The Lawsuits

In February 2014, Whaley was admitted to Bon Secours St. Francis Hospital where he died six days later. Arredondo brought a wrongful death claim against Respondents, stating that the Respondents’ negligence and recklessness caused her father’s death. The Respondents moved to compel arbitration based on the agreement she had signed.

Arredondo argued that 1) the POAs that named her as an agent for her father did not give her the authority to sign the arbitration agreement, so she was not bound by it, and 2) even if they had, the agreement was “unconscionable” and therefore unenforceable.

The circuit court found in favor of Arredondo, ruling that neither POA gave Arredondo the authority to sign the arbitration agreement and that even if they had, the agreement was unconscionable. The South Carolina Court of Appeals reversed this decision, holding that Arredondo did have the authority and that the agreement was not unconscionable.

The case then went to the Supreme Court of South Carolina, which reversed the appeals court’s decision, finding that Arredondo didn’t have authority to sign the agreement under the POAs. It did not address the question of whether the agreement was unconscionable.

Interpreting the Language in the POAs

How is it that the appeals court and the supreme court came to opposite conclusions?

First let’s look at the relevant sections in the POAs.

The general durable POA gave Arredondo the power “To make, sign, execute, issue, assign, transfer, endorse, release, satisfy and deliver any and all instruments or writing of every kind and description whatsoever, whether sealed or unsealed, of, in or concerning any or all of my business affairs, property or other assets whatsoever, including all property, real, personal or mixed, stocks, securities and choses in action, and wheresoever situated, including, without limiting the generality hereof thereto, notes, bonds, mortgages, leases, deeds, conveyances, bills of sale, and assignments, endorsements, releases, satisfactions, pledges or any agreements concerning any transfers of the above or of any other property, right or thing.” (Emphasis added.)

The health care POA gave Arredondo the power “To take any other action necessary to making, documenting, and assuring implementation of decisions concerning my health care, including, but not limited to, granting any waiver or release from liability required by any hospital, physician, nursing care provider, or other health care provider; signing any documents relating to refusals of treatment or the leaving of a facility against medical advice, and pursuing any legal action in my name, and at the expense of my estate to force compliance with my wishes as determined by my agent, or to seek actual or punitive damages for the failure to comply.” (Emphasis added.)

At first reading, these long paragraphs of dense legalese sound (at least to the layperson) like they cover pretty much everything. Surely Arredondo was authorized under one or both of these paragraphs to sign the arbitration agreement in question, wasn’t she?

But the SC Supreme Court’s close reading found that this wasn’t so, and it countered all the arguments of the Respondents and the SC Court of Appeals.

Argument 1: “Choses in action”

The GDPOA contains an old term that comes from common law and isn’t used often in modern law, “choses in action.” The SC Supreme Court defines it here as “a type of property interest or a proprietary right to a claim or debt.” The appeals court interpreted the term broadly enough to encompass the signing of the arbitration agreement. But the supreme court agreed with Arredondo that the appeals court’s definition was too broad, and “the arbitration agreement did not concern a chose in action or any other property right Whaley possessed at the time Arredondo signed it.”

(As a side note, Justice Few wrote a separate concurring opinion making known his dislike of the continued use of the imprecise, “obsolete,” and “antiquated” term.)

Argument 2: “Any other property, right or thing”

The SC Court of Appeals also stated that Arredondo was authorized to sign the arbitration agreement under the GDPOA because the authority it gave her extended to “any other property, right or thing.”

But this short phrase is taken out of context, the supreme court says; a longer reading of the text changes its meaning. Arredondo was given the authority to execute “any agreements concerning any transfers of the above or of any other property, right or thing.” (Emphasis added by the supreme court.) The arbitration agreement was essentially a series of waivers and had nothing to do with transferring any kind of “property, right or thing”; therefore, this language in the GDPOA doesn’t give Arredondo the authority, either.

Argument 3: Title of GDPOA

The Respondents argued that the very title of the POA – “General Durable Power of Attorney” – was intended to give Arredondo broad authority to act as an agent for her father’s care. But the supreme court states that it does not rely on a title, but rather the provisions within the POA to determine what the scope of her authority was, continuing, “Certainly, the GDPOA could have been drafted to give Arredondo the broad power to sign all documents Whaley could sign himself or otherwise do anything Whaley could do himself, but it was not so drafted.”

Argument 4: “Necessary”

Moving on to the HCPOA, the supreme court asked: Was it “necessary” for Arredondo to sign the arbitration agreement in order to act in the best interest of her father’s health?

Arredondo submitted an affidavit in which she said that the facility representative told her she had to sign the arbitration agreement for her father to be admitted. But the Respondents “consistently maintained” that signing the arbitration agreement was not a requirement for Arredondo’s father to be admitted to the facility. And indeed, by the time Arredondo signed the agreement, her father had already been admitted and given a room. At that point, Whaley had statutory protections and could not be discharged from the facility on the basis of Arredondo refusing to sign the arbitration agreement.

Since signing the arbitration agreement was not “necessary,” it was not authorized under this HCPOA.

Argument 5: “Required”

Similarly, was signing the arbitration agreement “required” by the facility to provide the care Arredondo’s father needed?

By the same reasoning above, the answer is no. Whaley was already admitted to the facility before Arredondo signed the agreement, so it could not have been a requirement.

Argument 6: Authority to pursue legal action

The appeals court also held that the clause above gave Arredondo the authority to pursue any legal action in her father’s name, which included signing the arbitration agreement. But the supreme court notes that the language gives Arredondo authority only to pursue legal action to “force compliance,” which is not applicable here. Citing a Kentucky Supreme Court decision Wellner, the South Carolina Supreme Court held that a pre-dispute arbitration agreement was not authorized by the HCPOA as it did not constitute the pursuit of legal action.

The Takeaway: Know What’s in Your POA

The SC Supreme Court went point by point and found that none of the language in either of the powers of attorney gave Arredondo authority to sign the arbitration agreement as her father’s agent, and it reversed the decision of the SC Court of Appeals.

While this ultimately worked out in Arredondo’s favor, it came at the cost of a long legal battle, during which time she was not able to pursue her original claim against the Respondents.

You cannot rely on the South Carolina Supreme Court finding in your favor. The easier thing to do is to know exactly what’s in any POA you sign or that names you as an agent. Don’t assume anything! Read your POA closely and take it to an estate planning attorney to discuss it if you’re unclear.

Personalized Estate Planning and Advice

For help with estate planning in South Carolina, including powers of attorney, call attorney Gem McDowell of the Gem McDowell Law Group. Gem believes that every situation is different and that estate planning documents should be tailored to the individual and family to reflect their unique circumstances.

Gem and his team can help you draft or revise powers of attorney as well as wills, trusts, and other estate planning documents. They can also give advice on contracts and other legal documents before you sign them so you know exactly what you’re signing and you have someone looking out for your best interests. Call the law office, located in Mt. Pleasant and serving the Charleston area and beyond, today at 843-284-1021 to schedule a free, no-obligation consultation.

Employee or Independent Contractor? A Closer Look at the Four-Factor Model

How do you know whether a worker in South Carolina should be classified as an employee or an independent contractor? The decision has big consequences for both employer and worker, as that classification impacts taxes, workers’ compensation, and more.

While the IRS has its own standard for determining whether a worker should receive a 1099 or a W-2 (which you can read about in this blog), right now we’ll focus on how the State of South Carolina approaches this question.

The Four-Factor Model to Determine Employment Status

For many decades, South Carolina courts have used what is called the four-factor model or four-factor test to determine whether a worker should be considered an employee or an independent contractor.

The four factors are:

The right or exercise of control;
Furnishing of equipment;
Method of payment; and
The right to fire.

Let’s look a closer look at all four.

The right or exercise of control. When an employer controls or directs the worker – or has the right to, even if that right is not exercised – that denotes an employer-employee relationship. An employee is told when to do their job, how to do it, and is typically supervised to some degree. In contrast, an independent contractor decides their own hours, determines how to do their work, and works without supervision.

Furnishing of equipment. When equipment is furnished by the employer to the worker to complete their job, that’s evidence in favor of an employee classification. An employee uses, for example, the computer and desk, or truck and tools, of the employer at the employer’s expense. An independent contractor uses their own materials and tools at their own expense.

Method of payment. Time-based payment tends to show an employee relationship while project-based payment tends to show an independent contractor relationship.

Right to fire. South Carolina is an at-will employment state meaning that an employer can fire an employee and end the relationship immediately with no further obligations or liabilities (assuming the termination was not unlawful). In contrast, many independent contracts include clauses in their contracts that require full or partial payment if a job is terminated unexpectedly before its conclusion.

When determining the status of a worker, no single factor is determinative, and South Carolina courts weigh all the evidence to come to a conclusion. The examples above are as black-and-white as possible, but when these types of cases reach the Court of Appeals or the Supreme Court of South Carolina, they are never as clear cut.

The Four-Factor Model Put to the Test in Ramirez v May River Roofing, Inc.

A case heard in the South Carolina Court of Appeals in November 2020, Ramirez v May River Roofing, Inc. (read the opinion here), shows the four-factor model in action and how SC courts approach the issue of determining a worker’s classification.

The Background

Francisco Cedano Ramirez started a business as a sole proprietor called Cedano Roofing. About a year later, he began working for a company called May River Roofing, Inc., and he worked “continuously and exclusively” with them for approximately three years.

In January 2016, Ramirez was on a roofing job when he fell to the ground, a fall of about 16 feet, and sustained “significant injuries to his back, neck, shoulders, chest, ribs, lungs, and upper extremities” as a result.

The Claims

Ramirez filed a claim for workers’ compensation on the basis that he was May River’s direct or statutory employee.

The Single Commissioner at the SC Workers’ Compensation Commission determined that Ramirez was neither a direct employee nor a statutory employee of May River, but an independent contractor, and therefore was not eligible for workers’ compensation benefits. Ramirez appealed and an appellate panel affirmed the decision.

This appeal followed in which the SC Court of Appeals looked at the evidence de novo to come to its own conclusion about whether Ramirez was an employee of May River and thus eligible for workers’ comp benefits.

Weighing the Evidence to Determine Employee or Independent Contractor Classification

Statutory employee: A statutory employee is worker whose income is treated as if they’re an independent contractor but whose taxes are treated as if they’re an employee. In South Carolina, “settled law commands” a sole proprietor may not be considered a statutory employee, so Ramirez’s claim that he was a statutory employee of May River was denied.

Direct employee: Here the court spends time looking at the evidence using the four-factor model.

Right or Exercise of Control

Factors in favor of independent contractor classification:

Ramirez had “a great deal of autonomy”
Ramirez set his own schedule
Ramirez did not punch a time clock
Ramirez was free to negotiate for additional payment or decline the job
Ramirez was free to hire additional help on a job without approval from May River

Factors in favor of employee classification:

Ramirez was required to wear a May River branded t-shirt at the jobsite
Ramirez was required to display a magnetic May River decal on his truck
Ramirez worked exclusively with May River for three years, which suggested to the court that May River had the right to control Ramirez by withholding work

There was also conflicting testimony about the level of supervision, so that was not considered as a factor in favor of either party.

The court acknowledges that May River’s control over Ramirez’s appearance and their exclusive working relationship might seem “trivial” but thinks they are not. It concluded that May River’s control over Ramirez was more than that of a typical employer-independent contractor relationship and concluded that this factor weighed in favor of an employee relationship.

Furnishing Equipment

Factors in favor of independent contractor classification:

Ramirez provided his own tools
Ramirez provided his own vehicle

Factors in favor of employee classification:

May River provided Ramirez with all the materials used in the roofing jobs
May River gave Ramirez a branded t-shirt and magnetic truck decal he was required to display

The court concluded that May River furnishing all the materials at its own expense showed “direct evidence of control” over Ramirez and found that this factor also weighed in favor of employee classification.

Method of Payment

Factors in favor of independent contractor classification:

Ramirez was paid “per roofing square” for roofing work (the majority of the work he did)

Factors in favor of employee classification:

Ramirez was paid by the hour for repair work (a minority of the work he did)

Because the majority of Ramirez’s work was paid on a project or piecemeal basis and his payment did not depend on the amount of time he spent working, the court concluded that this favored an independent contractor relationship.

Right to Fire

The court did not find any evidence that weighed in favor of either party.

Conclusion: Employee Relationship

The evidence in this case was a mix of factors in favor of both employee relationship and independent contractor relationship. However, after considering all the evidence the court concluded that May River and Ramirez did have an employer-employee relationship, meaning that Ramirez was eligible for workers’ compensation benefits.

Employers Take Note – South Carolina Courts Favor the Employee Classification

Even though Ramirez set his own schedule, had freedom to negotiate payment, could hire help without approval, was paid per roofing square the majority of the time, and used his own vehicle and tools, the SC Court of Appeals still found that the relationship he had with May River constituted an employer-employee relationship.

This reflects the tendency of South Carolina courts to strongly favor the employee classification over the independent contractor classification when it comes to cases involving benefits for injured workers. “The general rule is that workers’ compensation law is to be liberally construed in favor of coverage in order to serve the beneficent purpose of the [Workers’ Compensation] Act; only exceptions and restrictions on coverage are to be strictly construed,” the SC Court of Appeals states in this opinion. While this has long been a general rule, this bias towards employee classification has been even stronger since the Lewis v L. B. Dynasty (2015) case (covered briefly in the 1099/W-2 blog).

If you’re an employer, keep this in mind when hiring and classifying workers. You must treat independent contractors like independent contractors. Seemingly small things, like asking your worker to wear a branded t-shirt, can become evidence of an employer-employee relationship, as seen in this case. Otherwise, hire the worker as an employee so they have the protections they’re entitled to under South Carolina law.

Business Law and Strategic Advice

For help with starting, running, or ending a business, call attorney Gem McDowell of the Gem McDowell Law Group. He and his team help business owners in the Charleston area and across South Carolina with forming LCCs and corporations, drafting corporate governance documents like buy-sell agreements, handling commercial real estate transactions, and more. Gem is also a problem solver who can give you strategic advice so you can avoid problems and protect yourself and your assets. Call him at his Mt. Pleasant office today at 843-284-1021 to schedule a free consultation.

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