Patterson v. Witter (Lawyers Weekly No. 011-057-16, 14 pp.) (H. Bruce Williams, J.) Appealed from Richland County Circuit Court (G. Thomas Cooper Jr., J.) S.C. App.
Holding: Despite having their first circuit-court complaint dismissed because the suit involved the internal affairs of a trust such that the complaint should have been filed in probate court, plaintiffs actually should have made a pre-suit demand on defendants because the South Carolina Home Builders Self Insurers Fund is not a trust; instead, it is an unincorporated association, and plaintiffs’ claims are typical of derivative claims subject to the pleading requirements of Rule 23(b)(1), SCRCP.
We affirm the circuit court’s dismissal of plaintiffs’ second complaint.
Plaintiffs are members of the South Carolina Home Builders Self Insurers Fund (the Fund). Defendants are the Fund and its trustees.
Plaintiffs disagreed with defendants’ decision to remove $5,000,000 from the Fund to establish a separate member-owned insurance company. As noted above, plaintiffs’ attempts to challenge this decision in court have failed.
In the first lawsuit, defendants argued (1) that plaintiffs failed to meet the pleading requirements for derivative suits under Rule 23(b)(1) or, alternatively, (2) that the suit involved the internal affairs of a trust. In the second lawsuit, defendants relied on their first argument. Thus, defendants are not subject to judicial estoppel because they have not misrepresented facts or changed their version of events to gain an advantage in the instant litigation.
At first glance, the agreement which established the Fund – “Agreement and Declaration of Trust” – contains language that could be indicative of the Fund being a trust. The agreement refers to the Home Builders Association of South Carolina, Inc. (HBASC), as the “Settlor.” The agreement also grants the Fund’s “Board of Trustees” all powers conferred by the South Carolina Uniform Trustee’s Powers Act and authorizes it to invest the Fund’s assets. Additionally, the agreement mentions the Fund’s compliance with the rule against perpetuities and says the situs of the Fund is the State of South Carolina.
However, the agreement also contains provisions usually associated with business corporations: the board is elected by the Fund’s members, the agreement sets out requirements for board meetings, the board must establish an office to house the Fund’s books and records, the Fund must indemnify the board for negligence in all actions made in good faith, and the board is authorized to obtain liability insurance at the Fund’s expense.
We find the circuit court in this second case (which was filed in probate court and then appealed to the circuit court) correctly held that the Fund was not a trust. First, HBASC did not transfer any money or property to the board to hold in trust for the Fund’s members; rather, members subsequently contributed membership dues and premiums. Second, the agreement contains no provision for “beneficiaries.”
The circuit also correctly held that the Fund resembles an unincorporated association. It is a common enterprise of homebuilders who have voluntarily joined together to form a fund to provide workers’ compensation coverage for their businesses, and its members are jointly and severally liable for any shortfall in Fund assets.
Rule 23(b)(1) covers derivative suits for both corporations and unincorporated associations.
This action is premised on the alleged harm to the overall fund, not to individual members. Accordingly, plaintiffs’ claims are derivative and subject to Rule 23(b)(1).
Plaintiffs have not alleged what recourse they sought from the board prior to this suit. As a result, the circuit court could not determine whether the board’s refusal of the demand was wrongful or whether to allow the lawsuit to proceed. Therefore, the circuit court properly concluded that plaintiffs failed to comply with Rule 23(b)(1).
Affirmed.