Can I get Out of a One-Sided Contract? Adhesion Contracts and Unconscionability in South Carolina

Unless you live off the grid, you have almost certainly signed a very long contract full of dense legalese. You probably didn’t even read it. You certainly didn’t attempt to negotiate better terms for yourself. You just signed your name and hoped for the best.

These types of one-sided, boilerplate contracts are known as adhesion contracts, and they’re very common. If you want to lease a car, buy a new build home, enjoy streaming content, or enjoy any other number of products or services, you’ll encounter one. It’s a take-it-or-leave-it situation: accept the contract as is or simply don’t enjoy the product or service.

But what if you discover after signing that you’ve made a big mistake and want out? Can you get out of a one-sided adhesion contract?

Maybe. One way to get out of such a contract is for a court to find the contract terms so one-sided and oppressive they’re considered unconscionable. Today we’ll look at where South Carolina courts draw the line between enforceable and unenforceable with respect to adhesion contracts, and see what the South Carolina Court of Appeals said on the topic in Mart vs. Great Southern Homes, Inc. (2023).

Elements of Unconscionability in South Carolina

A court can find a contract, a clause, or behavior “unconscionable” when it’s so egregious that it shocks the conscience of the court. We’ve covered unconscionability in depth on this blog before when looking at Huskins v Mungo Homes, LLC (2022); read that blog here.

In South Carolina, two elements are required for unconscionability with respect to contract law:

Absence of meaningful choice
Oppressive and one-sided terms

Both elements need to be present for a court to find a contract or its terms unconscionable.

When a clause is found to be unconscionable, the court has the discretion to sever that clause and enforce the rest of the contract as is; render the entire contract unenforceable; or limit the application of the unconscionable clause. (See South Carolina code Section 36-2-302).

Adhesion Contracts in South Carolina and Unconscionability

The question is whether adhesion contracts contain:

Absence of meaningful choice AND
Oppressive and one-sided terms

By their nature, adhesion contracts entail an absence of meaningful choice. The party signing the contract (typically an individual consumer) does not have the opportunity to negotiate terms with the party writing and presenting the contract (typically a large company).

Adhesion contracts are also one-sided by nature. Terms favor the party providing the contract and disfavor the signing party.

The final element to satisfy for unconscionability is “oppressive.”

What’s Considered “Oppressive”?

The 2023 South Carolina Court of Appeals case Mart v. Great Southern Homes, Inc. (find it here) mainly focuses on whether arbitration can be compelled when a single contract contains conflicting arbitration clauses. (The court says yes.) At the end of its decision, the court also briefly addressed the issue of adhesion contracts and unconscionability.

Quoting the South Carolina Supreme Court case Damico v. Lennar Carolinas, LLC (2022), it wrote “a take-it-or-leave it contract of adhesion is not necessarily unconscionable, even though it may indicate one party lacked a meaningful choice. […] Rather, to constitute unconscionability, the contract terms must be so oppressive that no reasonable person would make them and no fair and honest person would accept them.” (emphasis added)

And: “The distinction between a contract of adhesion and unconscionability is worth emphasizing: adhesive contracts are not unconscionable in and of themselves so long as the terms are even-handed.” (emphasis in the original)

In the Mart opinion, the court provides some examples of unconscionable and therefore unenforceable terms from other cases involving home builders:

Smith v. D.R. Horton, Inc. (SC Supreme Court, 2016, here): D.R. Horton’s attempts to disclaim implied warranty claims and prohibit monetary damages of any kind; contract terms left relief “to the whim” of D.H. Horton
Damico (SC Supreme Court, 2022, here): Lennar’s contract gave Lennar “sole election” to choose the parties for arbitration, potentially forcing purchasers to separately litigate against subcontractors in circuit court
Huskins (SC Court of Appeals, 2022, here): The Mungo Homes contract shortened the statutory limitation period to bring a claim from three years (as provided for in state law) to a maximum of ninety days

These terms go beyond normal contract terms in favoring the contract-writing party such that the courts ultimately found them “oppressive.”

Be Careful What You Sign

So, can you get out of an adhesion contract? Maybe – but probably not. Even if you’re successful in proving in court that certain contract terms are unconscionable, the court may simply sever those terms and allow the rest of the contract to stand.

The bottom line: If you don’t want to be held to the terms of the contract, simply don’t sign it in the first place. You can’t count on getting out of a contract after the fact.

(And don’t forget that many contracts, including many EUAs and contracts you agree to digitally, give you the opportunity to opt out of arbitration in writing within 30 days, as we previously covered in this blog on arbitration.)

For help with contracts, business law, estate planning, and probate, contact Gem McDowell at the Gem McDowell Law Group. Gem and his team help individuals, families, and businesses in South Carolina from offices in Myrtle Beach and Mount Pleasant. Gem has over thirty years of experience and can help you and your family or your business protect your interests, avoid mistakes, and achieve peace of mind. Call today to schedule your initial consultation at 843-284-1021.

Avoid $591/Day Penalty: Business Owners, File a BOI Report ASAP

UPDATE: The requirement to file BOI reports is on hold – at least for now. From The National Law Review: “On December 3, 2024, the U.S. District Court for the Eastern District of Texas entered a preliminary injunction suspending enforcement of the Corporate Transparency Act (CTA) and its implementation of regulations nationwide.” In response, the Department of Justice issued a notice of appeal on December 5^th.

What this means for you: If you have already submitted your BOI report(s), there’s nothing left to do. If you have not yet done so, you may choose to do so anyway or wait and see how the legal proceedings play out. As noted in the article linked above, “reporting obligations may change on short notice,” so make sure to monitor the news for updates. You can also come back to this post, which we will keep updated.

Original post:

Attention U.S. business owners: If you are a beneficial owner in a non-exempt company, you must submit a Beneficial Owner Information Report. Depending on when your company was established, you may have 30 or 90 days from when your company was created or until January 1, 2025, to do so.

The penalty for failing to file is steep – over $500 per day in fines and even jail time.

The new reporting requirement is due to the Corporate Transparency Act (CTA), which was passed in late 2020 after being tacked onto a larger bill (the National Defense Authorization Act for Fiscal Year 2021). Here’s what to know about the reporting requirement and what you should do.

Frequently Asked Questions

How Do I File a Beneficial Owner Information Report?

You can file a BOIR online at https://www.fincen.gov/boi.

What is a Beneficial Owner Information Report?

A Beneficial Owner Information Report (BOIR) is a required submission to the Financial Crimes Enforcement Network (FinCEN, part of the Treasury Department) that contains information on the company and its beneficial owner(s). This information includes full name, address, date of birth, and ID.

What is a “Beneficial Owner”?

A “beneficial owner” is someone who owns or controls at least 25% of the “ownership interests” of the company or someone who exercises “substantial control” over the company.

Who Must File a Beneficial Owner Information Report?

A BOIR must be filed for every “reporting company” which is established in the U.S. or registered to do business in the U.S. and is not exempt (see below for exemptions). This may be an LLC, a corporation, or any other business entity that was created by filing with the secretary of state, as well as some trusts.

Just one BOI report is required per company, regardless of the number of beneficial owners. The report is typically filled out and filed by one of the beneficial owners, such as a member, manager, director, or corporate officer, or an attorney working at or for the company.

Which Companies Are Exempt?

Some companies qualify for an exemption, meaning they are not required to file a BOI report.

These include companies that are already subject to regulatory oversight such as banks, credit unions, insurance companies, and tax-exempt entities. “Large operating companies” are also exempt; under the CTA, a “large operating company” is one with a physical office in the U.S., more than 20 full-time employees, and over $5 million in gross receipts or sales for the previous year as reported on a federal income tax or information return.

Find the full list of the 23 exempt entities on the FinCEN website.

When is the BOIR Due?

Companies formed or established before January 1, 2024 have until January 1, 2025 to submit a BOIR.

Companies that have ceased to exist but were still in existence as of January 1, 2024 have until January 1, 2025 to submit a BOIR.

Companies formed or established between January 1, 2024 and January 1, 2025 have 90 days to submit a BOIR.

Companies formed or established after January 1, 2025 have 30 days to submit a BOIR.

Is a BOIR Due Every Year?

No, as of now, just one BOIR is required. However, substantial changes must be reported within 30 days with a new BOIR, if, for example, the beneficial owners change or a previously non-exempt company becomes exempt (or vice versa).

What is a FinCEN Identifier?

A FinCEN ID is a unique 12-digit number an individual or entity may use when submitting a BOIR. It is not required. However, if you are submitting multiple BOIRs, a FinCEN ID can help speed up the process by allowing you to submit your personal information just one time rather than repeating it again and again.

What Are the Penalties for Non-Compliance?

According to FinCEN, someone who “willfully” violates the BOI reporting requirements may be fined for each day the violation continues. The amount of the fine adjusts annually with inflation, so what was originally a $500 per day fine was (as of 2024) $591 per day.

Willful violation can also lead to up to two years in prison and a $10,000 fine.

Uncertainty Over the Future of the CTA

The stated intention of the Corporate Transparency Act is to reduce money laundering, financing of terrorism, and other financial crimes. However, it has already been challenged in a number of lawsuits, as some see it as intrusive and unconstitutional. The future of the CTA is unclear, as these legal challenges could lead to significant changes in reporting requirements.

But that’s a long way off, if it happens at all. For now, you can stay in compliance and avoid steep financial penalties (and possible imprisonment) by submitting a BOIR for any company in which you’re a beneficial owner.

Protect Your Interests, Avoid Mistakes, and Grow Your Business with Gem McDowell

For legal help and strategic advice on business in South Carolina, contact Gem of the Gem McDowell Law Group. Whether you want to establish, buy, sell, or grow your business, Gem and his team can help. Call the Myrtle Beach or Mt. Pleasant, SC office today at 843-284-1021.

Changing the Rules Mid-Game: What the Connelly v U.S. Decision Means for Closely Held Corporations

If you are a shareholder in a closely held corporation, you need to know about the June 2024 decision from the U.S. Supreme Court case Connelly v. United States (2024). This decision (find it here) could have dramatic consequences for your business and for you, personally, as a shareholder.

Here’s the central issue:

Should life insurance proceeds paid to a closely held corporation to buy out a deceased shareholder’s portion of the business be counted as a non-offsettable asset for the purposes of calculating the decedent’s federal estate taxes?

The U.S. Supreme Court says YES.

The issue is somewhat convoluted. The upshot is that this decision allows the IRS, in some circumstances, to essentially “tax” a portion of previously untaxable life insurance proceeds without directly taxing them. Instead, it’s done by counting the life insurance proceeds as a business asset that cannot be offset, thus increasing the deceased shareholder’s share of the company at time of death and increasing their taxable estate – and possibly creating a federal estate tax liability.

This is a drastic change from what has previously been done. It’s like changing the rules while you’re in the middle of the game; you were expecting to pass Go and collect $200, but now you owe $300.

Below, we’ll look at the background of Connelly and the court’s reasoning, then discuss what it could mean for you and the other shareholders in your closely held corporation.

Note that today’s blog is just an introduction to the topic. Since this decision is so new, it’s not clear how things will shake out; it will take some time for business owners and their attorneys to determine the best course of action moving forward. But for now, we wanted to put this on your radar. We recommend speaking with your own business attorney and/or estate planning attorney about the potential consequences for you if you are an owner in a closely held corporation. (And if you do not yet have a business attorney or estate planning attorney in South Carolina, call us at the Gem McDowell Law Group at 843-284-1021 to talk.)

Connelly vs United States (2024) Summary

Briefly: Michael and Thomas Connelly were brothers and together owned a building supply company, Crown C Supply (Crown). They had an agreement to ensure the business would stay in the family if either brother died. The surviving brother would have the option to purchase the shares first, and if not, then Crown would be required to purchase the deceased brother’s shares. The corporation purchased life insurance policies of $3.5 million on each brother to this end.

Michael died in 2013 owning 77.18% of the business (385.9 of 500 shares) at death, with his brother Thomas owning the remaining 22.82%. Thomas declined to buy the shares, so Crown redeemed them for $3 million, an amount agreed upon by Michael’s son and Thomas.

Michael’s federal tax return for the year of his death was audited by the IRS. As part of the audit, an accounting firm valued the business at Michael’s death at $3.86 million, with his 77.18% share amounting to approximately $3 million. The analyst followed the holding of Estate of Blount v Commissioner of Internal Revenue (2005) that stated life insurance proceeds should be deducted from the value of a corporation when the proceeds are “offset by an obligation to pay those proceeds to the estate in a stock buyout.”

But the IRS argued that Crown’s obligation to buy back the stock did not offset the life insurance proceeds. The $3 million in life insurance proceeds should be added to the assets of the business, the IRS argued, making the total value of Crown at Michael’s death $3.86 million + $3 million = $6.86 million. Michael’s 77.18% share of this larger amount would be approximately $5.3 million, and based on this, the IRS said Michael’s estate owed an additional $889,914 in taxes.

Michael’s estate paid these taxes, and Thomas, as Michael’s executor, later sued the United States for a refund. The case went before the Supreme Court in March 2024.

The Supreme Court’s Reasoning

In its decision, the court states two points that “all agree” on:

The value of a decedent’s shares in a closely held corporation must reflect the corporation’s fair market value for the purposes of calculating federal estate tax; and
Life insurance proceeds payable to a corporation are an asset that increase the corporation’s fair market value.

The question, then, is whether the obligation to pay out those life insurance proceeds offset the asset, effectively canceling itself out.

The Supreme Court’s answer: No.

The reasoning: “An obligation to redeem shares at fair market value does not offset the value of the life-insurance proceeds set aside for the redemption because a share redemption at fair market value does not affect any shareholder’s economic interest.” The court says that no willing buyer would treat the obligation as a factor that reduced the value of the shares.

Also, for the calculating estate taxes, the point is to assess how much an owner’s shares are worth at the time of death. In this case, it was before Crown paid out the $3 million to buy Michael’s shares. Therefore, that $3 million should be added to the value of the business’s assets and income generating potential, valued at $3.86 million.

This decision will likely affect millions of business owners and trillions of dollars. Depending on your personal and business circumstances, it could affect you, too.

What This Means for You: Federal Estate Taxes

The most important thing to know about federal estate taxes is that the laws affecting them can and do change regularly. (This is one big reason it’s important to have your estate plan reviewed regularly to ensure it’s up to date with current law. Read about the unintended consequences of an out-of-date estate plan here on our blog.)

The majority of individuals subject to U.S. taxes who die in 2024 will not be subject to federal estate taxes; only about 0.2% were expected to in 2023, according to a Tax Policy Center estimate. Currently, if an individual dies in 2024 with a taxable estate valued below $13,610,000, no federal estate tax needs to be paid. This amount doubles to $27,220,000 for married couples filing jointly.

But the “applicable exclusion amount” (also called the “unified tax credit” or “unified credit”) has not always been so high. For many years, it was just $600,000. The current unified tax credit amount is set to expire at the end of 2025, after which it will revert to a lower amount (expected to be around $7 million), unless Congress passes more legislation changing it first.

When Michael Connelly died in 2013, the unified tax credit amount according to the IRS was $5,250,000. Valuing his share of the business at death at $5.3 million rather than $3 million meant he had a larger taxable estate and owed additional federal taxes.

What does this mean for you? This makes estate planning tricky. You can’t know for sure when you’ll die or what the applicable exclusion amount will be that year. Depending on the value of your business and your personal assets, your estate may owe federal estate taxes you weren’t anticipating. The bottom line: If you have a buy-sell agreement and it is funded with life insurance, have it reviewed by an attorney ASAP.

What This Means for You: Succession Planning Going Forward

It’s common for shareholders in a family-owned closely held corporation to have buy-sell agreements that would keep the business in the family should a shareholder die. (Read more about buy-sell agreements on our blog here.) To that end, life insurance policies are often taken out on the shareholders to ensure funds are available to buy out the deceased shareholder’s shares at death.

For years, many business owners have had the corporation itself buy and maintain those life insurance policies on each shareholder. The proceeds went directly to the corporation and were not taxed. Additionally, they did not increase the value of the business, and thus the value of the deceased shareholder’s portion, at the time of the shareholder’s death.

Until now.

What does this mean for you? Now that this has changed after Connelly, shareholders in a closely held corporation may reconsider having the corporation purchase and maintain life insurance policies on its owners.

One option suggested in the Connelly opinion is for the shareholders to take out life insurance policies on each other in a “cross-purchase agreement.” The court acknowledges that this comes with its own set of problems, however, including different tax consequences and the necessity for each shareholder to maintain policies on the other shareholders.

Another potential option is to set up a separate LLC to maintain life insurance policies on the shareholders. In the event of a shareholder death, the LLC – not the corporation itself – would buy out the decedent’s share. This is one possible new solution to this new problem, but it is not yet tried and tested.

Finally, shareholders may continue to have the corporation purchase and maintain life insurance policies with the knowledge that each shareholder should create an estate plan for their personal assets that helps avoid federal estate taxes.

Watch This Space

As the dust settles from this decision, we’ll keep on top of it and come back with more information and advice.

Just remember – the law is not set in stone. Congress passes new legislation and courts render decisions regularly that can affect individuals and business owners. It can be hard to keep up with all the changes, which is why it’s important to have an attorney you can rely on to help keep your estate plan current and your business thriving.

Call Gem at the Gem McDowell Law Group in Myrtle Beach and Mt. Pleasant, SC. He and his team help South Carolina individuals and families create and review estate plans to protect assets and avoid family disputes. He also helps with the creation, purchase, sale, protection, and growth of South Carolina businesses through the creation of corporate governance documents, contracts, problem solving, and more. Call 843-284-1021 today to schedule a free consultation or fill out this form. We look forward to hearing from you.

What is a Certificate of Tax Compliance and Why Should You Get One for a Business Closing?

If you are planning on buying or selling a business in South Carolina, or a significant portion of its assets, you need to know what a Certificate of Tax Compliance is.

A Certificate of Tax Compliance is not mandatory in South Carolina, but we strongly advise our clients to get one prior to a business closing because it provides protection to the buyer.

Here’s what a Certificate of Tax Compliance is, how to get one, and how it can protect you.

What is a Certificate of Tax Compliance in South Carolina?

A Certificate of Tax Compliance is a document issued by the South Carolina Department of Revenue (SCDOR) that confirms a taxpayer has filed and paid all taxes due.

Any taxpayer in the state – business or individual – may request a certificate, which is valid for 30 days. If the taxpayer is current on taxes, the certificate is typically issued within 7-10 days of the request. If not, the SCDOR gives the taxpayer 30 days to file returns and/or remit payments to become up to date, after which a certificate will be issued. The taxpayer can request an extension if 30 days is not enough time.

How Do I Get a Certificate of Tax Compliance in South Carolina?

To request a Certificate of Tax Compliance (also called a Certificate of Compliance by the SCDOR), fill out Form C-268 and return it to the SCDOR by fax, email, or mail along with a $60 fee. Find the form and get more details on the SCDOR website and in the separate procedure document (PDF).

The request may be made either by the taxpayer (e.g., the business owner/seller) or by a third party (e.g., the prospective buyer) with a Power of Attorney authorizing the third party to request the certificate. Plan to get the certificate no more than 30 days before the business closing.

Why Get a Certificate of Compliance for Business Closings in South Carolina?

As stated above, a Certificate of Tax Compliance is not required by law for a business closing in South Carolina. But it serves an important purpose: it protects the buyer from any liens placed on the business assets due to unpaid taxes at the time of closing.

South Carolina Code § 12-54-124 (2022) states:

“In the case of the transfer of a majority of the assets of a business, other than cash, […] any tax generated by the business which was due on or before the date of any part of the transfer constitutes a lien against the assets in the hands of a purchaser, or any other transferee, until the taxes are paid. Whether a majority of the assets have been transferred is determined by the fair market value of the assets transferred, and not by the number of assets transferred. The department may not issue a license to continue the business to the transferee until all taxes due the State have been settled and paid and may revoke a license issued to the business in violation of this section.

“This section does not apply if the purchaser receives a certificate of compliance from the department stating that all tax returns have been filed and all taxes generated by the business have been paid. The certificate of compliance is valid if it is obtained no more than thirty days before the sale or transfer.” (Emphasis added.)

For just a $60 fee, a Certificate of Tax Compliance offers excellent protection for prospective business buyers, and that’s why we always strongly recommend our clients get one.

Contact South Carolina Business Attorney Gem McDowell

Gem and his team at Gem McDowell Law Group help business owners and employers in South Carolina with business creation, business acquisition and sales, business planning, and commercial real estate transactions. Gem has over 30 years of experience in South Carolina which includes multi-million-dollar real estate transactions, and he and his team have the knowledge and experience to help businesses grow and thrive. The Gem McDowell Law Group has offices in Myrtle Beach and Mt. Pleasant, SC. Call today at 843-284-1021 to schedule a free consultation to discuss your business needs.

What Makes an Arbitration Agreement Unenforceable?

Is it easy to get out of arbitration in South Carolina? That’s the question we’ll look at today.

Arbitration agreements and clauses are ubiquitous these days, from employment contracts to online End-User License Agreements. Arbitration is often touted as being a faster, less expensive, and more private alternative to civil lawsuits and civil court. But arbitration agreements can put individuals at a disadvantage by requiring them to waive their rights or burden them with lopsided terms. This may prompt them to try to get out of arbitration.

Maybe you’re a customer or consumer who doesn’t want to be bound to arbitration. Or maybe you’re a business owner or professional who wants to ensure the arbitration agreements in your contracts are enforceable. Whatever your situation, you should understand when arbitration is enforced and when it’s not in South Carolina so you can better look after your own interests.

First we’ll look at what makes a contract enforceable and unenforceable in South Carolina, then dive into some cases to see how these issues played out in the courts.

Are Arbitration Agreements Always Binding in South Carolina?

Generally yes, but occasionally no.

Valid arbitration agreements are enforceable in South Carolina. In the 2020 case Weaver v. Brookdale Senior Living, Inc. (which we’ve previously covered here), the South Carolina Court of Appeals stated that there is “potent” public policy favoring arbitration when the terms are entered into validly.

What constitutes a valid and enforceable contract in South Carolina? To start, parties signing the contract must have the authority and capacity to understand and enter into such an agreement. The contract also must:

Be mutually agreed upon
Be freely entered into
Include “consideration,” an exchange of values between the parties, such as money or the promise of a service
Not violate public policy

Since South Carolina courts view and treat arbitration agreements as they do any other part of a contract, these same standards apply.

In short, there’s no way to “get out” of a valid arbitration agreement in South Carolina.

Reasons an Arbitration Agreement May Be Unenforceable (Or, How to Get Out of Arbitration)

Arbitration agreements are not enforceable in South Carolina if they are not valid. Arbitration clauses within a contract may also be found to be unenforceable.

Reasons an arbitration agreement may found to be unenforceable (this list is not exhaustive):

Absence of signature
Fraud
Duress or coercion
Lack of authority to sign the agreement
Lack of capacity (aka sound mind)
Lack of mutual agreement
Lack of consideration
Unconscionability
Unclear language

Proving an arbitration agreement is unenforceable can be difficult, but it does happen. Next we’ll look at cases where arbitration agreements were successfully challenged in court.

Lack of Authority to Enter into Arbitration Agreement without Power of Attorney: Solesbee

In some cases, the enforceability of an arbitration agreement comes down to small details. That’s what happened in the 2022 South Carolina Court of Appeals case The Estate of Mary Solesbee v Fundamental Clinic (read it here).

The Background

Mary Solesbee entered Magnolia, a skilled nursing facility in Spartanburg County, in June 2016. Her son, Allen Dover, signed the admission agreement and a separate arbitration agreement when she was admitted. On July 14, 2016, Solesbee was transported to a hospital, where she died two weeks later.

Connie Bayne, Solesbee’s personal representative, then filed a wrongful death and survival action alleging nursing home negligence for actual and punitive damages. In response, Magnolia filed a motion to compel arbitration.

The trial court denied the motion to compel arbitration, finding that Dover did not have the authority to sign the arbitration agreement on behalf of his mother and rendering it invalid. On appeal, the SC Court of Appeals agreed with the trial court’s decision to deny Magnolia’s motion to compel arbitration.

The Details

The appeals court determined that the admission agreement and the arbitration agreement were two separate documents. Magnolia argued that the court should have found the two were merged, since merger is usually presumed when multiple documents are signed by the same parties at the same time as part of the same transaction.

But the court says that’s not always so. It found that the two documents were indeed separate because:

The admission agreement provided it was governed by South Carolina law, while the arbitration agreement provided it was governed by federal law
The arbitration agreement referenced the admission agreement, showing it was conceived of as a separate document
Each document was separately paginated with its own signature page

Additionally, the arbitration agreement was not a requirement for admission to Magnolia.

This matters because Bayne (Solesbee’s representative who brought the suit) argued that Dover (her son) did not have the authority to sign the arbitration agreement on his mother’s behalf. He did not have power of attorney for his mother at the time (and had only briefly possessed such powers years earlier before they were revoked) and did not have the authority to sign under any other legal theory.

He did, however, have the authority to sign the admission agreement under South Carolina’s Adult Health Care Consent Act. This act is limited to making health care related decisions only, and therefore did not give Solesbee’s son the power to sign the separate arbitration agreement.

Ultimately, because of how Magnolia wrote and structured its contracts, the court found that it could not compel arbitration.

Other Examples of Unenforceable Arbitration Agreements in South Carolina

Here are brief overviews of three other South Carolina cases in which arbitration agreements or sections were found to be unenforceable.

Lack of Authority Even with Power of Attorney: Arredondo

In Arredondo v. SNH SE Ashley River Tenant, LLC (2021), the South Carolina Supreme Court found that a daughter did not have the authority to sign an arbitration agreement on behalf of her father, despite being his agent under both a health care power of attorney and a general durable power of attorney. This case came down to the very specific wording in the powers of attorney, and it demonstrates how enforceability of a contract can hinge on language and word choice.

(The daughter also contended that the agreement was unconscionable and therefore unenforceable, but the court did not address this issue.)

Read more in detail about powers of attorney and the full story behind Arredondo in our blog on this case here.

Lack of Authority Due to Timing: Stott v White Oak Manor

In Stott v White Oak Manor, Inc. (2019), the South Carolina Court of Appeals found that a niece did not have the authority to sign an arbitration agreement on behalf of her uncle. There are two important elements in this case: One, capacity. The uncle possessed “intact mental functioning” at the time of his admission into a medical facility and therefore had the capacity to enter into agreements himself. Two, timing. A power of attorney that would have given the niece authority to enter into the agreement on his behalf was not recorded – and therefore not valid – until six days after her uncle was admitted to the facility.

Read more in detail about the background and the court’s reasoning in our blog on Stott here.

Unconscionability: Huskins v Mungo Homes

In Huskins v Mungo Homes (2022), the South Carolina Court of Appeals found that a portion of an arbitration clause within a purchase agreement was unconscionable and therefore unenforceable. It found the offending terms were absent of meaningful choice and were oppressive and one-sided, making them unconscionable.

Importantly, only the offending portion was severed from the clause, leaving the rest of the arbitration clause enforceable, and the court affirmed the circuit court’s order to compel arbitration under the newly modified terms.

Read more in detail about the background of this case and about unconscionability in our blog on Huskins v Mungo Homes here.

Understanding Arbitration and Reserving Your Rights

The examples of cases above show just how challenging it can be to get out of arbitration in South Carolina.

As a consumer, customer, or patient, you need to understand that the majority of the time, you are bound to arbitration when you agree to it. However, it’s not a given that you must agree; many contracts and agreements online allow you to opt out in writing within (typically) 30 days of signing the agreement. The next time you encounter a wall of text online that tells you to click the “I Agree” button, first look in the fine print for instructions on how to opt out of compelled arbitration and reserve your rights.

As a business owner or professional drafting an arbitration agreement or arbitration clause, you should know that the enforceability of your agreement can come down to terms, word choice, and other seemingly small details. It’s also important to ensure that the parties signing your agreement have the authority to do so.

Get Help with Contracts and Business Law in South Carolina

For help drafting or understanding arbitration agreements, employment contracts, and other contracts, contact Gem at the Gem McDowell Law Group. With over thirty years of experience, Gem along with his team helps South Carolina business owners grow their businesses and protect their interests and can represent individuals in contract disputes. Call to schedule your free consultation today at the Mount Pleasant office or Myrtle Beach office by calling 843-284-1021 today.

SC Employers Are Liable for Negligent Selection of Contractors: Understanding Ruh

“Under South Carolina law, can an employer be subject to liability for harm caused by the negligent selection of an independent contractor?”

This was the certified question posed to the Supreme Court of South Carolina by the US Court of Appeals for the Fourth Circuit in the recent case Ruh v. Metal Recycling Services, LLC (2023) (read it here).

The SC Supreme Court’s answer: YES.

If you’re an employer in South Carolina, this might sound concerning, but rest assured, the court insists that “the sky is not falling.” Here’s what this decision means for you.

Brief Background of Ruh v. Metal Recycling Services, LLC

Metal Recycling Services, LLC, hired an independent contractor, Norris Trucking, LLC, to transport scrap metal. A truck driver employed by Norris Trucking hit the car of Lucinda Ruh, who was injured in the accident.

Ruh sued. She later amended her complaint to claim that Metal Recycling Services was negligent in its selection of Norris Trucking as an independent contractor and thus had liability for the accident that injured her. The case ended up before the US Court of Appeals for the Fourth Circuit, a Federal Court, which sent the certified question to the SC Supreme Court.

Employers Have a Duty to Hire Competent Independent Contractors

It’s important to understand Ruh’s main argument. Ruh did not contend that Metal Recycling Services was liable because the independent contractor it hired, Norris Trucking, was negligent. She argued that Metal Recycling Services, the principal (the court’s term for “employer” throughout the opinion) was itself negligent in its selection of Norris Trucking as an independent contractor.

The Supreme Court of South Carolina says Yes, a principal can be held liable for its own negligence.

In its conclusion, the court states, “We answer the certified question ‘yes.’ The potential liability we recognize today is consistent with fundamental principles of tort law. It is based solely on a principal’s own negligence in hiring or selecting an independent contractor. It is not a form of vicarious liability nor is it an exception to the general rule that a principal is not liable for the negligence of an independent contractor.” (Emphasis added.)

This aligns with current South Carolina law, and, as noted by the Fourth Circuit in its certification order, “every other state in the Fourth Circuit has… recognized a duty to hire a competent independent contractor.”

What the Ruh Decision Means for South Carolina Employers

South Carolina employers may be understandably concerned about the effect this decision could have on its business and its vetting and contracting practices. Will this decision “open the floodgates” and “expand… the scope of liability” to every principal, as Metal Recycle Services argued? Will it adversely affect the business environment in the state, as others argued?

The SC Supreme Court goes into detail in its opinion about the possible ramifications of this decision, and says it wants to “assure those potentially affected by our decision that, in fact, the sky is not falling.” (Emphasis added.)

The court begins by affirming the general rule that a principal is not liable for the negligent act of any independent contractor it hires and that nothing in the Ruh opinion affects this general rule. This should come as a relief to South Carolina employers.

Four Factors Employers Should Consider When Hiring Independent Contractors

Next comes the most critical section of the decision for employers.

The court lists four factors that can guide principals (employers) when hiring independent contractors. Its analysis is based on section 411(a) of the Restatement (Second) of Torts.

Reasonable Care

An employer must use reasonable care when selecting an independent contractor.

This is not a very high standard, and the court even states that “most participants in the modern economy already act reasonably in selecting contractors,” meaning the Ruh decision will not add extra burden to the “vast majority of principals.”

If a plaintiff does bring a claim against a principal for negligence over the selection of a contractor, the plaintiff must use proof to establish a standard of care the principal should have used and also show that the principal breached that standard.

Risk of Harm

An employer must take into account the risk of harm associated with the work in question.

The standard of “reasonable care” varies depending on the degree to which the work involves risk of physical harm unless it is done “skillfully and carefully.” A riskier job requiring a higher level of competence and care on the part of the worker requires a “more thorough assessment” when hiring on the part of the principal.

Competent and Careful

An employer should take on a “competent and careful” contractor with the knowledge, skills, experience, and proper equipment to do the job at hand safely.

For a successful claim, a plaintiff must show that the principal breached the standard of care. The principal’s knowledge about the contractor’s competence and carefulness in previous work – or lack of it – “will always be relevant” in determining whether the principal breached the standard of care.

Proximate Cause

An employer’s negligence in selection of a contractor for the particular work must be a proximate cause of physical harm in order for a plaintiff to bring a successful claim.

Here, the court gives a good example to illuminate the nuance involved: “[…] if a principal hires a contractor unqualified to handle emergencies that may arise while hauling toxic chemicals, the principal is negligent in hiring the contractor. But if the contractor causes an accident by negligently failing to yield the right of way, and the dangerous quality of his cargo plays no part in the accident or injury, then the plaintiff will be unable to establish cause-in-fact and thus unable to establish proximate cause.”

Continuing: “In this example, the principal may be liable for his negligence in selecting the contractor only when the contractor’s lack of qualifications to handle an emergency involving toxic chemicals is the cause-in-fact of the plaintiff’s injury.”

The Takeaway

The court’s answer in Ruh does not set a very high bar for employers in South Carolina. If you’re an employer in South Carolina, you should hire independent contractors with care, ensuring that any contractor you engage has the appropriate qualifications and experience for the job. Be extra careful when hiring someone for a potentially risky or dangerous job. If you know or discover that the contractor performed poorly in the past, you might want to look for alternatives.

If you’re a business owner, you need to be proactive about protecting your interests and limiting your liability. For legal help and advice on business law and contracts, contact Gem McDowell of the Gem McDowell Law Group. Gem has over 30 years of experience helping South Carolina employers and business owners protect their interests, grow, and thrive. The Gem McDowell Law Group has offices in Mt. Pleasant, SC and Myrtle Beach. Call 843-284-1021 today to schedule a free consultation.

What is a Right of First Refusal and When Is It Enforceable?

The right of first refusal sounds simple on the surface. A right of first refusal (ROFR) gives the right-holder the opportunity to enter into a business transaction with another party before anyone else. It’s most commonly seen in real estate contracts, such as when a lessor signs a contract giving them the ROFR to put in an offer to purchase the property if it ever comes up for sale.

But as straightforward as it sounds on paper, it’s not always so straightforward in the real world. Contracts that include an ROFR must be clear and detailed in order to be enforceable.

The Supreme Court of South Carolina addressed this issue in the 2023 case Clarke v. Fine Housing, Inc. (here). We’ll look at the factors required for an enforceable right of first refusal in South Carolina and how they played out in this recent case.

The Pros and Cons of a Right of First Refusal

An ROFR can benefit both parties. In the example of a lessor with the ROFR to purchase the property, if and when it comes up for sale, they can be sure not to miss out on the opportunity to put in an offer. There’s no downside for the potential buyer; if they don’t want to buy the property, they simply refuse.

The property owner can benefit by having a potential buyer already lined up when it’s time to sell, which may help them in negotiations with other potential buyers. However, the downside for the property owner is that a ROFR can restrict their power of alienation, which is their ability to dispose of property.

“South Carolina law prohibits enforcement of unreasonable restraints on alienation of real property,” the court says in the Clarke opinion. The key word here is “unreasonable.” Whether a particular ROFR is enforceable depends on whether the restraints on alienation are considered unreasonable.

Unreasonable Restraints on Alienation of Property: What is Unreasonable?

In the Clarke opinion, the SC Supreme Court turns to the Restatement (Third) of Property. The Restatements of the Law (Third) are a comprehensive set of legal treatises widely referenced and relied upon by courts, judges, lawyers, and others across the U.S. On the subject of the ROFR, it says, “Reasonableness is determined by weighing the utility of the restraint against the injurious consequences of enforcing the restraint.”

The Supreme Court of South Carolina uses the factors listed in the Restatement (Third) of Property (Comment f) to determine, on a case-by-case basis, whether a right of first refusal is enforceable. The factors are:

The legitimacy of the purpose of the right,
The price at which the right may be exercised, and
The procedures for exercising the right

These factors are not exclusive.

Let’s look at each one of the factors and how they figure into the Clarke case.

Background of Clarke v Fine Housing (2023)

First, the pertinent background of 2023 Supreme Court of South Carolina case Clarke v. Fine Housing, Inc.: Barry Clarke owned a strip club in Charleston. In 1999, he entered into a lease agreement with the owners of another strip club across the street to use part of their unimproved land for parking. The lease contained the following language:

Section 5.2. Right of First Refusal: Lessor grants the Lessee the right of first refusal should it wish to sell.

Note that there’s no mention of price, timing, how to exercise the right, or any other specifics – not even which property this right of first refusal applies to.

In 2013, then-owner RRJR conveyed the property in question to Fine Housing, Inc. Clarke learned of the sale in 2014 after it was a done deal, having had no opportunity to exercise what he believed to be his enforceable right of first refusal (Right).

In 2015, Clarke brought this action for specific performance against Fine Housing and RRJR. The case eventually came before the Supreme Court of South Carolina, which agreed with the SC Court of Appeals that the Right was not enforceable because it constituted an unreasonable restraint on alienation.

Factors for an Enforceable Right of First Refusal

Here are the three factors the Supreme Court of South Carolina uses to determine enforceability of a right of first refusal on a case-by-case basis and how they show up in Clarke.

Factor 1: Legitimacy

In Clarke, Fine Housing didn’t challenge the legitimacy of the purpose of the Right, so the court didn’t address the issue.

Factor 2: Price

Price may or may not be an unreasonable restraint on alienation. If, for example, the ROFR were dependent on a fixed price, that could restrain alienation. If the price were to be matched to a third party’s offer, there would be less restraint.

In Clarke, Clarke argued that the Right left the price to be determined entirely by RRJR and required him to match any offer from a third party. He also argued that exercising the Right would have started a bidding war that would have benefitted RRJR.

The court agreed with Fine Housing that the absence of any method for determining the purchase price in the lease constituted an unreasonable restraint on alienation. Absence of specifics on how to determine price may not be as restraining as a fixed price, says the court, but it is still a restraint, and “a right of first refusal should contain some method for determining the price at which it may be exercised.” The lease Clarke signed had no method, and therefore this factor worked against him.

Factor 3: Procedures governing the exercise of the right

Comment f to the Restatement stresses the importance of provisions governing the exercise of the right, stating, “Lack of clarity may cause substantial harm by making it difficult to obtain financing and exposing potential buyers to threats of litigation. Lengthy periods for exercise of rights of first refusal will also substantially affect alienability of the property.”

Time is also an important consideration. How soon after the owner decides to sell does the right holder have to exercise their right? An extended period of time can be a restraint on the property owner, while a “reasonable” time frame does not impose unreasonable restraint and is generally enforceable.

In Clarke, Clarke argued that a ROFR does not require detailed instructions on how to exercise it to be valid, but this directly contradicts the Restatement (Third) of Property. He also argued that the lease provided satisfactory procedures regarding the exercise of the right. The court disagreed “because the Right contains no such procedures whatsoever.”

As for timing, Clarke argued that if there’s no mention of a timeline in the language of the agreement, then it must be done within a “reasonable time.” The court disagreed, saying that the point of the Restatement is to include a predetermined time limit so as to protect the property owner’s power of alienation, rather than having the owner rely on a “judicially implied ‘reasonable time.’”

Because of the total lack of provisions regarding timing and procedures on how to exercise the Right, the court found again in favor of restraint on alienation.

Additionally: Which Property?

The court also addressed a matter specific to Clarke: to which property did the Right ostensibly apply? The entire property that includes the unimproved land Clarke leased for parking, or the unimproved land only?

Clarke argued that the Right applied to the entire property, but the court disagreed because the language in the lease was not clear. That uncertainty constitutes an additional unreasonable restraint on alienation.

Takeaway: Rely on Clear, Specific Contracts

The SC Supreme Court affirmed the appeals court’s decision, finding in favor of Fine Housing and against Clarke, stating “The Right does not identify the property it encumbers, contain price provisions, or contain procedures governing the exercise of the Right. We conclude the Right is an unreasonable restraint on alienation. We therefore affirm the court of appeals’ holding that the Right is unenforceable.”

An important takeaway for anyone entering into a contract with a right of first refusal in South Carolina: Make sure the language in your contact is clear and specific and that it addresses the three factors discussed above. It must contain language on how the price should be determined and how the right should be exercised. Language that unreasonably restrains the property owner’s power of alienation may render it unenforceable, so the right cannot be construed too favorably to the would-be buyer.

Call Gem McDowell for Contracts, Strategic Business Advice, and Commercial Real Estate

Many legal disputes come down to the language in a contract. Is it clear? Is it enforceable? Would the courts side with you if the matter were ultimately litigated? It’s critical to get the contract right before signing it, so you lessen the chances of complications and litigation down the road.

For help with business contracts and commercial real estate, call business attorney Gem McDowell at the Gem McDowell Law Group. Gem has over 30 years of experience working with business owners to help them start, grow, and protect their businesses. He and his team can help you with contracts, corporate governance documents, strategic advice, and more. He also has extensive experience in commercial real estate transactions in South Carolina. Call the Gem McDowell Law Group today to schedule a free consultation at 843-284-1021.

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

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

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

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

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

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

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

Partnership Representatives

What is the role of the partnership representative?

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

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

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

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

Who can be a partnership representative?

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

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

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

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

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

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

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

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

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

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

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

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

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

You (may) have the option to elect out

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

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

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

Some advantages and disadvantages of opting out

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

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

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

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

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

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

Some issues to discuss:

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

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

Choose your partnership representative wisely

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

Call Business Attorney Gem McDowell for Help and Legal Advice

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

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

What is “Unconsionability” in the Law?

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

“Unconscionability” in the Law

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

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

Elements of Unconscionability in South Carolina

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

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

Absence of meaningful choice
Oppressive and one-sided terms

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

Unconscionability in Real Life: Huskins v Mungo Homes, LLC

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

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

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

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

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

Element 1: Absence of Meaningful Choice

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

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

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

Element 2: Oppressive and One-Sided Terms

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

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

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

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

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

Contract Law in South Carolina

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

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

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

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

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

Personal Goodwill vs. Enterprise Goodwill

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

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

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

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

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

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

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

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

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

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

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

Was it Personal or Enterprise Goodwill?

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

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

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

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

Buying, Selling, and Growing Your Business in South Carolina

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

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

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

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

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

The Four-Factor Model to Determine Employment Status

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

The four factors are:

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

Let’s look a closer look at all four.

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

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

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

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

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

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

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

The Background

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

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

The Claims

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

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

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

Weighing the Evidence to Determine Employee or Independent Contractor Classification

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

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

Right or Exercise of Control

Factors in favor of independent contractor classification:

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

Factors in favor of employee classification:

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

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

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

Furnishing Equipment

Factors in favor of independent contractor classification:

Ramirez provided his own tools
Ramirez provided his own vehicle

Factors in favor of employee classification:

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

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

Method of Payment

Factors in favor of independent contractor classification:

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

Factors in favor of employee classification:

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

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

Right to Fire

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

Conclusion: Employee Relationship

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

Employers Take Note – South Carolina Courts Favor the Employee Classification

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

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

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

Business Law and Strategic Advice

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

Can You Be Bound by an Arbitration Clause You Didn’t Agree to?

In June 2016, 90-year-old Bonnie Walker moved into the Brookdale Senior Living Center, a residential care facility in Charleston, SC. Six weeks later, she wandered out of the center one evening, and the following day her body was found by family members at a retention pond on the property, where she had been maimed and dismembered by an alligator.

This tragic event forms the basis of Weaver v. Brookdale Senior Living, Inc. (find the opinion here), a case heard by the South Carolina Court of Appeals in 2020. Walker’s granddaughter Stephanie Walker Weaver brought a lawsuit in her personal capacity (rather than on behalf of her deceased grandmother or anyone else) against the facility, its owner, and its director (collectively, the Appellants) for negligence, negligent infliction of emotional distress, and intentional infliction of emotional distress.

However, those aren’t the main issues for the court here. Instead, the court focuses on arbitration – specifically, whether the Appellants could compel Weaver to arbitration.

Arbitration and Potent Public Policy

Arbitration is an effective form of alternative dispute resolution (ADR) that settles matters out of the courtroom. In binding arbitration, the outcome is legally binding, just as it would be in litigation. Unlike litigation, however, arbitration is typically less expensive and faster in reaching a resolution. Another benefit of arbitration is that it keeps private business private, as opposed to resolving an issue in court where it becomes a matter of public record.

In this case, the Appellants say the trial court erred by denying their motion to compel Weaver to arbitration because there is strong state and federal policy favoring arbitration. The court of appeals agrees there is “potent” public policy favoring arbitration, but only in terms of interpreting and enforcing arbitration agreements that are entered into validly. The Federal Arbitration Act, which was signed in 1925 and applies to both state and federal courts, commands that arbitration agreements be treated like other contracts – no better or worse – but it doesn’t compel arbitration where mutual agreement among parties to arbitrate is absent. Nor does it give Appellants a “leg up,” in the words of the appeals court, in determining whether a valid arbitration agreement exists in the first place.

With this in mind, the issue in the present case is to determine whether a valid arbitration agreement exists: Are Weaver and the Appellants bound by a valid arbitration agreement?

When Nonsignatories Can Be Bound to Arbitration Agreements

If you’ve signed many contracts in your life or clicked “I Agree” on terms of service online, there’s a high chance you’ve agreed to binding arbitration with certain parties. That’s because standalone arbitration agreements and arbitration clauses within contracts are now commonplace. In those situations, you’ve agreed that you and the other party will settle disputes through arbitration rather than through litigation.

The residency agreement that Weaver’s grandmother signed when she entered the Brookdale facility contained an arbitration provision. It not only bound Walker to arbitration, but “third parties not signatories to this Arbitration provision,” including her family members, too.

However, Weaver herself never signed such an agreement with Brookdale, and there’s no evidence that she was aware of the content of the agreement her grandmother signed, yet the Appellants moved to compel her to arbitration. How is this possible?

In South Carolina, state law says that that nonsignatories can be bound to arbitration in an agreement they were not a party to under a number of theories, such as incorporation by reference, assumption, veil piercing/alter ego, and estoppel. For appellants, there’s only one theory: equitable estoppel, also called direct benefits estoppel in arbitration.

Equitable Estoppel, or Direct Benefits Estoppel

Equitable estoppel prevents someone taking legal action that goes against their previously stated words or prior behavior. The idea of equitable estoppel is that the party wishing to use it was in some way misled by the other party.

Under equitable estoppel/direct benefits estoppel, a nonsigner can be compelled to comply with a contract’s arbitration provision if all three of these conditions are met:

The nonsigner’s claim arises from the contractual relationship;
The nonsigner has “exploited” other parts of the contract by reaping its benefits; and
The claim relies solely on the contract terms to impose liability

As to the first point, the court of appeals concludes that Weaver’s claims do not arise from the contractual relationship. Her claims are not about how the Appellants breached any provision(s) in the residency agreement entered into with her grandmother; rather, they’re about general duties Appellants owe to everyone.

For instance, the court notes that one of Weaver’s claims was for emotional distress over the Appellants’ mishandling and failure to safeguard her grandmother’s remains. There is no provision in the residency agreement Walker signed relating to handling of remains. So Weaver’s claims do not arise directly from the contractual relationship between Walker and the Appellants, meaning the first of the three conditions is not met.

As to the second point, the court concludes that Weaver “exploited” and otherwise benefited from the residency agreement as much as “a pedestrian run over by a truck has benefited from the contract for the purchase of the truck” – that is to say, not at all. Therefore the second condition is not met, either.

Since all three conditions must be met and the first two weren’t, equitable estoppel cannot be used here. The court of appeals concludes that there is no valid arbitration agreement between Weaver and Brookdale and therefore affirms the trial court’s denial of the Appellants’ motion to compel arbitration.

Legal Help for Strong Contracts

Whatever side of the agreement you’re on, it’s important to understand the rights and limitations relating to arbitration whenever you sign a contract or agree to terms of service that include an arbitration provision. South Carolina courts have enforced arbitration agreements when valid but do not go so far as to bind nonsignatories to arbitration except under certain conditions.

For help with arbitration clauses, contracts, and other business matters, contact Gem McDowell at the Gem McDowell Law Group in Mt. Pleasant, SC. He and his associates serve clients in the Charleston area and across South Carolina, protecting their business interests and helping them plan for the future. If you have an issue to discuss or are looking for an experienced business attorney to advise you, call Gem today at 843-284-1021 to schedule a free consultation.

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