Court: District Court, D. South Carolina; May 16, 2019; Federal District Court
Defendant Delta Speir Plantation LLC's partial motion to dismiss has been granted in part and denied in part by the court. In 2010, James S. Shaw requested assistance from plaintiffs Raymond M. Gee and Adam M. Martin to assess the investment value of a property known as Delta Bluffs. Shaw, through his entity JS Real Estate Investments LLC, verbally agreed to compensate plaintiffs with 20% of profits from selling Delta Bluffs. Plaintiffs assisted Shaw through various stages, including a public auction purchase in December 2011 and a tax-advantaged donation of 100 acres to Savannah College of Art and Design (SCAD) in 2012, resulting in at least $2.5 million in tax savings.
In 2014, a written Agreement formalized the profit-sharing arrangement and included terms for 20% of any tax savings from the SCAD donation, payable after the risk of tax audits expired. The Agreement contains a merger clause asserting it encompasses the entire agreement between the parties. In 2015, plaintiffs helped renew a wetland permit, but communication ceased afterward. By 2016, Delta harvested timber from Delta Bluffs, generating at least $2 million, entitling plaintiffs to $400,000 based on their Agreement. They also claim $501,600 for tax savings related to the SCAD donation, which they allege is now due.
Plaintiffs demanded a total of $901,600 in March 2017, which remains unpaid. They initiated legal action in the Court of Common Pleas for Jasper County, South Carolina, on September 5, 2018, which was removed to federal court. Delta's initial motion to dismiss was followed by an amended complaint on January 31, 2019, asserting breach of contract and quantum meruit claims. Delta's partial motion to dismiss the breach-of-contract claim was filed on March 7, 2019, with subsequent responses and a hearing held on May 13, 2019. The court is now reviewing the motion.
A Rule 12(b)(6) motion challenges the legal sufficiency of a complaint without addressing factual disputes or defenses. To be sufficient, a complaint must provide a "short and plain statement" showing entitlement to relief per Fed. R. Civ. P. 8(a)(2). Such a motion should only be granted if it is clear that no set of facts could support the plaintiff's claim (Mylan Labs. Inc. v. Matkari). Courts must accept all well-pleaded allegations as true, viewing the complaint favorably towards the plaintiff, and the claims must be plausible on their face (Ashcroft v. Iqbal; Bell Atlantic Corp. v. Twombly).
In the case at hand, Delta seeks to dismiss the plaintiffs' breach-of-contract claim, asserting that the sale of timber does not trigger payment since it is not a sale of "a portion of Delta Bluffs." Delta argues that timber, once sold, is classified as a good under South Carolina's UCC and does not represent a portion of the real property. Although the Agreement entitles plaintiffs to 20% of profits from the sale of Delta Bluffs, Delta contends that "portion" refers only to real property. The court agrees with Delta regarding the timber sale but finds that a consent restraining order does not extend the risk of a tax audit, allowing the plaintiffs' claim for tax savings to proceed. Plaintiffs argue that the timber was part of Delta Bluffs at the Agreement's inception, warranting their share of the timber sale profits.
The sale of timber is characterized as 'profit' under the Agreement, defined as 'proceeds from a sale relating to transactions regarding the property,' which plaintiffs interpret to imply no limitations on transaction types for profit-sharing. They assert a right to 20% of the timber profit. In South Carolina, contract interpretation prioritizes the agreement's plain language, focusing on the parties' intentions as expressed within the document's four corners. If a contract's language allows for only one reasonable interpretation, it governs the contract's effect. However, if multiple interpretations exist, intent must be determined by a jury. A merger clause indicates the agreement is fully integrated, preventing alterations through parol evidence.
Both parties acknowledge that the timber was part of Delta Bluffs' real property until a sale contract was formed. Delta asserts that upon the sale contract's execution, the timber transformed into a good under the UCC, which classifies timber sales as sales of goods rather than real property. Case law supports this view, consistently treating timber as goods in sales contexts. Although plaintiffs argue that common law considers timber part of real property, this classification does not apply to timber sales. Relevant cases demonstrate that timber remains real property only when attached to land and not sold.
In First Carolina Joint Stock Land Bank of Columbia v. N.Y. Title, Mortgage Co., the central issue revolves around whether timber should be classified as part of the mortgaged land. The court aligns with the principle established in D.W. Alderman, Sons Co. that trees growing on land are considered real property until severed. Consequently, under South Carolina law, timber is treated as a good when sold. The Agreement in question entitles plaintiffs to profits only upon the sale of a portion of Delta Bluffs, which the plaintiffs argue should include timber as part of the real property since it had not been sold at the Agreement's inception. However, this argument fails against the Agreement's explicit terms defining the payment trigger as the sale, indicating that once timber is sold, it is no longer real property.
Additionally, the plaintiffs' counsel raised a new argument during the hearing, asserting uncertainty over whether the timber was sold, despite the plaintiffs’ amended complaint claiming the defendants profited from timber rights sales. The court found this argument unpersuasive. The plaintiffs also referenced Epstein v. Coastal Timber Co. Inc. to support their stance, but the court determined it was not applicable as Epstein dealt specifically with the interplay of timber sales in the context of mortgages and security interests. The Epstein court recognized the dual nature of timber as both real property and goods under the UCC, affirming that UCC provisions do not negate existing mortgages or liens on timber already recorded in real estate records. Thus, the court concluded that the UCC facilitates financing timber transactions while preserving the effects of prior mortgages.
The court clarified that changes to the UCC did not eliminate existing real estate law in South Carolina nor transform standing timber into goods. The focus of the case is on how to classify timber sales in relation to the Agreement. Plaintiffs' entitlement to profits hinges on the sale of Delta Bluffs real property, not timber, as the UCC categorizes timber sales as sales of goods. The Agreement specifies that plaintiffs can only earn profits from transactions involving the sale of Delta Bluffs, and the inclusion of "etc." in defining profit-generating transactions does not expand their rights beyond what is explicitly stated. Plaintiffs' argument that various transactions, including timber sales, qualify as 'profit transactions' lacks support in the Agreement, which includes a merger clause prohibiting the introduction of external definitions. Consequently, because the Agreement restricts profit sharing to the sale of Delta Bluffs real property, the court dismissed the breach-of-contract claim regarding timber sale profits.
Additionally, Delta asserted that plaintiffs would only receive a share of tax savings after the expiration of the risk of a federal or state tax audit, which remains active due to a consent restraining order involving Shaw. Delta's counsel indicated that this risk would cease once the restraining order is resolved. The restraining order was not part of the initial complaint but was included in Delta’s motion to dismiss, and the court can consider it since it is integral to the claims made.
Plaintiffs contend that the consent restraining order is not essential to the amended complaint but assert it does not impact Delta's three-year audit period for its tax return. The court evaluates the restraining order to ascertain its effect on the tax audit timeframe and concludes it does not present any ongoing risk of a tax audit. According to the Agreement, plaintiffs are entitled to 20% of Delta's tax savings once the risk of a federal or state tax audit has lapsed, with the risk expected to expire in October 2016. The IRS typically has three years to audit a tax return post-filing, and the amended complaint states that the audit period relevant to the SCAD donation expired in 2016, thereby entitling plaintiffs to the tax savings.
Delta argues that despite the expiration of the three-year period, the consent restraining order introduces a continuing risk of audit due to language in the order that allows for potential tax-related actions against Shaw or his entities. Conversely, plaintiffs interpret this language to affirm their entitlement to 20% of tax savings, asserting the order does not impact their claim. The court aligns with the plaintiffs' interpretation, stating that the restraining order explicitly has "no effect on any tax-related action," and does not extend the IRS's audit period. Consequently, the court determines that the consent restraining order does not require dismissal of the tax aspect of plaintiffs' breach-of-contract claim. The court partially grants and partially denies Delta's motion to dismiss this claim, with the dismissal noted as without prejudice due to the possibility of the audit risk expiring. Both parties agree that South Carolina law applies in this context.
