What Is A No-Contest Clause and Why Have One in Your Will?
A no-contest clause, also known as an in terrorem clause, is a clause in a will or revocable trust that is intended to prevent parties from contesting the will or trust by penalizing them for doing so. For example, a no-contest clause in a will may state that any party that contests the will is barred from inheriting anything under the will. A no-contest clause is a deterrent to nuisance lawsuits and cash grabs by parties who may want to get more from the estate than the will or trust allows.
A no-contest clause can:
- Discourage years of expensive and time-consuming litigation over an estate
- Prevent bickering and strain between family members and heirs of the estate
- Keep the testator’s private details private (since private details may become public in litigation)
This is not a standard clause in most estate planning documents. It’s typically only included if the testator expects there may be some disagreement over the estate plan after their death. You may want to include one in your will or revocable trust if, for example, you have given some children a larger portion of your estate than your other children, or have disinherited a child altogether, and therefore might expect a challenge to your estate plan.
When a No-Contest Clause is Unenforceable
In general, these clauses are valid and enforceable.
But many jurisdictions have recognized certain circumstances where no-contest clauses are not valid and enforceable: If the party challenging the will or trust has probable cause. If they believe forgery is involved, or they believe the document is the result of undue influence or duress, then the no-contest clause can be held invalid and unenforceable.
A South Carolina Supreme Court case filed in 2006, Russell v Wachovia, looked at this very issue. The opinion cited a North Carolina case in which 6 of 10 children contested their deceased father’s will, citing undue influence and duress. In this case, the deceased was 90 years old when he died, had been in declining health for years, was “worn out and feeble,” and at times failed to recognize his own children. The children challenging the will also noted that two other daughters who stood to inherit a substantial amount were always present at their father’s home when they visited. The court ruled that in this case, the no-contest clause was not enforceable, as the children who contested the will had probable cause to do so. The evidence demonstrated that it was reasonable to believe their father’s estate plan may have been the product of undue influence or duress.
That was very different from the case at hand in Russell v Wachovia, in which two children filed actions to set aside their father’s will and trusts. The South Carolina Supreme Court ultimately found that the no-contest clauses were enforceable. The only evidence to support probable cause here was “strife and discord” in the family, and the fact that the two children who contested the estate plan weren’t treated as well as they believed their father intended. The Supreme Court did not find this to be probable cause to contest the estate in the first place, thus the no-contest clauses were upheld. The two children who contested the will were therefore not allowed to inherit anything under the will and trust they contested.
Creating a Strong No-Contest Clause
If you do want to add a no-contest clause to your will or revocable trust, there are a few things you can do that may strengthen its validity if your estate plan is ever contested. In Russell v Wachovia, the Supreme Court noted that the testator:
- Was in good physical and mental health when he created his estate plan, still working and taking care of himself
- Told one of his sons and his attorney that he anticipated a potential challenge to his will and trust after his death
- Asked a former law clerk of his (he was a judge) to represent his grandchildren, whom he made beneficiaries, in case of a challenge
- Visited a psychiatrist to create a record of his testamentary capacity, i.e., to certify that he was legally and mentally able to make a valid estate plan
- “And most importantly,” according to the Court, he amended his will and revocable trust to include language that explicitly barred any party contesting the documents from benefiting under them
Taken altogether, these points only helped strengthen the validity of the no-contest clauses, as they demonstrated that his estate plan was not made under duress or undue influence. The Court concluded that “If a no-contest clause cannot be upheld under these facts, such a clause would not ever be enforceable.”
Get Help Creating a Strong and Enforceable Estate Plan
Estate planning can be complex, especially if you have a substantial estate, a large or blended family, or own a business. Having a solid estate plan is the best way to ensure your wishes will be carried out and can help keep peace in the family. For help with your estate planning documents, contact the Gem McDowell Law Group in Mt. Pleasant. Gem McDowell and his associatess are problem solvers who can develop the estate plan you need to protect your assets and your family. Call 843-284-1021 today to schedule your free consultation.
The Ongoing Battle over the James Brown Estate
The Godfather of Soul James Brown was born in Barnwell, South Carolina in 1933 and went on to become one of the greatest figures in music of the 20th century in a career that spanned six decades. He received a Grammy Lifetime Achievement Award, has a star on the Hollywood Walk of Fame, and was one of the first to be inducted in the Rock and Roll Hall of Fame. Brown left an indelible mark on music and was a huge influence on generations of musicians that came after him.
These days, his legacy also includes a very complicated estate. Brown died on Christmas Day in 2006 at the age of 73, leaving behind assets in the millions (the exact value hasn’t been disclosed) and an estate that’s been contested ever since.
The Estate of James Brown
Brown executed a will in 2000 in South Carolina and later that year had an irrevocable trust created, too. His assets were to be divided in part among his six living children. (Brown was married four times and acknowledged nine children as his, three of whom have since died, but DNA testing has shown he fathered more children. They were not named in the will.) Another substantial part of his estate was to go into a charitable and educational trust, the I Feel Good Trust, for the benefit of children in South Carolina and Georgia.
Several lawsuits have been filed by various parties over the years, and no distributions from the estate have occurred, either to Brown’s heirs or to the intended beneficiaries of the educational trust. The New York Times published an article in early 2018 covering much of the history of fighting over Brown’s estate, which you can read here.
One lawsuit of particular interest is the one the South Carolina Court of Appeals published an opinion on in May 2019. That’s because it required the court to interpret the law de novo, or for the first time, while courts usually rely heavily on precedent in their findings.
The Background
The background to this particular lawsuit is this: Several of Brown’s children and grandchildren (referred to as the Respondents) contested the Will and Trust. In 2015, the Respondents and the Fiduciaries of the estate reached a settlement wherein each of the Respondents would receive a payment of $37,500 in return for dismissing their claims to contest the Will and Trust. Importantly, they’d retain all their other rights and the Will and Trust would not be altered by the terms of the settlement.
Before the settlement was confirmed, two of Brown’s children, Terry Brown and Darryl Brown, who had not contested the Will and Trust, opposed the settlement. After a circuit court found the settlement was just and reasonable, Terry Brown appealed.
The Findings
It’s well established in case law that it’s acceptable for the heirs of an estate to make an agreement dividing the assets among themselves in a way that’s different than the will outlines, as long they all agree to it. But the Brown estate was different, since only some of the heirs were part of the settlement, not all of them. Terry argued that under South Carolina law, all the successors must consent to and approve of a settlement, and he didn’t consent to it, so therefore the settlement should not be considered valid.
However, the Court of Appeals looked at the law (specifically, Section 62-3-912) and held that his consent wasn’t necessary. The settlement didn’t seek to alter the amount of assets any successor was entitled to under the Will, and in fact specifically preserved the Estate Plan as is.
The Court also looked at Sections 62-3-1101 and 62-3-1102 and found that his approval wasn’t necessary, either. The settlement was not binding to Terry or to any other party that was not involved in the settlement. It, again, did not impact Terry or anyone else with an interest in the estate. To quote the Court, “He will receive precisely the same thing under the Will and Trust that he would have received had Respondents never challenged the Estate plan.”
Furthermore, the Court notes that it is unable to allow a successor who’s not part of the settlement to veto the settlement when it does not affect nor bind him. “This of course we cannot do, and Appellant’s position would allow a holdout successor to force the Fiduciaries to engage in the very thing [the law] is intended to avoid: dissipating the Estate in wasteful litigation.”
Complex Estate Planning
While the estate of James Brown is particularly complicated, all estate planning requires thoughtfulness, thoroughness, and attention to detail. That’s exactly what estate planning attorney Gem McDowell and his associatess provide when you work with them on your estate plan. Not having an estate plan, or having one that’s outdated (like Brown’s), can create a plethora of problems for your heirs. Contact the Gem McDowell Law Group to schedule your free consultation and take the first step towards peace of mind. Call 843-284-1021 today.
9 Reasons You Need a Will
We all know we “should” have a will. But why, exactly? Here are 9 good reasons to have a will.
1 To Maintain Good Family Relations After You Die
The main reason to have a will is for your family. After you pass, what happens to your assets won’t matter to you, but it will matter a lot to those who survive you. Many families have been torn apart by squabbles over an estate. Family members may spend years in court, and untold money, to get what they think they’re due. Meanwhile, those relationships fall apart. This doesn’t just happen after the death of people with large estates, but those with modest estates, too. A clear, current will can prevent many of these squabbles from happening in the first place and maintain the peace.
In short, you don’t get a will for yourself. You do it for your family.
2 To Ensure Your Assets Go to a Particular Individual
The primary purpose of a will is to determine where your assets will go after your death. If you don’t decide, and die intestate (i.e., without a will), the state will decide for you. In South Carolina, if you die without a will, your assets that are subject to probate will pass to your children, your spouse, your parents, and/or your siblings, depending on your family situation. You may not want your assets to go where the state wants them to go. Having a will lets you decide.
3 To Prevent Your Assets from Going to a Particular Individual
Just as your will allows you to ensure assets are going to the individuals you want them to go to, it also allows you to keep assets from individuals you don’t want to inherit anything through your will.
There may be several reasons for doing this. Perhaps you choose not to leave anything to an individual in your will because they’ll receive other assets directly outside of your will, such as life insurance payouts, pensions, retirement accounts, real property held as joint tenancy with right of survivorship, and assets held in trust of which they are the beneficiary.
Perhaps you and your spouse have mutually agreed to leave all of your property to your children rather than each other, especially if this is not your first marriage and there are children from previous partners. (Read more about estate planning in “Brady Bunch Marriages” here.)
Other times, you may choose to disinherit a child or other dependent because of strained familial relations. This is your choice, and a legally binding document will help ensure your wishes are carried out after your death.
4 To Make One Last Donation
So far, we’ve considered how a will can help you divide assets among surviving family members. But a will allows you to leave assets to organizations, too. If you’ve supported a particular cause, charity, or church during your lifetime, you can use your will to leave one final gift. (And depending on the size of your estate, a qualified donation can help reduce taxes, too.)
5 To Appoint a Guardian of Your Minor Children
If you’re the parent of a minor child, you should have a will in order to name your child’s guardian. This is the person who would take physical custody and care of your child after you die. (This assumes that there’s not another parent who would take custody.) If you don’t decide, then the state will, and it may choose someone you don’t want raising your child.
6 To Choose Your Executor
Similarly, the court will appoint an executor or personal representative to administer your estate after you die if you don’t name one in your will. You want to choose someone competent, trustworthy, and fair to settle your estate. It’s also a smart idea to speak with this person first to get their agreement, and to list alternatives in case your first choice is unavailable or declines the position after you’re gone.
7 To Speed Up the Process
Having a will can shorten the time it takes to settle your estate for the simple fact that it’s clear what should happen to your assets. Dying without a will invites family arguments over who should get what, and these arguments can last years and ruin relationship. (See #1.)
8 To Avoid Probate Altogether
What if all your assets are in trusts, so that when you die you have no assets to your name that are subject to probate? You should still have a will, specifically what’s known as a “pour-over will.” This dictates that any assets that are not in trust at the time of your death are to be distributed to the trust. If you don’t have a pour-over will, the assets still in your name when you die that are subject to probate will go through probate.
Learn more about the probate process here in South Carolina.
9 To Minimize Estate Taxes
Smart estate planning can reduce your estate taxes. However, this is not a big concern for most people. The only people who need to take into account estate taxes when drawing up a will are people with very large estates (worth over $11,180,000, as of 2018, or double that for married couples) and people in states that impose estate tax.
If you’re in this situation, you may want more than a simple will, and should speak with an estate planning attorney about your options.
Draft or Review Your Will with Mt. Pleasant Estate Planning Attorney Gem McDowell
If you don’t have a will, hopefully the nine reasons above convinced you that you need one. Call Gem McDowell at his Mt. Pleasant office to schedule a free consultation so you can get started on your estate plan right away. Gem has over 25 years of experience in estate planning, and he’s helped individuals with estates large and small with the planning they need. Call (843) 284-1021 or use this contact form to get in touch today.
Choosing the Right Business Entity at the Federal and State Level
As a business owner, it’s important to understand the differences between various business entities. Some of the differences include how the entity is structured, how it’s taxed, and what kind of liability protection if offers its owners.
Another difference that’s often overlooked is whether the entity is defined at the federal level or the state level. For instance, the corporation, partnership, and sole proprietorship are defined by the IRS at the federal level. The limited liability company, on the other hand, exists because of state statute. It’s treated as a corporation, partnership, or disregarded entity by the IRS for federal tax purposes.
Some entities look so similar at first glance, it can be hard to see the distinction between a business entity defined at the federal level and one at the state level. One example of this is the S-Corp versus the statutory close corporation.
Case in Point: Pertuis vs Front Roe
Even the Supreme Court of South Carolina failed to make the distinction between state and federal statute in a recent decision filed in July, 2018, Pertuis vs. Front Roe Restaurants, Inc.
In short, Kyle Pertuis was the manager of three restaurants owned by three separate S-Corporations: Lake Point and Beachfront, both in North Carolina, and Front Roe, in South Carolina. All three S-Corporations were owned by Mark and Larkin Hammond. After working with the Hammonds for several years, Pertuis decided to leave, and this case is primarily about his ownership in the three restaurants and their valuation.
That’s not relevant to our discussion here, but what is relevant is the South Carolina Supreme Court’s assessment of whether the three S-Corporations should be amalgamated into a single entity or not. If yes, that means the three would be considered together as if they were one company. If no, the three should continue to be considered as three distinct businesses.
The Trial Court said yes, the three should be amalgamated, citing in part the fact that the Hammonds had “disregarded corporate formalities” including shareholder and board of director meetings. The Supreme Court said the trial court erred, because it overlooked the fact that all three companies were S-Corporations, which are statutorily permitted to disregard various corporate formalities including those of having shareholder and board of director meetings. The Court cites SC Code Section 33 Chapter 18, -200, -210, -220, and -230 to make these points.
But here’s where the Supreme Court erred: it failed to make a distinction between an S-Corporation (federal) and a statutory close corporation (state). The SC Code it cited is about statutory close corporations, not about S-Corporations.
S-Corporation Versus Statutory Close Corporation
An S-Corporation is a business entity that is defined by the IRS. A statutory close corporation is a business entity allowed by some states, including South Carolina.
S-Corporation
An S-Corporation is a business entity with shares and shareholders, just like a C-Corporation. Certain entities may elect to become an S-Corp by filing Form 2553 with the IRS. Unlike a C-Corp, S-Corp income, losses, deductions, and credits “pass through” to shareholders, who pay taxes on the income (or deduct the losses) on their individual federal income tax returns. This is the biggest advantage of the S-Corp and why many businesses elect to become one – to avoid the “double taxation” of the C-Corp. (Read more on C-Corp versus S-Corp here on this blog.)
Statutory Close Corporation
A statutory close corporation is a type of corporation that is defined by state statute. A “close” corporation is typically one where the shareholders are actively involved in managing the business. Not all states allow for statutory close corporations, but South Carolina does. Any corporation in South Carolina with one or more shareholder may elect statutory close corporation status by filing with the South Carolina Secretary of State.
The main reason corporations in the state elect statutory close corporation status is because it offers business owners greater freedom from corporate formalities and greater organizational flexibility than does a standard corporation.
Some provisions to ease the formalities are automatically put in place for your business once the election is made to statutory close corporation status. Other provisions are only put in place if those incorporating make an affirmative selection. These may be made by checking the appropriate boxes on the form articles. Lastly, business owners also have the option to have documents laying out management, elimination of by-laws, dissolution rights, and buy-sell provisions.
The election of filing for a statutory close corporation at the state level does not affect how the corporation is taxed at the federal level. An important thing to note is that the statutory close corporation is automatically taxed as a C-Corp unless it makes the election to be taxed as an S-Corp.
Corporations that elect statutory close corporation status find that under these less rigid rules, they can operate more like a partnership, with greater organizational flexibility and freedom from standard corporate formalities.
Understand How the Law Affects Your Business: Work with Business Attorney Gem McDowell
Choosing the right entity and structure for your business may be more complex than simply deciding on LLC or corporation or partnership. By not understanding the difference between federal and state levels of business entities, and what options are available to you, you could be missing out on some great advantages in your business.
For a better understanding of your options, or for help drafting contracts and corporate governance documents, call Gem and his associatess at Gem McDowell Law Group in Mt. Pleasant, SC. Schedule an initial consultation by calling 843-284-1021 today.
Unintended Consequences: What Happens When You Don’t Do Things Right
Following procedure is important when it comes to the law.
This may go without saying, yet you’d be surprised at what sometimes happens, and what the consequences of failing to follow procedure can be.
This point is well illustrated by a recent case decided by the South Carolina Court of Appeals, Forfeited Land Commission v. Eartha Dean Moody Beard. (PDF here)
Error 1: Heirs Failed to Submit the Estate for Probate
In 2005, Willis Thompson passed away. He left his home in Bamberg County, South Carolina to Coretta McMillan and his two other grandchildren.
But after his death, the estate was never submitted to probate.
As a quick refresher, probate is the process after a person’s death in which outstanding taxes and debts are settled and assets are transferred to heirs. (Learn more about what probate is and whether you should try to avoid probate here on the blog.)
Since Willis’s estate did not go through probate, the deed to his home was never put in his grandchildren’s names, and he remained the owner of record long after his death.
Error 2: A Notice of Levy Was Not Properly Posted
After her grandfather’s death, McMillan paid property taxes on the home in 2005. However, due to the fact that she didn’t alert Bamberg County that Willis had died and never provided an alternative address to receive tax notices, she didn’t receive any delinquent tax notices for the property in 2006.
When the notices were returned undelivered and stamped “Deceased,” Bamberg County then referred the property over to the Delinquent Tax Office to post a notice of levy on the property and put it up for a tax sale.
The Circuit Court and Court of Appeals later found that the tax office did not follow procedure when it came to posting the notice of levy on the residence. The notice is brightly colored and highly visible, yet there was testimony that the notice was never seen posted on the home. Also, the delinquent tax collector for the office testified that there was nothing in the tax office’s file to indicate that there had been a witness to the posting of the notice, as is procedure.
What Happened Next (The Lawsuits)
The facts of this case are convoluted, but in short, the home was sold to the Forfeited Land Commission (“FLC”) (a county commission that exists to bid on property at tax sales not otherwise sold) and then ended up in the hands of Ralph Johnson, who purchased 38 other properties from the FLC at the same time. Meanwhile, McMillan had paid some of the property taxes for certain years and had also gotten a tenant for the house, unaware that it did not belong to her.
With many players in this story, there were many lawsuits and counterclaims, but it’s not relevant to go into detail about them. The one at hand was heard by the South Carolina Court of Appeals in October 2017 after appearing before the Circuit Court in September 2014.
The Courts’ Findings
The Circuit Court found that McMillan had waited too long – more than four years – to challenge the sale to Johnson. The statute of limitations is two years, which the Circuit Court found was triggered by Johnson’s action to evict McMillan’s tenant from the house in January 2010.
The Court of Appeals disagreed. It found that McMillan’s challenge to the sale of the home was not barred by the two-year statute of limitations because the tax sale was void. It was void because the tax office was not in “strict compliance” with statute, as it had failed to provide the required notice of levy. Because the tax sale was void, the two-year statute of limitations never ran.
The decision reversed the finding that McMillan was barred from setting aside Johnson’s tax deed and remands the case back to the Circuit Court to determine if Johnson is entitled to any amount.
Where This Leaves McMillan
McMillan did win this case but the matter isn’t over for her. It’s been four years since the first trial and 13 years since the death of her grandfather, yet she still does not own the home her grandfather intended to give her after his death. This entire situation could have been avoided by following procedure and putting her grandfather’s estate through probate shortly after his death.
For Important Matters, Work with an Experienced Attorney
When it comes to matters of estate planning, procedure is vitally important, and skipping a step or making an inadvertent mistake can be costly in terms of time and money. It’s smart to work with an attorney experienced in estate planning who can guide you through the process and make sure procedure is being followed.
If you’re looking for help with estate planning in South Carolina, contact Gem and his associatess at Gem McDowell Law Group in Mt. Pleasant, SC. Gem and his associatess help individuals and families plan their estates with foresight and intelligence to avoid problems in the future. Call today to schedule an initial consultation at 843-284-1021.
How to Word an Enforceable Provision: Invention Assignment Agreements and Confidentiality Agreements
Some of the most valuable assets a company can own are its trade secrets, patents, and inventions. Losing control of these assets can be very costly, so protection is a must.
To protect their intellectual property, companies often include clauses and provisions regarding trade secrets and inventions. Confidentiality agreements and nondisclosure agreements stop employees from sharing trade secrets and sensitive information. Assignment of Inventions clauses ensure that relevant inventions made by employees during their time at the company are assigned to the company. Trailer Clauses do the same thing but cover a period after the employee leaves the company’s employment.
For businesses in South Carolina with sensitive information, trade secrets, and other intellectual property to protect, it’s important to understand that having such clauses and agreements with your employees isn’t enough. They must be worded precisely in order to be enforceable by a South Carolina court.
A case in point, decided by the South Carolina Supreme Court in 2012, gives a real-life example of what happens when these types of agreements come under the scrutiny of the state’s highest court.
Background to the Milliken & Company v. Morin case
Brian Morin is a research physicist who started working for Milliken, an industrial chemical and textile producer, in April 1995. While employed, he began working on a new multifilament fiber, but Milliken did not agree to support its research and development. Morin resigned from Milliken in May 2004 and filed for a patent for the new fiber which he assigned to Innegrity, a company he founded the same week he quit Milliken.
Milliken found out about what Morin was doing and demanded he stop working with the fiber and furthermore said that under an employment agreement Morin had signed, the invention rightfully belonged to Milliken.
Eventually, Milliken and Morin’s case ended up in the South Carolina Supreme Court. The issue of interest to us here is Morin’s argument that the agreement he signed was overbroad and therefore unenforceable. He argued that the inventions assignment provision and confidentiality clause in his agreement should be scrutinized and enforced to the same standard of covenants not to compete.
The Supreme Court disagreed.
Why are Covenants Not to Compete Disfavored in South Carolina?
As we’ve discussed in previous blogs (here, here and here), South Carolina courts tend to side with the employee rather than the employer when it comes to covenants not to compete. The South Carolina Supreme Court has stated that “restrictive covenants not to compete are generally disfavored and will be strictly construed against the employer” and that they must also be reasonably limited in time and geographical scope. (See Rental Uniform Service of Florence, Inc. v. Dudley, 1983)
This is a high standard to hold all provisions to. However, it’s important to understand why these agreements are often found unenforceable by South Carolina courts. It’s because when they are overly broad and badly worded, they violate public policy by hampering an individual’s ability to make a living in their profession.
The same is not true about the provisions at hand, which do not hamper Morin’s ability to make a living within his profession. The Supreme Court found the inventions assignment agreement and the confidentiality agreement to be clear, reasonable, and enforceable. That’s why it upheld the Court of Appeals’ decision and decided against Morin.
What Employers Need to Know About Drafting These Provisions
While this South Carolina Supreme Court decision is good news for employers in this state, it’s important to understand that the Court upheld the enforceability of reasonable provisions. A reasonable provision is one that protects legitimate business interests yet does not violate public policy by hampering an individual from making a living in their profession.
In this particular case, the exact wording of the relevant parts of the employment agreement signed by Morin was important to the Court. Let’s look at the specific language used and upheld by the Court to understand what businesses can do when wording their own provisions in the future.
- Clear Definitions
For both the confidentiality clause and the invention assignment agreement, the Court’s opinion stressed that the definitions were extremely clear. Here they are, as presented in the opinion.
Milliken’s definition of confidential information contains five elements, all of which must be met for information to be considered confidential. The Court wrote “It does not take much elaboration to see that rather than covering general skills and knowledge, it encompasses only important information […]” As defined by Milliken in the agreement, confidential information is:
- Competitively sensitive information
- Of importance to and
- Kept in confidence by Milliken,
- Which becomes known to the employee through his employment with Milliken, and
- Which is not a trade secret.
Regarding the invention assignment agreement, the Court notes that at first Milliken defines inventions broadly, then provides the following broad exception to that definition:
“for which no equipment, supplies, facility or proprietary information of Milliken was used and
Which was developed entirely on your own time, and
- Which does not relate
- Directly to the business of Milliken or
- To Milliken’s actual or demonstrably anticipated research or development, or
- Which does not result from any work performed by you for Milliken.”
Both of these provisions had clear definitions that protected Milliken’s interests without limiting Morin’s ability to find employment.
- Reasonable Time Limitations
The Court stated that the confidentiality agreement was “reasonably limited” to “only” three years and it called the one-year restriction attached to this provision “eminently reasonable.”
Businesses should be conservative, not greedy, when attaching time limitations to any and all provisions.
- Reasonable Geography Limitations
Although not discussed in this decision, geographical limitations on such provisions are also important. The Court of Appeals decision in this case cited a previous South Carolina Supreme Court decision which found “geographic restriction is generally reasonable if the area covered by the restraint is limited to the territory in which the employee was able, during the term of his employment, to establish contact with his employer’s customers.”
For companies that do business with customers across the country and across the globe, this means that a provision unlimited in territory may not be considered unreasonable if the company actually does do business all over. For companies that do business solely in South Carolina, it would be unreasonable to have a provision unlimited in territory.
Employers should err on the side of being conservative when it comes to limitations in geography.
Get Help with Business Contracts, Employment Agreements, and More
As you can see, the wording in an employment agreement or provision can make the difference between being enforceable and unenforceable here in South Carolina’s courts. If you have business interests to protect, you should be working with an experienced attorney.
Gem McDowell is a business attorney with over 25 years of experience solving legal problems and helping businesses protect their interests. For advice and help with your business legal matter, contact Gem McDowell Law Group in Mt. Pleasant, SC today at 843-284-1021.
Protect Your Business Interests with Anti-Raid and Anti-Disparagement Provisions
We’ve talked before about how South Carolina courts tend to favor employees over employers in regards to covenants not to compete. This means that employers must be very careful in wording covenants not to compete to ensure they’re not overly broad or too restrictive.
But this bias against employers doesn’t extend to all covenants employers use. South Carolina courts are more likely to enforce covenants that don’t have clauses and provisions limiting an employee or former employee from earning a living in their profession.
Two other provisions that can help protect an employer’s business interests and should be considered when drafting a covenant not to compete are anti-raid provisions and non-disparagement provisions. As with covenants not to compete, the purpose of these provisions is to protect the employer’s interests after an employee leaves the company. Let’s look at them in turn.
Anti-Raid Provisions
The anti-raid provision typically states that for a period of time after the employee is no longer with the company (and possibly during employment as well), they may not approach or attempt to solicit anyone working for the company to leave in order to compete with the company. This is intended to prevent an employee from leaving the company and taking along other employees, which is clearly detrimental to the company’s interests.
Like covenants not to compete, these provisions must be reasonable. In practice, that means limiting the provision to a restricted period of time, often a year after leaving employment. South Carolina courts are likely to interpret these more favorably for the employer rather than the employee, as they don’t harm the employee’s ability to make a living in their profession after leaving their employer.
Non-Disparagement Clauses
This clause prohibits an employee from disparaging, or making negative comments, about the company, its officers, and its employees, whether orally or in writing. This provision can be found in both employment agreements (often as a clause within the covenant not to compete) and in severance or settlement agreements at the end of the employee’s tenure. The purpose is to protect the company’s reputation. Again, South Carolina courts may be favorable towards these clauses because they don’t have anything to do with restricting the employee’s right to work. Employers should consider using this clause as a matter of course upon either hiring or dismissing employees.
Still, employers need to use caution with this clause. The agreement must be clear to both parties, as a lack of clarity can lead to unintended consequences. Great care is warranted with these clauses, in part because they are greatly disfavored by state and federal agencies.
Work with an Experienced Business Attorney in Mt. Pleasant, SC
As always, remember that issues like this depend very much on the state where business is being done and arbitrated.
If you need legal advice on business contracts, employment or severance agreements, business real estate transactions, corporate taxes, or other business matters in South Carolina, contact Gem McDowell Law Group in Mt. Pleasant, SC. Gem and his associatess help businesses of all sizes protect their interests so they can continue to grow. Call today to schedule an initial consultation at 843-284-1021.
Can Your Retirement Account Be Used to Settle Business Debts?
Let’s say you owe money in a judgment, yet you still want to continue contributing to your savings accounts. Can you do that, or can that money be used to settle your judgment?
First Citizens Bank v. Blue Ox
A case decided by the South Carolina Court of Appeals heard in late 2017 dealt with this exact issue. Here’s a little bit of the background.
J. Chris Lindgren was the sole member of Blue Ox, LLC. In 2013, he signed confessions of judgment totaling $113,000 on behalf of himself and Blue Ox after he defaulted on a loan from the Bank. Lindgren never paid the judgment, and in the meantime, Blue Ox went defunct. Since the time of the judgment, Lindgren made contributions to an IRA account and a 401(k) plan.
The Bank wanted the judgement settled and started supplemental proceedings against Lindgren. It argued that the contributions he made to those accounts were fraudulent and that money should be available to pay off the judgement.
Lindgren knew he owned money to the Bank. Yet he still made contributions to three separate savings accounts. Was that legal? Should the money have been or become available to pay off the judgment? Or are those accounts protected from such use?
The case was first heard and decided by the Master-In-Equity before the cross-appeal was heard by the Court of Appeals. The Master-In-Equity determined that the 401(k) contributions were exempt from execution but his IRA contributions were not. Here are some issues the Court considered when deciding the case, and what it means for you.
The Homestead Exemption Act: What’s Exempt Under the Law
The Bank argued that the 401(k) contributions Lindgren made were not subject to protection under the Homestead Exemption Act.
What is the Homestead Exemption Act? It’s probably best known to South Carolina homeowners because it exempts the first $50,000 in value in real property in from property taxes for homeowners over 65, totally and permanently disabled, or legally blind.
The Act goes much further than this, however, and spells out exactly how much property a debtor may have that is “exempt from attachment, levy, and sale.” That is, these particular assets are protected from being used to settle debts.
In addition to the $50,000 in real property that’s exempt, the Act also allows $5,000 of interest in one motor vehicle, $4,000 in personal property such as household goods and clothing, $1,000 in family jewelry, etc. It also protects income due to the debtor from things like social security benefits, veterans’ benefits, alimony, and pension plans.
In the case at hand, the Court of Appeals AFFIRMED the Master’s initial finding and DISAGREED with the Bank. It determined that that the contributions Lindgren made to his 401(k) accounts were clearly protected under Section 15-41-30(A)(14) of the Act as a matter of statute. The Court also noted that “the exemptions in the Homestead Act are to be construed in favor of the Debtor.”
The Statute of Elizabeth: What Constitutes Fraudulent Behavior
It is illegal under South Carolina law to intentionally transfer assets in order to avoid paying your debts. If you remember from a previous blog on this topic of fraudulent conveyances and the Statute of Elizabeth, Courts can look for “badges of fraud” to assess whether or not someone’s behavior was fraudulent in intent.
In this case, the Court stated that the Bank needed to demonstrate Lindgren’s “actual intent to defraud” in order to make his savings contributions available for settlement of the judgment. The Court determined that the following badges of fraud were present:
- Lindgren did not possess enough assets to pay the debt
- Lindgren reserved the benefit of the IRA contributions for himself
- Lindgren was aware of the outstanding judgment against him at the time of the contributions
However, the Court found that many other badges were missing:
- Contributions were limited in amount
- Contributions were not secretive
- Contributions were in line with his long-standing pattern of investing in retirement
This last point is important. Lindgren provided evidence that he had a pattern of contributing to his savings accounts for many years before he signed the confessions of judgment. The contributions he made after the judgment were a continuation of that pattern, which the Court said is “conduct that is encouraged by the very existence of the exemption.”
Based on all this, the Court did not find “clear and convincing” evidence of fraudulent intent. It REVERSED the Master’s finding that Lindgren’s IRA contributions were fraudulent conveyances.
Ownership and Consideration
The Court failed to find Lindgren’s behavior demonstrated clear intent to defraud under the Statute of Elizabeth. Yet it also acknowledged that analysis under the Statute of Elizabeth was not mandated in this case for two reasons.
First, one of the hallmarks of fraudulent conveyance is that the asset changes ownership. However, money contributed to an IRA still belongs to the debtor; while it has now been transferred into a protected asset, ownership has not changed. (The Court also noted that in bankruptcy, the “conversion of a non-exempt asset into an exempt asset is not in and of itself a fraudulent act.”)
Second, there is the issue of consideration, which refers to the exchange of one thing for another. Typically, in instances of fraudulent conveyance, no consideration is being given for the assets transferred. For example, someone may transfer land into someone else’s name, but receive no money for it. This is one of the badges of fraud.
In this case, the Court stated that “in the specific case of IRAs, the contribution is never made for valuable consideration” (emphasis theirs). Therefore, it is not appropriate to consider Lindgren’s contributions his IRA in terms of the Statute of Elizabeth.
Your Savings Accounts May Be Safe from Debts
The South Carolina Court of Appeals looked at state statute, the intent of the law, and the Debtor’s behavior to come to the conclusions it did. It ultimately protected Lindgren’s contributions to his savings accounts from execution for settlement of the judgment he owed. This is a positive outcome for individuals who may be in debt but want to continue saving for the future.
However, don’t assume that any contributions made to savings accounts are always safe from execution. A lot depends on the particular facts of the case. In addition, this is a Court of Appeals decision, and may not be the final word on the issue. As of March 2018, there is a petition for rehearing pending, meaning that the South Carolina Supreme Court could reverse the decision.
Get Business and Estate Planning Advice
For legal advice from an experienced business and estate planning attorney, call Gem McDowell Law Group in Mt. Pleasant today at 843-284-1021. Gem has over 25 years of experience in solving legal problems and helping people planning for the future, and he is ready to help you do the same.
6 Common LLC Creation Mistakes
Starting a new business is exciting but also a little intimidating. There’s a lot you probably don’t know, and mistakes can end up costing you.
If you’ve decided to start a limited liability company (LLC), then you’ve already avoided the biggest mistake, which is not having a business entity at all. But you’ll also want to avoid these 6 other common mistakes people make when starting an LLC.
Mistake 1: Choosing to Become an LLC When It’s Not the Right Entity for Your Business
The first mistake people make when creating an LLC is choosing an LLC to begin with. The limited liability company is a great business structure for many business ventures, but it’s not suitable for all.
The main consideration is money. Do you plan on growing with capital from outside investors? If so, a corporation is likely a better choice for you. Investors are typically more comfortable investing in corporations than in LLCs. Corporations are also the only entities that can issue stock, so if you dream of a big IPO in the future, then the corporation is the entity for you.
Mistake 2: Incorporating Your Business in the Wrong State
Once you’ve determined that the LLC is the right entity for your business, your next step is to decide on where to incorporate it, i.e., where to register it.
Most of the time, incorporating in the state where you live and do business is the best solution. Some entrepreneurs want to incorporate in other states like Delaware, Wyoming, or Nevada for the supposed tax and legal benefits. This can make sense for larger companies, but it rarely makes sense for smaller LLCs.
Incorporating your business in a state your business isn’t based in means taking on hassles like maintaining a registered agent in both the state you live in and incorporate in, filing paperwork in both states, and paying fees to both states. After considering the time and money involved, it’s typically not a savvy move for most LLCs. It’s usually smarter to incorporate in your home state.
Mistake 3: Choosing the Wrong Type of LLC
There are actually four types of LLCs you can create in South Carolina, as we’ve covered before in a previous blog. Check out that blog for more information, but in short, know that an LLC can be either “term” or “at will” and “member managed” or “manager managed.” If you select the wrong type when setting up your LLC, it can be bad for the LLC and the members down the line.
Mistake 4: Choosing a Bad Name
What makes a “bad” name? One that’s already being used.
Before choosing a business name, do some research. You can search for existing business names in South Carolina here under “Existing Business,” which is a good start. (South Carolina does not allow a new business to register a name that’s not “grammatically distinguishable” from existing names.) You might also want to search the trademark database at the US Patent and Trademark Office here to see if the name you have in mind is being used somewhere else. Finally, a thorough Google search for your proposed name can turn up other uses of the name.
Your name matters because if you inadvertently violate someone else’s trademark, you can get in trouble. Disputes over names can end up being costly and time-consuming if someone sues you over the name and you want to defend your right to use it. But even if you decide to let go of the name, it will cost you time and money to rebrand your digital and physical presence. Worse, you will have lost the brand recognition and goodwill you’ve built up over the years in your community. So choose wisely.
Mistake 5: Not Having Corporate Governance Documents
This is probably the single biggest mistake you can make when you plan to start an LLC with business partners. Many people go into business with friends or family members, and at the start everything is copacetic. Everyone gets along and there are no major disagreements. But many an experienced business attorney will tell you that times change, and that’s when things can get ugly.
Imagine that you’re in a business with two friends and everything is going well at first. Then one friend unexpectedly dies, and you find you’re now in business with their spouse. Or the other friend starts slacking off, working fewer hours but taking the same profits as the hard-working partners. Or you become incapacitated and can no longer work. Or the three of you disagree on how to raise money for the company. What happens to you, your investment, and the business in these situations?
Corporate governance documents are intended to lay out the rules so that when a disagreement or unpleasant situation arises, what happens next is clear. These simple documents can preserve good relations between partners, protect the partners’ investments, and protect the business itself.
Two important documents that any business owner with partners should consider getting during the creation of their business:
An operating agreement. This spells out how the company should be managed, how profits and losses are handled, how much of the company each member owns, what each member’s responsibilities are, and more.
A buy-sell agreement. This document covers what happens to the business when a member dies, becomes incapacitated, stops working, etc. Read more about buy-sell agreements here.
By addressing future scenarios now, you can avoid major problems down the line. Just know that it’s vital to discuss these things before you and your partners start operating your business.
Mistake 6: Not Getting Legal Assistance When You Need It
It’s very easy to go online and get the forms to start an LLC yourself, without the help of an attorney. Is that smart?
In some cases, doing so is fine and poses no future problems, particularly with single-member LLCs that operate within one state and are wholly self-funded. These business owners would likely benefit from speaking with a business attorney, but they may feel pretty confident that they can create their LLC on their own.
But other entrepreneurs should consider speaking with an attorney before and during the creation process of their LLC. This is especially true in any of the following situations:
- You have business partners
- You plan to take on money from outside investors
- You plan to do business in multiple states
The cost is usually the main reason that people don’t want to spend the money on an attorney at this stage, and that’s understandable. Business owners want to make money before they spend it. But the money you spend up front on corporate governance documents or advice from an experienced attorney can save you money and mistakes down the road. (Plus, don’t forget this expense is a business write-off when it comes to tax time.)
Questions About Your LLC? Speak with Business Attorney Gem McDowell
Gem McDowell is a business attorney with over 25 years of experience helping people start and run their businesses. He’s a problem solver who can help you start out right and avoid the many mistakes he’s seen in the past. Contact Gem at his Mt. Pleasant office today to schedule a free consultation by calling (843) 284-1021 or filling out this contact form.
Arguing for Bigamy: When the Court Must Decide Between Competing Public Policy Issues
Should a bigamous marriage be recognized in South Carolina if doing so upholds an important legal doctrine? That was the main issue at the center of a case recently decided by the South Carolina Court of Appeals. (You can read the decision in full here: PDF.)
The Background of the Case
Blondell and Charles Gary were married (exactly when is unclear) and had two children together, one of whom is Angel Gary. They later divorced. Then, in 1982, Charles married Doretha Chisholm. They later divorced as well.
Charles then remarried Blondell in 1999 – two years before his divorce from Doretha was finalized in 2001. Charles and Blondell lived together as man and wife from 1999 until Blondell’s death in 2012 in a traffic accident. She and Charles were passengers in an ambulance operated by Lowcountry Medical Transport when the driver lost control and collided with a tree, killing Blondell.
After Blondell’s death, Angel Gary was appointed personal representative to her mother’s estate. In 2012 she filed suit against Lowcountry Medical Transport for actual and punitive damages for the accident that led to her mother’s death. They settled for $2.25 million in 2015.
Later that year, Angel filed a petition to determine heirship to her mother’s estate. She contended that Charles was already married to another woman when he attempted to marry Blondell, and that the marriage between Charles and Blondell was void. Charles argued that he was a rightful heir, but the Circuit Court disagreed, and ruled that his marriage to Blondell was void and he was not heir to Blondell’s estate.
The decision was appealed, which brings us to the case in hand.
Issues of the Case
There are two issues here at odds with each other.
- Parties being judicially bound by their pleadings.
What does this mean? It means that parties that have stated something on the record in a court proceeding are bound to those statements unless they are “withdrawn, altered or stricken by amendment or otherwise.” Essentially, a party cannot take a position contradictory to its pleadings in previous cases.
This was a key defense for Charles. He argued that based on the above doctrine, the Estate must be bound by their previous assertion in the Lowcountry Medical Transport suit that he was the “surviving spouse and beneficiary” of Blondell’s estate.
The Court of Appeals has previously stated that “parties are judicially bound by their pleadings” as a matter of course.
- Bigamous Marriage.
South Carolina, like all other states, outlaws bigamy. It also prevents a common law marriage from forming if there was an impediment at the time of marriage, such as one of the intended spouses being married to someone else. Even if the impediment is removed, the union does not automatically become a common law marriage. (Note that Charles did not attempt to argue that he and Blondell had a common law marriage.)
A similar issue occurred in the 1992 Johns v Johns case in which a woman sued her purported common law husband for divorce, child custody, and financial support. The Court found there was no common law marriage and denied her requests because her purported husband was married to another woman for the entirety of their relationship.
A Matter of Public Policy
On this blog we’ve seen the term “public policy” before, when discussing indemnification clauses and covenants not to compete and NDAs. In the context of contract law, public policy may be a reason to find a contact unenforceable, because enforcing it would be detrimental to the public good.
The Court acknowledges that it comes down to weighing competing public policies in this case. In its decision, it writes, “On one side, we have a marriage which contravened public policy […] On the other, the doctrine of binding a party to its pleadings exists to protect the integrity of the court process.”
In this instance, the Court finds that public policy is better served by not recognizing bigamous marriage: “While ordinarily the Estate may be bound to its previous assertions, we find that policy should yield to the overriding policy against bigamous marriages.” In so doing, it affirmed the Circuit Court decision that Charles was not a rightful heir to Blondell’s estate.
The Law Can Be Complex – Call Gem McDowell
We like to cover recent South Carolina cases from the Court of Appeals and Supreme Court on this blog because it’s important to understand that what happens in these cases has a very real effect on how laws are interpreted in our state and on the work we do for our clients.
The fact is, the law is complex and can change. If you’re facing legal issues having to do with estate planning, business, commercial real estate, or tax law, contact Gem and his associatess at Gem McDowell Law Group in Mt. Pleasant, SC. Gem and his associatess help individuals and families plan their estates with foresight and intelligence to avoid problems in the future. Call today to schedule an initial consultation at 843-284-1021.
The #1 Mistake People Make With Trusts
Trusts are wonderful tools for financial planning and estate planning. There are many, many kinds of trusts, each with its own purpose, pros, and cons. Trusts may be used to, among other things, avoid certain taxes, avoid probate, leave specific assets to an individual or organization, or pay for life insurance.
However, it doesn’t matter what kind of trust it is when it comes to the biggest mistake we see people make with trusts. That mistake: not putting anything into the trust.
The Basics Of Trusts
This can happen when people don’t understand what a trust fundamentally is.
A “trust” is an arrangement between three parties where the “trustor” (also called a “trustmaker,” “grantee,” or “settlor”) gives ownership of certain assets to a “trustee” for the benefit of a “beneficiary.” (Note that there may be more than one trustee and/or more than one beneficiary, according to the terms of the trust.)
The key point here is that the trustor gives up ownership of assets that go into the trust. This does not happen automatically upon signing the documents that create trust. The trustor must do it separately. Ideally, the estate planning attorney who draws up the trust will provide explicit instructions on what to do next and how to transfer assets, but that doesn’t always happen.
To transfer assets into the trust, the trustor signs over the deed of their house, title of their car, stocks and bonds, bank accounts, and any other selected assets to the trust. Which assets go in the trust depend on what the objective of the trust is. If the purpose is to avoid probate, then everything should go in the trust. If the purpose is to provide some money for the grandchildren over several years, for example, a selection of securities might be enough.
What Can Go Wrong
If someone does make this mistake, and fails to transfer ownership of assets from themselves to the trust they created, it can and likely will cause unintended consequences.
Imagine an adult child whose father said he had created a trust in order to avoid probate. Upon the father’s death, the child discovers that the trust was never funded. Everything is still owned in the father’s name at the time of his passing. Now the estate will pass through probate and, depending on the size of the estate, may be subject to estate taxes that could have been avoided. This is just one example, but there are many other ways an unfunded trust can cause unexpected problems.
Avoid This Mistake and Others With Guidance From Experienced Attorneys
Trusts are complex. For help creating trusts and understanding how they fit into your overall estate plan, call Gem McDowell Law Group. Gem is an estate planning and business attorney with over 20 years of experience helping individuals and families plan for the future. Contact Gem at the Mt. Pleasant office at (843) 284-1021 or use this contact form to get in touch and schedule a consultation today.
Would Your Contract Hold Up in Court? Indemnification Clauses and Public Policy.
If you’re in business, you know that contracts are a must to protect yourself. But don’t make the mistake of assuming that simply having a contract is enough. If it’s worded incorrectly, it can cost you.
In previous blogs we’ve discussed what can happen when covenants not to compete and nondisclosure agreements overreach or violate public policy – they become unenforceable.
The same is true with other common clauses in business contracts. Today we’re looking at the indemnification clause, which was the subject in a recent case before the South Carolina Court of Appeals. The Court determined that the clause in question was worded in such a way as to violate state public policy and was therefore unenforceable.
Let’s look at what indemnification is first, then the case, and finally, what you as a business owner can do so you don’t find yourself in the same situation.
What is Indemnification?
In an indemnification clause, the indemnifying party (the indemnifier) agrees to – in standard contract language – “indemnify, hold harmless, and defend” the indemnified party (the indemnitee) against lawsuits and losses resulting from the actions or negligence of the indemnifying party.
In practice, indemnification serves to shift the costs of defending lawsuits and paying resulting damages, if any, from one party (the indemnitee) to the other (the indemnifier). It may also shift the actual defense litigation as well.
For example, say a construction company hires a subcontractor to do some work on a house. The subcontractor indemnifies the construction company against damages arising from lawsuits due to its (the subcontractor’s) work. Let’s say the subcontractor does a shoddy job and the homeowner later sues the construction company for damages. Because it was indemnified, the construction company can expect the subcontractor to cover the fees it spends defending itself and the damages it pays to settle the claim.
A Real-Life Example
This was the general situation in the case at hand, D.R. Horton v. Builders FirstSource v. Jamie Arreguin.
The builder D.R. Horton, Inc. (Horton) entered into a contract with Builders FirstSource (BFS) for BFS to do some construction work on a home. Several years after the work was completed, Horton was sued by Patricia Clark for damages related to multiple alleged construction defects in the home. Horton was ordered to pay Clark $150,000 in general damages after arbitration.
Horton then sought to recover those damages and legal fees from BFS under their contract’s indemnification clause. The case went to a circuit court, which sided with BFS. It then went to the South Carolina Court of Appeals, which affirmed the lower court’s decision.
(For more details about this case, read the PDF of the court’s opinion here.)
What happened? BFS and Horton had an indemnification clause in their contract; why was Horton not able to recover under it?
The Indemnification Clause Violated Public Policy
The main reason the Court decided in BFS’s favor was that the contract’s indemnification clause was written in such a way as to violate South Carolina public policy.
The Court of Appeals found that it was allowable under state statute for Horton and BFS to agree that BFS would indemnify Horton for damages caused by BFS. However, the Court also found that it was not allowable for Horton to have BFS indemnify Horton for damages caused by Horton, which is how the clause was worded. That violated Section 32-2-10 of the South Carolina code and went against public policy, making it illegal and therefore unenforceable.
Here is the relevant section of the Code, abridged for clarity:
“Notwithstanding any other provision of law, a promise or agreement in connection with the […] construction […] of a building […] purporting to indemnify the promisee […] against liability for damages […] proximately caused by or resulting from the sole negligence of the promisee […] is against public policy and unenforceable.”
In addition, the circuit court and Court of Appeals found that Horton failed to provide BFS written notice of the Clark matter, as per their contract, which acted as a waiver of Horton’s right to indemnification. Also, Horton and Clark requested that the arbitration award be general, which means there was no way to know what part, if any, of the $150,000 award was related to construction work completed by BFS.
What This Means for You
Time and again, businesses get in trouble when they try to get more than they fairly and lawfully deserve. Here, Horton wanted BFS to pay damages for what may have been Horton’s own negligence, which is not reasonably fair, and is also not legal. In the end, Horton got nothing.
As a business owner, here’s what you can do to avoid a similar situation:
- Be very intentional about the wording in the contracts you create. While you want to protect your company’s interests, if you go overboard, you could end up with a clause or contract that’s unenforceable.
- Be just as careful about the contracts you sign. Do you understand what every clause means, and is it fair?
- Work closely with an attorney who understands contract law. Have your attorney draft new contracts or review existing contracts and discuss them with you to ensure they’re worded correctly and align with your business interests.
Get Help with Your Contracts From the Business Attorneys at Gem McDowell Law Group
Gem McDowell is a problem solver and a business attorney with over 25 years of experience. He can help you with your legal needs including reviewing and drafting contracts. Call them at Gem McDowell Law Group in Mt. Pleasant, South Carolina to discuss your business matter at (843) 284-1021 today.
