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

Employee or Independent Contractor? Employers Need to Know DOL’s Proposed Rule

This blog will be updated with relevant developments

Misclassification of workers by employers is a big problem, according to the Department of Labor (DOL).

“The misclassification of employees as independent contractors remains one of the most serious problems facing workers, businesses, and the broader economy,” it says in a 10/13/2022 notice of proposed rulemaking (NPRM) from the Wage and Hour Division of the DOL, discussed below.

To combat worker misclassification, the NPRM proposes modifications to regulations regarding how workers should be classified. This is a big deal because if the proposal is adopted – which it almost certainly will be – it would make it more difficult for workers to be classified as independent contracts and easier to be classified as employees, compared to current regulations.

Further, the DOL and the Internal Revenue Service (IRS) entered into a Memorandum of Understanding (MOU) in mid-2022, replacing a similar MOU from 2011, that lays out how the two agencies will work together to combat worker misclassification. More on this below, too.

These developments are of great importance to employers in South Carolina and across the country. It could mean reclassifying some workers that are currently independent contractors as employees, with all that entails.

Here’s what to know.

Proposed Rule by the DOL on Worker Classification

On October 13, 2022, the Wage and Hour Division of the DOL published a notice of proposed rulemaking (NPRM), Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA). You can read the NPRM in its entirety here on the Federal Register.

The rule would provide clear guidance on how to classify workers, making it “more consistent with judicial precedent” and with the FLSA’s “text and purpose,” says the DOL. Workers classified as employees have protections and benefits at the federal level under the FLSA, such as minimum wage and overtime pay, which independent contractors do not have.

The practical effect would most likely be that many workers who are now currently classified as independent contractors would need to be reclassified as employees. An article from the Small Business Administration on the topic notes that “In its Initial Regulatory Analysis, DOL estimates that millions of small businesses could hire and/or be independent contractors,” so this rule could affect a large number of people.

The Six Factors of the Economic Reality Test for Worker Classification

Classification would involve a totality-of-the-circumstances analysis using a multifactor economic reality test comprised of six specific factors and one additional, nonspecific factor. They are:

Opportunity for profit or loss depending on managerial skill
Investments by the worker and the employer
Degree of permanence of the work relationship
Nature and degree of control
Extent to which the work performed is an integral part of the employer’s business
Skill and initiative
Additional factors

In this blog we won’t go into too much detail about each of these factors, but here’s a little bit of explanation for each one. (For more discussion on the history and application of these tests, follow this link to go straight to factor #1 in the NPRM, which goes into great detail about all the factors.)

Opportunity for profit or loss depending on managerial skill. This considers several factors such as whether the worker determines their own pay, can accept or decline jobs at will, engages in marketing or advertising to secure more work, and has an opportunity for loss.
Investments by the worker and the employer. This should also consider how the worker’s investment (if any) compares to the employer’s investment in the business.
Degree of permanence of the work relationship. This should also consider whether the worker works for the employer exclusively or works for others, too.
Nature and degree of control. This considers factors such as scheduling, supervision over the performance of work, setting rates, and the worker’s ability to work for others.
Extent to which the work performed is an integral part of the employer’s business. This is not the same as the degree of contribution a worker makes; for example, one person in a call center of hundreds is still performing work that is essential to the business, even if that individual worker’s contribution is minimal.
Skill and initiative. Specialized skills and business-like initiative are factors that favor independent contractor status, while work that’s unskilled, requires no training, or requires training from the employer favors employee status.
Additional factors. Other factors, not enumerated here, may be considered if relevant to determining a worker’s classification.

No one factor is more important than the other, and no single factor is determinative on its own. Rather, this is a totality-of-the-circumstances approach to determine worker classification.

How is this rule different from current rule?

If finalized, which is very likely, this rule would rescind and replace the 2021 Independent Contractor Rule (2021 IC Rule). That rule was finalized in January 2021 shortly before President Trump left office and President Biden was inaugurated, and it was scheduled to take effect in March 2021.

The 2021 IC Rule focuses on two core factors to determine classification: 1, the nature and degree of control over the work, and 2, the worker’s opportunity for profit or loss. Additional factors may be considered if the first two are not clearly determinative. The purpose of this streamlined approach is to “promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy,” according to the final rule published by the DOL.

The current NPRM notes that the approach of the 2021 IR is not in keeping with past approaches, which have included multifactor economic reality tests that looked at the totality of the circumstances, it does not “fully comport” with the FLSA’s text and purpose, and it goes against long standing case law.

In practice, the 2021 IC Rule makes it easier for workers to be classified as independent contractors rather than employees. The rule that’s currently being proposed would make it harder for workers to be classified as independent contractors.

DOL and IRS working together to identify employers misclassifying workers

The interest in codifying and enforcing rules on worker classification is not new.

The DOL and the IRS entered into a Memorandum of Understanding (MOU) in 2022, replacing a similar one from 2011, in which the agencies agree to collaborate and share information. This is less in the pursuit of protecting workers and ensuring they are afforded the protections under the FLSA due to them and more about collecting revenue.

The point of the collaboration is to “promote employer compliance with obligations to properly pay employees and to pay employment taxes.” The MOU outlines, among other things, how the DOL can evaluate businesses to refer to the IRS to look into whether workers have been misclassified. In addition, in reference to whether the DOL should refer a particular case to the IRS, it says “Given scarce IRS resources, the focus is where there is a likely source of collection.”

In short, the IRS appears to be looking for sources of revenue. (Another recent initiative announced by the IRS is a “proposed revenue procedure” called the Service Industry Tip Compliance Agreement program, a voluntary program for employers that would improve reporting of tips to the IRS.)

What this means for employers

Employers need to pay attention to if and when the DOL finalizes the rule proposed in October 2022 and ensure that they are correctly classifying their workers under the new rule once it takes effect. Some employers may be able to easily reclassify existing independent contractors as employees, if needed. Others may not have the resources to do so, because of the associated costs of employment taxes, workers’ compensation insurance, additional benefits, and so forth for employees. Employers may have to significantly change their relationship with their workers in order to meet the qualifications of being an independent contractor, or possibly let these workers go entirely.

The DOL notes in its NPRM that businesses that are already in compliance and are correctly classifying workers will benefit from this new rule, as businesses that misclassify employees as independent contractors gain a competitive advantage. This advantage will be eliminated or reduced if and when the new rule is finalized.

Additionally, an increase in the number of employers could mean an increase in unions and labor organizing. Labor unions generally are not allowed to organize independent contractors, but they can organize employees. The connection between worker classification and the drive to increase organizing and unions was made explicit on Joe Biden’s campaign website page for “Strengthening worker organizing, collective bargaining, and unions.” One of the promises was to “drive an aggressive, all-hands-on-deck enforcement effort that will dramatically reduce worker misclassification.”

Employers should also be aware that even if/when this rule from the DOL is passed, this is not the one and only way to determine whether a worker is an employee. The IRS has its own guidance on determining whether to provide a 1099 or a W-2 (read more on that here), and individual states may have their own rules or precedents, too; in South Carolina, the four-factor model is the standard (read more on that here).

Contact Business Attorney Gem McDowell for Advice and Guidance

If you’re an employer in South Carolina and are seeking legal advice, call Gem McDowell. He has over thirty years of experience helping South Carolina business owners start, grow, and thrive in their businesses. Changing classifications of workers could have a large impact on your business, as could noncompliance, and Gem can advise you on how to navigate this change.

Call Gem and his team at the Gem McDowell Law Group at the Mount Pleasant office at 843-284-1021. In addition to an office in Mount Pleasant near Charleston, Gem also has an office in Myrtle Beach for your convenience.

Involved in Real Estate or Passive Activities? Passive Activity Loss Rules to Know

Let’s say you’ve dipped your toe into the real estate game and flipped a house. Instead of making a killing on it, you took a big financial hit. When tax time comes around, can you take that loss against your regular income to reduce your taxes?

Generally, no. That’s because of passive activity loss rules.

In short, passive activity loss rules are anti-tax shelter rules. They prohibit taxpayers from using financial losses from passive activity to offset active income and thereby reduce their taxable income and pay less in taxes.

If you own rental property or are otherwise involved in any passive activity trade or business, you need to know about passive activity loss rules. We’ll look at these rules more closely along with the important definitions and exceptions you should know.

Passive Activity Loss Rules: Definitions and Overview

Below is a summary of some key points of the passive activity loss rules along with definition of terms (in bold). Note that this blog is not intended to be exhaustive, but just to familiarize you with the topic. We’ll be discussing rules from the IRS, specifically Topic No. 425 and Publication 925 (2021), which are derived from 26 U.S. Code § 469. The IRS rules are detailed and contain multiple exceptions, which we won’t go into here, as this is an overview. If you believe you’re subject to passive activity loss rules, speak with an accountant to help you with your taxes.

Passive activity loss rules prohibit a taxpayer from taking a deduction of losses incurred from passive activity to offset active (ordinary/earned) income.

While passive activity losses can’t be used to offset active income, they can be used to offset passive activity income. Losses that exceed passive activity gains in the same year can be carried over to the following tax year.

Passive activity rules apply to:

Individuals
Estates
Trusts (other than grantor trusts)
Personal service corporations, and
Closely held corporations

The IRS notes that grantor trusts, partnerships, and S corporations are not directly subject to these rules, but the individuals who own them are.

Active income includes wages, salaries, commissions, and any other income “that comes from performing a service.” This is the money you make from your job or business, whether you’re a W2 employee, 1099 contractor, or business owner actively involved in your business.

In contrast, passive income is income from a passive activity in which you’re not “materially” involved. The IRS defines two kinds of passive activity: 1) rental activities, and 2) trade or business activities the taxpayer did not actively contribute to.

Material participation means being involved in the business activity on a “regular, continuous, and substantial basis.” The IRS lays out seven “material participation tests” to help determine whether involvement is passive or active. The taxpayer only needs to satisfy one of the seven for their participation to be considered material and thus not have the activity considered “passive.”

To see all seven tests, go to IRS Publication 925, linked above; here are three:

Participation in the activity for more than 500 hours in the tax year
Participation in the activity for more than 100 hours in the tax year, and at least as much as any other individual (including individuals who don’t own any interest in the activity)
“Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year”

These material participation tests do not apply to rental activity (discussed below) or to working interests in oil and gas property, which have separate rules.

Active participation is a lower standard to meet than “material” participation. For example, taking decisions with regard to management of the business activity would qualify as active participation.

Passive Activity and Rental Activities

If you earn income from a rental property, then you know that it only takes a few major repairs or renovations or a couple months without tenants to put you in the red for the year.

That’s where passive activity loss rule comes in. These rules apply to you because the income from your rental property is considered passive activity, even if you are “materially” involved in the activity, as described above – unless you are a real estate professional.

To be considered real estate professional by the IRS, you must meet both of the following requirements:

“More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.”
“You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.”

Under the IRS’s definition, you do not need to be a licensed real estate agent, contractor, or other certified real estate professional to meet these requirements. Conversely, the IRS definition means that some people who are licensed in the field, like a part-time real estate agent, would not be considered a real estate professional, and their rental activity would be considered passive.

Real property trades or businesses include not only renting out a real property, but development, construction, acquisition, management, and more.

Special $25,000 allowance

If you are not a real estate professional, then your income is considered passive. Any loss you derive from rental activities may be “trapped” (meaning, you can’t take the loss on your taxes) unless you can offset gains from other passive activities – most of the time.

But there is one big exception to know about. The IRS allows up to $25,000 in passive losses to be used to offset ordinary income such as salary or wages as long as you are “actively participating.” In this specific context, active participation may include things like determining rental terms, approving new tenants, and making repairs or hiring someone to do them.

The full amount up to $25,000 is available for taxpayers whose modified adjusted gross income (MAGI) is $100,000 or less. It begins to phase out above a MAGI of $100,000 and is completely phased out at a MAGI of $150,000, meaning that you cannot offset any ordinary income from passive losses if your MAGI is over $150,000.

There are several facets to this special allowance that we won’t go into here, including different allowance amounts depending on filing status and exceptions to the phaseout rules; again, read more on IRS.gov for more detail.

Estate Planning and Trusts

Passive activity loss rules apply to trusts and estates, too. Remember to work with an accountant if you have questions about how passive activity loss rules affect your taxes. If you have questions about trusts and estate planning, or are the personal representative of someone who recently died and need advice, call estate planning attorney Gem McDowell.

Gem and his team at the Gem McDowell Law Group help individuals and families in South Carolina with trusts, wills, powers of attorney, and other estate planning documents to ensure they’re in control of their assets now and in the future. Call Gem and his team at his Mt. Pleasant office at 843-284-1021 today to schedule your free consultation.

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.

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