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25024 - Mibbs, Inc. v. SCDOR

Shearouse Adv. Sh. No.
S.E. 2d

THE STATE OF SOUTH CAROLINA

In The Supreme Court

Mibbs, Inc., Appellant,

v.

South Carolina Department of Revenue, Respondent.

Appeal From Richland County

James R. Barber, III, Circuit Court Judge

Opinion No. 25024

Heard November 3, 1999 - Filed December 6, 1999

AFFIRMED

A. Camden Lewis and Mark W. Hardee, both of

Lewis, Babcock & Hawkins, L.L.P.; and Richard A.

Harpootlian and Robert G. Rickard, both of Law

Offices of Richard A. Harpootlian, P.A.; all of

Columbia, for appellant.

James D. Brice and Ronald K. Wray, II, both of

Gibbes, Gallivan, White & Boyd, P.A., of Greenville,

for respondent.







MOORE, A.J.: Appellant (Mibbs) commenced this action against



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Mibbs, Inc. v. S.C. Dept. of Revenue





respondent (Department) to recover for business losses allegedly incurred

when cash payouts for video poker were banned in Anderson and Oconee

counties pursuant to a November 1994 local option referendum. The trial

judge granted Department summary judgment. We affirm.





FACTS



Mibbs operated two convenience stores, one in Oconee County

and one in Anderson County. In July 1993, the legislature enacted S.C.

Code Ann. § 12-21-2806 which provided for the local option referendum

regarding cash payouts to be held in November 1994. Mibbs subsequently

entered into written contracts1with Best Amusement, Inc. (Best) for the

placement of nine video poker machines in its stores in exchange for a 50%

share of the profits for a term of five years.2 At the time, the Best employee

discussed with Mibbs's owner the recent enactment of § 12-21-2806 and its

possible effect. Best held the licenses for the machines. Mibbs paid no charge

to lease the machines.





In November 1994, Oconee County and Anderson County voted

against continuing cash payouts for video poker. On July 1, 1995, cash

payouts became illegal and Department revoked Best's licenses for the

machines. Mibbs's Anderson County store was sold sometime in 1995; the

Oconee County store went out of business in September 1996. In November

1996, this Court struck down the law providing for the local option

referendum as unconstitutional. Martin v. Condom 324 S.C. 183, 478 S.E.2d

272 (1996).


1On August 10, 1993, Mibbs signed a contract for machines to be

placed in its Oconee County store. This contract was superseded by a second

contract with the same terms signed on October 21, 1993. The parties signed

the same contract applicable to the Anderson County store on October 1,

1993, and July 6, 1994. No reason is given in the record to explain why the

superseding contracts were signed. Best's owner stated he did not know of

any reason.





2 The contracts provide that Best was entitled to $25 before the split

was calculated but Best's owner testified this was not done in practice.

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Mibbs, Inc. v. S.C. Dept. of Revenue





Mibbs subsequently commenced this action to recover damages

allegedly resulting from the loss of video poker revenue. The complaint

alleged a regulatory taking of Mibbs's contracts with Best and an

unconstitutional impairment of contract. Department asserted immunity as

a defense and moved for summary judgment.





The trial judge found no taking or impairment of contract. In

addition, he found Department absolutely immune under S.C. Code Ann. §

15-78-60(4) (Supp. 1998) which provides that a government entity is not

liable for the enforcement -of any law "whether valid or invalid."





DISCUSSION



The trial judge's ruling regarding Department's immunity was

not appealed and is the law of the case. In re: Morrison, 321 S.C. 370, 468

S.E.2d 651 (1996). Since Department is immune, summary judgment was

properly granted on all causes of action. Failure to appeal an alternative

ground of the judgment will result in affirmance. South Carolina Tax

Comm'n v. Gaston Copper Recycling Corp., 316 S.C. 163, 447 S.E.2d 843

(1994); Biales v. Young, 315 S.C. 166, 432 S.E.2d 482 (1993). Further, the

issues raised regarding the taking and impairment of contract causes of

action are completely without merit as discussed below.





Taking clause

Mibbs contends the ban on cash payouts resulted in a regulatory

taking of Mibbs's property interest in the contracts in violation of due

process.





In determining whether governmental regulation violates the

takings clause, the Court will consider the economic impact of the regulation,

its interference with reasonable investment-backed expectations, and the

character of the governmental action. Eastern Enterprises v. Anfel, 524 U.S.

498 (1998). Where there is no reasonable investment-backed expectation, no

taking will be found. Id.; Connolly v. Pension Benefit Guaranty Corp., 475

U.S. 211 (1986). In this case, there is no "investment-backed" expectation

since Mibbs invested nothing in obtaining or ,performing these contracts.





Further, Mibbs complains of no taking except lost business

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Mibbs, Inc. v. S.C. Dept. of Revenue





profits. Collateral damages, including lost business profits, are not

recoverable on a takings claim. United States v. General Motors Corp., 323

U.S. 373 (1945) (Fifth Amendment takings clause concerns itself solely with

the owner's relation to the physical thing and not with consequential

damages); Carolina Power & Light Co. v. Copeland, 258 S.C. 206, 188 S.E.2d 1

88 (1972). Here, the contracts entitled Mibbs to no contractual amount in

exchange for placement of the machines in his stores. Had no one played the

video poker machines, Mibbs would have earned no profits from cash

payouts and would have had no recourse under the contracts. The profits

from cash payouts were therefore collateral to the contracts and not

recoverable on a takings claim. General Motors, 323 U.S. at 378.





Moreover, an interest that depends totally upon regulatory

licensing is not a property interest that is compensable under the takings

clause. Mitchell Arms, Inc. v. United States, 7 F.3d 212 (Fed. Cir. 1993).

Mitchell involved the federal government's revocation of import permits for

certain assault weapons after the plaintiff had signed contracts with a

foreign government to purchase such weapons for resale in this country.

The plaintiff claimed its investment-backed reliance on the permits constituted a

compensable property interest under the takings clause. The court found the

plaintiff's right to sell the weapons was not inherent in its ownership of them

because any sale depended upon government import permits. Similarly,

Mibbs's contractual right to the profits from cash payouts depends totally

upon regulatory licensing and is not inherent in its right to possess the

machines. Mibbs's interest in the contracts is therefore not a property

interest that is compensable as a taking.





Further, Mibbs signed the contracts after enactment of the

statute allowing for the local option referendum that ultimately prohibited

cash payouts. The continuing legality of cash payouts was therefore

completely speculative at the time the contracts were signed and Mibbs had

no "reasonable expectation" the contracts would retain their value for the

remainder of the five-year terms. We find no merit in Mibbs's contention

that a taking occurred when the statute providing for the local option

referendum was enacted in light of the fact no property right could have

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Mibbs, Inc. v. S.C. Dept. of Revenue





existed at that time since the contracts had not yet been signed.3





Mibbs has failed to allege a compensable taking and summary

judgment was properly granted on this cause of action.





Impairment of contract



A three-step analysis applies to a Contract Clause claim. First,

the Court must determine whether the State law has in fact operated as a

substantial impairment of a contractual relationship. If the State regulation

constitutes a substantial impairment, the State, in justification, must have a

significant and legitimate public purpose behind the regulation. Once a

legitimate public purpose has been identified, the next inquiry is whether

the adjustment of contractual rights is based upon reasonable conditions and

is of a character appropriate to the public purpose. Energy Reserves Group,

Inc, v. Kansas Power and Light Co., 459 U.S. 400 (1983); see also Ken

Moorhead Oil Co. v. Federated Mut. Ins. Co., 323 S.C. 532, 476 S.E.2d 481

(1996); St. Andrews Pub. Serv. District v. Moseley, 323 S.C. 389, 475 S.E.2d

750 (1996).





Mibbs contends because the ban on cash payouts in Anderson

and Oconee counties was struck down by this Court as invalid, it is

unreasonable regulation and therefore unconstitutionally impaired Mibbs's

contracts.





This argument misapprehends the nature of the Contract Clause

analysis. The threshold inquiry is whether the State law has operated as a

substantial impairment of a contractual relationship. Energy Reserves, 459

U.S. at 411. We have specifically found no substantial impairment of a


3 Any oral agreement the parties may have had previous to the signing

of the contracts is irrelevant. Such an agreement would be unenforceable

under the Statute of Frauds. S.C. Code Ann. § 32-3-10 (1991) (agreement

not to be performed within the space of one year from its making not subject

to action for its enforcement). An unenforceable agreement cannot give rise

to any vested property right and therefore can be the basis of no takings

claim. See Barnhill v. City of North Myrtle Beach, 333 S.C. 482, 511 S.E.2d

361 (1999) (no taking where no vested right in property).

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Mibbs, Inc. v. S.C. Dept. of Revenue





contract where the subject of the contract is a highly regulated business

whose history makes further regulation foreseeable. Ken Moorhead Oil,

supra. In this case, further regulation regarding cash payouts was

foreseeable, especially in light of the fact Mibbs signed these contracts after

enactment of the law providing for the local option referendum.





Mibbs complains it could not foresee an invalid regulation of cash

payouts. The reasonableness of the regulation itself is irrelevant at this

point in the inquiry. For purposes of determining whether there was a

substantial impairment of contract, we consider whether the law in question

altered the reasonable expectations of the parties. Ken Moorehead Oil,

supra. At the time the contracts were signed, Mibbs could not have

reasonably expected no regulation would interfere with its profits from cash

payouts. Further, we note that in Martin v. Condon we struck down the ban

on cash payouts because it did not apply statewide, not because it was

substantively invalid regulation.





Moreover, there is no impairment for purposes of a Contract

Clause analysis where the statute does not affect a pre-existing contract

between private parties. Ogden v. Saunders, 25 U.S. (12 Wheat) 212 (1827);

American Nat'l Fire Ins. Co. v. Smith Grading and Paving Inc, 317 S.C.

445, 454 S.E.2d 897 (1995). Here, Mibbs's contracts were entered into after

enactment of the legislation it claims created the impairment.4 We conclude

the trial judge properly granted Department summary judgment on the

Contract Clause cause of action.





AFFIRMED.



Finney, C.J., Toal, A.J., Acting Associate Justices William T.

Howell and C. Tolbert Goolsby, Jr., concur.


4Again, any previous oral arrangement was unenforceable and bestows

no rights protected under the Contract Clause. See Miller v. Rowland, 999

F.2d 389 (9th Cir. 1993) (Contract Clause does not protect unenforceable

contract).

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