Brad Walbeck v. The I'On Company ( 2023 )

THE STATE OF SOUTH CAROLINA
In the Supreme Court
Brad J. Walbeck and Lea Ann Adkins, Both Individually
and Derivatively on Behalf of The I'On Assembly, Inc.;
I'On Assembly, Inc., Petitioners-Respondents,
v.
The I'On Company, LLC; The I'On Club, LLC; The I'On
Group, LLC f/k/a Civitas, LLC; and I'On Realty, LLC,
Respondents-Petitioners.
Appellate Case No. 2019-000968
ON WRIT OF CERTIORARI TO THE COURT OF APPEALS
Appeal from Charleston County
The Honorable Stephanie P. McDonald,
Circuit Court Judge
Opinion No. 28134
Heard December 14, 2022 – Filed February 8, 2023
AFFIRMED IN PART, REVERSED IN PART
Justin O'Toole Lucey, Joshua Fletcher Evans, and Dabny
Lynn, all of Justin O'Toole Lucey, P.A., of Mt. Pleasant,
for Petitioners-Respondents.
Brian Duffy, Julie Lauren Moore, and Patrick Coleman
Wooten, all of Duffy & Young, L.L.C., of Charleston, for
Respondents-Petitioners.
JUSTICE HEARN: This case involves promises made and broken to homeowners
by a developer and its affiliated entities. Following a lengthy trial, a jury returned
verdicts on several causes of action in favor of the homeowners, and the developer
appealed. The court of appeals initially upheld the jury's verdict for $1.75 million on
the homeowners' breach of fiduciary claim and a verdict for $10,000 on a breach of
contract claim by an individual homeowner. Thereafter, upon petitions for rehearing,
the court of appeals completely reversed course, dismissing all of the homeowners'
claims as a matter of law and reversing and remanding the breach of contract claim
by the individual homeowner. We granted certiorari and now affirm in part and
reverse in part, thus reinstating the jury's verdicts.
FACTS/PROCEDURAL HISTORY
The facts of this case are complicated, and, in the words of Justice George C.
James, are "not for the weary." Stoneledge at Lake Keowee Owners' Ass'n, Inc. v.
IMK Dev. Co., LLC, 435 S.C. 109, 114, 866 S.E.2d 542, 545 (2021). I'On is a high-
density residential development that comprises public squares, restaurants, shops,
and homes designed to imitate historic urban housing, including a replica of
downtown Charleston's Rainbow Row. After this Court rejected a referendum effort
to restrict multi-use zoning, construction of I'On Phase II began around 2000. See
I'On, LLC v. Town of Mount Pleasant, 338 S.C. 406, 409, 526 S.E.2d 716, 717
(2000).
In 2010, Plaintiffs, Brad Walbeck and Lea Ann Adkins (collectively,
"Homeowners"), sued the I'On Company, LLC, the I'On Club, LLC, the I'On Group,
LLC, Thomas Graham, and Vince Graham, (collectively "Developers") for various
causes of action related to the nonconveyance of certain real property and
community amenities within the neighborhood. Thomas Graham, Vince Graham,
and I'On Realty Company, LLC were dismissed from the case prior to trial, and a
mistrial was ordered during the first trial in order to realign the HOA as a plaintiff.
In the subsequent trial, the jury returned verdicts in favor of Walbeck and the HOA.
The HOA elected its $1.75 million verdict for breach of fiduciary duty, and Walbeck
elected his $20,000 negligent misrepresentation verdict.
At the heart of Homeowners' claims is the allegation that Developers breached
their promise to convey certain real property community amenities, upon their
completion, to the HOA. Specifically, Homeowners claim that Developers promised
to convey an event facility (the Creek Club), a community dock, a boat ramp, and a
parking lot. With the exception of a portion of the parking lot, all of these amenities
are located on Lot CV-6, a civic-use zoned property along Hobcaw Creek.
In 1998, in order to comply with the Interstate Land Sales Full Disclosure Act
("ILSA"), Developers filed a Property Report with the U.S. Department of Housing
and Urban Development which included the following language:
THE RECREATIONAL FACILITIES LISTED IN THE CHART
ABOVE SHALL, UPON COMPLETION OF CONSTRUCTION, BE
CONVEYED TO THE [HOA] BY QUITCLAIM DEED FREE AND
CLEAR OF ALL MONETARY LIENS AND ENCUMBRANCES AT
NO COST TO THE [HOA] OR ITS MEMBERS. UPON
CONVEYANCE OF THESE FACILITIES TO THE [HOA], IT
SHALL ASSUME FULL RESPONSIBILITY FOR THE COSTS OF
OWNERSHIP, OPERATION, AND MAINTENANCE OF THE
FACILITIES CONVEYED TO IT.
The chart that preceded this section of the 1998 Property Report 1 included
nonspecific references to a "Community Dock" and a "Creekside Park." Lot CV-6
was not listed or specifically referred to by the 1998 Property Report. Thomas
Graham, one of two primary developers of I'On along with his son, testified this was
because Developers did not own the lot at that time. Additionally, the I'On Company
submitted plans, applications, and letters to DHEC representing that the community
docks were in lieu of private docks and were "for the use and enjoyment of the I'On
community." DHEC, as well as the Army Corps of Engineers, subsequently
approved these plans.
When Walbeck purchased his lot in November 1999, he received a copy of
the 1998 Property Report and the relevant sections were included in his lot's
purchase agreement. Development of I'On continued in the early 2000s, with
multiple community docks, parks, and homes. On Lot CV-6, the Creek Club and
1
The 1998 Property Report also warned prospective buyers that "VARIOUS
RECREATIONAL FACILITIES IN THE SUBDIVISION MAY BE OWNED AND
OPERATED BY PERSONS OTHER THAN THE [HOA]. THERE IS NO
GUARANTEE THAT ANY SUCH FACILITIES WILL BE AVAILABLE FOR
USE BY LOT OWNERS." (all caps in original).
adjacent docks were completed in 2001.2 Perpendicular to that lot sat Creekside Park
(later named "Marshwalk Park" to avoid confusion with a nearby neighborhood).
The Community Dock is distinct from the other docks built in the neighborhood
during this time due to its size, deep-water access to Hobcaw Creek, and its
proximity to the Creek Club.
Shortly after the 1998 Property Report was drafted, Developers began a
pattern of conduct altering their initial promise to convey ownership of the disputed
properties to the HOA. Beginning in December of 1998, the I'On Company sent a
letter to a neighboring development, Olde Park, offering to allow residents of that
neighborhood access to the community dock and boat ramp for a fee of $350,000,
which was accepted. In this same letter, the I'On Company stated the community
dock and boat ramp would "belong to the [HOA,]" with negligible fees to be charged
for dock keys. However, at trial Vince Graham acknowledged that the plan to deed
the disputed amenities to the I'On Club rather than to the HOA changed sometime
between November 1998 and March 1999.
In February of 2000, the I'On Club, I'On Company, and the HOA executed a
"Recreational Easement and Agreement to Share Costs." This easement granted the
HOA access to the Creek Club, boat ramp, parking lot, and boat slip on Lot CV-6.
Notably, when the I'On Club conveyed the easement to the HOA, it lacked title to
the servient estate, Lot CV-6, which instead was owned by the I'On Company. It was
not until August of 2000 that the Club acquired title, despite the fact that the
amenities belonged to the HOA according to the 1998 Property Report. Developers
nonetheless recorded the easement in I'On's declaration of covenants, conditions and
restrictions ("I'On's Covenants"). The easement apportioned certain costs to the
HOA for a term of 30 years. The HOA began making these annual payments for
usage and upkeep in 2004. 3
2
Over the years, Developers have equivocated on whether the dock off Lot CV-6 is
the "Community Dock" referenced in the 1998 Property Report. Even at trial,
Thomas Graham vacillated, initially refusing to concede that the reference to a
community dock in the report referred to the main dock at the Creek Club. When
Homeowners' counsel reminded him that he had testified to the contrary in his
deposition, Graham replied: "I don't remember what I said two years ago."
Ultimately, after being impeached with his deposition testimony, Graham admitted
that the dock at the Creek Club was intended to be conveyed to the HOA.
3
Around that time, the HOA's board, then chaired by Developers, authorized one
board member, Edward Clem, to speak to a real estate attorney about the easement.
In April of 2000, the I'On Company amended the 1998 Property Report,
deleting the obligation to convey a "Creekside Park" and "Community Dock" to the
HOA. Later in 2000, the I'On Company conveyed two docks and a 2.86-acre tract
of land, which would become Marshwalk Park, to the HOA and again amended the
property report.
This vacillation continued when, in 2005, Developers entered into a
"Handover Agreement" with the HOA, which stated that "the I'On Company will
notify the [HOA] Board when common area property and structures are ready to be
handed over to the [HOA]." This document further outlined the importance of
handing all properties over in good repair and provided assurances to the HOA that
the process was prepared to go forward. Nevertheless, in an email discussing the
Creek Club Boat Ramp and docks, Chad Besenfelder, Developers' manager,
proposed a different plan to the Grahams in November of 2006, stating "[b]oth the
HOA and the Club do not want responsibility for this area …. I think the area should
stay in control of the Club so not to interfere with events."
Ultimately, Developers began to negotiate an outright sale of the two lots
containing the amenities to a third party rather than convey them to the HOA. In
2007, Developers discussed several proposals concerning the Creek Club and the
associated community dock and boat ramp. One of the proposals by Thomas Graham
was to sell the HOA another lot for a community center at a cost of $650,000 rather
than to convey the Creek Club to them. This would allow Developers to sell the
Creek Club as a personal residence, providing there were not any zoning issues.
However, Besenfelder tabled any plan for the time being, writing, "The docks are
too controversial and taking away even part of this community amenity would cause
trouble."
In 2008, Mike Russo proposed to Developers that his company, 148 Civitas,
purchase Lots CV-5 and CV-6. However, Besenfelder emailed Russo in August of
2008 and acknowledged the HOA's right to the property in dispute, stating: "Subject
to HOA approval, the I'On Company plans to convey the docks and boat ramp to the
HOA, retaining continued easement for both I'On Club and Creek Club events."
Clem had concerns that "it was signed by the same person in three different roles, as
the manager of the I'On Club; as the president of the I'On homeowners association;
and as the general manager of the I'On Company. Sort of shaking hands with
yourself, as I could describe it." The attorney drafted a new agreement, but the HOA
Board was not satisfied with the changes and did not adopt it.
Hearing rumors about this possible sale, the HOA scheduled an October 2008
meeting to discuss Russo's attempts to purchase the lots. Following this meeting,
Besenfelder emailed the Grahams requesting assurance that an upcoming meeting
with the Town of Mount Pleasant would lead to the continued designation of the lots
as civic property. Besenfelder proposed that Developers "not separate the docks
from the Creek Club at this time." He added that it was clear, based on the current
use, that the lots were properly zoned as civic property and something could be
worked out with Russo to ensure the HOA's continued use of the lots because Russo
"want[ed] this deal to work[.]"
Notwithstanding this attempt to sell the property to Russo, in March of 2009,
Besenfelder sent another email to Developers, now confirming that he was working
with Thomas Graham to help prepare the "parcel for HOA dock and ramp turnover"
by dividing these amenities from the Creek Club, thus contradicting his earlier
recommendations. Also in March of 2009, Russo withdrew his offer to purchase the
land due to pending litigation with I'On resident Catherine Templeton.4
After this initial sale to Russo fell through, Developers' plan for the Creek
Club Dock and Boat Ramp changed again. Besenfelder emailed the I'On Club's
property manager, copying all Board members, that the I'On Company "is preparing
to deed the community dock to the [HOA] and discussed plans to subdivide the
property to facilitate the transaction. Even Vince Graham conceded at trial that it
was "entirely reasonable for the Assembly and the homeowners to rely on this
representation." Yet within hours of the Besenfelder email being sent, secret
negotiations resumed between Developers and Russo for the sale of the property.
Russo again made an offer to Developers, which they accepted in June of
2009. A month later, the President of the HOA, Bruce Kinney, called Thomas
Graham to discuss a phone call Kinney had received about a pending sale of the
amenities, but Graham informed Kinney that the Creek Club was merely undergoing
a "management change." This conversation occurred during the same time that
4
Though not a party to this litigation, Templeton was a homeowner at the time of
Russo's offer and had sought legal action to halt the sale of the disputed lots and
amenities. Templeton attended HOA meetings, wrote the HOA board president, and
generally alleged that the HOA had ownership of the disputed properties pursuant to
the 1998 Property Report. She formed an LLC with other homeowners,
communicated with the Board of Zoning Appeals and the Town of Mount Pleasant,
but eventually settled with Thomas Graham after he threated a countersuit.
Kinney was in the midst of negotiations with Developers to correct the recreational
easement and make it permanent, and Kinney knew nothing about the sale to Russo's
company, 148 Civitas, until he was informed by Thomas Graham on August 11,
2009, that the sale had taken place on August 5, 2009.
Walbeck filed suit in December of 2010, and Adkins subsequently joined.
With the parties unable to resolve their disputes, the case proceeded to trial.
Following a mistrial, which was granted in order to realign the HOA as a plaintiff, a
second trial ensued, and the jury awarded the following damages: breach of contract
($1,000,000 for the HOA and $10,000 for Walbeck), negligent misrepresentation
($1,000,000 for the HOA and $20,000 for Walbeck), breach of fiduciary duty
($1,750,000 for the HOA), and ILSA ($1 for Walbeck). 5, 6 Having to elect their
remedies, Walbeck chose his negligent misrepresentation verdict, and the HOA
elected its breach of fiduciary duty claim.
The parties appealed to the court of appeals, which initially unanimously
upheld the jury's breach of fiduciary duty verdict, concluded Homeowners'
derivative action on behalf of the HOA could proceed because a formal demand
would have been futile, and affirmed the trial court's decision to amalgamate
Developers. Thus, under the first opinion, the HOA's $1,750,000 verdict and
Walbeck's $10,000 breach of contract verdict were upheld. Following both parties'
petitions for rehearing, the court of appeals reversed course and unanimously
substituted its opinion, this time practically nullifying the jury's verdicts. See
Walbeck v. I'On Co., LLC, 426 S.C. 494, 827 S.E.2d 348 (Ct. App. 2019). The court
reversed the trial court's denial of Developers' JNOV motions on derivative claims
and breach of fiduciary duty—meaning that the HOA could not collect on any of the
verdicts—and reversed the trial court's finding that Developers were amalgamated.
As to the only remaining claim—Walbeck's individual breach of contract cause of
action—the court of appeals remanded that $10,000 verdict for a new trial because
it was tainted by an erroneous amalgamation ruling. The court then affirmed the trial
court's rulings that the recreational easement was invalid and that Developers were
5
Walbeck and Adkins entered a settlement agreement with Russo prior to trial.
6
The jury found for Developers on all of Adkins's claims, on the HOA's and
Walbeck's fraud claims, and on Walbeck's claim for a violation of the South Carolina
Unfair Trade Practices Act. Although the jury determined Developers' conduct was
reckless, willful, and/or wanton, it declined to award punitive damages.
not entitled to attorney's fees. This Court granted the parties' cross-petitions for
certiorari.
ISSUES
I. Were Homeowners' claims barred by the statute of limitations?
II. Did the court of appeals err in its ruling regarding Homeowners' claims for
breach of fiduciary duty?
III. Did the court of appeals err in finding the homeowners failed to meet the
requirements for filing a derivative suit?
IV. Did the court of appeals err in reversing the circuit court's amalgamation
finding?
DISCUSSION
Because the myriad of evidence adduced during this lengthy trial presented
quintessential jury issues, we disagree with the court of appeals' reversal of the jury
verdicts. We find the trial court properly submitted Homeowners' claims and the
issue of the statute of limitations to the jury, and we find its verdict was supported
by the evidence. See Burns v. Universal Health Serv., Inc., 361 S.C. 221, 232, 603
S.E.2d 605, 611 (Ct. App. 2004) ("The verdict will be upheld if there is any evidence
to sustain the factual findings implicit in the jury's verdict.") (citation omitted).
I. Timeliness
Both the individual Homeowners and the HOA filed four claims and each is
subject to an applicable statute of limitations. Based on the conflicting evidence
presented as to when Homeowners should have discovered that the property was not
going to be conveyed to them as promised, together with the repeated assurances
that it would be conveyed, the trial court submitted the issue of the statute of
limitations to the jury. Developers have consistently argued this was error, and, in
its second, substituted opinion, the court of appeals agreed, holding that a budgetary
provision in a 2005 usage agreement triggered as a matter of law the running of the
limitations period for all the claims except Walbeck's individual breach of contract
claim. This was error. 7
Ordinarily, the question of when a statute of limitations began to run is one
left to the jury. Dunbar v. Carlson, 341 S.C. 261, 269, 533 S.E.2d 913, 917 (Ct. App.
2000) ("[G]enerally, statute of limitations issues are for the jury, rather than the
court, to resolve."). Specifically, the question of when a plaintiff discovered, or
should have discovered the alleged harm is for the jury to decide because it is an
objective question. Arant v. Kressler, 327 S.C. 225, 229, 489 S.E.2d 206, 208 (1997)
(stating in a medical malpractice action that when there is conflicting testimony
regarding time of discovery of facts giving notice, the date on which discovery
should have been made becomes an issue for the jury to decide). The presence of
conflicting testimony regarding the time discovery should have occurred necessarily
requires the jury's resolution. Brown v. Finger, 240 S.C. 102, 113, 124 S.E.2d 781,
786 (1962) ("The burden of establishing the bar of the statute of limitations rests
upon the one interposing it…and where the testimony is conflicting upon the
question, it becomes an issue for the jury to decide.") (internal citations omitted). In
the case at bar, the jury was presented with a host of conflicting evidence as to when
Homeowners should have, by the exercise of reasonable diligence, discovered the
facts giving rise to their claims.
The jury found the operative notice date for each claim was August 5, 2009—
the date Developers conveyed the properties at issue to Russo. 8 While the jury
certainly could have accepted the 2005 date argued by Developers and ultimately
embraced by the court of appeals, we believe the jury's contrary finding is supported
by the evidence.
7
We do not address the timeliness of Walbeck's breach of contract claim because
Developers now concede that Walbeck's contract to purchase his lot was a sealed
instrument and thus has a twenty-year statute of limitations. See S.C. Code Ann.
§ 15-3-520 (2005).
8
Interestingly, the trial judge specifically mentioned during an in camera colloquy
with the attorneys that the date of the transfer to Russo was what triggered the statute
of limitations. As she stated: "Because that's when it became very clear to the
landowners in I'On that that parcel, CV-6, couldn't be given to them, regardless of
any representations that the jury may find have been made, because it was gone then,
and gone to a third-party."
Beginning in 1998, Developers produced a property report that promised to
convey the Creek Club and the Community Dock to the HOA, upon their
completion. Subsequently, Developers amended that report at least twice, changing
the operative language to more vague terminology, specifically changing
"Community Dock" to community docks. In February of 2000, ostensibly to pacify
the Homeowners, the I'On Club entered into a recreational easement with the HOA,
whereby the HOA was permitted use of the amenities and agreed to share costs of
their upkeep.9
Substantial evidence was presented that although the initial plan—and
promise—by Developers was to convey the disputed property to the HOA,
Developers jettisoned that plan. In a March 2009 email, Thomas Graham's attorney,
Jo Ann Stubblefield, explained that the 2000 recreational easement was granted
because "in early 2000 the decision was made" to change course from the 1998
Property Report. 10 Rather than convey the properties at issue to the HOA,
Developers decided they wanted the I'On Club to retain title, subject to an easement
that provided for neighborhood use. Stubblefield then detailed the changes between
the 1998 Property Report and subsequent iterations, including excepting the
sidewalks and community dock from the properties to be conveyed to the HOA.
However, rather than the I'On Club retaining title, in 2002 Lot CV-5 was conveyed
to the Grahams for a nominal fee and that deed was recorded. At trial, Thomas
Graham described the situation as "evolving." Another interpretation would be that
Developers continued to change their position with regard to the disputed property
in an apparent effort to pacify the HOA, thereby lulling the homeowners into
believing that the property would eventually be theirs as promised.
Following the 2005 Handover Agreement, wherein Developers promised to
inform the HOA when common areas were ready to turn over to HOA control,
Besenfelder instead discussed other options with the Grahams. In April of 2007,
Besenfelder sent the Grahams proposals for what to do with the Creek Club and
9
However, as previously noted, the I'On Club did not have title to the properties
when it executed the easement, instead receiving them from the I'On Company for
the nominal fee of $5.00 in August of 2000. Additionally, while the easement was
denominated "permanent[,]" subsequent language indicated that it would expire after
thirty years.
10
Thomas Graham forwarded this email to Bruce Kinney (then-president of the
HOA), Russo, and Besenfelder with the message, "I think this explains why the
community dock was not deeded to the [HOA.]"
docks, including "selling the Creek Club to the HOA[.]" Besenfelder listed the pros
and cons of doing so, one pro being "[t]he HOA gets the infamous boat ramp and
docks" and one con being the loss of a potentially valuable financial asset. He closed
the email by suggesting the group "keep [these options] quiet for now[.]" In July,
Besenfelder emailed the Grahams asking what the value of the Creek Club would be
if it was repurposed and sold as a residential property, to which Thomas Graham
replied, "[o]ur Creek Club is a potentially valuable asset… How can we capitalize
this potential value?" Besenfelder then proposed limiting access, and Thomas
Graham expressed concern that the homeowners had existing rights in the property.
Further evidence of this ever-shifting plan for the disputed properties surfaced
in September of 2008 when Developers surreptitiously began the process of selling
to a third party, Russo. Besenfelder, in an email titled "Creek Club, Please keep
confidential[,]" informed Russo that the I'On Club had hired an accountant to
perform the due diligence in advance of a sale. In this email to Russo, Besenfelder
mentioned that I'On Club members get discounted use rates due to a preexisting
agreement, but that he would "work with [other parties to] revise that agreement"
and further informed Russo that, "the docks were promised to the homeowners and
Vince [Graham] would like to honor that someday." In March of 2009 when
Besenfelder seemed to express an intention not to turn over the docks, Russo
inquired, "[d]oes this mean you're not going to turn over the docks???? Let me know
ASAP[.]"
After the first deal with Russo fell through, an email from Besenfelder to the
property manager, copying all Board members, again promised that the property
would be conveyed, even mentioning that the property would be subdivided to
accomplish this transfer. Nevertheless, as already noted, within hours of this email,
secret negotiations began again with Russo, and the sale ultimately took place on
August 5, 2009, the date on which the jury later found the statute of limitations was
triggered.
As is clear from the recitation of the communications and events which
transpired between the parties since the 1998 Property Report, when the HOA knew
or should have known the Developers' promises were not going to be fulfilled was a
question of fact for the jury, not one capable of being decided as a matter of law. We
believe this case is similar in some respects to Stoneledge at Lake Keowee Owners'
Ass’n v. IMK Development Co., LLC, 435 S.C. 176, 177, 866 S.E.2d 577, 578
(2021), where the Court implicitly acknowledged that although defendants in that
case may have had a colorable argument as to the running of the statute of
limitations, this Court nonetheless affirmed the jury's verdict. See id. ("Application
of both the basic three-year limitations period and the discovery rule in any given
case can present factual issues for a jury to resolve. . . . [W]e are constrained by our
standard of review and conclude that under the facts of this case, there was a jury
issue as to whether the statute of limitations had expired by the time the action was
commenced against [the defendant]"). In Stoneledge, the jury found in favor of the
homeowners after the trial court denied defendants' motion for directed verdict based
on the statute of limitations. As is the case here, there was a question of fact as to
when Homeowners were put on notice.
Because ample evidence was presented supporting the jury's determination of
when Homeowners were on notice, the jury's verdicts are reinstated. While there is
an argument that the budgetary provision relied on by the court of appeals could
have led to notice, the jury was cognizant of that argument but was convinced by the
ample contrary evidence. That finding, because it was supported by sufficient
evidence, should not have been overturned on appeal. Accordingly, we find that
these claims are timely.
II. Merits of the HOA's Breach of Fiduciary Duty Claim
Homeowners argue Developers owed fiduciary duties to the HOA and that
they breached these duties by not conveying the property, as well as by granting
various easements over the property to third parties and in self-dealing by
surreptitiously selling the property to Russo in 2009. Developers counter that their
fiduciary duties to the HOA did not include a responsibility to convey the disputed
property and therefore their sale to Russo did not constitute a breach. We agree with
Homeowners that the court of appeals focused too narrowly on the Developers'
failure to convey the disputed properties, ignoring the plethora of other evidence
presented of the Developers' bad faith, broken promises, and self-dealing, all of
which support the jury's verdict on Homeowners' breach of fiduciary duty cause of
action.
Establishing a breach of fiduciary duty has three elements: (1) existence of
the relationship, (2) breach of the duty owed to the Plaintiff, (3) damages
proximately resulting from that breach. See Turpin v. Lowther, 404 S.C. 581, 589,
745 S.E.2d 397, 401 (Ct. App. 2013). Developers owe fiduciary duties to
homeowners and homeowners' associations regarding common areas.11 Goddard v.
11
Generally, when a Developer turns over control of the HOA to its members by
relinquishing its superior voting power, the fiduciary relationship is extinguished;
the developer no longer has control over that which an HOA has an interest. See
Fairways Dev. Gen. Partn., 310 S.C. 408, 415, 426 S.E.2d 828, 832 (Ct. App. 1993).
Specifically, common areas must be conveyed in good repair and if they are not,
sufficient maintenance funds must be provided in tandem with the property
conveyance. Id. In Concerned Dunes West Residents, Inc. v. Georgia-Pacific Corp.,
this Court likened this duty to those present in a business relationship, holding
developers owe homeowners a duty, "much like that owed by promoters of a
corporation to investors." 349 S.C. 251, 256, 562 S.E.2d 633, 636 (2002).
Importantly, in subdivisions with common areas that are subject to covenants, the
responsibilities outlined in the covenants control. Cedar Cove Homeowners Ass'n,
Inc. v. DiPietro, 368 S.C. 254, 259, 628 S.E.2d 284, 286 (Ct. App. 2006).
More broadly, "it is [] well settled" that those in a fiduciary relationship with
another party must not act to "make use of that relationship to benefit his own
personal interests." Lesesne v. Lesesne, 307 S.C. 67, 69, 413 S.E.2d 847, 848 (Ct.
App. 1991). Conduct that violates this mandate includes self-dealing, fraud,
unconscionable conduct, misrepresentations, etc. See Bennett v. Estate of King, 436
S.C. 614, 633, 875 S.E.2d 46, 55 (2022) (Kittredge, J. dissenting). This makes sense
because the fiduciary relationship imposes a "special confidence in another so that
the latter, in equity and good conscience, is bound to act in good faith and with due
regard to the interests of the one reposing confidence." Id. at 633, 875 S.E.2d at 56.
The trial judge consistently questioned whether Developers' argument—that
nonconveyance is only a contractual issue rather than a potential breach of fiduciary
duty—was too narrow. This occurred at the directed verdict stage, as well as in the
Goddard v. Fairways Dev. Gen. Partn., 310 S.C. 408, 414, 426 S.E.2d 828, 832 (Ct.
App. 1993) (finding that superior voting power by developers created a fiduciary
relationship with condo-owners). However, those duties stem from developer
control of the entity, the ongoing nature of construction, and the transfer of common
areas. See Concerned Dunes West Residents, Inc. v. Georgia–Pacific Corp., 349 S.C.
251, 260, 562 S.E.2d 633, 638 (2002) ("[T]he developer has a fiduciary duty to the
POA to transfer common areas that are in good repair; if the developer transfers
substandard common areas, the developer must, at the time of transfer, provide the
POA with the funds necessary to bring the common areas up to a standard of
reasonably good repair.") (emphasis added). Here, Developers maintained consistent
veto authority over the board, continued construction in I'On until past the 2009
conveyance, and delayed the transfer of the disputed property, thereby continuing
their fiduciary relationship with the HOA. These facts counteract any concerns that
the fiduciary relationship was extinguished at the time of Developers' transfer to
Russo.
court's order denying JNOV, where she stated, "a developer's failure to convey
community properties in their entirety is at least the equivalent of conveying them
in 'substandard condition' (if not worse), and thus, any distinction between properties
which should have been conveyed and properties which were actually conveyed in
a substandard condition is a distinction without a difference." However, the court
decided to send this cause of action to the jury based not only on the nonconveyance
but also on the evidence of bad faith and self-dealing that was presented, and the
court denied Developers' motion for JNOV on that additional ground as well. In its
second opinion, which reversed the jury's verdict on breach of fiduciary duty, the
court of appeals pivoted and embraced the Developers' narrow approach, focusing
only on the Developers' act of nonconveyance. See Walbeck v. I'On Co., LLC, 426
S.C. 494, 517, 827 S.E.2d 348, 360 (Ct. App. 2019) ("[T]he circuit court's denial of
Appellants' JNOV motion was based on its extrapolation of a specific fiduciary duty
to convey title to common areas from the duty pronounced in Goddard and Dunes
West, i.e., the fiduciary duty to ensure common areas are in good repair before
turning them over to a homeowners association.") (emphasis in original).
Homeowners argue this holding was unnecessarily and erroneously
constricted, as the two relationships between Developers and the HOA—contractual
and fiduciary—are inextricably intertwined. Under this analysis, the contractual duty
to convey was overlaid by a fiduciary relationship, which means that while the
nonconveyance was certainly a breach of contract, the subsequent self-dealing by
Developers through the secret sale of the property to a third party constituted a
breach of the Developers' fiduciary duties to the HOA. Stated differently, if the only
evidence in the record of a breach of fiduciary duty was that Developers did not
convey the property, that claim might well be limited to a breach of contract. While
Developers urge this Court to focus only on the nonconveyance, Homeowners have
never taken such a limited approach, nor did the trial court. Instead, there was
sufficient evidence of bad faith, promises made and broken, and self-dealing
presented in addition to the breach of contract, to warrant submission of the fiduciary
claim to the jury. This nefarious conduct includes, but is not limited to, the secretive
sale to Russo, the false representation regarding the property's rightful ownership,
and the easement granted to third parties when the property had been promised to
the HOA. This kind of conduct, by those in a fiduciary relationship, has clearly led
to breaches in other cases and, though springing from contract in this case,
constitutes breaches of fiduciary duty. See, e.g., Moore v. Moore, 360 S.C. 241, 251,
599 S.E.2d 467, 472 (Ct. App. 2004) ("Parties in a fiduciary relationship must fully
disclose to each other all known information that is significant and material, and
when this duty to disclose is triggered, silence may constitute fraud.") (citation
omitted). Accordingly, we reverse the court of appeals and reinstate the jury verdict
as to this cause of action.
III. Derivative claims
The court of appeals dismissed Homeowners' derivative claims, finding the
claims failed the requirements of Rule 23, SCRCP. There is a strong argument that
the HOA's realignment as a plaintiff renders this issue moot. Nevertheless, because
it seems the parties tried this case as derivative claims—as evidenced by
Homeowners' opening and closing, arguments at the directed verdict stage, and the
jury charge—we address the merits.
Shareholders of an organization may bring a derivative suit pursuant to Rule
23, SCRCP, in order to compel an organization to represent its interest through
litigation. Patterson v. Witter, 425 S.C. 213, 231, 821 S.E.2d 677, 687 (2018).
Generally, this occurs when the organization's leaders and directors have chosen, for
whatever reason, to not act on their own to protect the organization's legal rights.
Rule 23(b)(1), SCRCP, mandates:
In a derivative action brought by one or more shareholders or members
to enforce a right of a corporation or of an unincorporated association,
the corporation or association having failed to enforce a right which
may properly be asserted by it, the complaint shall be verified and shall
allege that the plaintiff was a shareholder or member at the time of the
transaction of which he complains or that his share or membership
thereafter devolved on him by operation of law. The complaint shall
also allege with particularity the efforts, if any, made by the plaintiff to
obtain the action he desires from the directors or comparable authority
and, if necessary, from the shareholders or members, and the reasons
for his failure to obtain the action or for not making the effort.
Id. Accordingly, Rule 23, SCRCP, requires a plaintiff to set forth particularized
allegations—a departure from the more liberal pleading requirements of Rule 8,
SCRCP. Carolina First Corp. v. Whittle, 343 S.C. 176, 188, 539 S.E.2d 402, 409
(Ct. App. 2000). Pursuant to Rule 23, a shareholder plaintiff must either make a
demand on the entity that it pursue a claim or plead with particularity the exceptional
circumstances that demonstrate why making a demand would be futile. Id. A demand
made on a corporation must (1) identify the alleged wrongdoers, (2) describe the
factual basis of the wrongful acts and the harm caused to the corporation, and (3)
request remedial relief. Patterson, 425 S.C. at 233-34, 821 S.E.2d at 688. In
reviewing these requirements, the trial court is neither limited to considering only
the allegations put forth in the complaint nor precluded from considering a pre-suit
demand letter that was not expressly incorporated by reference into the complaint.
Patterson, 425 S.C. at 234-35, 821 S.E.2d at 688-89.
Here, in denying Developers' JNOV motion, the trial court stated, "by virtue
of the verdict and monetary awards rendered in favor of the [HOA], it is clear that
the representative [Homeowners] prosecuted this action in an effort to preserve all
I'On lot purchasers' common interest in the amenity property." Further, the trial court
specifically found that the homeowners made repeated demands, and even if they
had not, a demand would have been futile since Developers had veto power on the
HOA board. Grant v. Gosnell, 266 S.C. 372, 376, 223 S.E.2d 413, 415 (1976) ("In
evaluating the 'excuse' allegations in a derivative suit, 'Courts have generally been
lenient in excusing demand.'") (quoting DeHaas v. Empire Petroleum Co., 435 F.2d
1223 (10th Cir. 1970)). We find the trial court properly denied JNOV because even
if no formal demand was made, any attempt to do so would have been futile in light
of the Developers' remaining control of the HOA through its veto power. Indeed,
Thomas Graham conceded he had previously stated in his deposition that this veto
power was like being on the "Supreme Court."
Moreover, after the HOA was realigned as a plaintiff, utilizing a derivative
action makes little sense. The HOA is a party to this litigation and acting on the same
side as the purported interested members, regardless of their success or failure to
compel suit through a derivative action. Thus, the only purpose of the derivative
suit—compelling the HOA to join as a plaintiff—has been accomplished. See
Lennon v. S.C. Coastal Council, 330 S.C. 414, 415, 498 S.E.2d 906, 906 (Ct. App.
1998) ("A threshold inquiry for any court is a determination of justiciability, i.e.
whether the litigation presents an active case or controversy."); see generally Smith
v. Sperling 354 U.S. 91, 95 (1957) (finding that realignment of a corporate plaintiff
in a derivative action defeated subject matter jurisdiction). Accordingly, the court of
appeals' dismissal of the HOA's claims is reversed.
IV. Amalgamation/Single-Business Enterprise Theory
Homeowners contend the court of appeals erred in reversing its original
opinion that the trial court did not err in amalgamating the interests of the various
entities. Homeowners assert the court of appeals should not have applied the single-
business entity test set forth by this Court in Pertuis, but even if Pertuis applies,
amalgamation is appropriate because there is ample evidence of exploitative and
evasive conduct resulting in unfairness. Additionally, Homeowners argue
Developers waived the question of amalgamation by asking the trial court to decide
the issue before sending the case to the jury. Homeowners also contend that even if
the parties should not have been amalgamated, Developers cannot establish material
prejudice, and therefore it was error for the court of appeals to remand for a new
trial.
Conversely, Developers argue they did not waive any challenge to the
amalgamation ruling since that is an issue for the trial court to answer in the first
instance and may be appealed. As to the merits, Developers contend the court of
appeals correctly recognized that amalgamation is the exception, not the rule.
Accordingly, Developers argue Homeowners' failure to show a causal connection
between any bad faith or improper conduct and the mixing of several different
corporate entities precludes treating the various Developers as one. Developers
assert the court of appeals properly concluded the trial court's erroneous
amalgamation ruling prejudiced them, and therefore, the new trial remedy was
correct.
In Pertuis, the Court formally adopted the single business enterprise theory as
one method of piercing the corporate veil. Pertuis v. Front Roe Rests., Inc., 423 S.C.
640, 655, 817 S.E.2d 273, 280 (2018). There, a restaurant manager who was a
minority shareholder filed suit against the majority shareholders for being "squeezed
out" of the business, which actually consisted of three S-corporations. The trial court
determined the three entities constituted a "de facto partnership" and amalgamated
the interests. In formally adopting the single business enterprise theory, the Court
acknowledged the practical reality that businesses often form different corporate
structures as a means of shielding shareholders from liability—"there is nothing
remotely nefarious in doing that." Id. at 655, 817 S.E.2d at 280-81. Accordingly, the
Court required two elements before amalgamating different interests into one under
the single business enterprise theory: 1) "the various entities' operations are
intertwined" and 2) "further evidence of bad faith, abuse, fraud, wrongdoing, or
injustice resulting from the blurring of the entities' legal distinctions." Id. The Court
placed the burden on the party seeking to pierce the corporate veil and also cautioned
that deciding whether to amalgamate various entities should only be done upon
"substantial reflection." Id. ("As with other methods of piercing the corporate form
that have previously been recognized in South Carolina, equitable principles govern
the application of the single business enterprise remedy, and this doctrine 'is not to
be applied without substantial reflection.'" (citation omitted)). After formally
adopting this test, the Court concluded the trial court erred in amalgamating the three
entities because there was no evidence of bad faith by the majority shareholders.
While Pertuis involved a claim of minority shareholder oppression, this Court
applied Pertuis in a construction defect case where a homeowner's association
sought to amalgamate various entities structured as limited liability companies.
Stoneledge at Lake Keowee Owners' Ass'n, Inc. v. IMK Dev. Co., LLC, 435 S.C. 109,
866 S.E.2d 542 (2021). The Court reversed the trial court's "decision" to amalgamate
the various LLCs that employed the investors, construction contractors, and sales
team for a residential property development. 12 A principal of the construction
contractor had knowledge of construction defects plaguing the project while working
with another intertwined sales entity. The various LLCs shared members, and
homeowners testified they were confused as to the different roles that each LLC and
individual played. In declining to amalgamate the LLCs, the Court noted that it
viewed the facts "with the requisite hesitancy to invade the LLC form . . . ." Id. at
126, 866 S.E.2d at 551. The Court reviewed the record de novo and concluded that
the only evidence of "bad faith, abuse fraud, wrongdoing, or injustice" was the fact
that the profits of the developer, who had constructive notice of construction defects,
were "entirely dependent" on the sales entity's ability to sell units. Id. at 119, 126,
866 S.E.2d at 548, 551 (2021). Accordingly, amalgamation was not appropriate.
In denying Developers' JNOV motion, the trial court concluded that any
distinctions between the various entities were blurred, as all were "controlled,
managed, and owned by the same individuals, and all collectively functioned as one
in the day-to-day operations" of the I'On development, "including promulgating
deceptive and misleading representations." Additionally, although the trial court did
not have the benefit of the Pertuis decision at the time it denied Developers' JNOV
motion, some of the court's findings still demonstrate more than that the various
entities were simply intertwined. For example, the trial court noted that the
recreational easement, which was entered into between the I'On Company, the I'On
Club, and the HOA in 2000 was executed on behalf of all three entities by the general
manager of the I'On Company. Nevertheless, a subsequent general manager of the
I'On company informed the HOA in 2009 that the I'On Company was preparing to
deed the property containing the community dock to the HOA despite the fact that
the I'On Club, not the I'On Company, owned the property. The trial court also
recounted how lots CV-5 and CV-6 were transferred between the I'On Company to
12
As the Court noted, the trial court never reached the merits of the claim, instead
simply denying a directed verdict motion on the issue but not revisiting it.
Nevertheless, because the question of amalgamation lies in equity and the parties, as
well as the court of appeals, all treated the issue as being decided on the merits, the
Court reached the matter. Stoneledge, 435 S.C. at 120, 866 S.E.2d at 548.
the I'On Club in 2000 for $5, CV-5 was transferred two years later to the owners of
the I'On Company for $5, although there was no evidence that consideration was
actually paid to the I'On Club. In its initial opinion, the court of appeals agreed with
the trial court's amalgamation ruling but reversed in its substituted opinion,
concluding there was no evidence of "bad faith, abuse, fraud, wrongdoing, or
injustice resulting from the blurring of the entities' legal distinctions."
We find the court of appeals correctly analyzed this issue initially, and erred
in its second opinion by adopting Developers' limited view of the test set forth in
Pertuis. While it is true that courts should be hesitant to invade the corporate form,
here there is more than enough evidence that the creation of various entities furthered
Developers' abilities to refrain from doing that which they repeatedly told the HOA
and the residents they would do—turn over the disputed amenities to the HOA. As
this Court stated in Pertuis, "the corporate structure should not shield—fraud,
evasion of existing obligations, circumvention of statutes, monopolization, criminal
conduct, and the like." 423 S.C. 640, 654-55, 817 S.E.2d 273, 280 (quoting SSP
Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 455 (Tex. 2008))
(emphasis added).
The 1998 Property Report specifically provided that the HOA would own the
dock and park once the development was completed. Then, within a year, the plan
changed, as Developers decided not to convey the amenities, including the
community dock, completely disregarding the 1998 Property Report. Next,
Developers attempted to change from outright HOA ownership to mere HOA access
by granting the HOA a recreational easement, despite not actually owning the
property at the time. In an amended property report in 2000, the community dock
was removed from the list of amenities owned by the HOA, thus purporting to
accomplish the change from ownership to access without any input or consideration
of the interests of the residents and the HOA. Between 2006 and 2007, Developers
had yet to turn over the community dock or boat ramp, and openly acknowledged
that "[t]he docks are too controversial and taking away even part of this community
amenity would cause trouble." Shifting course again, in 2008, Besenfelder wrote,
"We are ready to deed this community dock and ramp to the homeowners and wish
to comply with regulations."
Ultimately, Developers reversed themselves yet again, and decided to sell the
docks to Russo without informing the HOA because they wanted to "keep the
transaction quiet because of all the brew ha hah (sic) and filings." Developers even
went a step further when, instead of disclosing the outright sale of the properties to
Russo, they told Kinney that Russo was simply taking over management of the lots
and amenities. Thus, under our de novo review of this issue, the evidence shows that
not only were the various entities intertwined and acting in concert with each other,
their conduct demonstrates "bad faith, abuse, fraud, wrongdoing, or injustice
resulting from the blurring of the entities' legal distinctions." Pertuis, 423 S.C. at
655, 817 S.E.2d at 280-81. Although the jury elected not to award punitive damages
in this case, its verdict did include a finding that the Developers’ conduct was
"willful and wanton."13 Accordingly, we find the court of appeals erred in declining
to apply the single-business enterprise theory. Because the trial court did not err in
amalgamating the different entities, there is no need for a remand. 14
CONCLUSION
Based on the forgoing, we: (1) reverse the court of appeals' ruling on the
statute of limitations because the issue as to when Homeowners had adequate notice
13
Moreover, we note that following the verdict, the trial court issued an order—from
which the Developers did not appeal—holding them in contempt for their
destruction of evidence. The trial court pointed out specific examples of documents
that were deleted, and noted that the forensic report revealed that "Besenfelder
deleted approximately 51,527 files and folders[.]" The trial court ultimately awarded
over $23,000 in sanctions.
14
In Developers' cross-petition for certiorari, they assert the court of appeals erred
in relying on the two-issue rule in upholding the trial court's finding that the 2000
recreational easement was invalid. As to the merits, Developers contend the after-
acquired title doctrine applies and that the easement was perpetual rather than limited
to 30 years. While we agree the two-issue rule applies and affirm the court of appeals
on this issue, we do so for a different reason. Regardless of whether the lack of an
arms-length transaction constituted a separate ground in the trial court's order, the
court specifically noted, "Additionally, the Doctrine of Unclean Hands precludes
Developers from relying upon equitable principles such as the After-Acquired Title
Doctrine because, in order to recover in equity, one must act equitably." Developers
have not addressed this equitable basis supporting the trial court's decision, so it is
the law of the case. See Jones v. Lott, 387 S.C. 339, 346, 692 S.E.2d 900, 903 (2010)
("Under the [two-issue] rule, [when] a decision is based on more than one ground,
the appellate court will affirm unless the appellant appeals all grounds because the
unappealed ground will become the law of the case."). In any event, we agree with
the trial court that because Developers acted inequitably, we do not need to reach
whether the after-acquired title doctrine could apply in this case.
to begin the limitations clock was properly presented to the jury and resolved by it;
(2) find any procedural issues related to the derivative claims either (a) moot as the
HOA was realigned as a plaintiff and the trial court explicitly found it adopted its
own claims against the Developers, or (b) demand was saved by futility due to the
Developer's continuing veto power; (3) hold that Developers breached the fiduciary
duties owed to Homeowners; (4) reverse the court of appeals' decision that
Developers could not be amalgamated, as there is more than enough evidence of bad
faith, abuse, fraud, wrongdoing, or injustice resulting from the blurring of the
entities' legal distinctions; and (5) affirm the court of appeals that the recreational
easement was invalid.15
AFFIRMED IN PART; REVERSED IN PART.
KITTREDGE, Acting Chief Justice, FEW, JAMES, JJ., and Acting Justice Jan
B. Bromell Holmes, concur.
15
Before the circuit court, Walbeck claimed attorney's fees under his statutory ILSA
claim. See 15 U.S.C.A. § 1709(a)-(c) (2012) ("The amount recoverable . . . may
include, in addition to matters specified [in this section] interest, court costs, and
reasonable amounts for attorneys' fees . . . ."). The trial court found both that
Walbeck could recover attorney's fees under ILSA and that his claim for more than
$1 million was unreasonable, reducing the fee by over 75%. See Farmers &
Merchants Bank v. Fargnoli, 274 S.C. 23, 26, 260 S.E.2d 185, 187 (1979) ("The law
requires, however, that the award must be reasonable."). Though Developers
challenged this claim before the court of appeals, its ultimate finding that the ILSA
claim was barred was dispositive. Rather than remanding to the court of appeals,
because we agree with the trial court's analysis on this issue and we reinstate the
jury's verdict as to the timeliness of Walbeck's claims, the attorney's fees award of
$225,500 to Walbeck is likewise reinstated.