Opinion ID: 1233634
Heading Depth: 2
Heading Rank: 2

Heading: Impairment of Contract Claim

Text: Appellants assert the trial judge erred by dismissing their Contract Clause claim. They claim that, in spite of the high degree of regulation of the video poker industry, they could not have foreseen an illegal ban on cash payouts. Further, appellants argue that, unlike the video poker operator in Mibbs, supra, they entered into contracts before the enactment or notice provisions of the local option law. Both the United States and South Carolina Constitutions prohibit the State from passing laws which impair the obligations of contracts. See U.S. Const. art. I, § 10; S.C. Const. art. I, § 4. A three-step analysis is applied to determine whether a law violates the federal and state Contract Clauses. Ken Moorhead Oil Co. v. Federated Mutual Ins. Co., 323 S.C. 532, 476 S.E.2d 481 (1996). Initially, the Court must determine whether the state law has operated as a substantial impairment of a contractual relationship. If the regulation does constitute a substantial impairment, the State, in justification, must have a significant and legitimate public purpose behind the regulation. Lastly, once a legitimate public purpose has been identified, the Court determines whether the adjustment of contractual rights is based upon reasonable conditions and is of a character appropriate to the public purpose. Mibbs v. South Carolina Dep't of Revenue, supra . In Mibbs, the Court addressed this same Contract Clause issue-whether a video poker operator could foresee the passage of the invalid local option law. We held where there is a Contract Clause claim, the threshold inquiry is whether the State law has operated as a substantial impairment of the reasonable expectations of the parties. Id. The validity of the regulation is irrelevant to this initial determination. Id. Further, the Mibbs Court noted Martin v. Condon, supra , struck down the ban on cash payouts because it did not apply statewide, not because the ban was substantively invalid. Id. Presumably, the legislature could have banned cash payouts for coin-operated video gaming machines if it did so on a statewide basis. [4] Finally, the fact that appellants entered into contracts for the placement of video gaming machines before the legislature enacted the local option law is an insignificant distinction from Mibbs. In Mibbs, the Court acknowledged there is no substantial impairment of a contract where the subject of the contract is a highly regulated business whose history makes further regulation foreseeable. Id. 337 S.C. at 608, 524 S.E.2d at 629. It concluded the video poker industry was highly regulated and, therefore, further regulation regarding cash payouts was foreseeable. Although recognizing the operator had entered into contracts after enactment of the local option law, Mibbs was nonetheless decided on the basis of the high degree of regulation in the video gaming industry. Appellants assert our decision today will affect the reliability of contracts entered into by participants in other highly regulated fields like banking and insurance. We disagree. Throughout the late 1980s and early 1990s, the same time period during which appellants entered into their contracts, lawmakers repeatedly introduced legislation specifically aimed at eliminating nonmachine cash payouts. [5] In this unique environment, appellants could not have reasonably expected that no regulation would interfere with their anticipated cash payouts. Our ruling does not affect the certainty of contracts in highly regulated fields. As previously determined in Mibbs, the trial judge properly dismissed the impairment of contract claim because appellants could not have reasonably expected cash payouts for coin-operated video gaming machines to remain legal when they entered into the contracts. AFFIRMED. TOAL, C.J., MOORE, J., and Acting Justices C. VICTOR PYLE, Jr., and THOMAS L. HUGHSTON, Jr., concur.