State ex rel. Medlock v. Nest Egg Soc. Today, Inc.

• Decision Date: 21 May 1986
• Docket Number: No. 0793,0793
• Citation: 290 S.C. 124,348 S.E.2d 381
• Parties: STATE of South Carolina, ex relatione T. Travis MEDLOCK, Respondent, v. NEST EGG SOCIETY TODAY, INC., Thomas Atkin, and Gary W. Meilahn, Appellants. . Heard
• Court: South Carolina Court of Appeals

Page 381

348 S.E.2d 381

290 S.C. 124

STATE of South Carolina, ex relatione T. Travis MEDLOCK, Respondent, v. NEST EGG SOCIETY TODAY, INC., Thomas Atkin, and Gary W.

Meilahn, Appellants.

No. 0793.

Court of Appeals of South Carolina.

Heard May 21, 1986.

Decided Sept. 2, 1986.

Merl F. Code and Jeffery Weston, both of Code & Weston, P.A., Greenville, for appellants.

T. Travis Medlock, Atty. Gen., and William K. Moore, Deputy Atty. Gen., Columbia, for respondent.

BELL, Judge.

The State, on the relation of its Attorney General, brought this action for violation of the South Carolina Unfair Trade Practices Act ¹ against Nest Egg Society Today, Inc., a Florida corporation, and two of its directors, Thomas Atkin and Gary W. Meilahn. The circuit court found the defendants had violated the Act by operating an unlawful pyramid scheme and issued a permanent injunction prohibiting them from conducting a pyramid club or similar organization within South Carolina. A separate hearing was subsequently held to determine whether the violation of the Act was willful. The court found a willful violation and assessed civil penalties of $45,000 jointly and severally against the defendants. They appeal. We affirm.

The evidence showed that Nest Egg was incorporated by Atkin and Meilahn, who are officers, directors, and shareholders of the corporation. Atkin and Meilahn are responsible for management and policy decisions of the corporation. They, with others, created the Nest Egg membership program which gave rise to this lawsuit.

Prior to the commencement of this action, Nest Egg was engaged in selling memberships in the corporation in South Carolina. Under the membership program, each member of the corporation was to "sponsor" three new members by selling them each a membership package furnished by the corporation. New members paid the sponsor $5.00 for the membership package. Included in the package was a "Membership Registration Form" containing a computerized sponsorship list of nine names of existing Nest Egg members. The person in the number one position on the list was designated the "Membership Coordinator." The person in the number nine position on the list was the "sponsor" who sold the new member the package.

The instructions in the membership package directed the new member to send a $5.00 money order to the person in the number one position on the list. This payment was described as "a mandatory one-time only Management Bonus." The new member was also directed to send a $5.00 money order to Nest Egg to cover membership dues, together with a receipt for the money order sent to the Membership Coordinator, and a completed Membership Registration Form.

If the new member complied with these instructions, Nest Egg sent him three new membership packages to sell. These membership packages contained a Membership Registration Form with a new computerized sponsorship list of nine names. The new member's name appeared as the "sponsor" in the number nine position on the new list and the person who sold him his membership package was advanced to the number eight position. All other persons on the list were advanced one position and the Membership Coordinator to whom the new member had sent the "Management Bonus" was deleted from the new list.

The rules of the membership program prohibited the use of any promotional material other than that furnished by Nest Egg. Any deviation from the rules would lead to cancellation of the member's participation in the membership program. If Nest Egg's instructions were followed, membership in the corporation would increase through a chain process of new members securing other new members, thereby advancing themselves on the sponsorship list to a position where they would receive a $5.00 management bonus from a potential 19,683 new members, for a total sum of $98,415.00 in management bonuses.

At the time of trial, Nest Egg had 9,039 members in South Carolina. These members had paid approximately $45,000 in membership dues to the corporation.

I.

Nest Egg does not appeal the judgment that its membership program is an unlawful pyramid scheme under Section 39-5-30, and thus constitutes a violation of Section 39-5-20, declaring unfair or deceptive practices in the conduct of trade or commerce to be unlawful. The main question on appeal is whether the circuit court erred in finding Nest Egg was guilty of a willful violation of the statute.

A.

Section 39-5-110 prescribes a civil penalty not exceeding five thousand dollars per violation if the court finds a defendant has willfully used a method, act, or practice declared unlawful by Section 39-5-20.

Nest Egg argues that willfulness requires a specific intent to violate the law, which the State failed to prove on the part of Nest Egg or the individual defendants in this case.

At common law, the term "willful" connotes a determination to exercise one's own will in spite of and in defiance of the law. State v. Alexander, 48 S.C.L. (14 Rich.) 247 (1867). Conduct committed with a deliberate intention under such circumstances that a person of ordinary prudence would be conscious of it as an invasion of another's rights is "willful." Rogers v. Florence Printing Co., 233 S.C. 567, 106 S.E.2d 258 (1958). The intent to violate the law or another's rights may be proved by circumstantial evidence. Cf., State v. Carroll, 277 S.C. 306, 286 S.E.2d 382 (1982).

Ordinarily, the word "willful" as used in a statute has the same meaning as it has at common law. Reeves v. Carolina Foundry & Machine Works, 194 S.C. 403, 9 S.E.2d 919 (1940). Accordingly, Nest Egg contends that the circuit court should have applied the common law definition of willfulness to the facts of this case. In view of the plain language of the Unfair Trade Practices Act, however, we are unable to sustain this contention.

Section 39-5-110(c) states:

For the purposes of this section, a willful violation occurs when the party committing the violation knew or should have known that his conduct was a violation of § 39-5-20.

We hold that this definition creates a statutory standard of willfulness different from the common law standard. For purposes of Section 39-5-110, conduct is "willful" if the defendant "should have known" it violates Section 39-5-20. The standard is not one of actual knowledge, but of constructive knowledge. If, in the exercise of due diligence, a person of ordinary prudence engaged in trade or commerce could have ascertained that his conduct violates the Act, then such conduct is "willful" within the meaning of the statute.

Applying this standard of willfulness to the facts of the case, we think it is clear the defendants' violation of Section 39-5-20 was "willful." A person who exercised due diligence to ascertain whether the Nest Egg membership program violates the law in South Carolina would have no doubt that it is a prohibited pyramid plan. On its face, the Nest Egg program includes provisions for the increase of membership through a chain process of new members securing other new members as a means of advancing themselves in the group to a position where they receive money from other members. Since Section 39-5-30 declares such devices or plans a violation, per se, of Section 39-5-20, any person of ordinary understanding would know the Nest Egg program is unlawful. We, therefore, reject the defendants' contention that, as a matter of law, they were not guilty of a "willful" violation of the statute.

B.

In a related argument, Nest Egg maintains that even if actual knowledge is not required to render a violation "willful," the State's evidence was insufficient to prove willfulness under a due diligence standard. For this reason, Nest Egg asserts the circuit court erred in denying its motion for a directed verdict.

The circuit court found that Nest Egg's method of conducting business in South Carolina is the precise conduct prohibited by Section 39-5-30. This finding is amply supported by Nest Egg's own promotional materials which were admitted into evidence without objection to prove the manner in which the Nest Egg membership program operated. Nest Egg admitted it had over nine thousand dues paying members in South Carolina. It is reasonably inferable from the facts admitted by Nest Egg that most of these members were participating in the membership program. The admitted facts also support the circuit court's finding that Nest Egg conducted a large scale, sophisticated pyramid operation using computerized membership lists. The court took judicial notice that practically every state, including Florida, the state in which Nest Egg was incorporated and is domiciled, prohibits pyramid schemes like the Nest Egg membership program. Nest Egg does not seriously contest the fact that pyramid clubs are almost universally prohibited by law. We sustain the circuit court's conclusion that these facts were sufficient to prove that Nest Egg and the individual defendants should have known the membership program violated the law in South Carolina.

C.

Nest Egg emphasizes that the State introduced no new evidence at the trial on the issue of willfulness, but relied on the same evidence it presented in support of its motion for summary judgment. Since the motion for summary judgment was denied, Nest Egg argues that by entering judgment for the State, the trial judge overruled a prior order of another circuit judge in violation of Rule 60, Rules of Practice for the Circuit Courts of South Carolina. See Perry v. Jones, 17 S.C.L. (1 Bailey) 10 (1828); Cook v. Taylor, 272 S.C. 536, 252 S.E.2d 923 (1979); State ex rel. Medlock v. Love Shop, Ltd., 286 S.C. 486, 334 S.E.2d 528 (Ct.App.1985).

The denial of a motion for summary judgment is not an adjudication on the merits in favor of the party opposing the motion. Geiger v. Carolina Pool Equipment Distributors, Inc., 257 S.C. 112, 184 S.E.2d 446 (1971). Thus, the denial of the State's motion was not a judicial determination that...