McMillan Pazdan Smith, LLC v. Donza H. Mattison (1) ( 2024 )

THE STATE OF SOUTH CAROLINA
In The Court of Appeals
McMillan Pazdan Smith, LLC, Plaintiff/Counter-
Defendant, Respondent,
v.
Donza H. Mattison, Defendant/Counterclaimaint,
Appellant.
AND
Donza H. Mattison, in a Derivative Capacity on Behalf of
McMillan Pazdan Smith, LLC, Third-Party Plaintiff,
Appellant,
v.
Ronald G. Smith, Estate of Joseph M. Pazdan, Brad B.
Smith, and Chad C. Cousins, Third-Party Defendants,
Respondents.
Appellate Case No. 2020-001645
Appeal From Greenville County
R. Lawton McIntosh, Circuit Court Judge
Opinion No. 6079
Heard December 6, 2023 – Filed August 7, 2024
AFFIRMED
David Eliot Rothstein, of Rothstein Law Firm, P.A., of
Greenville, for Appellant.
Thomas H. Keim, Jr., of Ford & Harrison, LLP, of
Spartanburg; Allen Mattison Bogan, of Nelson Mullins
Riley & Scarborough, LLP, of Columbia; and Miles
Edward Coleman and Samuel W. Outten, both of Nelson
Mullins Riley & Scarborough, LLP, of Greenville, all for
Respondents.
VINSON, J.: Donza H. Mattison, on behalf of McMillan Pazdan Smith, LLC
(MPS), appeals the circuit court's grant of summary judgment dismissing her
derivative action against Ronald G. Smith, the Estate of Joseph M. Pazdan, Brad B.
Smith, and Chad C. Cousins (collectively, Majority Members). Mattison argues
the circuit court erred by (1) assigning her the burden of proof and disregarding
many of the applicable factors when determining whether she was a fair and
adequate representative for the derivative action; (2) accepting unsworn,
boilerplate statements for affidavits; (3) ascribing her with an improper motive for
filing the derivative action; (4) considering confidential settlement negotiations
that were inadmissible under Rule 408, SCRE; (5) failing to view the facts in the
light most favorable to her as required on Majority Members' motion for summary
judgment; (6) refusing to consider her "class of one" argument; (7) limiting the
scope of discovery; and (8) refusing to address the conflict of interest that arose
due to the same law firm representing MPS, Majority Members, and the minority
members of MPS. We affirm.
FACTS AND PROCEDURAL HISTORY
MPS is an architecture firm with offices in South Carolina, North Carolina, and
Georgia. Mattison is a former employee and current minority shareholder of MPS
who worked as an architect in its Spartanburg office. Mattison began working for
MPS's predecessor, McMillan Smith & Partners Architects, PLLC (McMillan
Smith & Partners), in September 1994 and became a partner at the firm two years
later. McMillan Smith & Partners merged with Pazdan-Smith Group to form MPS
in 2009.
Following the merger, MPS members signed an operating agreement dated
September 25, 2009. The 2009 operating agreement stated any amendment to the
agreement that affected the financial or voting rights of the members required
approval of all MPS members. On November 30, 2015, members of MPS adopted
an amended and restated operating agreement, which Mattison refused to consent
to or sign. Mattison refused to sign the 2015 operating agreement primarily
because it reduced the "required interests of members," the supermajority of the
firm's membership needed to approve certain company matters, from 75% to
66.67%.
Beginning on November 20, 2017, Mattison went on medical leave from MPS.
Mattison and MPS entered into a severance agreement, which addressed Mattison's
dissociation from MPS. The severance agreement provided that nothing in the
agreement would have any effect on Mattison's rights and remedies relating to her
dissociation from MPS or her ownership rights or interests upon dissociation.
In January 2018, Mattison was diagnosed with breast cancer. She voluntarily
resigned from MPS in February 2018. On August 3, 2018, Mattison notified MPS
her cancer treatments had finished and she was prepared to continue finalizing the
terms of the buy-out of her membership interests. The same day, MPS conveyed
an offer to purchase Mattison's 2,035.34 ownership units for $267,647.21, a price
based on a valuation prepared by HDH Advisors LLC (HDH), a third-party
appraiser MPS had retained to provide an annual business appraisal of the firm.
On January 14, 2019, Mattison sent a letter to MPS disputing HDH's valuation and
demanding a higher per-unit price. Mattison claimed HDH failed to account for
"the managing members' excessive compensation, perks and benefits, as well as
above-market lease payments to related parties . . . for the Spartanburg office"
when determining the fair market value of her units. Mattison demanded payment
of $829,000 for her ownership interest in MPS and stated she intended to file an
action for judicial valuation of her shares and a shareholder derivative action if the
matter was not resolved before February 1, 2019.
On February 20, 2019, the parties engaged in mediation in an effort to resolve the
dispute but were unable to reach an agreement. MPS filed their declaratory
judgment action against Mattison on February 22, 2019. The complaint requested
that the circuit court find that (1) the severance agreement was a valid and
enforceable contract, (2) Mattison's units were to be valued in accordance with the
terms of the 2015 operating agreement, (3) MPS followed the 2015 operating
agreement's provisions regarding the annual valuation of the company, (4) the
value of Mattison's units should be determined by applying the per unit price from
the 2017 valuation conducted by HDH, and (5) Mattison did not have the right to
contest HDH's 2017 valuation of MPS. Mattison filed an answer, counterclaims,
and this derivative action against Majority Members.
Mattison's derivative action included causes of action for breach of fiduciary duty
and breach of an operating agreement against Majority Members on behalf of
MPS. She alleged Majority Members had overpaid themselves through "excessive
compensation, bonuses, perquisites, and fringe benefits" for themselves and their
families. Mattison also alleged Majority Members Ron Smith, Brad Smith, and
Joseph Pazdan approved the lease transaction of MPS's Spartanburg office, which
is owned by Ron Smith's wife, for years even though the rental rate exceeded the
fair market value of similar office space. Her third-party complaint stated she had
sent the January 14, 2019 letter suggesting the firm should take action against its
Managing Members for breach of fiduciary duty.
On April 1, 2019, Majority Members filed a motion to dismiss, arguing that
Mattison's third-party complaint did not meet the pleading requirements of Rule
23(b)(1), SCRCP, which pertains to derivative actions by shareholders, because
she failed to make a pre-suit demand. Majority Members also argued that Mattison
did not fairly and adequately represent the interest of MPS's other similarly
situated members.
Mattison filed a motion to disqualify Respondent's counsel, arguing that having the
same counsel represent both MPS and the Majority Members simultaneously
created a conflict of interest. Mattison later agreed to withdraw the motion without
prejudice pending the circuit court's ruling on Majority Members' motion to
dismiss.
After a hearing on the motion, the circuit court issued an order dismissing the
derivative action without prejudice and allowing Mattison thirty days to amend her
pre-suit demand and derivative action claims pursuant to Skydive Myrtle Beach,
Inc v. Horry County.1 The circuit court held Respondent's argument regarding
Mattison's ability to represent the other minority members in abeyance pending
further discovery.
On June 18, 2019, Mattison sent a second letter to MPS stating she believed the
Majority Members were excessively compensated and giving notice MPS should
take legal action against Majority Members and that she would pursue a derivative
action if the issues she raised were not addressed. Mattison then filed an amended
answer, counterclaims, and third-party complaint. The amended third-party
complaint included claims of breach of fiduciary duty and breach of the operating
1
426 S.C. 175, 189, 826 S.E.2d 585, 592 (2019) ("Under Rules 12(b)(6) and 15(a),
the circuit court may not dismiss a claim with prejudice unless the plaintiff is given
a meaningful chance to amend the complaint, and after considering the amended
pleading, the court is certain there is no set of facts upon which relief can be
granted.").
agreement against Majority Members. Majority Members filed a second motion to
dismiss, again arguing Mattison's third-party complaint did not meet the
requirements of Rule 23(b)(1), SCRCP, and that Mattison did not adequately
represent the interests of MPS's other members. Majority Members contended the
June 18, 2019 letter could not be considered a valid pre-suit demand because
litigation was already underway. The circuit court held a hearing on Majority
Members' second motion to dismiss on September 10, 2019, and afterwards issued
an order denying the motion, finding that Mattison's June 18, 2019 letter was a
valid pre-suit demand and that she had properly pled the derivative action claims in
her amended third-party complaint. The circuit court again held the issue of
whether Mattison fairly and adequately represented the interests of other members
of MPS in abeyance pending further discovery.
Majority Members filed a motion for a protective order and to quash non-party
subpoenas. Mattison filed a renewed motion for disqualification of Majority
Members' counsel, again arguing that counsel should not represent MPS and
Majority Members simultaneously. At a hearing held on Majority Members'
motion for a protective order, the circuit court sua sponte issued a ruling limiting
discovery to two issues: the valuation of Mattison's ownership interest and whether
she was a fair and adequate representative for the derivative action. The circuit
court later issued an order granting the Majority Members' motion for a protective
order and to quash the non-party subpoenas. The order included its ruling limiting
discovery.
Majority Members' counsel notified Mattison that they had obtained statements
from every other member of MPS refusing to support the derivative action. The
members' statements indicated that the members reviewed and considered
Mattison's allegations in the derivative action and declined to support the action in
any way. Majority Members requested that Mattison dismiss her derivative action
in light of the member statements. Mattison declined to withdraw the derivative
action and served notice of depositions to six of the minority members who signed
the statements against the derivative action. Majority Members filed a motion for
a protective order from the deposition notices, arguing Mattison's "sole purpose in
noticing the depositions was to subject the members of MPS to annoyance,
embarrassment, oppression, and undue burden and expense."
Before the hearing on the motion for protection, the circuit court requested a
conference call with both parties. During the conference call, the circuit court
denied Majority Members' motion for protection, allowing the depositions of the
six minority members of MPS to proceed. The circuit court limited the depositions
to the topics of the valuation of Mattison's membership shares and her ability to
serve as a fair and adequate representative of MPS in the derivative action. The
circuit court also held Mattison's motion for disqualification of Majority Members'
counsel in abeyance until it determined whether Mattison was a fair and adequate
representative for the derivative action.2
The depositions of William Joslin, Keith Allen Jacobs, II, and Paulette Myers were
taken in January and February 2020. During the depositions, the minority
members adopted and affirmed under oath the member statements in which they
declined to participate in the derivative action. The minority members also stated
they had no concerns or issues with Majority Members' compensation after
Mattison presented them with information regarding those allegations.
Following the depositions, Majority Members filed a motion for summary
judgment as to Mattison's derivative action, arguing that Mattison did not fairly
and adequately represent the other members of MPS because the "undisputed
evidence show[ed] that the other members of MPS oppose this derivative action
and the allegations made by Mattison." Majority Members contended Mattison
sought relief contrary to the interests of the other members of MPS and that she
brought the derivative action to gain leverage in the dispute regarding the value of
her membership units.
Mattison opposed the motion, arguing she could fairly and adequately represent the
interests of the other member of MPS. She contended she did not bring the
derivative action to gain leverage in the dispute concerning the value of her
membership units and that she could pursue a derivative action without the support
of the other members of MPS as a "class of one," being the only shareholder not
currently employed by the firm.
At the hearing held on the motion for summary judgment, the following discussion
occurred:
THE COURT: [A]side from the numbers, the clear
uncontested issue between the parties in your
correspondence to Sam is that, "We reject this offer that
you have given us. And if you don't settle with us, we’re
going to file this derivative action." It's clearly, based on
2
The circuit court did not issue an order regarding the issues it ruled on during the
conference call, and no record of the rulings exists outside Mattison's counsel's
letter summarizing the rulings and the circuit court's email confirming the letter
correctly stated the rulings.
your own language, a leverage being used in this case,
and I don't see how any time you can get around it . . . .
[MATTISON]: Well, Your Honor, I mean, there was
nothing improper in her doing that.
When the circuit court inquired how Mattison could adequately represent the
minority shareholders still employed with MPS who did not support the derivative
action when she had an underlying claim to increase the valuation of her
membership units, Mattison's counsel stated "the question is, can she represent
similarly situated shareholders?" The circuit court replied "I don't buy that
argument, but you can try it. And I thought it was very clever, but I don't buy the
fact that she's the only one similarly situated being the nonemployee shareholder. I
don't buy that."
Later in the hearing, the circuit court stated "[T]he real issue behind this derivative
case, in my view, is that she's trying to seek a higher payout," to which Mattison's
counsel responded "No question about that, Your Honor, but there's nothing wrong
with that." When the circuit court stated "your ultimate goal is to increase what her
buyout is" Mattison's counsel again agreed. Mattison's counsel also stated "the
idea that we're trying to maximize the value of her claim, that's absolutely what
we're trying to do." Mattison's counsel continued "[a]nd that's what my fiduciary
duty to her is to try and maximize that claim, but I'm not using it as a strike suit or
a retaliatory thing."
When discussing the derivative actions during the hearing, the circuit court stated:
"The burden of proof is different. It's on the defendant as opposed to the plaintiff.
I got that." Additionally, when Mattison's counsel stated Majority Members had
the burden of proof, the circuit court replied "I think [they have] met that burden of
proof quite frankly." After the hearing, the circuit court issued an order holding
the motion for summary judgment in abeyance pending depositions of three more
minority members of MPS.
Mattison filed an affidavit summarizing her history with MPS and the alleged
overcompensation of Majority Members that led her to file the derivative action.
She stated she understood her fiduciary duty to the similarly situated minority
members in bringing the derivative action.
Donald Love, Jr., Richard Cullen Pitts, and Harry D. Ballard were deposed, and
they all affirmed their prior written statements declining to participate in the
derivative action. During the deposition they also reviewed the information
provided by Mattison and stated they had no concerns about Majority Members'
compensation. Majority Members filed a memorandum in support of their still
pending motion for summary judgment, while Mattison filed a memorandum in
opposition to summary judgment.
The circuit court issued a Form 4 order granting summary judgment for Majority
Members on the derivative action and directing Majority Members to prepare a
proposed order to that effect. Later the circuit court issued its formal order
granting summary judgment for Majority Members, finding Mattison was not a fair
and adequate representative of the other members of MPS because the other
members of MPS opposed her derivative action, she brought the derivative action
to gain leverage in the dispute regarding the valuation of her membership units,
and she sought relief contrary to the interests of the other members of MPS.
Mattison filed a motion to reconsider, which the circuit court denied. This appeal
followed.
ISSUES ON APPEAL
1. Did the circuit court mistakenly assign to Mattison the burden of proof, and
disregard the applicable factors on the issue of whether she could fairly and
adequately represent the interests of similarly situated members of MPS in a
derivative action?
2. Did the circuit court err by accepting unsworn, boilerplate statements from
MPS's witnesses when these statements failed to comply with Rule 56(e),
SCRCP?
3. Did the circuit court incorrectly ascribe to Mattison an improper motive in filing
her derivative action?
4. Did the circuit court err in considering and relying on confidential settlement
communications that were inadmissible under Rule 408, SCRE?
5. Did the circuit court fail to view the facts and inferences in the record in the
light most favorable to Mattison, by disregarding statements made in Mattison's
verified pleadings and supplemental affidavit?
6. Did the circuit court err in refusing to consider the "class of one" argument in
Mattison's derivative action?
7. Did the circuit court improperly limit the scope of discovery where the minority
members' knowledge about the underlying facts of the derivative action was
crucial to Mattison's allegations?
8. Did the circuit court err in refusing to address the intractable conflict of interest
that exists in the same law firms' representing MPS, Majority Members, and the
minority members of MPS simultaneously?
STANDARD OF REVIEW
"When reviewing the grant of a summary judgment motion, [an appellate] court
applies the same standard that governs the trial court under Rule 56(c), SCRCP;
summary judgment is proper when there is no genuine issue as to any material fact
and the moving party is entitled to judgment as a matter of law." S. Glass &
Plastics Co. v. Kemper, 399 S.C. 483, 490, 732 S.E.2d 205, 208-09 (Ct. App.
2012). "Once the moving party carries its initial burden, the opposing party must
come forward with specific facts that show there is a genuine issue of fact
remaining for trial." Id. at 490, 732 S.E.2d at 209 (quoting Sides v. Greenville
Hosp. Sys., 362 S.C. 250, 255, 607 S.E.2d 362, 364 (Ct. App. 2004)).
"A trial court judge's rulings on discovery matters will not be disturbed on appeal
absent a clear abuse of discretion." Dunn v. Dunn, 298 S.C. 499, 502, 381 S.E.2d
734, 735 (1989).
ANALYSIS
I. Fair and Adequate Representation
Mattison argues the circuit court erred in finding she could not fairly and adequately
represent the minority members of MPS in a derivative action. She contends the
circuit court incorrectly assigned her the burden of proof when determining whether
she could represent the other members of MPS. Mattison also asserts the circuit
court disregarded many of the factors adopted by Davis v. Comed, Inc. 3 when
determining that she was not a proper representative of MPS. Mattison further avers
she was a legitimate "class of one" and that the circuit court erred in finding she filed
her derivative action to gain leverage in her dispute regarding the valuation of her
membership units. We disagree.
3
619 F.2d 588 (6th Cir. 1980) (listing factors courts have examined in determining
whether a plaintiff can provide the requisite fair and adequate representation in a
derivative action).
Rule 23(b)(1), SCRCP, states "a derivative action brought by one or more
shareholders or members to enforce a right of a corporation . . . . may not be
maintained if it appears that the plaintiff does not fairly and adequately represent the
interests of the shareholders or members similarly situated in enforcing the right of
the corporation or association."
In examining, Fed. R. Civ. P. 23.1, the federal equivalent of Rule 23(b)(1),
SCRCP, the United States Court of Appeals for the Sixth Circuit set forth the
following factors for evaluating whether a derivative plaintiff met the
representation requirements under the federal rule:
[(1)] economic antagonisms between representative and
class; [(2)] the remedy sought by plaintiff in the
derivative action; [(3)] indications that the named
plaintiff was not the driving force behind the litigation;
[(4)] plaintiff's unfamiliarity with the litigation; [(5)]
other litigation pending between the plaintiff and
defendants; [(6)] the relative magnitude of plaintiff's
personal interests as compared to his interest in the
derivative action itself; [(7)] plaintiff's vindictiveness
toward the defendants; and, finally, [(8)] the degree of
support plaintiff was receiving from the shareholders he
purported to represent.
Davis, 619 F.2d at 593-94.4
4
Many jurisdictions have applied these same factors when considering this issue.
See, e.g., Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir. 1990); Vanderbilt v.
Geo–Energy, Ltd., 725 F.2d 204, 207 (3d Cir. 1983); Elgin v. Alfa Corp., 598 So.
2d 807, 818-19 (Ala. 1992); Fink v. Golenbock, 680 A.2d 1243, 1256 (Conn.
1996); Jennings v. Kay Jennings Family Ltd. P'ship, 659 S.E.2d 283, 288 (Va.
2008); Woods v. Wells Fargo Bank, 90 P.3d 724, 735-36 (Wyo. 2004).
Additionally, this court considered these factors when determining whether the
appellant was a fair and adequate representative to bring a derivative action in
Boathouse at Breach Inlet, LLC by & through Stoney v. Stoney, 442 S.C. 633, 900
S.E.2d 483 (Ct. App. 2024), reh'g denied, Apr. 29, 2024, petition for cert. filed,
May 29, 2024.
Typically, the elements are intertwined or interrelated,
and it is frequently a combination of factors which leads
a court to conclude that the plaintiff does not fulfill the
requirements of 23.1 (although often a strong showing of
one way in which the plaintiff's interests are actually
inimical to those he is supposed to represent fairly and
adequately, will suffice in reaching such a conclusion).
Id. at 593. Courts have stated these factors are not exclusive and need to be
considered in the totality of the circumstances of each case. Jennings, 659 S.E.2d
at 288.
A plaintiff in a shareholder derivative action owes the
corporation his undivided loyalty. The plaintiff must not
have ulterior motives and must not be pursuing an
external personal agenda. Whether or not such a
personal agenda exists is determined by the trial court,
and we will not reverse its determination absent clear
error. In deciding this question, the court may properly
consider the amount of the plaintiff's stake in the
corporation as balanced against his interest and how the
litigation may affect his external interests.
Smith v. Ayres, 977 F.2d 946, 949 (5th Cir. 1992). "A number of courts have held
that plaintiffs who had large personal suits against the company which they
purported to represent were not adequate representatives because of the likelihood
that they would use the derivative suit as leverage in settling the personal suit."
Palmer v. U.S. Sav. Bank of Am., 553 A.2d 781, 786 (N.H. 1989). "While a
plaintiff is not necessarily disabled to bring suit simply because some of his
interests extend beyond that of the class, the court may take into account outside
entanglements that render it likely that the representative may disregard the
interests of the other class members." Blum v. Morgan Guar. Tr. Co. of N.Y., 539
F.2d 1388, 1390 (5th Cir. 1976). "[T]he trial court should beware allowing a
derivative suit to proceed where the 'representative could conceivably use the
derivative action as "leverage" in other litigation . . . .'" Smith, 977 F.2d at 949(second alteration in original) (quoting Blum, 539 F.2d at 1390).
This court has held "that under the appropriate circumstances, a single member of a
limited liability company may 'fairly and adequately represent the interests of' a
class of one and have standing to maintain a derivative action." Boathouse at
Breach Inlet, LLC, 442 S.C. at 647, 900 S.E.2d at 490 (Ct. App. 2024). The Utah
Supreme Court recognized a "class of one" could have derivative standing,
explaining,
In light of the greater vulnerability to malfeasance that is
present in closely held corporations, we hold that a sole
dissenting shareholder in a closely held corporation
qualifies as a class of one for purposes of derivative
standing when that shareholder (1) seeks by its pleading
to enforce a right of the corporation and (2) does not
appear to be similarly situated to any other shareholder.
Further, we hold that shareholders' motivation for
opposing the derivative action is relevant to determining
the question of whether any shareholder is similarly
situated to the derivative plaintiff. To conclude
otherwise would be to permit corporate looting and
malfeasance in circumstances where all but one
shareholder benefit personally from the illegality or are at
risk of personal detriment were the malfeasance brought
to light.
Angel Invs. LLC v. Garrity, 216 P.3d 944, 951 (Utah 2009).
"The true measure of adequacy of representation under Rule 23.1 is not how many
shareholders the plaintiff represents but rather how well the representative plaintiff
advances the interests of similarly situated shareholders." Halsted Video, Inc. v.
Guttillo, 115 F.R.D. 177, 179 (N.D. Ill. 1987). However, "[a] plaintiff in a
shareholder derivative action owes the corporation his undivided loyalty" and "
"must not have ulterior motives and must not be pursuing an external personal
agenda." Smith, 977 F.2d at 949. Courts have also stated "[o]nly in the rarest
instances may there be a shareholder derivative action with a class of one." Id. at
948. "In many cases that have permitted single shareholder derivative claims,
courts have rested their holding, in part, upon the observation that there was no
hint of any conflict between the individual's interests and the interests of the
corporation." ShoreGood Water Co. v. U.S. Bottling Co., No. CIV.A.RDB 08-
2470, 2009 WL 2461689, at *6 (D. Md. Aug. 10, 2009).
Initially, we hold the circuit court applied the correct standard of proof when
deciding to grant summary judgment to Majority Members. See Halsted Video,
Inc., 115 F.R.D. at 179 ("The burden is on the defendants to show that the plaintiff
will not fairly and adequately represent the corporation and its shareholders.").
The circuit court stated several times that the burden was on Majority Members to
prove Mattison was not an adequate representative. The order granting
Respondent's motion for summary judgment shows that the circuit court
considered the evidence presented by Majority Members and determined they met
the required burden of proof in demonstrating Mattison did not fairly and
adequately represent the interests of other members of MPS. Next, we find the
record indicates the circuit court considered the Davis factors when determining
Mattison was not a fair and adequate representative. In its order granting summary
judgment, the circuit court listed the Davis factors and stated that "[c]onsidering
these factors . . . the [c]ourt finds that Mattison does not fairly and adequately
represent the interests of the other members of MPS." The circuit court then
provided further analysis of the Davis factors that supported its grant of summary
judgment, including the opposition of all other members to the derivative action
and its finding that Mattison was using the derivative suit to gain leverage in the
dispute over the valuation of her membership units. The circuit court further found
the relief Mattison sought was contrary to the interests of the other members of
MPS.
We hold the circuit court did not err in granting summary judgment for Majority
Members because the only reasonable inference to be drawn from the evidence
was that Mattison could not fairly and adequately represent MPS in a derivative
action as a "class of one." See Boathouse at Breach Inlet, LLC, 442 S.C. at 647,
900 S.E.2d at 490 (holding "that under the appropriate circumstances, a single
member of a limited liability company may 'fairly and adequately represent the
interests of' a class of one and have standing to maintain a derivative action");
Angel Invs. LLC, 216 P.3d at 951 (holding "a sole dissenting shareholder in a
closely held corporation qualifies as a class of one for purposes of derivative
standing when that shareholder (1) seeks by its pleading to enforce a right of the
corporation and (2) does not appear to be similarly situated to any other
shareholder."). We find Mattison was not similarly situated to any other members
of MPS because she is the only shareholder not still employed with MPS.
However, her personal interest in increasing the value of her membership units and
the conflict between her interests and the interests of MPS bar her from acting as a
representative in a derivative action. No other members participated in this
derivative action, and the other members who were deposed stated they did not
believe the derivative action was necessary even after Mattison presented them
with information regarding her allegations. Additionally, Mattison requested a
finding that amendments to MPS's operating agreement without unanimous
consent were null and void, which would result in the divestment of two members
of their ownership interest when she was the only member who opposed the
amendments. See Davis, 619 F.2d at 594 (listing "the degree of support plaintiff
was receiving from the shareholders he purported to represent" and " the relative
magnitude of plaintiff's personal interests as compared to his interest in the
derivative action itself " as factors).
Viewing the evidence in the light most favorable to Mattison, we find Mattison
failed to put forth evidence that the other members of MPS opposed the lawsuit
due to any improper motivation or self-interests. See also Angel Invs. LLC, 216
P.3d at 951 ("[W]e hold that shareholders' motivation for opposing the derivative
action is relevant to determining the question of whether any shareholder is
similarly situated to the derivative plaintiff."). The other members of MPS who
refused to support Mattison did not personally benefit from the alleged self-dealing
of Majority Members. In fact, if Mattison's derivative action succeeded and
Majority Members were ordered to return money to MPS, the value of the other
minority members units would likely increase. Despite this, the minority members
stated in their depositions that they did not support the derivative action because
they had no issue with the compensation of the Majority Members, who
contributed a great deal to the success of the firm. Mattison argues that the other
members opposed the derivative action because they are still employed by MPS,
but Mattison provided no evidence other than the fact of their continued
employment to suggest this was their reason for their opposition.
We find no other reasonable inference could be drawn from the evidence presented
but that Mattison's interest in increasing the value of her membership interests was
her sole motivation for bringing the derivative action. See Davis, 619 F.2d at
593-94 (listing the factors to consider when determining whether a plaintiff was a
fair and adequate representative in a derivative action, including "the relative
magnitude of plaintiff's personal interests as compared to his interest in the
derivative action itself" and "the remedy sought by plaintiff in the derivative
action"). Mattison's January 14, 2019 letter to the Majority Members demanded a
higher price for her membership units than that offered by MPS and stated that if
the parties did not resolve the matter she intended to "file not only an action for
judicial valuation of her shares, but also a shareholder derivative action on behalf
of MPS." Additionally, Mattison's counsel agreed with the circuit court's statement
that her "ultimate goal is to increase what her buyout is," but responded there was
"nothing improper" in using the derivative action as leverage in the action
regarding the valuation of Mattison's units. Mattison's primary interest in bringing
the derivative action was to raise the price of her membership units–also the focus
of her direct action against MPS. This did not represent the interests of the other
members and is not in the best interests of MPS. See Smith, 977 F.2d at 949(stating a "plaintiff in a shareholder derivative action owes the corporation his
undivided loyalty" and "must not have ulterior motives and must not be pursuing
an external personal agenda"); Blum, 539 F.2d at 1390 ("While a plaintiff is not
necessarily disabled to bring suit simply because some of his interests extend
beyond that of the class, the court may take into account outside entanglements
that render it likely that the representative may disregard the interests of the other
class members."); Smith, 977 F.2d at 949 ("[T]he trial court should beware
allowing a derivative suit to proceed where the 'representative could conceivably
use the derivative action as "leverage" in other litigation . . . .'" (second alteration
in original) (quoting Blum, 539 F.2d at 1390)).
We also find Mattison could not fairly and adequately represent MPS in a "class of
one" derivative action because her interest in increasing the values of her
membership shares conflicted with the interests of the corporation. See Davis, 619
F.2d at 594 (listing "economic antagonisms between representative and class" as a
factor); ShoreGood Water Co., 2009 WL 2461689, at *6 ("In many cases that have
permitted single shareholder derivative claims, courts have rested their holding, in
part, upon the observation that there was no hint of any conflict between the
individual's interests and the interests of the corporation."). If Mattison were to
prevail on her derivative claims, money might be returned to MPS. However, it is
unclear what effect a finding that all of the Majority Members overcompensated
themselves at the firm's expense and requiring them to return funds to MPS would
have on the firm's future. Additionally, Mattison sought to invalidate the 2015
operating agreement, which was signed by all other members of MPS, and a
finding that amendments to the operation agreement without unanimous consent
were null and void, which would result in the divestment of two members of their
ownership interest. Therefore, we hold evidence supports the circuit court's
finding that Mattison's interests were economically antagonistic to MPS, despite
her contention that she could fairly and adequately represent the corporation.
Applying the other Davis factors, we find Mattison was a driving force in this
litigation and was familiar with the proceedings. See Davis, 619 F.2d at 594
(listing "indications that the named plaintiff was not the driving force behind the
litigation" and "plaintiff's unfamiliarity with the litigation" as factors). As to
whether there is other litigation pending between the parties, Mattison did not
initiate the declaratory judgment action MPS filed regarding the valuation of
Mattison's membership units, and therefore we give it less weight when
determining her ability to represent the other members. See Vanderbilt v. Geo-
Energy Ltd., 725 F.2d 204, 208 (3d Cir. 1983) ("[L]ess weight should be given to a
corporate defendant's claim for the disqualification of the representatives of the
shareholder class where the corporate defendant was the one who initiated the
litigation about which it now complains."). We also find the Majority Members
have not provided evidence of any vindictiveness on Mattison's part toward MPS
or the Majority Members. See Davis, 619 F.2d at 594 (listing "plaintiff's
vindictiveness toward the defendants" as a factor).
After considering the Davis factors, we find the only reasonable inference to be
drawn from the evidence was that Mattison could not represent MPS as a "class of
one" because her sole motivation was to increase the valuation of her shares and
her interests conflict with the interests of MPS. See Davis, 619 F.2d at 593 (stating
"it is frequently a combination of factors which leads a court to conclude that the
plaintiff does not fulfill the requirements of 23.1 (although often a strong showing
of one way in which the plaintiff's interests are actually inimical to those he is
supposed to represent fairly and adequately, will suffice in reaching such a
conclusion)"). Therefore, we hold the circuit court did not err in granting summary
judgment in favor of Majority Members because Mattison failed to put forth
evidence of a genuine issue of material fact as to whether she could fairly and
adequately represent MPS as a "class of one" in a derivative action. See S. Glass &
Plastics Co., 399 S.C. at 490, 732 S.E.2d at 208-09 ("When reviewing the grant of
a summary judgment motion, [an appellate] court applies the same standard that
governs the trial court under Rule 56(c), SCRCP; summary judgment is proper
when there is no genuine issue as to any material fact and the moving party is
entitled to judgment as a matter of law."). Accordingly, we affirm the circuit court
on this issue.
II. Minority Members' Statements
Mattison argues the circuit court erred in relying on the unsworn, boilerplate
statements of MPS's minority members in ruling on MPS's motion for summary
judgment. We agree the circuit court erred in considering the signed members
statements because the statements were not sworn or notarized. See Orsi v.
Kirkwood, 999 F.2d 86, 92 (4th Cir. 1993) ("It is well established that unsworn,
unauthenticated documents cannot be considered on a motion for summary
judgment."); Rule 56(c),SCRCP ("The judgment sought shall be rendered
forthwith if the pleadings, depositions, answers to interrogatories, and admissions
on file, together with the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a judgment as a matter of
law."). However, we find other evidence presented by Majority Members proved
Mattison lacked the support of the other minority members of MPS. 5 The six
minority members Mattison deposed affirmed under oath that they did not support
Mattison's derivative action, even after they were given information about
Mattison's accusations against MPS. Additionally, the fact that no other minority
members have filed suits against MPS or participated in the derivative action
indicates the derivative action is not in the interest of the other members. See
Davis, 619 F.2d at 596 ("[N]o members of the other proposed subclasses have
indicated an interest in the suit by instituting independent suits of their own, which
frequently happens where the claims are believed to be meritorious and in the
interests of the class. Nor has there been any indication that members of these other
proposed subclasses desire to be represented by plaintiff." (quoting Guttmann v.
Braemer, 51 F.R.D. 537, 539 (SDNY 1970)). Because the circuit court considered
other evidence that was properly before it on this issue, any error in relying on the
unsworn statements does not require reversal.
III. Confidential Settlement Communications
Mattison argues the circuit court erred in considering evidence that improperly
revealed pre-litigation settlement discussions when granting MPS's motion for
summary judgment. She contends the evidence was inadmissible under Rule 408,
SCRE, and it was improper for MPS to use that evidence to argue she threatened
filing a derivative action solely to obtain a higher valuation of her shares.
"Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or
offering or promising to accept, a valuable consideration in compromising or
attempting to compromise a claim which was disputed as to either validity or
amount, is not admissible to prove liability for or invalidity of the claim or its
amount." Rule 408, SCRE. "This rule . . . does not require exclusion when the
evidence is offered for another purpose, such as proving bias or prejudice of a
witness, [negating] a contention of undue delay, or proving an effort to obstruct a
criminal investigation or prosecution." Id.We hold the circuit court did not err in considering Mattison's January 14, 2019
letter regarding HDH's valuation of her shares. Mattison referenced the letter in
her pleadings, stating her "counsel sent a letter to [MPS's] counsel suggesting that
the firm should take action against its managing Members for breach of fiduciary
duty." See Frazier v. Badger, 361 S.C. 94, 104, 603 S.E.2d 587, 592 (2004) ("A
5
Although an exact number is not stated in the record, MPS appears to have
eighteen minority members including Mattison based on the number of statements
signed in opposition to the derivative action.
litigant cannot complain of prejudice by reason of an issue he has placed before the
court."); Rule 56(c), SCRCP ("The judgment sought shall be rendered forthwith if
the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of
law."). Further, she stated in her memorandum in opposition to the Majority
Members' motion to dismiss, which was filed with the circuit court, that the
January 14, 2019 letter "was not written in the context of settlement negotiations."
Thus, by her own statements the letter did not constitute settlement negotiations
and therefore did not violate Rule 408. Therefore, we hold the circuit court did not
err in considering Mattison's initial demand letter along with the other evidence in
the record that supported its finding that Mattison brought the derivative action to
increase the price of her units, such as the statements Mattison's counsel made
during the proceedings when considering Majority Member's summary judgment
motion.
As to the admission of the initial demand made by Mattison in the January 14,
2019 letter, even assuming it was an error to admit the demand pursuant to Rule
408, we find the error did not prejudice Mattison because the circuit court did not
rely on the demand in granting summary judgment to Majority Members. See
Johnson v. Sam Eng. Grading, Inc., 412 S.C. 433, 448, 772 S.E.2d 544, 552 (Ct.
App. 2015) (stating prejudice is required to obtain reversal based on the erroneous
admission of evidence). At the hearing, after Mattison's counsel stated the
admission of her initial demand was improper, the circuit court stated "aside from
the numbers, the clear uncontested issue . . . in your correspondence to [Majority
Members' counsel] is that 'We reject this offer that you have given us. And if you
don't settle with us, we're going to file this derivative action.'" The circuit court did
not reference Mattison's original demand in its order granting summary judgment,
which it based in part on its finding that she brought the derivative action to gain
leverage in the dispute concerning the valuation of her units. Therefore, even if
Mattison's initial demand should not have been admitted, this issue does not
warrant reversal of the circuit court's grant of summary judgment.
IV. Verified Complaint and Supplemental Affidavit
Mattison argues the circuit court erred in disregarding her affidavit, amended
answer, counterclaims, and third-party complaint when determining she had
"presented no facts, by affidavit or otherwise, to support her allegations against the
third-party defendants." She contends the allegations of self-dealing transactions
made by Majority Members contained in her verified pleading must be taken as
true when considering her motion for summary judgment. She further asserts her
affidavit "confirms she can fairly and adequately represent the interest of similarly
situated minority members in enforcing the rights of MPS" against Majority
Members. We disagree.
We hold Mattison has failed to identify any facts related to her derivative action
that the circuit court overlooked in granting summary judgement. Her conclusory
statement contained in her affidavit that she could fairly and adequately represent
the other minority members in a derivative action did not create a genuine issue of
material fact precluding summary judgment. See Trotter v. First Fed. Sav. & Loan
Ass'n, 298 S.C. 85, 90 n.3, 378 S.E.2d 267, 270 n.3 (Ct. App. 1989) ("A conclusory
statement on the issue in dispute does not create a question of fact precluding
summary judgment."). We find the majority of the allegations contained in her
verified pleadings regarding Majority Members' self-dealing transactions related to
the merits of her derivative claim but not to whether she was a fair and adequate
representative of other members of MPS, which was the issue before the circuit
court on summary judgment. Mattison's derivative action complaint does state that
she could "fairly and adequately represent the interests of the members of MPS
who are similarly situation in enforcing the rights of MPS" and that she could
represent the other minority members "without fear of retaliation by Managing
Members in the form of adverse employment actions" because she was no longer
an employee of MPS. We find these conclusory statements in the verified
complaint cannot defeat a properly supported motion for summary judgment. See
Dawkins v. Fields, 354 S.C. 58, 68, 580 S.E.2d 433, 438 (2003) (stating "[t]he
abundance of conclusory allegations found in respondents' verified complaint"
meant it "simply [was] not an appropriate substitute for an affidavit"); see also
Charles Alan Wright, et al., Federal Practice and Procedure § 2738 (1998)
("ultimate or conclusory facts and conclusions of law, as well as statements made
'on information and belief,' cannot be utilized on a summary-judgment motion"
(footnotes omitted)). Accordingly, we affirm on this issue.
V. Limited Discovery
Mattison argues the circuit court erred in refusing to allow sufficient discovery
regarding "the merits of the derivative claims" or the questioning of "minority
members about crucial elements of the derivative claims." She maintains she
needed to question minority members regarding the underlying facts of the
derivative action to support her allegations that the Majority Members concealed
evidence of their self-dealing from the minority members of MPS. Mattison
contends Majority Members' counsel thwarted her attempts to conduct discovery
by limiting the depositions she took, instructing those deposed not to answer valid
questions, refusing to provide financial information and supplemental discovery
responses, blocking third-party subpoenas, and keeping her expert witness from
inspecting the Spartanburg office. She asserts the circuit court erred in rejecting
her request for additional time to conduct discovery on whether she was a fair and
adequate representative of the other minority members. We disagree.
We hold the circuit court did not err in limiting discovery to information regarding
Mattison's ability to fairly and adequately represent the other members of MPS
because it was within the circuit court's discretion to limit discovery to that
threshold issue. See Dunn, 298 S.C. at 502, 381 S.E.2d at 735 ("A trial court
judge's rulings on discovery matters will not be disturbed on appeal absent a clear
abuse of discretion."); Oncology & Hematology Assocs. of S.C., LLC v. S.C. Dep't
of Health & Env't Control, 387 S.C. 380, 388, 692 S.E.2d 920, 924 (2010)
("Generally, the scope of discovery is within the trial court's discretion." (quoting
In re CSX Corp., 124 S.W.3d 149, 152 (Tex. 2003))); Rule 26(b), SCRCP ("Unless
otherwise limited by order of the court . . . the scope of discovery is as follows
. . ."). We note that other jurisdictions have stated that the issue of whether a
plaintiff is an adequate representative of other shareholders in a derivative action is
a threshold issue to determine before reaching the merits of the claim. See e.g.
Barrett v. S. Conn. Gas Co., 374 A.2d 1051, 1059 (Conn. 1977) ("We note further
that the issue of whether [the plaintiff] could assure the court of adequate
representation of [the corporation]and its shareholders must necessarily be resolved
before proceeding to the merits of the corporate claim in a derivative suit brought
by him."). Therefore, we hold it was within the circuit court's discretion to limit
discovery to this issue.
Additionally, Mattison deposed six MPS members and received thousands of pages
of documents from MPS in response to her discovery requests. The circuit court
based its finding that Mattison did not have the support of other members in
bringing the derivative action on the depositions of the six members, in which they
affirmed under oath they did not support the derivative action and testified they
had no concerns about Majority Members' compensation, and the fact that no other
minority members joined Mattison's derivative action or brought their own. The
circuit court based its finding that Mattison brought the derivative action to gain
leverage in the dispute over the valuation of her units on Mattison's counsel's
statements during the summary judgment hearing and Mattison's statement in her
January 14, 2019 letter that she planned to file an action for judicial valuation of
her shares and this derivative action if the matter of the valuation of her units was
not resolved. Therefore, we find that Mattison has not shown that further
discovery would create a genuine issue of material fact as required to deny
summary judgment. See Guinan v. Tenet Healthsystems of Hilton Head, Inc., 383
S.C. 48, 54-55, 677 S.E.2d 32, 36 (Ct. App. 2009) ("A party claiming summary
judgment is premature because they have not been provided a full and fair
opportunity to conduct discovery must advance a good reason why the time was
insufficient under the facts of the case, and why further discovery would uncover
additional relevant evidence and create a genuine issue of material fact.").
Accordingly, we affirm the circuit court's grant of summary judgment as to this
issue.
VI. Conflict of Interest
Finally, as to Mattison's argument that the circuit court erred in failing to address
an alleged conflict of interest created by allowing the same law firms to represent
MPS, the Majority Members, and the minority members of MPS, we hold Mattison
abandoned this argument on appeal. See Rule 208(b)(1)(E), SCACR (requiring
citation to authority in the argument section of an appellant's brief); First Sav.
Bank v. McLean, 314 S.C. 361, 363, 444 S.E.2d 513, 514 (1994) (noting when a
party fails to supply authority supporting her assertion, the party is deemed to have
abandoned the issue on appeal).
CONCLUSION
Based on the foregoing, the circuit court's order granting summary judgment in
favor of Majority Members is
AFFIRMED.
MCDONALD, J., and BROMELL HOLMES, A.J., concur.