Palmetto Construction Group, LLC v. Restoration Specialists, LLC ( 2021 )

THE STATE OF SOUTH CAROLINA
In The Supreme Court
Palmetto Construction Group, LLC, Respondent,
v.
Restoration Specialists, LLC, Reuben Mark Ward, and
Lynnette Pennington Ward, Petitioners.
Appellate Case No. 2019-002052
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
Appeal from Charleston County
Mikell R. Scarborough, Master-in-Equity
Opinion No. 28010
Heard January 12, 2021 – Filed March 10, 2021
AFFIRMED AS MODIFIED
A. Bright Ariail, Law Office of A. Bright Ariail, LLC, of
Charleston for Petitioners.
Jaan Gunnar Rannik and Andrew K. Epting Jr., Epting &
Rannik, LLC, both of Charleston for Respondent.
JUSTICE FEW: This is a civil action to collect a debt under a contract that
contains an arbitration provision. The defendants appealed the master in equity's
order refusing to set aside the entry of their default. The court of appeals dismissed
the appeal on the basis that an order refusing to set aside an entry of default is not
immediately appealable. Palmetto Constr. Grp., LLC v. Restoration Specialists,
LLC, 428 S.C. 261, 266, 834 S.E.2d 204, 206 (Ct. App. 2019). The defendants filed
a petition for a writ of certiorari claiming the order is immediately appealable
because it had the effect of precluding their motion to compel arbitration, and in fact,
the order states, "Defendants' motion to stay and compel arbitration is denied as [the
defendants are] in default." See Cape Romain Contractors, Inc. v. Wando E., LLC,
405 S.C. 115, 121 n.4, 747 S.E.2d 461, 464 n.4 (2013) ("An order denying arbitration
is immediately appealable." (citing Towles v. United HealthCare Corp., 338 S.C. 29,
34-35, 524 S.E.2d 839, 842-43 (Ct. App. 1999))); see also S.C. Code Ann. § 15-48-
200(a)(1) (2005). We affirm the court of appeals.
Palmetto Construction Group brought this action against Restoration Specialists, its
managing member Mark Ward, and his wife Lynnette Ward for payment under a
construction contract with an arbitration provision. The defendants did not answer
the complaint. The circuit court found all three defendants were in default under
Rule 55(a), SCRCP, and referred the case to the master in equity pursuant to Rule
53(b), SCRCP. The defendants filed a motion to set aside the entry of default. The
master denied the motion, and the defendants appealed. The court of appeals held
the master's order was not immediately appealable and dismissed the appeal.
Palmetto Constr. Grp., 428 S.C. at 266, 834 S.E.2d at 206. The court of appeals
found the fact the order refusing to set aside the entry of default effectively precluded
the defendants' effort to compel arbitration did not affect the immediate appealability
of the order. 428 S.C. at 266-67, 834 S.E.2d at 207.
A party in default has three primary options: (1) do nothing pending the entry of
judgment by default under Rule 55(b), SCRCP; (2) file an appearance under Rule
55(b)(2), SCRCP, in an attempt to protect its interests before the entry of judgment
by default; or (3) request the entry of default be set aside pursuant to Rule 55(c),
SCRCP. Under either option, the party has no right of appeal until after final
judgment. See Thynes v. Lloyd, 294 S.C. 152, 153, 363 S.E.2d 122, 122 (Ct. App.
1987) (stating an "order refusing to grant relief from the entry of default is not
appealable until after final judgment"); but see Johnson ex rel. Jefferson v. Gene's
Used Cars, Inc., 295 S.C. 317, 317, 368 S.E.2d 456, 456 (1988) (stating "while the
Court of Appeals reached the correct result in [Thynes], it improperly relied on Rule
72, SCRCP, and federal cases interpreting the appealability of orders made pursuant
to Rule 55(c) . . . . We agree that the . . . denial of a Rule 55(c) motion is not directly
appealable under S.C. Code Ann. § 14-3-330 (1976).").
The defendants contend the law of arbitration changes the immediate appealability
of the master's order. To support their contention, they rely on language from the
Supreme Court and this Court stating the law "favors" arbitration. See, e.g., Moses
H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S. Ct. 927, 941,
74 L. Ed. 2d 765, 785 (1983) ("Section 2 [of the Federal Arbitration Act] is a
congressional declaration of a liberal federal policy favoring arbitration agreements
. . . ."); Zabinski v. Bright Acres Assocs., 346 S.C. 580, 596, 553 S.E.2d 110, 118
(2001) ("The policy of the United States and South Carolina is to favor arbitration of
disputes."). However, there is nothing in the law of arbitration that affects the
immediate appealability of an order refusing to set aside an entry of default.
Specifically, the fact the order effectively precludes the defaulting party's effort to
arbitrate the claim does not change whether the order may be immediately appealed.
Our courts' statements that the law "favors" arbitration were never intended to
elevate a contractual right of arbitration above the procedural rules of the court or
other contractual provisions. See Richard Frankel, The Arbitration Clause As Super
Contract, 91 Wash. U. L. Rev. 531, 533 (2014) ("Much of this arbitration favoritism
is attributable to lower-court misinterpretation of thirty-year-old dicta . . . .").
Congress passed the Federal Arbitration Act in 1924 to "ensure judicial enforcement
of privately made agreements to arbitrate." Dean Witter Reynolds, Inc. v. Byrd, 470
U.S. 213, 219, 105 S. Ct. 1238, 1242, 84 L. Ed. 2d 158, 164 (1985). "[The Act's]
purpose was to place an arbitration agreement 'upon the same footing as other
contracts, where it belongs,' and to overrule the judiciary's longstanding refusal to
enforce agreements to arbitrate." 470 U.S. at 219-20, 105 S. Ct. at 1242, 84 L. Ed.
2d at 164 (quoting H.R. Rep. No. 96, at 1 (1924)). Quoting the House Report on the
Act, the Supreme Court explained,
The need for the law arises from an anachronism of our
American law. Some centuries ago, because of the
jealousy of the English courts for their own jurisdiction,
they refused to enforce specific agreements to arbitrate
upon the ground that the courts were thereby ousted from
their jurisdiction. This jealousy survived for so long a
period that the principle became firmly embedded in the
English common law and was adopted with it by the
American courts. The courts have felt that the precedent
was too strongly fixed to be overturned without legislative
enactment, although they have frequently criticised the
rule and recognized its illogical nature and the injustice
which results from it. This bill declares simply that such
agreements for arbitration shall be enforced, and provides
a procedure in the Federal courts for their enforcement.
470 U.S. at 219-20 n.6, 105 S. Ct. at 1242 n.6, 84 L. Ed. 2d at 164-65 n.6 (quoting
H.R. Rep. No. 96 at 1-2) (emphasis added).
The Supreme Court of South Carolina first discussed a "federal policy favoring the
arbitration of disputes" in Trident Technical College v. Lucas & Stubbs, Ltd., 286
S.C. 98, 103, 333 S.E.2d 781, 784-85 (1985), relying on cases interpreting the
Federal Arbitration Act. Referring to a similar "policy" in South Carolina, we cited
cases that simply recognized the right to contract for limited arbitration. 286 S.C. at
103-04, 333 S.E.2d at 785 (citing Harwell v. Home Mut. Fire Ins. Co., 228 S.C. 594,
599, 91 S.E.2d 273, 275 (1956) (stating as to a limited arbitration agreement, "where
the policy expressly or by necessary implication forbids the insured from bringing
suit until after the amount of the loss has been submitted to arbitration or appraisal,
compliance with such provision . . . is a condition precedent to the right of insured
to maintain an action on the policy"); Bollmann v. Bollmann, 6 S.C. 29, 42-43 (1875)
("An arbitration proceeds from the consent of the parties. The Court is but
the instrument through which . . . effect can be given to their will. It contemplates
an adjustment of their controversy by a forum not bound by the strict rules of law,
but permitted within certain limits to substitute their own mode of investigation in
the place of that through which alone Courts of justice are allowed to exercise their
functions.")).
Before Trident Technical College, South Carolina practiced a reluctance similar to
that of the federal courts to enforce arbitration agreements because they deprived the
courts of jurisdiction. In Episcopal Housing Corp. v. Federal Insurance Co., 269
S.C. 631, 239 S.E.2d 647 (1977), for example, we stated, "It is well established in
South Carolina that general arbitration agreements which oust the South Carolina
circuit court from jurisdiction are unenforceable as against public policy." 269 S.C.
at 636, 239 S.E.2d at 649; see also Childs v. Allstate Ins. Co., 237 S.C. 455, 460,
117 S.E.2d 867, 869-70 (1961) (stating "an [arbitration] agreement is upheld when
it provides for arbitration of the amount of the loss" (a limited arbitration agreement)
but is "not binding upon the parties" if it "undertakes to require arbitration of the
question of liability"); Jones v. Enoree Power Co., 92 S.C. 263, 267, 75 S.E. 452,
454 (1912) ("An agreement to submit to arbitration all questions of law and fact that
may arise under a contract is contrary to the public policy and void, as an attempt to
oust the courts of their jurisdiction and establish in their place a contract tribunal.").
In Episcopal Housing Corp., however, we finally accepted the supremacy of federal
law permitting general arbitration agreements. "It is equally true," we stated,
referring to the previously quoted statement that general arbitration agreements were
unenforceable, "that under the supremacy clause of the United States Constitution
. . . , this Court must recognize that federal statutes enacted pursuant to the United
States Constitution are the supreme law of the land." 269 S.C. at 636, 239 S.E.2d at
649. In Trident Technical College, only eight years after Episcopal Housing Corp.
and two years after the Supreme Court made its first "policy" statement in Moses H.
Cone, we followed the federal courts by stating "this policy favoring the arbitration
of disputes is also well established in South Carolina." 286 S.C. at 103, 333 S.E.2d
at 785.
Neither the Supreme Court nor this Court, however, meant to give the law of
arbitration such a special status that it would supplant state procedural law. Rather,
these statements must be read in the context in which the Courts made them:
overruling a longstanding, policy-based rule that arbitration agreements are
unenforceable. In Volt Information Sciences, Inc. v. Board of Trustees of Leland
Stanford Junior University, 489 U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989),
the Supreme Court explained, "There is no federal policy favoring arbitration under
a certain set of procedural rules; the federal policy is simply to ensure the
enforceability, according to their terms, of private agreements to arbitrate." 489 U.S.
at 476, 109 S. Ct. at 1254, 103 L. Ed. 2d at 498; see also Dean Witter Reynolds, 470
U.S. at 219-20, 105 S. Ct. at 1242, 84 L. Ed. 2d at 164 ("The [Federal Arbitration]
Act, after all, does not mandate the arbitration of all claims, but merely the
enforcement . . . of privately negotiated arbitration agreements."). Therefore, when
considered in the proper context, our statements that the law "favors" arbitration
mean simply that courts must respect and enforce a contractual provision to arbitrate
as it respects and enforces all contractual provisions. There is, however, no public
policy—federal or state—"favoring" arbitration. See Toler's Cove Homeowners
Ass'n, Inc. v. Trident Const. Co., 355 S.C. 605, 611, 586 S.E.2d 581, 584 (2003)
("There is no federal policy favoring arbitration under a certain set of procedural
rules and the federal policy is simply to ensure the enforceability of private
agreements to arbitrate." (citing Volt Info. Scis., 489 U.S. at 476, 109 S. Ct. at 1254,
103 L. Ed. 2d. at 498)).
In this case, the simple fact the master refused to set aside the entry of default,
thereby preventing the defendants from requesting the court to compel arbitration,
does not mean the order was immediately appealable. In a case like this, the circuit
court should proceed to a determination of damages and the entry of judgment under
Rule 55(b). From the final order of judgment, the aggrieved party may file an appeal
challenging the circuit court's finding there was not good cause to set aside the entry
of default, and may address any Rule 60, SCRCP, issue such as whether the
aggrieved party demonstrated excusable neglect. See ITC Commercial Funding,
LLC v. Crerar, 393 S.C. 487, 494-95, 713 S.E.2d 335, 338-39 (Ct. App. 2011)
(considering—after default judgment—whether the defaulting party's neglect was
excusable pursuant to Rule 60, SCRCP); Thynes, 294 S.C. at 154, 363 S.E.2d at 123
(stating "the denial of a motion" to set aside an entry of default for good cause "is
not appealable until after final judgment" (citation omitted)).
Therefore, the court of appeals correctly determined the order refusing to set aside
the entry of default was not immediately appealable. The court of appeals erred,
however, in addressing the defendants' argument they did not waive their right to
arbitration. See Palmetto Constr. Grp., 428 S.C. at 267-70, 834 S.E.2d at 207-08.
In the context of default, the concept of waiver is bound up in the Rule 55(c)
determination of good cause and Rule 60(b) determinations such as excusable
neglect. On appeal from a final judgment, the defendants may challenge any such
determinations, and if that challenge is successful, may claim they did not in fact
waive their contractual right to arbitration.
The decision of the court of appeals to dismiss the appeal is
AFFIRMED AS MODIFIED.
BEATTY, C.J., KITTREDGE, HEARN and JAMES, JJ., concur.