821 S.E.2d 677
S.C.2018Background
- The South Carolina Home Builders Self Insurers Fund (the Fund) was formed in 1995 by an Agreement between the Home Builders Association and a Board of Trustees to provide self-insurance for member employers under the Workers' Compensation Act; the Agreement barred diverting Fund assets from its stated purposes and provided for distribution of remaining funds on termination.
- Beginning in 2003 the Board pursued winding down the Fund and using approximately $5 million of Fund assets to capitalize a new mutual insurance company, and spent Fund money on related items (software, office space, subscriptions, expanded insurance coverage).
- The Workers' Compensation Commission acknowledged the Fund would close and approved release of $5 million in non-pledged assets to capitalize the new mutual insurer, without evaluating consistency with the Agreement's terms.
- Petitioners (Fund members) sued the Fund, the Board, and individual trustees alleging breach of fiduciary duty, breach of trust, breach of contract, and fraud-related contract breach, seeking return of assets, accounting, and declaratory relief; respondents moved to dismiss on multiple grounds including lack of jurisdiction (probate court) and failure to satisfy Rule 23(b)(1) pre‑suit demand for derivative claims.
- The circuit court dismissed (first for probate jurisdiction, then later treating the Fund as an unincorporated association and dismissing for failure to satisfy Rule 23(b)(1)); the court of appeals affirmed; the Supreme Court granted certiorari and reversed, holding Petitioners met Rule 23(b)(1) pleading requirements and remanding for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Is the Fund a trust or an unincorporated association and does form control Rule 23 applicability? | Patterson: Agreement creates a trust; Rule 23 inapplicable. | Respondents: Fund functions as an unincorporated association; Rule 23 applies. | Court: Need not resolve entity label; Rule 23(b)(1) applies to derivative claims regardless of whether entity is a trust. |
| 2. Are the claims direct (individual) or derivative (on behalf of Fund)? | Patterson: Joint-and-several liability makes injuries individual; some claims are direct. | Respondents: Removal of $5M harmed Fund generally; claims are derivative. | Court: Complaint includes both derivative claims (e.g., harm to Fund’s ability to pay) and some plausible direct claims; court of appeals erred to treat all claims as derivative. |
| 3. Did Plaintiffs satisfy Rule 23(b)(1) pre‑suit demand / pleading particularity? | Patterson: Sent a January 30, 2013 demand letter and alleged pre‑suit efforts in the complaint; satisfies Rule 23. | Respondents: Complaint allegations were too general and did not particularize pre‑suit demand as required by Whittle. | Court: Plaintiffs satisfied Rule 23(b)(1); the demand letter is properly considered and, with the complaint, meets particularity requirements; dismissal was error. |
| 4. Was the dismissal appropriate where court considered materials outside the complaint (conversion to summary judgment)? | Patterson: Court should consider the demand letter and allow supplementation/amendment. | Respondents: Court properly dismissed under Rule 12(b)(6)/Rule 23. | Court: Trial court had effectively converted the motion into summary judgment by considering extraneous materials; substantive dismissal for failure to satisfy Rule 23 was erroneous. |
Key Cases Cited
- Germann v. N.Y. Life Ins. Co., 286 S.C. 34 (Ct. App. 1985) (interpretation of trust instruments governed by instrument language and settlor intent)
- Navarro Savings Ass'n v. Lee, 446 U.S. 458 (U.S. 1980) (business form cannot be disregarded when instrument is an express trust)
- Brown v. Stewart, 348 S.C. 33 (Ct. App. 2001) (distinguishing derivative claims from individual claims for corporate losses)
- Ward v. Griffin, 295 S.C. 219 (Ct. App. 1988) (individual stockholder recovery when misconduct causes particular loss to shareholder)
- Carolina First Corp. v. Whittle, 343 S.C. 176 (Ct. App. 2000) (Rule 23 pre‑suit demand must be sufficiently particularized)
- L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419 (2d Cir. 2011) (documents attached or integral to complaint may be considered by court)