Your Risks as a Minority Member in an LLC: Oppression and Squeeze-Out
A limited liability company (LLC) is a great thing for many entrepreneurs. Among other things, it provides liability protection while requiring fewer formalities than a corporation. But it’s not risk-free. One of the potential risks is minority oppression of members who own less than 50% of the LLC.
Today we’re going to look at what minority member oppression is, what your rights are as a minority member of an LLC, and what you can do to protect yourself.
Risk of Oppression for Minority Members in an LLC
Minority member oppression occurs when a member or members of an LLC act to reduce a minority member’s involvement in the LLC against their will.
When minority shareholder oppression occurs in a corporation, the shareholder can simply sell their shares (albeit at an unfairly low price in many cases) and walk away. However, in an LLC and close corporations, it’s often not so easy. The minority member may find that their investment is essentially being held hostage, and they don’t have a legal avenue to get it out of the company. Walking away means losing their investment.
The oppression often entails reducing the minority member’s income from the business, keeping them out of the loop regarding company business, and excluding them from important management decisions. Another tactic is for the majority member(s) to create a new, separate business entity and merge that with the existing business without giving the minority member any ownership in the new merged business, instead exchanging their interests for cash or eliminating it altogether.
When the end goal of this oppression is to force the minority member to give up their ownership in the LLC altogether, that’s commonly referred to as a squeeze-out or freeze-out.
LLC Minority Members’ Rights Under South Carolina Law
If your LLC does business without important governance documents (covered in the section below) and a dispute arises and goes to court, then South Carolina laws regarding LLCs apply. These vary somewhat depending on what kind of LLC it is (member-managed or manager-managed), but under SC law, minority members can expect certain rights, including:
- The right to a share of distributed profits
- The right to a share of proceeds of a sale if the LLC is sold or dissolved in proportion to their ownership
- The right to see the company’s books and financial records
- The right to sue another member or members for breach of fiduciary duty if they engage in misconduct
These protections sound great but they may not play out the way you want in real life. For example, majority members may take an income as an employee (rather than a distribution as an owner) or spend the company’s money in another way to avoid making distributions to minority members. Or they could structure a sale of the LLC in such a way as to legally cut out a minority member from the proceeds.
In short, don’t rely on default South Carolina laws to protect your interests as a minority member in an LLC. It’s best to have governance documents including an operating agreement with terms that are favorable to minority members and for you as a minority member to know, understand, and agree to those terms.
How Minority Members Can Protect Themselves: The Operating Agreement
In South Carolina, the Articles of Incorporation is the only document your LLC is legally required to have to be in business. Other governing documents are optional but extremely important for multi-member LLCs, the most important of which is the operating agreement.
An operating agreement details the ways in which the LLC will operate, covering such topics as ownership, members’ and managers’ duties, voting rights, how decisions are made, how profits and losses are handled, and more. Terms regarding buying and selling ownership or the LLC may be included or can be handled in a separate buy-sell agreement. Same with raising capital, which may be included in the operating agreement or detailed in a separate capital call agreement.
It’s important to understand that an operating agreement is not bulletproof. Majority members may still try to squeeze out or freeze out a minority member. However, when drafted in a way that protects a minority member’s interests, an operating agreement can help. If an issue arises and goes to court, then the court will look at the terms of the operating agreement rather than defaulting to SC law, which will be better for you (assuming the agreement is drafted well).
Work with a Business Attorney to Draft Your LLC’s Governing Documents
Each LLC is different and the members within each LLC are different, so no two operating agreements are alike. If you’re planning on joining or starting up an LLC with other people, or if you’re already in one but don’t have governing documents, talk to a business attorney. They can not only draft an operating agreement (and other documents) tailored to you and your business, they can also advise you on potential pitfalls and situations you may not have considered. Because what you don’t know can hurt you.
Gem McDowell is a business attorney in Mount Pleasant, SC, serving clients in the Charleston area and across the state. He and his associates at the Gem McDowell Law Group help people start, grow, and protect their businesses and business interests. Gem is a problem solver who has seen a lot in over 30 years of experience, and he can advise you on your situation and help you protect your interests. To schedule a free consultation, call 843-284-1021 today.
Get It in Writing – It’s the Law
Please be advised that the Court assumed for purposes of the Motion for Summary Judgment that all the facts the Plaintiff (Kagan) alleged were true in the light most favorable to him and without consideration of the Defendants Simchons’ version of the events to form the basis for their legal analysis.
Have you heard that oral contracts are legally binding? While many verbal agreements are valid and can be upheld in court, that’s not always the case. South Carolina law requires written contracts for certain types of agreements, and without evidence in writing, the contract cannot legally be enforced.
Still, some people, either not knowing the law or not seeing the need for a written contract, go ahead with a deal in good faith based on a verbal agreement and a handshake.
Jeffrey S. Kagan did so, lending large amounts of money on handshake deals, in a case (Kagan v Simchon) that was heard by the South Carolina Court of Appeals in May 2019.
Can you guess how it turned out for him?
Lending Money Without a Written Contract
Kagan had a close relationship with Renee Simchon, the respondent in the case, and her husband, Sam. Kagan worked as an independent contractor for many years for Sam’s company, Bay Island Sportswear, Inc., which was next door to Simchon’s realty company, Greenwood Realty, in Greenwood, SC.
Over the years, Kagan occasionally loaned them money, including $129,000 in June 2009 (First Loan), $210,000 in October 2010 (Second Loan), and $52,000 in November 2013 (Third Loan). Kagan later stated that the agreements for the First Loan and Third Loan were not reduced to writing, but stated there was written evidence of the Second Loan.
Simchon used the money from the Second Loan to pay off a mortgage she held for one of her clients, and the plan was to repay the principal when the property was sold. Instead, after the sale of the property, Simchon wrote Kagan a check for $31,616.46 and gave the remaining $180,000 to her husband Sam to invest on Kagan’s behalf. Kagan later stated in a deposition that he did not authorize that transfer of money to Sam.
Kagan also believed that from this point, the First Loan and Second Loan were consolidated. When he made the Third Loan, he stated he believed that it was also consolidated with the first two. Again, this consolidation was not put down in writing, and was done on the basis of “a handshake, a look in the eye and a personal relationship.”
Sam made periodic payments until November 2013. In April 2014, Kagan’s employment with Sam’s shop was terminated.
Taking It to the Courts
In August 2015, Kagan filed summons and complaint seeking repayment on all three loans, alleging breach of contract and other actions. In response, the defendants filed a motion to dismiss.
The case was heard in circuit court in February 2016, in which Kagan’s claims regarding the First Loan and the Third Loan were dismissed after he admitted that the terms of these loans had not been reduced to writing. The case was heard again in circuit court in January 2017 after some claims were dismissed and Simchon remained as the only defendant. This time, the Second Loan was dismissed for the same reason; despite Kagan claiming that there was written evidence of the Second Loan, he was not able to produce it.
Without written evidence of the terms of the loans, the court was not able to enforce Kagan’s claims for repayment, citing Section 37-10-107 of South Carolina Code:
No person may maintain an action for legal or equitable relief […] to lend or borrow money; […] or […] to renew, modify, amend, or cancel a loan of money […] involving in any such case a principal amount in excess of fifty thousand dollars, unless the party seeking to maintain the action or defense has received a writing from the party to be charged containing the material terms and conditions of the […] agreement and the party to be charged, or its duly authorized agent, has signed the writing.
In short, if you make a business deal that involves lending, borrowing, renewing, modifying, amending, or canceling a loan over $50,000, you must have the agreement written down and signed to be legally enforceable. (Note that this does not apply to “a loan of money used primarily for personal, family, or household purposes,” per 37-10-107(3)(a).)
The circuit court thus granted Simchon’s motion for summary judgment. The case was appealed and heard by the SC Court of Appeals in May 2019.
The Statute of Frauds in South Carolina
The circuit court cited the statute of frauds (SOF) as the reason for barring or dismissing Kagan’s claims. SOF requires that certain types of agreements be written down and signed to be enforceable. The concept comes from common law and is present in every state in one form or another.
In South Carolina, the statute of frauds is found in SC Code Title 32 Chapter 3. Agreements that must be reduced to writing and signed by an authorized party are those:
- Requiring an executor or administrator to pay damages from their own estate
- Requiring a person to pay the debt of another
- Made in the consideration of marriage (i.e., prenuptial agreements)
- Involving the contract or sale of land
- That take longer than a year to perform
In addition, Section 36-2-201(1) requires a contract recording the sale of goods valued over $500 in order for any related action to be enforceable, and, as seen above, Section 37-10-107 requires written evidence to enforce actions on lending or borrowing $50,000 or more in business deals, or making changes to the agreement related to it.
Kagan argued that the circuit court erred because Simchon used the money from the Second Loan to pay off a mortgage that was in her name – not that of her realty company – therefore making it a personal loan that wasn’t subject to 37-10-107.
The SC Court of Appeals disagreed, stating that even if the mortgage was in her own name, the money was “used” (the word in the statute, the court notes) on behalf of a client in the course of business, making it subject to 37-10-107. The Court of Appeals agreed with the circuit court’s finding that Kagan’s claim with respect to the Second Loan was therefore barred.
The Statute of Limitations in South Carolina
The circuit court found that Kagan’s breach of contract claim was barred because of the statute of limitations (SOL), or the time allowed by law in which to bring a legal claim. Kagan argued that the circuit court erred, saying that Sam’s payments on the loans tolled the statute of limitations until the payments stopped.
“Tolling” means pausing or delaying the time left on the SOL. Tolling may allow someone to bring a lawsuit even after the SOL has seemingly run out.
However, in this case, the appeals court did not agree that the SOL was tolled, as that would have depended on the loans being consolidated. If you remember, Kagan stated that he believed all three loans were consolidated. He also stated that the terms of the consolidation were never written down – and that’s the problem.
The appeals court affirmed the circuit court’s finding, again citing 37-10-107, which states (as discussed above) that any amendment or modification to a loan over $50,000 must be in writing to be enforceable. Without the terms in writing, there is no tolling of the SOL.
The SOL therefore began when Simchon breached their agreement by failing to transfer the remainder of the money from the sale of the property to Kagan. This happened on March 21, 2011, and since the SOL for a breach of contract claim in South Carolina is three years, Kagan had until March 21, 2014 to file. He didn’t until August 2015, nearly a year and a half after the SOL had run out.
Get Help with Your Contracts
The South Carolina Court of Appeals affirmed the circuit court’s order to grant summary judgment to Simchon. Unfortunately for Kagan, he wasn’t able to use the force of the law to help him recover the outstanding money he was owed. This could have been avoided had he gotten everything in writing.
Contracts exist for a reason, and a correctly written one can save you time, money, and heartache. Don’t rely on a handshake or the goodwill you have with another party when making a deal, especially when there’s a substantial amount of money on the line. Work with an attorney to ensure that your interests are looked after and protected.
Business attorney Gem McDowell of the McDowell Law Group in Mt. Pleasant, SC, serves clients in the greater Charleston area and the state of South Carolina. He and his associates can help you with contracts, business creation and planning, commercial real estate, and more. To make an appointment or to schedule a free 20-minute consultation with an attorney, call Gem and his team today at 843-284-1021.
Accretion and Property Rights on Sullivan’s Island
Imagine you own beachfront property in South Carolina just steps away from the ocean. Now imagine that over time, the distance between your home and the ocean gets larger and larger as the beach grows, putting you further and further from the water.
This was the situation for homeowners on Sullivan’s Island, a small island town just outside Charleston, SC. They sued the town in a case that was heard by the South Carolina Supreme Court in November 2019, Bluestein vs. Town of Sullivan’s Island. At the center of the case was the concept of accretion.
Accretion
South Carolina’s coastline is subject to a number of natural phenomena including erosion and accretion. Erosion occurs when sand, sediment, and other land matter is carried away from the coast, causing the beach to shrink as the high-water line creeps further in. It’s caused by strong waves, storm surge, and coastal flooding.
The contrary of this is accretion, where sand, sediment, and other land matter is deposited on the coast by the waves. Over time, this causes the beach to grow bigger.
Sullivan’s Island experiences both of these forces, with erosion affecting the coastline in the northern part of the island and accretion affecting the southern and central areas.
Suing Over the Town’s Approach to Managing Accretion
Accretion is a natural phenomenon, so what’s the basis for someone to sue over it? While accretion is something that can’t be controlled by humans, the consequences of it can be.
In the case at hand, two couples – Nathan Bluestein and Ettaleah Bluestein, MD, and Theodore Albenesius and Karen Albenesius (collectively, the Petitioners) – brought a suit against the Town of Sullivan’s Island and Sullivan’s Island Town Council (collectively, the Town).
The Petitioners separately bought front-row property on Sullivan’s Island, the Bluesteins around 1980, the Albenesiuses around 2009. Their properties were considered oceanfront when purchased and were a short distance from the shoreline. Today, due to accretion, the shoreline is much further away from their homes, approximately 500 feet or more. (In a footnote in its opinion, the court notes that the rate of accretion is approximately 17 feet per year.)
This does not mean that the Petitioners’ properties have increased – the land between their properties and the shoreline doesn’t belong to them. That property is subject to a 1991 deed, created in the aftermath of Hurricane Hugo, under which the Town has duties to upkeep the land.
How to interpret the deed was the main issue in the case, with the court noting “The parties have cherrypicked language from the 1991 deed which ostensibly supports their respective interpretations of the deed.”
The Town’s Duties to the Land
The Petitioners argue that the 1991 deed means the Town should keep the vegetation on that land between their properties and the shoreline in the same condition as it was in 1991. In 1991, the vegetation was mostly sea oats and wild flowers, no taller than 3 feet high. In contrast, the Town argues that the deed gives it unfettered license to allow the vegetation to grow unchecked, which is what it has done.
Over the years, a maritime forest has grown up on that land. The tall and thick vegetation harbors coyotes, snakes, and other “varmints” (in the word of the court) and is a fire hazard, complain the Petitioners. The Petitioners also complain that their homes are taxed like beachfront property, but they now have no ocean views or ocean breezes due to the vegetation growth and are farther away from the ocean. In the case heard by the Court of Appeals, they claimed their properties have lost more than $1,000,000 in value because of this.
The Court of Appeals affirmed summary judgment for the Town in its decision, which the Supreme Court reversed in its February 2020 decision, remanding the case. The Supreme Court stated that this case can’t be settled as a matter of law, as the 1991 deed is too ambiguous, and there are still issues of material fact that must first be resolved.
Just recently, in October 2020, the parties reached a settlement resolution together, ending further litigation. As described in the settlement, the Town will “implement selective thinning of the Accreted Land” zone by zone using funds from the Town, Plaintiffs, and Homeowners. This should mitigate the effects of accretion on the property in question. Read about the full settlement resolution here.
Caring for Land in the Public Interest
As South Carolina residents, we all have an interest in the health of our coastlines, even if we live far from the beach. Just as we saw in the case covered on this blog about the Public Trust Doctrine, it’s up to the entities in charge of these precious stretches of land to balance the needs of the individuals who live there with the public good, while respecting Mother Nature.
Marketability and Minority Discounts in South Carolina Courts
If you’re a part owner of a closely held corporation, it can be challenging to determine the dollar value of your interest in it. Not only do closely held corporations not make their finances public, making it difficult to know the company’s value as a whole, but your interest in it could be subject to discounts – like a marketability discount or a minority discount – that reduce the value to less than you might expect.
A case heard by the South Carolina Supreme Court, Clark v Clark, discussed both marketability discounts and minority discounts (also called lack of control discounts) in the context of a divorce, illuminating how SC courts consider and evaluate such discounts.
First let’s look at the methods used to determine the value of closely held corporations, then what the discounts are, then the case itself.
Methods to determine value a closely held company
The value of a closely held corporation and an interest in it can be determined by a few different methods.
Income approach. This method examines the company’s past earnings in order to project future earnings. This approach is popular because it looks at something that’s of interest to the potential buyer: how much money they can expect to see from their investment. However, it ultimately relies on making predictions about the future which no one can really know, which is the primary disadvantage.
Value, asset, or book approach. This method adds together the value of assets (minus depreciation) and then subtracts liabilities. It’s simple and straightforward and doesn’t require any guessing, but it fails to take many factors into consideration, such as a company’s brand recognition, customer goodwill, and other intangible but important factors.
Market approach. This method compares the private company in question to public companies that are similar in size, industry, and so on to come to a value. This approach works well when there are public companies that are similar enough to the closely held corporation to make a fair comparison, but it’s a poor choice when there aren’t.
Discounts on Interest in Closely Held Corporation
Two common discounts that can be applied to an owner’s partial interest in a closely held business are the lack of marketability discount (also called, simply, the marketability discount) and the lack of lack of control discount (also called the minority discount).
Marketability discount. This discount may be applied since there’s typically a significantly smaller market of potential buyers for privately held stock compared to publicly held stock. The transaction usually takes longer and involves higher transaction costs, too.
Lack of control/minority discount. Similarly, this discount recognizes that being a partial owner without controlling interest in a company is much less appealing than owning a controlling share. (In fact, control is so important in closely held businesses that controlling interests can sell for more than face value due to what’s called “premium for control.”)
Background of Clark v Clark
In the case at hand, Clark v Clark, the central issue is the value of the minority interest held by Patricia Clark in her husband George Clark’s family business.
The two married in 1987 and filed for divorce in 2012. At the time of the divorce, George owned 75% of the family business his father founded in the late 1980s, Pure Country, Inc., which manufactures and sells custom tapestry, blankets, afghans, and so forth. George had been 100% owner after his father died but then transferred 25% interest to Patricia in 2009 when she approached him about getting equity in the company. The stock agreement for the transfer restricted her ability to sell her interest “to the business, other shareholders, or immediate family members.”
Putting a value on Patricia’s equity
In an 8-day bench trial, George and Patricia called separate experts to testify as to the value of Patricia’s 25% interest in Pure Country, Inc. George’s expert, Catherine Stoddard, used three different approaches to determine the value and explained her reasoning to the court.
- The income approach led to an initial value of Patricia’s 25% at $116,365. Stoddard then applied a 35% marketability discount to account for the issues discussed above as well as the specific stock agreement in this situation that limited Patricia’s ability to sell her interest to select buyers.
- The asset approach valued the entire company at $736,000 and Patricia’s share, with a marketability discount and a lack of control discount applied, at $83,725.
- The market approach led to a value of $65,430 for Patricia’s 25% interest.
Stoddard determined that $75,000 was the appropriate value. This included both discounts.
Patricia’s expert, Marcus Hodge, came to a different conclusion. He compared the company to other companies he believed were comparable – also in the mill industry in North Carolina, as Pure Country, Inc. was – but didn’t show how they were indeed comparable in terms of size, scope, and lines of manufacturing. He valued the entire company at $1.8 million and applied a 26% marketability discount, but later said it should not be discounted. Hodge did not apply a minority discount.
The family court debated whether or not discounts should be applied since the business was not actually going to be sold. Ultimately, it found Stoddard to be more credible and agreed that Patricia’s 25% interest was worth $75,000.
The SC Court of Appeals heard the case and affirmed the family court’s decision to apply a lack of control discount. However, it rejected the marketability discount, in part because there was no evidence that George planned to sell the company, and it wasn’t appropriate to engage in the “fiction” that the business was going to be sold.
The Supreme Court hears the case
Both parties appealed, and the Supreme Court of South Carolina heard the case in December 2019.
The supreme court agreed with the family court that a marketability discount did apply. Whether or not the company is actually going to be sold, “a party’s interest in a closely held corporation is valued according to its fair market value.” That amount is what a willing buyer would pay a willing seller in a sale. It’s not required that be business will actually be put up for sale, but that fiction is a helpful way to determine the value of a company or interest in it. In a footnote in the opinion, the court states, “South Carolina embraces fair market value, which is not controlled by an owner’s intent—rather it reflects the time it would take to sell the asset in question.”
However, it doesn’t mean that a marketability discount need apply in every situation. South Carolina has recognized that its applicability can and should be determined on a case-by-case basis. The supreme court believes the best approach is to allow the family court or trial court judges the discretion to apply them depending on the facts of the case before them. In this case, the supreme court agreed with the family court that George’s expert, Catherine Stoddard, was more credible.
The supreme court also agreed with the family court that a lack of control discount applies here. Patricia argued that because her 25% interest would be going to George, making him 100% owner of the company, the lack of control discount should not apply. But the supreme court stated that “the minority status certainly affects an asset’s fair market value” so it’s appropriate for courts to consider applying them.
The supreme court ultimately found that the appropriate value of Patricia’s 25% interest was $86,226.
Dissenting opinion
Three justices agreed with the majority opinion, while two disagreed in an interesting dissent. They believed that neither discount should have been applied in this case. The similarities to a previous case, Moore v Moore – in which the share in question would go to the individual who owns the rest of the company, and there’s no intent to sell – are strong enough that it makes sense to follow the conclusions of that case, in which neither discount was applied. Since Patricia’s 25% would go to George, who owns the other 75%, there is no real, actual possible devaluation of her interest. Therefore, it’s not appropriate to apply either discount in this case.
Business Advice from an Experienced Business Attorney
For business legal advice on protecting your majority or minority shareholder status in a closely held corporation, work with an experienced business attorney like Gem McDowell. Gem has over 30 years of experience helping people start, grow, and protect their businesses. He and his associates at the Gem McDowell Law Group can help you, too. Call the Mount Pleasant office today at 843-284-1021 to schedule a free consultation.
What Does It Take to Prove Undue Influence when Contesting a Will?
Undue influence is one of the most common reasons a last will may be found invalid in South Carolina, along with procedural errors and lack of testamentary capacity. (Read more about all three on our blog here.) When someone pressures or coerces the testator – the person making their will – to create or change the terms of the will in their favor, that’s undue influence. A will that’s the result of undue influence can be voided by the court.
But having a will declared invalid isn’t easy. There’s a presumption that a will is valid, as long as the testator was of sound mind and followed the correct procedures when executing it. In South Carolina, if someone wants to challenge the validity of a last will on the grounds of undue influence, the burden of proof is on the person challenging the will.
This can be difficult because, in the words of the South Carolina Court of Appeals in Gunnells v. Harkness, “our courts have recognized that ‘the evidence of undue influence will be mainly circumstantial’ because undue influence is often exercised behind closed doors, preventing any direct proof.”
With this in mind, how difficult is it to show undue influence, and what does it take to convince the court to set aside a will?
What Undue Influence Looks Like
As stated above, there’s rarely direct evidence of undue influence, such as video or audio recordings of the influencer coercing the testator to change their will. But there are behaviors that indicate undue influence, and that’s what the court looks for.
Influencers may use force, threats, and psychological or emotional manipulation to get what they want. Isolating the testator from friends or family members is a common tactic used by influencers. Threatening to restrict visits from children, grandchildren, friends, and other loved ones is another.
In many cases, the testator is older and the influencer is younger, which can create a power imbalance. The testator may be experiencing cognitive decline that makes them more susceptible to pressures of undue influence. Or they may be dependent on the influencer for their health and well-being, relying on them for food, medication, transportation, and so on. The influencer may be a child who seeks to have the testator leave their entire estate to them and disinherit other would-be heirs, or a caregiver or other individual who is close to the testator.
Courts also look for evidence of a fiduciary relationship between the two parties, which is where one party places special trust and confidence in the other. The existence of such a relationship creates a presumption of undue influence.
Case in Point: Gunnells v Harkness
Since the evidence is typically circumstantial, and the burden of proof is on the party challenging the will, what kind of evidence is needed to prove undue influence when contesting a last will?
In a case heard by the South Carolina Court of Appeals in June 2019, Gunnells v. Harkness, a disinherited child successfully challenged the validity of her deceased mother’s last will on the grounds of undue influence. We’ll look at the evidence closely to see just how much was needed to convince the court that the will was invalid.
Here’s the background. Helen B. Gunnells (Helen) and her husband Aiken Arden Gunnells (Arden) were married for many years and had three children, Glenn, Cathy, and Belinda. In 2006, Helen executed a last will and testament that left her estate to her husband Arden, or, if he did not survive her, in equal parts to the three children.
In March 2013, Glenn moved in with his parents to help care for them, and in June, Arden died. Less than a month after Arden’s death, Helen executed another will, with the help of a lawyer suggested by Glenn. In contrast to the 2006 will, the 2013 will left the estate to Glenn and cut out Cathy and Belinda entirely.
Helen died the following February. Glenn applied for informal probate of the 2013 will, a process in which the estate is probated without any involvement from the court.
Challenging the Validity of the Will
In July 2014, Cathy filed a petition opposing probate of the 2013 will, arguing it was the result of undue influence. The probate court held a hearing in March 2016 in which it heard testimony from several parties. It ultimately determined that the 2013 will was indeed the product of undue influence and was voided. The 2006 will, which left Helen’s estate in equal shares to all three of her children, was reinstated.
Glenn appealed the probate court’s decision to the circuit court, which affirmed the probate court’s decision in April 2017. He appealed again, and the case was heard by the South Carolina Court of Appeals in June 2019.
Proving Undue Influence
In its opinion, the SC Court of Appeals cites previous cases to set the bar for undue influence:
“The undue influence necessary to invalidate a will must reach a level of force and coercion, not ‘the influence of affection and attachment’ nor ‘the mere desire of gratifying the wishes of another.’”
If you believe a family member’s will was the result of undue influence and you want to have it voided, pay attention to the amount and the type of evidence presented in this case for an idea of what it takes to successfully prove undue influence.
In this case, the evidence supporting the existence of undue influence primarily came from Helen’s brother Brantley, Helen’s close friend Carroll, and her daughters Cathy and Belinda.
Concerns about the will
- The 2013 will is substantially different from the 2006 will; while the earlier one left her estate in equal parts to all three children should her husband predecease her, the more recent one left the entire estate to one child and disinherited the other two
- Carroll stated that Helen told her she didn’t want to make a new will but said “I had no choice,” saying Glenn told her she had to
- Cathy said that on the day Helen died, Glenn said to her, “you’re going to be surprised [with] what’s in the new will. I have everything.”
- Brantley sent a letter “To Whom It May Concern” expressing concerns over the way Helen had changed, especially around Glenn, the day after Glenn applied for probate of the 2013 will
Isolation and restricted visitation
- Brantley, Carroll, Cathy, and Belinda all testified that Glenn restricted Helen’s communication and visitation. Helen stopped calling them, rarely answered the phone herself when they called her, and seemed “very hesitant” to talk once Glenn moved in.
- Brantley said he asked Helen to call Cathy because she was scheduled to have surgery soon, but Helen told Brantley that she’d have to ask Glenn, because Glenn didn’t like her talking to Cathy
- Brantley said that in a conversation about having Cathy and Belinda help with their mother’s care, Glenn told him he didn’t want his sisters at the house
- Brantley visited after Arden’s death and found Glenn had made the downstairs living room into his bedroom and had installed a video surveillance system with cameras all over the property
- Carroll said Glenn wouldn’t let her speak to Helen if he answered the phone when she called
- Carroll said Helen told her she couldn’t talk on the phone the way she could before her husband died
- Carroll said Helen told her she wanted to visit her sister in Georgia but Glenn wouldn’t take her (Helen was apparently wheelchair-bound and relied on Glenn for transportation)
- Belinda stated Glenn never told her about her father’s failing health, and that’s when she first started noticing a change in communication with her parents
- Belinda stated she received a forceful email from Glenn saying that nothing would be signed or initialized without him looking at it after she put her name and her sister’s name on the hospital visitation list when their father was sick
- Belinda went to her parents’ house after her father’s death to get the death certificate, which Glenn had put it in a plastic bag and hung it from the front door. When she knocked to come in, Glenn told her she couldn’t see their mother and after arguing, Glenn threatened to call the police on her. Cathy remembered this incident, too.
- Cathy said Glenn threatened to have her arrested for harassment if she went to see Helen
- Cathy had keys to her mother’s house that she used to get in until Glenn changed the locks and told Cathy she wasn’t welcome anymore unless he was present
- Cathy tried to call her mother several times but stated Glenn would answer, tell her she wasn’t allowed to talk to her, “laugh[,] and hang up”
One or even a few of these would likely not rise to the level of undue influence. But with all of the testimony taken together, which collectively shows a pattern of behavior on the part of Glenn with respect to his mother, the SC Court of Appeals found there was enough evidence to support undue influence and affirmed the circuit court’s decision.
It’s worth noting that the court did find evidence of a fiduciary relationship between Glenn and Helen – he had power of attorney and added his name to his mother’s bank accounts after his father died – but ultimately determined that Glenn presented evidence to rebut the presumption of undue influence on these grounds.
Help with Wills, Trusts, and Estate Planning in South Carolina
A last will is one of the most important legal documents you will ever sign. This is especially true if you have a large estate and/or a complex family situation. There are things you can do when creating your estate plan to make it as solid as possible and reduce the chances of lawsuits over your estate in the future.
For help creating or amending your estate plan, call estate planning attorney Gem McDowell of the Gem McDowell Law Group. He and his associates have helped many families create the wills, trusts, powers of attorney, and other documents they need for peace of mind. Call him at his Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.
What Happens If You Sell the Same Land to Two Separate Parties? Specific Performance as a Remedy
When seeking justice through the courts, a person or party who has been wronged may receive compensation to help right that wrong. That compensation may be a “legal remedy,” which means it can take the form of monetary damages, or it may be an “equitable remedy,” which includes remedies that don’t involve money. Specific performance is one such equitable remedy.
Specific performance was at the heart of a case that was heard by the South Carolina Court of Appeals in February 2020, Shirey v Bishop, in which a woman entered into two agreements to sell the same piece of land to two parties.
Specific Performance as an Equitable Remedy
Specific performance is a legal concept where the court can order a party to perform a specific act. The performance of the specific act is the equitable remedy that compensates the injured party for the wrong done to them.
Usually, the specific act is the completion of a contract they were already party to and is most commonly seen in cases involving the sale or purchase of land. That’s because the law considers land unique; even if the injured party were awarded monetary damages, they would not be able to purchase a piece of land identical to the one in question, because every piece of land is different.
Specific performance may also be compelled in cases not relating to real estate. For example, the Uniform Commercial Code (UCC), a set of laws adopted by all 50 states and D.C. that standardizes commerce laws between the states, does allow for specific performance as a remedy to the buyer in some cases. “Specific performance may be decreed where the goods are unique or in other proper circumstances” (SC Code Section 36-2-716). However, in practice, specific performance as a remedy is rarely used in cases not involving the conveyance of land.
Selling the Same Land to Two Separate Parties
We can see specific performance in action in Shirey v Bishop.
The background: Gwen G. Bishop and her husband ran a grave digging and burial vault business together for over 30 years from a property (the Property) located in Newberry County, SC. After her husband’s death in 2010, Bishop ran the business by herself, but soon decided she no longer wanted to continue.
In April 2012, Bishop agreed to sell the Property to her niece, Cassandra Robinson. They entered into a contract under which Robinson agreed to pay Bishop’s mortgage until it was satisfied. (The mortgage holder, TD Bank, was not notified of this arrangement and did not agree to it.) The contract was never recorded.
A few years later, in late 2014 or early 2015, Bishop then entered into an agreement to sell the Property to Robert G. Shirey, even though she had already previously entered into a contract to sell it to her niece.
Shirey and Bishop signed a contract (the Shirey Contract) in which Shirey agreed to buy the land for $125,000, including $1,000 in earnest money. The contract included a provision that the closing must occur “no earlier than Aug 3, 2015 [,] and no later than Aug 12, 2015.”
They set the date of closing for August 12, 2015. Shirey brought a check for $122,976.92 to his attorney’s office and waited for Bishop to arrive for the closing to complete the transaction. She never showed up.
Shirey’s attorney then called Bishop and asked if the closing period could be extended to the following day, the 13th. Bishop agreed, and a new appointment for the closing was set.
Once again, Bishop did not show up. Her doctor sent a note to Shirey’s attorney asking to excuse Bishop from the closing.
But that same afternoon, when she should have been closing the deal with Shirey, Bishop entered into a second contract to sell the Property to Robinson. Robinson agreed to purchase the Property for $33,000 and assume the mortgage. Bishop executed a deed conveying the Property to Robinson, and Robinson recorded the deed the same day.
The Case is Heard by a Special Referee
On August 20, 2015, Shirey filed a complaint against Bishop requesting specific performance of the Shirey Contract plus attorney’s fees. He later amended his complaint to add TD Bank (the mortgage holder) and Robinson after he discovered the deed conveying the land from Bishop to Robinson.
In March 2017, the case was heard by a special referee. (A special referee is lawyer who has expert knowledge in a particular field and may hear cases where the law is clear but the facts are in dispute. They judge on the facts and bind the parties to a decision.)
In May 2017, the special referee found in favor of Shirey, setting aside the deed to Robinson, awarding attorney’s fees to Shirey, and ordering specific performance of the Shirey Contract. This means that Bishop and Shirey would need to carry out the terms of their contract and Robinson would lose the Property.
Bishop and Robinson appealed.
Requirements for Specific Performance
Quoting another case, the SC Court of Appeals states in its opinion:
“In order to compel specific performance, a court of equity must find (1) clear evidence of an agreement; (2) that the agreement has been partly carried into execution on one side with the approbation of the other; and (3) that the party who comes to compel performance has performed on his part, or has been and remains able and willing to perform his part of the contract.” (Gibson v Hrysikos, 1987)
The Appellants raised a few arguments against the validity of the special referee’s awarding of specific performance, including these two: 1, there was no valid contract for the conveyance of the land from Bishop to Shirey and 2, Shirey had not demonstrated that he was able to perform the contract.
Contract Validity and the Statute of Frauds
The Statute of Frauds (SOF) requires certain types of agreements to be in writing and signed in order to be enforced by law. Under this statute, contracts involving land must be written down. Furthermore, modifications or amendments to the agreement must also be in writing to be enforceable.
In this case, the Appellants argue that the special referee erred in finding Shirey was entitled to specific performance because there was no valid contract, a valid contract being the first of three requirements to compel specific performance, as stated above.
They argue that the Shirey Contract was no longer valid because the closing did not happen within the period specified in the contract. After Bishop failed to show up at the closing on August 12th – the last day that the deal could go through, according to the Shirey Contract – Shirey’s attorney called her and they agreed to extend the closing period by one day. This was an oral agreement and was not written down.
So, does this make the Shirey Contract invalid under the SOF? It’s a very interesting legal question but unfortunately, we don’t get an answer. It’s well established that an issue cannot be brought up anew on appeal, and that’s what happened here. The SC Court of Appeals dismisses the argument because the Appellants did not bring it up to the special referee nor did they bring it up in their answers to Shirey’s complaint.
Capability of Performing the Contract
The Appellants also argue that Shirey did not demonstrate he was capable of performing his obligations under the Shirey Contract both at the time of closing and when he brought the legal action. Ability and willingness on the part of the complainant to perform their part of the contract is the third of three requirements to compel specific performance, as stated above.
Shirey argues that he fulfilled his obligations under the Shirey Contract by tendering the purchase price on August 12, 2015, the original closing date, when he brought a check for the purchase price to his attorney’s office. He had also put down $1,000 in earnest money. At the time of the appeal, he was still ready, willing, and able to go through with the Shirey Contract. Therefore, the SC Court of Appeals agreed with Shirey.
The Importance of Legal Help for Real Estate Contracts
Finding that all three requirements to compel specific performance were satisfied, the SC Court of Appeals affirmed the special referee’s grant of specific performance. The deed from Bishop to Robinson will be set aside and the Property will be sold to Shirey.
Most people know better than to enter into multiple contracts to sell the same piece of land to different parties. Still, real estate law can be complex, and getting the right help with real estate transactions, particularly in business, is crucial.
Gem McDowell is a commercial real estate attorney and business attorney with nearly 30 years of experience in the law. He has closed over $1 billion worth of real estate deals, including a single deal of $270,000,000. Along with his extensive experience, he’s also a problem solver who can help you grow and protect your business. To schedule an appointment or a free 20-minute consultation on your issue, call Gem and his team at his Mount Pleasant, SC office at 843-284-1021 today.
Doing Good While Making Money: Benefit Corporations in South Carolina
You’ve heard of C-corps and S-corps, but what about B Corps?
B Corp is short for benefit corporation, a type of for-profit business entity that is regulated by state law. Currently, 35 states and DC have enacted legislation to create benefit corporations, including South Carolina.
As stated in the 2012 South Carolina Benefit Corporation Act (find it here), “a benefit corporation shall have as one of its corporate purposes the creation of a general public benefit.” Here, “general public benefit” is defined as “a material positive impact on society and the environment taken as a whole.”
Who Benefits from a Benefit Corporation?
Traditionally, corporations are run with the primary driver of making money for their shareholders. High-level decisions are made with this question in mind: How can we maximize profits for the benefit of the shareholders? Though it’s not actually a legal requirement for corporations to make the most money possible, this is often the way it works in the real world. After all, a CEO who doesn’t make enough money for the shareholders can be ousted by the board of directors.
But in a B Corp, making money is not the primary driving force. Instead, business decisions are guided, in part, by the desire to create a particular benefit in the world.
Examples of some benefits that a B Corp might have include:
- Donating a portion of income to charitable causes
- Operating in a way to reduce environmental impact or actively preserve the environment
- Providing goods and services to a specific group of people such as low-income families
- Providing employment and economic opportunities for underserved groups
- Promoting education or awareness of a certain subject
- Advancing the welfare of other groups besides in addition to the shareholders, like the employees, the customers, or particular minority groups
A well-known business that’s also a B Corp is Patagonia, which amended their articles of incorporation in 2012 to include a commitment to sustainability and treating workers well. Ben & Jerry’s also became a B Corp in 2012, with a goal of advancing social change for good.
What It Means to Be a B Corp
The decision to be a B Corp is a big one. It can drastically change the way you approach decisions and run your business. Of course, that’s the exact reason why some people want to run a B Corp.
For instance, let’s say your stated public benefit is to protect the environment. You may choose packing for your product that is biodegradable and more environmentally-friendly but is more expensive to produce. A regular corporation may be bound to sticking with less environmentally-friendly options, because that’s the decision that maximizes profits and increases shareholder value. But as a B Corp with a stated intention of helping the environment, you can choose to forsake some of those profits for the public benefit of a better environment.
Requirements for Becoming and Being a B Corp
Entrepreneurs can incorporate their business as a benefit corporation in South Carolina by including a provision in its articles of incorporation that it is a benefit corporation and specifying its benefit purpose. Existing entities can also become B Corps by changing their status.
In South Carolina, there are some requirements that come along with being a benefit corporation. One is the submission of an annual report to the Secretary of State which must include, among other things, an assessment of the business against a third-party standard. Though the law says that a B Corp need not have an outside party certify them, there are organizations that do that, such as the independent nonprofit B Lab.
Additionally, a director on the board must be the elected and serve as the benefit director, and you may also have an officer designated as the benefit officer. (The same person can fill both roles at the same time.) Their roles and duties are described by law, but in short, both are responsible for making sure that the company is carrying out its mission as a benefit corporation in terms of the benefits it creates.
Advantages and Disadvantages
As with all types of business entities, there are pros and cons of being a B Corp.
Pros of being a B Corp:
- Furthering a cause you believe in and making a positive change in the world through your company
- Ability to make decisions in your company that align with your values rather than focusing solely on making more money
- Attracting and working with talented people who share the same values (especially important to younger workers who increasingly want to work at ethical, mission-driven companies)
- Attracting impact investors
- Good for public relations and consumer perception of your business
- Being part of a values-based global movement
- If you change your mind later, you can easily drop your B Corp your status
Cons of being a B Corp:
- Additional burdens of paperwork, certification, and maintaining benefit director and benefit officer roles
- Converting to a B Corp may be difficult for existing publicly traded companies (which is why Etsy gave up its B Corp status and Warby Parker did, too)
- Uncertainty due to how new B Corps are, and the potential increase in liability exposure
Though there many more advantages than disadvantages listed here, the disadvantages still merit consideration.
However, if you are driven to do good via your business and you want more control over how your company can make that happen, a B Corp is something to look into.
Is Becoming a B Corp Right for Your Business?
Changing your status or incorporating as a B Corp is a big step. Before taking that step, speak to an experienced business attorney like Gem McDowell. Gem has over 25 years of experience working with clients, giving them strategic advice on how to start, grow, and protect their businesses. Contact Gem and his associates at the Gem McDowell Law Group in Mt. Pleasant to schedule your free consultation by calling 843-284-1021 today.
Can Your HOA Foreclose on Your Home for Non-Payment of Dues?
Losing your home in a foreclosure because you missed a $250 HOA payment – can that actually happen? Is it even legal?
Yes and yes. This exact situation happened to Tina and Devery Hale. Our past two blogs went into detail on their case, Winrose Homeowners’ Association v Hale (read the opinion here), which went before the South Carolina Supreme Court in 2019. Those blogs are linked here and here.
But we’re not done yet because there’s even more to it. This case exposes bad parties acting in bad faith that every homeowner should be aware of.
Can Your HOA Take Your Home for Non-Payment of Dues?
Did you know that it’s not only the bank that has the power to foreclose on your home? It may seem absurd that your HOA can foreclose on your home because you missed paying your assessment, but it is legal in South Carolina and it does happen.
In the Winrose case, the Hales agreed to the following covenants and restrictions when they bought their house:
“If the [HOA dues] assessment is not paid within thirty (30) days after the delinquency date, the assessment shall bear interest from the date of delinquency at the rate of eight percent per annum, and the [HOA] may bring legal action against the owner personally obligated to pay the same or may enforce or foreclose the lien against the lot or lots […]”
The HOA was within their legal rights to do what they did. However, that doesn’t mean the SC Supreme Court was happy about it.
HOAs Making a Buck Off Unsuspecting Homeowners
Typically, once the court has stated its decision, that’s the end of the opinion. But not here. Writing the opinion for Winrose v Hale, Justice Kittredge had more to say. “We note our concern about this foreclosure proceeding,” he begins.
Recognizing the right of the HOA to pursue a lien and a foreclosure on the Hales’ house, the court characterizes this as a tactic to “capitalize on a small debt.” Though the amount past due was small, the HOA’s attorney went straight to the strongest measures possible as a next step – placing a lien and foreclosing on a house valued at $128,000 for a past due amount of $250.
Why? “The true nature of this foreclosure action is illustrated by the service and filing fees (which are more than double the amount of the principal due) and attorney’s fees (which were eight times the amount of the principal due),” writes the court (emphasis original). “A foreclosure proceeding is a last resort, not a business model to be swiftly invoked for the purpose of exploiting property owners.”
The Hales’ HOA was willing to let them lose their home and their equity in it in order to make some money in fees. Luckily for The Hales, they got their house back in the end, but that’s not always how this scenario plays out. Many people have lost their homes to HOA foreclosures.
Buyers Extorting Homeowners
The HOA was not the only bad actor here; the court was also “especially troubled” by the actions of the party that bought the Hales’ home, Regime Solutions, LLC.
In the majority of judicial sales, like the kind that was used to sell the Hales’ home, the purchaser of the foreclosed home takes on the property’s mortgage and other debts. This is necessary because the house is only free and clear once the associated debts are settled.
But Regime never took on the Hales’ mortgage. Not only that, but their business model appears to be based on not assuming the mortgage of the properties it purchases. After buying a foreclosure at a very low price, Regime either lets the bank foreclose on the property or it negotiates with the homeowners to let them have their house back for a large fee.
Between 2013-2016, Regime bought 38 properties that were later foreclosed on by the bank and 15 properties that it gave back to the original owners through a quitclaim deed for a profit of between $2,911-$13,984 per property. In the present case, the Hales offered to pay Regime $9,000 to settle the matter, but Regime asked for $35,000. The Hales didn’t pay it.
Summing up this section, the court states, “We do not countenance the improper use of foreclosure proceedings by the HOA, its attorney, or Regime” (emphasis original).
Could This Happen to You?
Yes, possibly. Depending on what covenants and restrictions you agreed to with your own HOA or regime, you could potentially find yourself in a similar situation as the Hales.
What can you do to avoid it?
First, make good decisions. Towards the end of its opinion, the court states “Our decision today should not be read as a shift toward providing relief to homeowners despite their own poor choices, in particular here, falling behind on a minimal amount of HOA dues and subsequently failing to respond to the summons and complaint.”
So take action on any and all legal matters that come your way. Fulfill your legal obligations as you promised to do in a timely manner by paying your mortgage and dues on time every month. Don’t assume that there could be no legal ramifications to paying late just because it’s a relatively small amount of money. This thinking can get you in trouble.
Next, review the paperwork you signed with your HOA or regime. It’s common for buyers to skim over these documents during a long real estate closing and therefore have no idea what it is they’re actually agreeing to. But you can take the time now to look at your covenants so you’re aware of the powers your HOA or regime has to charge you interest, place a lien on your property, pursue a foreclosure, and so on.
Finally, contact an attorney if you have any questions, especially if you’ve been served with papers.
Smart Legal Advice
If you need help with estate planning, business documents, commercial real estate, or strategic advice in a legal matter, contact Gem and his associates at the Gem McDowell Law Group in Mt. Pleasant, SC. Gem is a problem solver with over 35 years of experience helping families and business owners alike protect their interests and make smart decisions for peace of mind. Schedule a free consultation by calling 843-284-1021 today.
What Makes a “Grossly Inadequate” Sales Price: The Debt Method vs. the Equity Method
In South Carolina, a judicial sale of a property can be set aside if the sales price is “inadequate.” Either the sales price must be “inadequate” and also involve fraud, or the price must be “so grossly inadequate so as to shock the conscience of the court.”
What makes a sales price “grossly inadequate”? Just how low does it have to be? In South Carolina, there is no set amount or percentage that a court must apply to make that determination. However, looking back at past cases in the state, courts have consistently determined that sales prices of 10% or less of the property’s value are “grossly inadequate.”
Based on this, the 10% threshold was used as a benchmark in Winrose Homeowners’ Association v Hale (read the opinion here) which went before the South Carolina Supreme Court in 2019, and which we discussed in a previous blog.
How to Calculate the Sales Price: Debt Method vs Equity Method
In Winrose, Tina and Devery Hale’s home was sold in a judicial sale after they missed an HOA payment of $250 and their HOA foreclosed. Regime Solutions, LLC, bought it with a high bid of $3,036. The fair market value of the house was $128,000, with an unpaid mortgage balance of $66,004.
Since fraud was not an issue in this case, the question for the court to decide was whether the sales price of the house in question was “so grossly inadequate” that the sale could be set aside. If so, the foreclosure could be vacated and the home returned to the Hales. If not, the judicial sale would stand and Regime would retain the house.
With the 10% benchmark in place, the court needed to determine what the sales price was. There are two methods for determining whether a bid price is so grossly inadequate as to shock the conscience:
- The Debt Method. This assumes that the party that purchases the foreclosed property will become responsible for the mortgage and other associated debts. This method focuses on how much the foreclosure purchaser must pay before having a free-and-clear title to the property, so the value of the outstanding mortgage is added to the bid price.
In this case, Regime would have paid ($3,036 bid) + ($66,004 mortgage balance) = $69,040. This is 53.9% of the Property’s fair market value of $128,000.
- The Equity Method. This method focuses not on the debt the foreclosure purchaser is taking on, but the equity they would gain through the transaction. Instead of adding the outstanding mortgage balance to the bid, the balance is subtracted from the fair market value and compared to the bid.
In this case, Regime would stand to gain ($128,000 fair market value) – ($66,004 mortgage balance) = $61,996. The amount Regime paid, $3,036, is 4.9% of the equity it would stand to gain.
The majority of the time, the party that purchases the foreclosure does take on the obligations of the mortgage, because associated debts needs to be settled in order to have a free-and-clear title. For these situations, the Debt Method is appropriate.
But in the present case, Regime never took on the Hales’ mortgage and never took any positive steps to do so. As Justice Lockemy pointed out in his dissenting opinion in the Court of Appeals decision, it didn’t make sense to credit Regime with having taken on the mortgage. Furthermore, the Hales continued to pay their mortgage, substantially reducing the outstanding debt on the house over time. Therefore, using the Equity Method in this case is, in the words of the SC Supreme Court decision, “the only logical option.”
Since 4.9% is clearly below the 10% threshold, the court concluded that the bid was, indeed, “so grossly inadequate as to shock the conscience of the court.” The court set aside the foreclosure sale.
Get Strategic Legal Advice
For guidance and legal help on business matters, estate planning, and commercial real estate in South Carolina, call Gem of the Gem McDowell Law Group in Mount Pleasant, SC. Gem and his associates are experienced problem solvers who are here to help you and your family. Call 843-284-1021 today to schedule a free consultation at the Mount Pleasant office.
How A South Carolina Couple Missed an HOA Payment and Lost Their Home
Imagine this situation:
You miss an HOA payment. Then you receive some legal documents in the mail, put them in a drawer, and forget about them. When the HOA sends a bill for the outstanding amount, you pay it and later receive confirmation that the situation is resolved.
The next thing you know, you discover that your house has been foreclosed on, someone bought it at auction, and now they are trying to evict you.
Though this may sound crazy, this is exactly what happened to Tina Hale and her husband Devery Hale. Their case, Winrose Homeowners’ Association v Hale (read it here), went all the way to the Supreme Court of South Carolina. It’s a good cautionary tale about what can happen when you ignore legal proceedings and an eye-opening look at the way some parties try to take advantage of unsuspecting homeowners.
The Hales Miss an HOA Payment
Tina and Devery Hale bought their home (the Property) in 1998 for $104,250. In addition to paying their mortgage regularly, they were also obligated to pay a monthly assessment of $250 to their HOA, Winrose Homeowners’ Association, Inc.
In January 2011, the Hales fell behind in HOA dues. In response, the HOA first filed a lien against the Property and then pursued a foreclosure, seeking $556.41, which was the amount of the late dues plus accrued interest. The right of the HOA to charge interest on late payments, put a lien on the lot, and pursue foreclosure was part of the covenants and restrictions that the Hales agreed to when they bought their house.
The Hales didn’t respond to the complaint (in an affidavit, Tina Hale said that she simply put it in a drawer and forgot about it), so the HOA submitted an affidavit of default. From then on, the Hales didn’t receive any further notices of what was going on with respect to the foreclosure and sale.
It was here that the HOA sent the Hales a bill for the outstanding $250, which they paid. The HOA’s law firm then sent the Hales a letter saying that the lien had been satisfied, and the Hales thought that was the end of it. But the HOA didn’t withdraw their suit.
Foreclosure and Sale
The matter first went to a master-in-equity (Master), who entered a default judgment of foreclosure and sale against the Hales. He calculated an amount due of $2,898.67, comprised of $250 in principal, $80.87 in interest, and $2,025 in attorney’s fees. The Master noted that the sale of the property would be subject to the existing mortgage.
The Property sold at public auction two weeks later to Regime Solutions, LLC (Regime) with the high bid of $3,063. At that time, the fair market value of the Property was approximately $128,000, with an outstanding mortgage balance of approximately $66,000.
The Hales remained unaware of all of this. It wasn’t until Regime tried to evict them from their house – which they continued to make mortgage payments on – that they discovered what was happening.
The Hales Fight Back
Upon discovering what was going on, the Hales filed a motion to vacate the foreclosure sale on the basis of the sale price being “so grossly inadequate as to shock the conscience of the court.” Vacating the sale would give the Hales back ownership of their house.
The Master denied the motion to vacate. Though the amount of $3,063 is low, when taking into account the outstanding mortgage amount of $66,004, he calculated an effective sales price of $69,0404. At a little over half the fair market value of $128,000, this is a great deal for the buyer but is not low enough to shock the conscience of the court.
The matter next went to the South Carolina Court of Appeals, where a majority of the panel affirmed the Master’s decision. Notably, Chief Justice Lockemy dissented, saying it didn’t make sense to consider the outstanding mortgage amount in the effective sales price, since Regime had not, in fact, assumed the Hales’ mortgage and never took any steps to do so.
The South Carolina Supreme Court’s Decision
The matter then went to the South Carolina Supreme Court, where it was heard in September, 2019. The issues at hand were whether the judicial sale of the Property should be set aside due to an inadequate sales price and how to calculate that price.
Ultimately, the SC Supreme Court agreed with Chief Justice Lockemy’s take that it wasn’t right to credit Regime with having taken on the debt of the mortgage. Using the Debt Method, the court determined that the sales price of $3,036 on a house with a fair market value of $128,000 was, indeed, so grossly inadequate so as to shock the conscience of the court. The court set aside the foreclosure sale and remanded the case back to the Master.
(Read more on how the court determined the sales price and what exactly constitutes a “grossly inadequate” price in this follow-up blog.)
Take Care of Legal Matters Promptly
Though the Hales ultimately won, it took over eight years to get a verdict in their favor and surely caused a lot of stress and expense in the meantime. While they weren’t in control of the actions of their HOA or Regime, there are a couple lessons to be learned here.
First, do not ignore a summons, lawsuit, or any other legal document, and don’t put it in a drawer and forget about it; speak to an attorney right away about it. Second, understand the contracts you’re involving yourself in. Most people would probably find it inconceivable that their HOA would foreclose on their house for a simple missed payment of $250. But that’s exactly what happened here, and it was because of the terms in the contract both parties agreed to. It’s important to understand what you’re agreeing to anytime you sign a contract.
For help or advice on contracts, or for issues of business law or estate planning, contact Gem McDowell. Gem and his associates at the Gem McDowell Law Group can give you the strategic advice you need to make smart, informed decisions. Call 843-284-1021 today to schedule a free consultation or to book an appointment at the Mount Pleasant office.
What Is HEMS and What Does it Mean for Trustees?
HEMS is an acronym that stands for Health, Education, Maintenance, and Support. It’s commonly used in trusts as a way to guide and restrict the kinds of distributions that a trustee can make to a beneficiary.
Purpose and Benefits of HEMS
There are a few reasons for and benefits of HEMS.
For one, adhering to the “ascertainable standard” of HEMS can be vital for protecting the trust’s assets. For example, say a wife creates a testamentary trust that names her spouse both beneficiary and trustee upon her death. The trust may limit distributions of the assets to HEMS, which is an ascertainable standard recognized by the IRS. If the husband takes distributions that fall under one of these categories, the assets of the trust are not considered to be part of his personal estate – they belong to the trust, a separate entity – and are therefore protected from certain taxes. For this same reason, a creditor coming after the husband cannot access the trust’s assets to pay the husband’s debts.
Another benefit has to do with the trustee-beneficiary relationship, when it’s not the same person in both roles. It’s common for a beneficiary to want to draw more money from the trust while the trustee’s goal is to keep the trust as intact as possible. The HEMS standard serves to restrict the trustee from making distributions that can unnecessarily diminish the trust, while providing appropriate support for the beneficiary. By including this language in the trust, a grantor can prevent the beneficiary from having unlimited access to the trust’s assets.
Or, it can work the other way. Say that same couple from above has a trust that remains in the spouse’s control as trustee and beneficiary during his lifetime, and after his death passes to the couple’s children as beneficiaries. In this case, it’s the children who are motivated to ensure the trust remains as intact as possible. It’s in their best interest to ensure their father is adhering to the HEMS standard with the distributions he takes for himself as trustee and beneficiary.
Finally, the HEMS standard provides valuable guidance to trustees, whether they are also a beneficiary or not. By understanding what’s included under the umbrella of health, education, maintenance, and support, a trustee can better determine what distributions to make from the trust’s assets.
Examples of HEMS
Health, Education, Maintenance and Support are rather broad categories, but what do they include, exactly? The exact items included can vary by state, but here are examples of HEMS that are commonly included.
Examples of Health
Some basic examples in the Health category include:
- Routine health care
- Hospital care
- Emergency medical treatment
- Psychiatric or psychological care
- Prescription drugs
- Dental
- Vision
The following may also be considered included in this category:
- Elective procedures like LASIK or cosmetic surgery
- Alternative medicine treatments
- Gym, sports club, or spa memberships
- Health supplements
Examples of Education
This category commonly includes:
- Tuition for all levels of schooling from grammar to graduate, professional, or technical school or training
- Continuing education expenses
- Expenses for school-related programs, such as Study Abroad in college
- Support during schooling years, even during summers and other breaks
Examples of Maintenance and Support
“Maintenance” and “support” are one and the same. Commonly included in this category:
- Mortgage or rent payments
- Property taxes
- Premiums for health, life, and property insurance
- Travel and vacation expenses
- Charitable giving
This category is the least clearly defined. It’s typically interpreted to include distributions that help maintain the beneficiary’s standard of living. Distributions to cover expenses that are solely for the beneficiary’s happiness rather than support do not fall under this category.
For example, say our couple from above typically takes a two-week vacation to the Rockies each year. After the wife dies and her husband controls the trust, a distribution to cover this annual vacation would fall under this category. A distribution to cover a four-month, ‘round-the-world luxury cruise would not. That’s because such a vacation would be beyond his typical standard of living.
However, depending on the trust, the trustee may have some discretion to make distributions for just such an unusual vacation or other luxury that would be outside the beneficiary’s established standard of living.
Use of HEMS
Grantors can include general language regarding HEMS or they can be more prescriptive and precise about how they’d like the trust’s assets used. For instance, a grantor may specify that trust money can be used to pay for college but not for graduate school. Or that the beneficiary must use other sources of funds, if available, to pay property taxes or rent before accessing the trust’s money. The grantor has a large degree of control when directing how the trust’s funds can be used.
Not all trusts contain language relating to HEMS; it depends on the particulars and purpose of the trust. Whether or not it’s appropriate in your estate plan is something to discuss with an estate planning attorney.
Get Help with Trusts and Estate Planning
The HEMS standard is just one commonly used tool grantors have to direct how a trust’s assets are distributed. Trusts are powerful documents that can be a cornerstone of an estate plan. For help creating a trust, or other estate planning documents like wills, living wills, and POAs, contact the Gem McDowell Law Group. Gem and his associates will help you create the personalized plan you need so your family is cared for and your wishes are carried out. Whether you have documents that need review or updating, or it’s your first time doing estate planning for your family, Gem and his team can help. Call 843-284-1021 today to schedule a free consultation or to book an appointment at the Mount Pleasant office.
Sharing the Cost of Liability: What is Contribution?
Let’s say there’s an accident that leaves a person injured. The injured party sues the party at fault – the tortfeasor – who ends up paying damages. The injured party has received compensation for their injury, and the tortfeasor has paid what they owe. End of story.
But what if more than one party is liable for the accident? What is a party to do when they have paid the full amount of damages for an accident they’re only partly responsible for?
The answer: seek contribution.
What is Contribution in Civil Law?
Contribution is the “tortfeasor’s right to collect from others responsible for the same tort after the tortfeasor has paid more than his or her proportionate share, the shares being determined as a percentage of fault,” as defined in United States v. Atl. Research Corp.
In other words, a defendant (tortfeasor) who has paid out more than their fair share of money to a plaintiff has the right to seek contribution (money) from other parties who also bear liability for the injury or wrongful death in question. That money must be in a proportional amount, so the tortfeasor is limited to recovering an amount equal to the excess paid to the plaintiff.
This right of contribution does not exist for any party that intentionally caused or contributed to the injury or wrongful death in question. (For more on the ins and outs of contribution, read the South Carolina Contribution Among Tortfeasors Act in the SC Code here.)
A Case Concerning Contribution: The Background
The South Carolina Court of Appeals heard a case in December 2018 that concerned contribution, Charleston Electrical Services, Inc. v. Rahall. (Find the decision here.) The situation is nuanced and involves a party seeking contribution from a daughter for an injury to her mother, which makes it especially interesting.
In August 2010, Wanda Rahall and her mother, Elsie Rabon, visited Rahall’s fiancé at his apartment in Charleston. The apartment of her fiancé, George Kornahrens, was located in a building on property he owned but was leasing to Charleston Electrical Services (CES). He was the business manager of CES but had no ownership in the company.
During the August visit to the property to see Kornahrens, Rabon was knocked down and injured by Gunner, an “overly friendly” German shepherd owned by CES. Rabon was hospitalized and it was determined she had a broken hip.
In December 2010, Rabon filed a lawsuit against CES for negligence and strict liability. The parties later settled for $200,000, and Rabon released CES, Rahall, and Kornahrens from liability.
In July 2013, CES and Selective, its insurance carrier, filed a lawsuit against Rahall seeking contribution in the amount of half the settlement paid to Rahall’s mother Rabon. The issue went before a master-in-equity in August 2016, who found against CES and Selective. They appealed to the SC Court of Appeals.
Here’s Where Contribution Comes In
A party can only successfully seek contribution if there is another party partially responsible for the injury. CES and Selective needed to show that Rahall was also responsible for her mother’s injury in order to recover money from her.
CES and Selective argued that Rahall was negligent, and therefore was partially liable for the accident. To show negligence, the following points must be established: 1) the defendant (Rahall) owed a duty of care to the plaintiff (Rabon); 2) the defendant breached the duty of care by negligent act or omission; 3) the defendant’s breach was the cause of the plaintiff’s injury; and 4) the plaintiff suffered damages as a result.
Premises liability
Rahall owed her mother a duty of care, CES and Selective argued, under a premises liability theory. In SC, a landowner owes a duty of care to guests on their property. This includes a duty to warn a guest of potential dangers they should know about.
Remember that Rahall was not the owner of the property where the accident occurred; her fiancé was, and he was leasing it to CES who had full control of the property at the time when the injury occurred. However, Rahall had been engaged to her fiancé for four years and lived in the apartment on the property with him when she was in Charleston. She kept things there and had a key. Based on this, CES and Selective argued that she was a “possessor of the Property” and therefore owed a duty of care to Rabon.
The Court of Appeals disagreed. Rahall didn’t pay utilities, rent, or taxes on the apartment, she kept a separate home in a different city, and she had no ownership interest or control of any part of the property. (The master had even called the idea that she was liable under a theory of premises liability “patently meritless.”) Therefore, she had no duty of care and negligence could not be established as a basis of liability under a premises liability theory.
Special relationship exception
In SC, no one owes a duty to warn another person about potential danger or to control their conduct with these five exceptions: 1) where the defendant has a special relationship to the victim; 2) where the defendant has a special relationship to the injurer; 3) where the defendant voluntarily undertakes a duty; 4) where the defendant negligently or intentionally creates the risk; and 5) where a statute imposes a duty on the defendant.
CES and Selective argued that Rahall owed a duty to Rabon under this “special relationship exception” rule. She knew that Gunner had previously jumped on visitors, they asserted, and should have known that the dog would pose a threat to her elderly mother – and warned her.
But the master and later the Court of Appeals disagreed with this argument. “Our jurisprudence has not extended a legal duty to children to protect, warn, or supervise a parent,” stated the Court of Appeals in its decision.
Ultimately, the Court of Appeals affirmed the master-in-equity’s decision, and CES and Selective were unsuccessful in their attempt to seek contribution.
The Challenges of Seeking Contribution
CES believed it was not wholly responsible for the accident that injured Rabon and so sought contribution from another party they believed was also partially liable. But you can see that seeking contribution can be challenging – they had to prove liability, and they failed. It’s also a large commitment of time and finances on the part of the defendant. It’s something no business wants to go through.
In situations like these, sound legal advice is a necessity. If you’re a business owner looking for help with a legal issue, contact Gem McDowell and his team at the Gem McDowell Law Group in Mt. Pleasant, SC. With over 25 years in business law in SC, Gem has the experience to not only handle legal matters but also offer sound strategic advice that can protect your business and help it grow. Schedule a free consultation to discuss your business with him by calling 843-284-1021 today.
