The Boathouse at Breach Inlet, LLC v. Richard S. W. Stoney ( 2024 )

THE STATE OF SOUTH CAROLINA
In The Court of Appeals
The Boathouse at Breach Inlet, LLC, by and through its
member, Laurence O. Stoney, Jr., Appellant,
v.
Richard S.W. Stoney, individually and as Member-
manager of The Boathouse at Breach Inlet, LLC and
Crew Carolina, LLC, Defendants,
and
Theodore Stoney, Jr., individually as Trustee for Richard
Stoney, Jr. and Gregory G. Holmes, Third-Party
Intervenors,
of whom Richard S. W. Stoney, individually and as
Member-manager of The Boathouse at Breach Inlet, LLC
is the Respondent.
Appellate Case No. 2020-001203
Appeal From Charleston County
Clifton Newman, Circuit Court Judge
Opinion No. 6056
Heard October 10, 2023 – Filed April 3, 2024
REVERSED AND REMANDED
Sarah P. Spruill and Tyler Keith Gilliam, both of
Haynsworth Sinkler Boyd, PA, of Greenville; and
Stafford John McQuillin, III and Scott Y. Barnes, both of
Haynsworth Sinkler Boyd, PA, of Charleston; all for
Appellant.
Capers G. Barr, III, of Barr Unger & McIntosh, LLC, of
Charleston; and Jesse Sanchez, of The Law Office of
Jesse Sanchez, of Mount Pleasant; both for Respondent.
VERDIN, J.: The Boathouse at Breach Inlet, LLC (the Company), by and through
its member Laurence D. Stoney, Jr. (Laurence),1 appeals the circuit court's ruling
that Laurence lacked standing to bring this derivative action against Richard S.W.
Stoney (Richard), individually and as member-manager of the Company, and Crew
Carolina, LLC. Laurence also argues the circuit court erred in granting a motion to
dissociate Laurence as a member of the Company. We reverse and remand.
FACTUAL/ PROCEDURAL BACKGROUND
In 1995, Richard, who is a licensed attorney, decided to open a restaurant on the
Isle of Palms, which he named The Boathouse on Breach Inlet (the Restaurant).
He entered into a twenty-year lease with the option to purchase the property and
then proceeded with construction and preparations. When an investor backed out
at the eleventh hour and Richard was running out of money, Richard's brother,
Theodore Stoney (Ted), and their first cousin, Laurence, offered to invest in the
Restaurant. On November 21, 1997, Richard, Laurence, and Ted executed the
operating agreement to form the Company. 2 Richard owned eighty percent;
Laurence owned five percent; and Ted owned ten percent for himself and an
additional five percent in trust for Richard, Jr., Richard's son.3 At the time of trial,
the Company's members were Richard; Ted; Ted on behalf of Richard, Jr.;
Laurence; Richard's now ex-wife, Lori Stoney; Lori on behalf of their daughter
Croft Stoney; Gregory Holmes, who bought shares in 2009; and Michael Cox, who
bought shares in 2014. Richard maintained sixty percent of the voting rights.
1
Because this appeal involves several Stoney family members, we refer to them by
their first names.
2
Laurence invested $28,750; Ted invested $50,000 and received a greater
percentage of the Company because he had also provided services during the
construction of the Restaurant.
3
The operating agreement listed slightly different ownership interests, but Richard
testified the above-listed percentages were correct.
The Restaurant was an immediate success and received national publicity. With
the success of the Restaurant, the Company's members opened a second restaurant
in downtown Charleston, The Boathouse on East Bay (BEB Restaurant). They
formed The Boathouse on East Bay, LLC (BEB) on January 8, 1999, and the BEB
Restaurant opened the next month. The BEB members were the same as the
Company, with the addition of two new members: Michael Maloney and Beverly
Stoney Johnson, Richard and Ted's sister.
Shortly before opening the BEB Restaurant, Richard formed Crew Carolina, LLC
(Crew Carolina) to manage the Company and BEB, their corresponding
restaurants, and the future restaurants Richard envisioned. Richard, who was Crew
Carolina's sole member, held a meeting with the Company's and BEB's members to
discuss Crew Carolina's business plan. Richard testified that forming Crew
Carolina created savings and increased the buying power in negotiations with
vendors by centralizing the restaurants' purchasing, accounting, and operations.
Crew Carolina used a sweep account for banking, in which the restaurants' sales
were deposited nightly into their individual accounts and then swept into Crew
Carolina's central account overnight.
Richard rapidly expanded his restaurant and catering empire under the umbrella of
Crew Carolina. However, after BEB, he did not offer Laurence a membership
interest in any of the subsequent ventures. Unfortunately, unlike the Company and
the Restaurant, none of the subsequent companies enjoyed lasting profitability and
success. In order to support these less successful companies and to pay for
personal expenses, Richard borrowed money from the Company, which he booked
as "due to [the Company]/ due from" Crew Carolina. During his divorce hearing,
Richard stated repeatedly that he "'robb[ed] Peter to pay Paul' to keep creditors at
bay and allow certain businesses to continue operating." Stoney v. Stoney, 425
S.C. 47, 58, 819 S.E.2d 201, 207 (Ct. App. 2018).
Jamie Stabler, Crew Carolina and the Company's current comptroller, bookkeeper,
and "crisis manager," acknowledged Richard used funds from the Company to
fund his personal expenses and unsuccessful restaurants and entities. She testified
Crew Carolina owed the Company over $4 million. She detailed how Richard's
day-to-day operation of borrowing money from the Company put the Company
into a cash flow crisis, even though the Company consistently produced income.
The Internal Revenue Service charged the Company $43,840 in fines and penalties
for failing to pay its taxes in a timely manner. Stabler also testified that the
Company at times could not make payroll, harming employees who may have been
living paycheck to paycheck. She stated Richard used the Company's funds for
non-business travel to the Bahamas, Belgium, Chicago, France, Key West, and
New York; payments to his former girlfriend; expenses for his polo ponies; and
expenses relating to his share of the family property, Kensington Plantation. She
admitted Crew Carolina did not have an income stream or a bank account and she
did not believe the Company could collect the outstanding amount it was owed by
Crew Carolina. In addition, Stabler testified that Richard had her inquire about
writing off the debt to the Company. Eventually, the Company forgave $361,537
in indebtedness on its 2010 tax return.
Richard was advised to stop his practice of taking money from the Company to
fund other expenses. On November 26, 2007, Chip Robinson, who was Crew
Carolina's comptroller at the time, informed Richard that counsel advised him that
any commingling of funds between business entities without identical ownership
was not permitted without the members' written permission. In an April 15, 2010
memo, Robinson told Richard they were "consumed with cash flow issues" from
two of Richard's other restaurants and suggested removing the Company "in this
role as blood donor for the hemorrhages at [the other restaurants to] solve the cash
flow issues." Despite these warnings, Richard continued this practice until at least
May 2019 and made matters worse.
J. Dennis Jarvis, who was an accountant for the Company, Crew Carolina, and
Richard, personally, stated in an affidavit that he was told on numerous occasions
that Richard would not repay the millions of dollars he owed to the Company.
Because Crew Carolina did not have a cash flow stream or a prospect of generating
one, Jarvis and Robinson agreed that Richard should treat the money owed from
Crew Carolina to the Company as personal draws to Richard, which must be
repaid. In addition, Jarvis stated that Richard proposed closing Crew Carolina and
writing off over $4 million that Crew Carolina owed the Company. Finally,
Richard instructed Jarvis to refrain from discussing the due to/from book entries
with other members of the Company and did not permit him to share the
Company's tax returns with certain members, including Laurence. At trial, Jarvis
described Richard's use of the Company's funds for personal expenses as "deadly."
Laurence's expert witness, Don M. Hollerbach, a forensic accountant, testified
Richard "commingled funds using funds for personal use and effectively turning a
commercial enterprise that is a restaurant enterprise into a banking enterprise."
Hollerbach summarized his opinions: (1) Richard owed the Company over $4
million; (2) if this amount was a loan, Richard owed $428,107.23 in interest; (3)
there were disproportionate distributions;4 and (4) the diversion of funds from the
Company for personal matters and funding unrelated entities harmed the Company
and put it in a cash flow crisis.
Laurence began to suspect Richard was borrowing the Company's funds as early as
1999 because distributions decreased every year even though the Restaurant was
doing well. When he asked Richard why he was not receiving distributions,
Richard told Laurence to trust him and assured Laurence in an August 9, 2005
letter, "I'm not in the business with my family and dear friends in an attempt to
skim profits or benefits not available to them . . . ." Laurence asked Richard to see
the Company's books at least ten times, but the only time Richard offered to let
him see the books, Richard required him to sign a nondisclosure agreement, which
Laurence declined to do. Laurence acknowledged that his relationship with
Richard started to deteriorate when the financial issues began.
Laurence also presented evidence of Richard's questionable actions as the
Restaurant's property's landlord. Richard had the Company guarantee his personal
loan to purchase the property. On November 7, 2012, Richard had the Company
confess judgment in favor of the lender in the amount of $1,812,017.69, which he
claimed he did to prevent foreclosure of the property.
In May 2011, Richard, as manager and landlord for the Company, entered into a
lease that allowed the Company to renew its lease with him in five-year terms
through 2035. However, in February 2015, the limited liability company Richard
formed to own the land, 101 Palm Boulevard, LLC, 5 entered into a new lease that
was only for five years. At trial, Richard testified he was willing to extend the
lease to 2035, saying he expected everyone to trust him. The February 2015 lease
also changed the responsibility for repairing a bulkhead from the landlord to the
Company. Richard explained he did not think it was fair or in his best interest as
the landlord to have the responsibility for the bulkhead, which served the
Restaurant and not the marina on the property. 6
4
Hollerbach testified Richard improperly made disproportionate distributions to
Holmes and Cox when other members of the Company did not receive
distributions. Holmes received a total of $227,503 in distributions between 2012
and 2019; Cox received $7,354 in 2019.
5
Richard was the sole member of this company.
6
One quote for the total replacement of the bulkhead was $900,000.
On October 9, 2015, Laurence brought this derivative action on behalf of the
Company against Richard and Crew Carolina (collectively, Defendants), asserting
various causes of action including breach of fiduciary duty, conversion, unlawful
distributions, an accounting, and unjust enrichment. He sought actual and
consequential damages; punitive damages; attorney's fees and costs; prejudgment
interest; a full accounting, and orders piercing the corporate veil, declaring
Defendants were not entitled to indemnification from the Company, and requiring
repayment of the money Richard took from the Company.
Defendants answered, asserting a general denial and various defenses, including
the statute of limitations, laches, the business judgment rule, doctrines of waiver
and estoppel, unclean hands, and asserting that Laurence could not fairly and
adequately represent the Company's interests. Ted and Holmes (collectively,
Intervenors) moved to intervene, asserting they opposed the derivative action.
Laurence subsequently filed an amended complaint asserting Intervenors were not
similarly situated members of the Company because they were motivated by their
individual interests and benefited from the improprieties in Richard's management.
The parties filed a stipulation that Laurence was not similarly situated to any other
member of the Company.
After a preliminary hearing on the issue of Laurence's standing to bring this
derivative action, the circuit court issued an order allowing Laurence to proceed.
Defendants and Intervenors filed a motion to dissociate Laurence, which the circuit
court preliminarily denied. After a non-jury trial, the circuit court issued an order
holding Laurence was not a fair and adequate representative under Rule 23(b)(1) of
the South Carolina Rules of Civil Procedure (SCRCP) to bring this action. It
explained his motivations were vindictive and personal, rather than seeking to
vindicate a corporate wrong, and the equitable remedy he sought was too tainted
by his own inappropriate conduct, especially since ninety percent of the Company's
membership opposed the action. In addition, the circuit court granted the motion
to dissociate Laurence. Laurence filed a motion to alter or amend, which the
circuit court denied. This appeal followed.
STANDARD OF REVIEW
"A shareholder's derivative action . . . is one in equity." Straight v. Goss, 383 S.C.
180, 191, 678 S.E.2d 443, 449 (Ct. App. 2009). "[A]n action for dissociation is
also equitable in nature." Park Regency, LLC v. R & D Dev. of the Carolinas,
LLC, 402 S.C. 401, 411, 741 S.E.2d 528, 533 (Ct. App. 2012). "Therefore, this
court may find facts in accordance with our own view of the preponderance of the
evidence." Straight, 383 S.C. at 192, 678 S.E.2d at 449. "However, we are not
required to disregard the findings of the trial judge who saw and heard the
witnesses and was in a better position to judge their credibility." Id.
LAW/ANALYSIS
I. Laurence's Standing
Laurence argues the circuit court erred in holding he lacked standing to bring this
action because a derivative action was the proper means of seeking redress for
alleged wrongs to the Company. He asserts he was a legitimate "class of one" who
would fairly and adequately enforce the rights of the Company. We agree.
Section 33-44-1101 of the South Carolina Code (2006) authorizes a member of a
limited liability company to bring a derivative action. See § 33-44-1101
(authorizing a member to "maintain an action in the right of the company if the
members or managers having authority to do so have refused to commence the
action or an effort to cause those members or managers to commence the action is
not likely to succeed"). Rule 23(b)(1), SCRCP sets out the requirements for "one
or more . . . members" of a limited liability company to bring a derivative action to
enforce a right of the company. Thus, under the plain language of the statute and
applicable rule, a single member of a limited liability company can bring a
derivative action. See Maxwell v. Genez, 356 S.C. 617, 620, 591 S.E.2d 26, 27
(2003) ("In interpreting the meaning of the South Carolina Rules of Civil
Procedure, the Court applies the same rules of construction used to interpret
statutes."); Hodges v. Rainey, 341 S.C. 79, 85, 533 S.E.2d 578, 581 (2000)
("Where the statute's language is plain and unambiguous, and conveys a clear and
definite meaning, the rules of statutory interpretation are not needed and the court
has no right to impose another meaning."); Maxwell, 356 S.C. at 620, 591 S.E.2d at
27 ("If a rule's language is plain, unambiguous, and conveys a clear meaning,
interpretation is unnecessary and the stated meaning should be enforced.").
In addition, Rule 23(b)(1) limits who may bring such an action, providing "The
derivative action 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." Rule
23(b)(1), SCRCP. Because our state has not yet addressed whether a single
member of a limited liability company may bring a derivative action, we look to
other jurisdictions for guidance.
The Sixth Circuit Court of Appeals set forth the following factors for evaluating
whether a derivative plaintiff meets the representation requirements outlined in
Rule 23.1 of the Federal Rules of Civil Procedure: 7
[E]conomic antagonisms between representative and
class; the remedy sought by plaintiff in the derivative
action; indications that the named plaintiff was not the
driving force behind the litigation; plaintiff's
unfamiliarity with the litigation; other litigation pending
between the plaintiff and defendants; the relative
magnitude of plaintiff's personal interests as compared to
his interest in the derivative action itself; plaintiff's
vindictiveness toward the defendants; and, finally, the
degree of support plaintiff was receiving from the
shareholders he purported to represent.
Davis v. Comed, Inc., 619 F.2d 588, 593-94 (6th Cir. 1980).
However, "these factors 'are not exclusive and must be considered in the totality of
the circumstances found in each case.'" Cattano v. Bragg, 727 S.E.2d 625, 629
(Va. 2012) (quoting Jennings v. Kay Jennings Family Ltd. P'ship, 659 S.E.2d 283,
288 (Va. 2008)). The Virginia Supreme Court recognized in applying the Davis
factors, a single shareholder derivative claim is possible when "the totality of the
circumstances support[s] a finding that the plaintiff's personal interests do not
preclude the shareholder from fairly and adequately representing the corporation."
Id.The Utah Supreme Court similarly held that due to "the greater vulnerability to
malfeasance that is present in closely held corporations" a single shareholder could
maintain a derivative action as a "class of one" when the shareholder "(1) seeks by
its pleading[s] to enforce a right of the corporation and (2) does not appear to be
similarly situated to any other shareholder." Angel Invs. LLC v. Garrity, 216 P.3d
944, 951 (Utah 2009). As the Texas Supreme Court noted, "The rule[8] does not
7
South Carolina Rule 23(b)(1) uses the language of the prior version of Federal
Rule 23.1, which was in effect at the time Davis was decided. Rule 23, SCRCP,
note. The 2007 amendment to Federal Rule 23.1 was "intended to be stylistic
only." Fed. R. Civ. P. 23.1, Advisory Committee Notes.
8
See Texas Rule of Civil Procedure 42(a). This rule was modeled after the Federal
Rule of Civil Procedure 23.1. The comments to the current Texas Rule of Civil
place any minimum numerical limits on the number of shareholders who must be
'similarly situated.' It follows that if the plaintiff is the only shareholder 'similarly
situated,' he is in compliance with both the letter and the purpose of the rule."
Eye Site, Inc. v. Blackburn, 796 S.W.2d 160, 162-63 (Tex. 1990).
Numerous other courts have recognized a "class of one" may maintain a derivative
action. See, e.g., Larson v. Dumke, 900 F.2d 1363, 1368 (9th Cir. 1990) (holding
"a single shareholder may bring a derivative suit"); Jordon v. Bowman Apple
Prods. Co., 728 F. Supp. 409, 412 (W.D. Va. 1990) ("In appropriate circumstances
a single shareholder may be situated in a unique position and thus constitute a
legitimate 'class of one.'"); Halsted Video, Inc. v. Guttillo, 115 F.R.D. 177, 180
(N.D. Ill. 1987) (holding the plaintiff was a "legitimate class of one" and the
defendants did not meet their burden of showing that plaintiff was an inadequate
representative); Brandon v. Brandon Constr. Co., 776 S.W.2d 349, 353-54 (Ark.
1989) ("The real test is not the number of shareholders represented in a derivative
action, but the alleged injuries and the remedies sought."); Clemons v. Wallace,
592 P.2d 14, 16 (Colo. App. 1978) (holding Rule 23.1 of the Colorado Rules of
Civil Procedure did not preclude a derivative suit by a corporation with only one
minority stockholder); HER, Inc. v. Parenteau, 770 N.E.2d 105, 114 (Ohio Ct.
App. 2002) (holding that the appellant, who was "the only similarly situated
shareholder, can fairly and adequately represent the interests of the corporation.").
We agree with the above cases and hold 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. To hold otherwise would be to deprive a sole dissenting shareholder from
seeking relief from another shareholder's wrongdoing. Eye Site, Inc., 796 S.W.2d
at 163 ("[W]e question the wisdom of construing [the rule] in any manner which
prevents a shareholder in a close corporation from enforcing his rights.").
Considering the totality of the circumstances, we hold Laurence qualifies as a
legitimate class of one. Reviewing the relevant Davis factors, we first address
whether lack of support from the other members of the Company bars Laurence
from maintaining this action. See Davis, 619 F.2d at 594 (listing "the degree of
support plaintiff was receiving from the shareholders he purported to represent" as
Procedure 42 explain that the portion of the rule regarding derivative suits was
deleted because it was redundant to Article 5.14 of the Business Corporation Act,
which sets forth detailed procedures for derivative suits.
a factor). The parties stipulated Laurence was not similarly situated to the other
members, and Laurence admitted that no other members officially supported this
action. 9 However, we must consider the other members' motivations for opposing
this action in determining whether Laurence is an adequate representative. See
Larson, 900 F.2d at 1368 (stating the lack of support from the non-defendant
shareholders did not make the sole shareholder an inadequate representative
because "the non-defendant shareholders may have been motivated by individual
interests, rather than the good of the corporation . . . ."); Angel Invs. LLC, 216 P.3d
at 951 (holding 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"). Ignoring the opposing shareholders'
motivations could "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, 216
P.3d at 951.
It is evident Richard and the other Company members who opposed this action
were motivated by their individual interests. Richard, the majority member and the
one accused of malfeasance and looting the Company, naturally opposed this
action. Ted admitted he opposed the action because he was currently in litigation
with Richard to recover over $3 million that Richard owed him. Although he
proclaimed he did not support this action, Ted acknowledged the Company
supported Richard's other entities10 and the return of the $4 million Richard
"borrowed" from the Company would benefit it. Holmes and Cox benefited from
Richard's malfeasance by receiving distributions when other members of the
Company did not. While Richard's daughter testified she did not support the
litigation, her mother holds her share in trust and supports the action. Therefore,
we hold the other members' lack of support does not preclude Laurence from
maintaining this action as a class of one.
We next address whether Laurence's vindictiveness towards Richard motivated
him to bring this action. See Davis, 619 F.2d at 594 (listing "plaintiff's
vindictiveness toward the defendants" as a factor). We must keep in mind that
"[c]harged emotions and economic antagonism are virtually endemic to disputes in
closely held corporations." Cattano, 727 S.E.2d at 629. We therefore "must look
beyond the mere presence of economic and emotional conflict, placing more
9
The circuit court noted Richard's ex-wife Lori supported Laurence's action.
10
However, he claimed "it was all above-board" because "[e]verything was
documented."
emphasis on whether the totality of the circumstances suggest that the plaintiff will
vigorously pursue the suit and that the remedy sought is in the interest of the
corporation." Id.
Ted characterized the relationship between Richard and Laurence as being "as bad
as you can get" and recalled Laurence threatened to "get Richard" and "turn his
world upside down." Although Richard described Laurence as being humble,
gracious, and enjoyable to be around at the time they formed the Company, he
claimed that by the time they formed BEB, their relationship had deteriorated. The
change in their relationship coincided with Richard using the Company's funds to
support his other entities and personal expenses, which upset Laurence. In an
email dated June 23, 2010, Richard criticized Laurence for being abrasive and
threatening litigation, but in the same email, he acknowledged Laurence had not
been receiving distributions because profits from the Company were used to
support other entities. Ted recalled Laurence "claimed that monies were being
diverted from the [Company] to pay for other entities," and he complained about
not getting proper distributions from the Company. Laurence acknowledged his
concern was the money missing from the Company, but he explained that in
bringing this action, he sought to recover the money owed to the Company and use
it to make the Restaurant a showpiece.11 No one disputes Richard owes the
Company over $4 million. With this action, Laurence seeks to return this money
to the Company. While animosity certainly exists between the parties, we hold this
hostility is not fatal to Laurence maintaining the derivative action.
We further hold the remaining Davis factors support Laurence's standing to bring
this action. See Davis, 619 F.2d at 593-94 (listing the factors as "economic
antagonisms between representative and class; the remedy sought by plaintiff in
the derivative action; indications that the named plaintiff was not the driving force
behind the litigation; plaintiff's unfamiliarity with the litigation; other litigation
pending between the plaintiff and defendants; [and] the relative magnitude of
plaintiff's personal interests as compared to his interest in the derivative action
itself"). Laurence was the driving force of this litigation and was familiar with the
proceedings. As far as the record shows, there is no other litigation pending
between Laurence and Richard. Laurence has only a five-percent interest in the
Company, but he sought to make Richard reimburse the Company over $4 million.
As stated above, no one contests that Richard used the Company's funds to support
his other entities and personal expenses. Laurence presented evidence that
11
Ted contended Laurence brought the action for personal gain and to get his
portion of Kensington, the family plantation.
Richard's use of these funds hurt the Company, at times causing it to be unable to
make payroll, incur late fees, and owe money to the IRS. Without a doubt, the
return of over $4 million would benefit the Company. In addition, to support his
breach of fiduciary duty claim, Laurence presented evidence that Richard used the
Company as the guarantor for personal loans and modified the Company's lease to
make it more beneficial to Richard as landlord. Laurence prosecuted this action
vigorously and declared his intent for the proceeds of the action to be returned to
the Company to improve the Restaurant. Therefore, we hold Laurence fairly and
adequately represented the interests of the class of one in prosecuting this
derivative action for the benefit of the Company. See Cattano, 727 S.E.2d at 629
("[W]e must look beyond the mere presence of economic and emotional conflict,
placing more emphasis on whether the totality of the circumstances suggest that
the plaintiff will vigorously pursue the suit and that the remedy sought is in the
interest of the corporation.").
Furthermore, we doubt Laurence would have had standing to bring an action
against Richard individually. Pursuant to Section 33-44-410 of the South Carolina
Code (2006), a member of a limited liability company may only maintain an action
against the company or another member or manager to enforce that member's
rights under the operating agreement and under South Carolina law. That
member's loss must be "separate and distinct" from that of the company. See Ward
v. Griffin, 295 S.C. 219, 221, 367 S.E.2d 703, 704 (Ct. App. 1988) ("A stockholder
may individually sue corporate directors, officers, or other persons when he has
sustained a loss separate and distinct from that of other stockholders generally."
(quoting 19 Am. Jur.2d Corporations § 2245 (1986))); id. ("However, an
individual stockholder has no right to bring an action in his own name and in his
own behalf for a wrong committed solely against the corporation." (quoting 19
Am. Jur.2d Corporations § 2245)); Wilson v. Gandis, 430 S.C. 282, 311-12, 844
S.E.2d 631, 647 (2020) (holding the majority members of a limited liability
company lacked standing to bring a breach of fiduciary duty claim in their
individual capacities against the minority member because the majority members'
loss would not be separate and distinct from the company's loss); Patterson v.
Witter, 425 S.C. 213, 231, 821 S.E.2d 677, 687 (2018) ("An action seeking to
remedy a loss to the corporation is generally a derivative one." (quoting Brown v.
Stewart, 348 S.C. 33, 49, 557 S.E.2d 676, 684 (Ct. App. 2001))); id. ("An action
regarding the fiduciary obligation of a director is ordinarily enforceable through a
derivative action."); id. ("'A shareholder may maintain an individual action only if
his loss is separate and distinct from that of the corporation.'" (quoting Brown, 348
S.C. at 49, 557 S.E.2d at 684)).
Laurence's claims in this action involved losses to the Company, rather than to his
own membership interest, and also involve Richard's alleged breach of his
fiduciary duty to the Company; therefore, the claims must be brought in a
derivative action. To deny Laurence standing in the derivative action would deny
him and the Company a remedy, which we find is not the intent of Rule 23(b)(1).
See Eye Site, Inc., 796 S.W.2d at 163 ("[W]e question the wisdom of construing
[the derivate standing rule] in any manner which prevents a shareholder in a close
corporation from enforcing his rights."). Accordingly, we hold the circuit court
erred in finding Laurence lacked standing to bring this derivative action on behalf
of the Company.
II. Dissociation
Laurence argues the circuit court erred in granting the motion to dissociate him
from the Company because Defendants and Intervenors did not meet their burden
of showing it was not reasonably practicable to carry on the business with him.
We agree.
"The term 'dissociation' refers to the change in the relationships among the
dissociated member [of a limited liability company], the company and the other
members caused by a member's ceasing to be associated in the carrying on of the
company's business." Park Regency, LLC, 402 S.C. at 411, 741 S.E.2d at 533
(alteration in original) (quoting S.C. Code Ann. § 33-44-601 cmt. (2006)). A
member may be dissociated from a limited liability company by judicial
determination when the member "engaged in conduct relating to the company's
business which makes it not reasonably practicable to carry on the business with
the member." § 33-44-601(6)(iii).
Though not binding on this court, we find the Supreme Court of New Jersey's
factors instructive when determining when judicial dissociation is warranted:
(1) [T]he nature of the [limited liability company]
member's conduct relating to the [limited liability
company's] business; (2) whether, with the [limited
liability company] member remaining a member, the
entity may be managed so as to promote the purposes for
which it was formed; (3) whether the dispute among the
[limited liability company] members precludes them
from working with one another to pursue the [limited
liability company's] goals; (4) whether there is a
deadlock among the members; (5) whether, despite that
deadlock, members can make decisions on the
management of the company, pursuant to the operating
agreement or in accordance with applicable statutory
provisions; (6) whether, due to the [limited liability
company's] financial position, there is still a business to
operate; and (7) whether continuing the [limited liability
company], with the [limited liability company] member
remaining a member, is financially feasible.
IE Test, LLC v. Carroll, 140 A.3d 1268, 1279 (N.J. 2016). The court cautioned
that "[Limited liability company] members seeking to expel a fellow member . . .
are required to clear a high bar" and a court may not order disassociation "merely
because there is a conflict." Id. It explained "disagreements and disputes among
[limited liability company] members that bear no nexus to the [limited liability
company's] business" did not justify a member's expulsion, and "it must be
unfeasible, despite reasonable efforts, to keep the [limited liability company]
operating while the disputed member remains affiliated with it." Id. at 1278.
In finding Laurence should be dissociated, the circuit court cited (1) Laurence's
denigrating the Company to its food vendors; (2) his efforts to change the
ownership and management of the Company during Richard's divorce litigation;
and (3) his efforts to purchase the BEB land without disclosing his efforts to
Richard. We find none of these incidents evidence conduct relating to the
Company's business that would warrant judicial dissociation.
Richard and Ted claimed Laurence talked negatively about Richard to the
representatives of Richard's major food suppliers at the Carolina Yacht Club,
telling them that Richard was not paying his bills, that the restaurants were on a
cash basis, and that Richard would not do business with Laurence. In contrast,
Laurence stated the "word on the street" with the vendors was that Richard and the
Company had bad credit. He maintained he did not tell the vendors that the
Company had credit issues; rather, they told him. Both Richard and Laurence
acknowledged having a confrontation about Laurence's statements, but while
Richard testified that Laurence did not deny making the statements, Laurence
asserted he told Richard the vendors were the ones talking about his bad credit.
First, in taking our own view of the preponderance of the evidence, we find
Laurence was truthful in testifying the vendors came to him about the credit issues.
Richard was, in fact, having credit issues at this time. Furthermore, Richard did
not present any of the vendors at trial to contradict Laurence's assertions. Finally,
we find Laurence's negativity was directed at Richard and not at the Company. See
S.C. Code Ann. § 33-44-201 (2006) (stating a limited liability company is a legal
entity distinct from its members).
Next, we hold Laurence's testimony at Richard's divorce hearing did not support
judicial dissociation. At the 2011 divorce hearing, Laurence testified that he was
not averse to the family court awarding Lori the Company and he agreed with her
hiring a manager, such as Bill Hall of Hall's Chophouse, to manage the Restaurant.
We find Laurence's planning for the possibility of Lori receiving Richard's
membership interest in the Company did not warrant dissociation and any
negativity was directed at Richard, individually, and not at the Company. See
§ 33-44-201 (stating a limited liability company is a legal entity distinct from its
members).
Finally, we find Laurence's attempt to purchase the property that BEB leased for
BEB Restaurant did not warrant dissociation. When BEB Restaurant opened, BEB
leased the property from the Drew family. The relationship with the Drew family
quickly soured, and Richard and Ted entered into negotiations to purchase the
property. Laurence also made an offer to purchase the property. He admitted he
did not tell Richard and Ted he also wanted to purchase the property and explained
he thought the property would be a good investment for him individually.
Although Richard and Ted ultimately prevailed in purchasing the property, they
paid $100,000 to $200,000 more than they originally planned.
We hold Laurence's attempt to purchase the property did not have a sufficient
nexus to the Company's business to warrant dissociation. See IE Test, 140 A.3d at
1278 (holding "disagreements and disputes among LLC members that [bore] no
nexus to the LLC's business [would not] justify a member's expulsion"). First,
BEB was a separate limited liability company from the Company. Second,
Richard and Ted bought the property for themselves and not on behalf of BEB or
the Company. Accordingly, Laurence did not usurp a corporate opportunity, and
he had an equal right to seek purchase of the property as they did. See S.C. Code
Ann. § 33-44-409(e) (2006) ("A member of a member-managed company does not
violate a duty or obligation under this chapter or under the operating agreement
merely because the member's conduct furthers the member's own interest.");
§ 33-44-201 (stating a limited liability company is a legal entity distinct from its
members).
In addition, while the parties expressed their opposition to being in business
together, we find their animosity was not sufficient for judicial dissociation. Much
of their disagreement was over Richard's use of the Company's funds and may be
resolved with this action. In addition, with only a five-percent interest, Laurence
was not in a position to interfere with the management of the Company or create
deadlock. Furthermore, the Restaurant was doing well financially, and Richard
testified he expected it to increase sales by $250,000 to $500,000 that year.
Therefore, the Company was in a financial position to continue operating, and
Laurence remaining a member would not make the continuation of the Company
financially unfeasible.
We, therefore, hold the circuit court erred in finding Laurence "engaged in conduct
relating to the company's business which makes it not reasonably practicable to
carry on the business with the member." See § 33-44-601(6)(iii). Accordingly, we
reverse the circuit court's grant of the motion for dissociation.
CONCLUSION
We REVERSE the circuit court's finding that Laurence was not an appropriate
member representative for this derivative action and its dismissal of this action.
We further REVERSE the circuit court's granting of the motion to dissociate
Laurence. We REMAND this matter for a determination of the merits of the
derivative action.
Accordingly, the order of the circuit court is
REVERSED AND REMANDED.
WILLIAMS, C.J., and HEWITT, J., concur.