South Carolina Finance Corp. of Anderson v. West Side Finance Co.

Decision Date17 March 1960
Docket NumberNo. 17628,17628
Citation236 S.C. 109,113 S.E.2d 329
PartiesSOUTH CAROLINA FINANCE CORPORATION OF ANDERSON, Plaintiff-Respondent, v. WEST SIDE FINANCE COMPANY and J. J. Meredith, Defendants-Appellants.
CourtSouth Carolina Supreme Court

E. Harry Agnew, Anderson, Leatherwood, Walker, Todd & Mann, Greenville, for appellants.

J. Bratton Davis, Columbia, Watkins, Vandiver & Freeman, Anderson, for respondent.

LEGGE, Justice.

Action to enjoin the alleged breach of a covenant not to compete, and for damages for such breach. Consolidated for trial with it was an action by the defendant Meredith against the plaintiff on a promissory note, to which reference will be made later. An injunction pendente lite was issued and the cause was referred to a special referee to take testimony and report to the circuit court his findings, conclusions and recommendations. Concluding that the covenant was unreasonable, contrary to public policy, and without consideration, and that the plaintiff had come into equity with unclean hands, he recommended that the complaint be dismissed and that judgment be entered against the plaintiff on the promissory note before mentioned. Exceptions to the special referee's conclusions as to these issues were sustained by the Honorable Thomas P. Bussey, Presiding Judge, who by his decree of June 16, 1959, held the covenant valid, enjoined its breach, and found that the plaintiff was entitled, after offset of the amount of the note against its damages, to compensation from the corporate defendant in the amount of $4,281.93, which amount he ordered paid. From this decree both defendants appeal.

The essential facts are not in dispute. For some time prior to March 28, 1958, South Carolina Finance Corporation of Anderson (the corporate name of which, until October 7, 1957, had been Lakemont Finance Company) was engaged in the small loan business with its office at 113 Lakemont Drive, Anderson, South Carolina. On March 28, 1958, it entered into a written agreement with West Side Finance Company, Inc., which was also in the small loan business, having its office at 2103 West Whitner Street in Anderson, whereby it purchased from West Side its furniture, fixtures and office equipment and all of its outstanding small loan accounts receivable as of the close of business on March 25, 1958, and West Side and its officers covenanted, among other things, that for a period of three years from March 28, 1958, they would not 'engage or be interested directly or indirectly through the medium of any corporation, partnership, association, firm or company, or otherwise, in the business of making personal small loans in Anderson, South Carolina, or within a radius of twenty-five (25) miles of Anderson, South Carolina.'

The agreement was executed, on the part of West Side, by J. J. Meredith, its President and sole stockholder. It allocated the purchase price, $23,139.11, as follows:

                '(i) Small Loan Accounts Receivable as of the close of business
                  March 25, 1958 ................................................... $21,018.09
                (ii) Furniture, fixtures and office equipment .......................... 621.02
                (iii) Covenants not to compete ....................................... 1,500.00
                                                                                    -----------
                                                                                    $23,139.11'
                

Of the purchase price, $2,500 was evidenced by a non-negotiable promissory note of the purchaser in that amount, dated March 28, 1958, payable to West Side Finance Company, Inc., sixty days from said date, with interest at the rate of six per cent per annum. This note contained the following provision:

'There shall be deducted from the $2,500.00 any loss sustained or any legal expense incurred by the maker of this note as a result of any breach of any of the warranties or agreements or representations made by West Side Finance Company in an agreement of sale made March 28, 1958.'

Upon completion of the transaction of March 28, 1958, South Carolina Finance Corporation moved its office from 113 Lakemont Drive to 2103 West Whitner Street, which it leased from J. J. Meredith, its owner, Meredith's company, West Side Finance Company, having vacated it. About two weeks later, Meredith sold to Mr. Pratt Sosebee all of the stock of West Side Finance Company and the remaining assets of that company, consisting of the office safe, the neon sign, and two notes receivable in the aggregate amount of $1,237.88 which in the course of the settlement on March 28, had, by mutual agreement, been retained by West Side. Thereafter, and prior to the maturity of the $2,500 note before mentioned, West Side Finance Company, by Pratt Sosebee as its President, assigned that note to 'J. J. Meredith or Order.' Within a month after the transaction of March 28, West Side Finance Company moved into the building at 113 Lakemont Drive, that had been vacated by South Carolina Finance Corporation, and there actively engaged in the small loan business; and it continued to do so until its lending operations were halted by the injunction pendente lite issued in this action on September 4, 1958.

The appeal here challenges the adverse ruling by the circuit judge on the issues that had been resolved in favor of the defendants by the special referee, as before mentioned. In addition, it challenges the award of damages as being without proper evidentiary support.

Appellants based their claim to the shelter of the 'clean hands' maxim upon: (1) variance, which they contend was undisclosed, between the terms of the agreement of March 28 and those of an option that West Side had given to South Carolina Finance Corporation on March 24; and (2) intellectual and educational superiority of the buyer's representative over Meredith, who was illiterate. The option, to expire April 1, 1958, gave to South Carolina Finance Corporation the right to purchase: (1) all of West Side's accounts receivable (less the two notes before mentioned, aggregating $1,237.88) as of the close of business March 24, at their face value; and (2) all of West Side's office equipment (except the safe) at 'remaining cost' as shown on the depreciation schedule in West Side's 1957 income tax return. It further provided that in the event of its being exercised: (1) the seller would pay all outstanding current obligations; (2) Meredith, as sole stockholder, would transfer all of the West Side stock to the buyer; and (3) the buyer would 'pay J. J. Meredith personally one thousand five hundred and no/100 ($1,500.00) dollars, in consideration that he will not compete in his name or in any capacity in the small loan business in Anderson County, South Carolina, for the next three years from this date.' It further provided that it was expressly contingent upon the buyer's agreeing to take a lease of the premises then occupied by the seller, for a term of one year at a rental of $50 per month, with option to renew for four additional years at a rental of $60 per month, the seller agreeing to make certain improvements to said premises.

That the transaction as consummated was not identical with that proposed in the option affords, of itself, no basis for application of the 'clean hands' maxim; establishment of appellants' claim required proof of unconscionable overreaching on the part of respondent in the transaction. But we note, in passing, the differences in the transaction as proposed in the option and that consummated by the 'agreement of sale', as follows:

1. The option contemplated the transfer by Meredith to the purchaser of all of the capital stock of West Side; whereas in the sale as consummated Meredith retained this stock.

2. The option contemplated a covenant on the part of Meredith personally not to compete in Anderson County; the agreement of sale contained a covenant on the part of West Side and its officers (the record reveals none other than Meredith) not to compete within a radius of twenty-five miles of the City of Anderson.

The following observations seem pertinent:

1. West Side's license, which was to expire on December 31, 1958, was not mentioned in either instrument. It was, by the express provisions of Section 8-794.41 of the Code, non-assignable.

2. The price to be paid by the buyer was substantially the same under the agreement of sale as under the option, to wit: all accounts (small loan notes) receivable, (excepting the same two), as of the close of business March 24 (option) or March 25 (agreement of sale), at face; office equipment (except safe) at depreciated value; and $1,500 for covenants not to compete.

3. Had Meredith transferred his stock to the buyer, as was contemplated in the option, West Side would have become a wholly owned subsidiary of the buyer; its future operations, if any, would have been completely subject to the buyer's control; and consequently there was no reason to provide, in the option, for a covenant on the part of West Side not to compete.

4. It can hardly be said that Meredith's position was worse under the agreement of sale as consummated than it would have been had the option been exercised. In either case, he, personally, would have covenanted not to compete for three years. The area of the covenant was larger under the agreement of sale than that provided for in the option. But under the agreement of sale as consummated Meredith still had the stock of West Side, and he and that company would be free of the covenant after three years; whereas under the terms of the option West Side could never have reentered the small loan business as an independent entity, without the buyer's consent.

Throughout the transaction respondent was represented by its treasurer, Mr. Robert R. Hudson, a well-educated certified public accountant. He testified that when he went to the office of West Side on March 28 he took with him the option of March 24 and the agreement of sale that he had had prepared and that...

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