Allen Patterson, Steve Tilton, Richard Sendler, Lincoln Privette, Marc Ellis, Joey Carter, Barry Davis, Michael Nieri, Allen Patterson Residential LLC, Tilton Group, Sendler Construction Co., Inc., Privette Enterprises, Ellis Construction Co., Inc., The Barry Davis Company, Inc., Great Southern Homes, and J. Carter, LLC, on behalf of themselves and others similarly situated, Petitioners,
Herb Witter, Colin Campbell, Eddie Weaver, Tom Markovich, Keith Smith, Jim Gregorie, individually and as Trustees of the South Carolina Homes Builders Self Insurers Fund, and the South Carolina Home Builders Self Insurers Fund, Respondents. Appellate Case No. 2016-002343
May 24, 2018
OF CERTIORARI TO THE COURT OF APPEALS
from Richland County G. Thomas Cooper, Jr., Circuit Court
Edward Bradley and S. Jahue Moore, both of Moore Taylor Law
Firm, PA, of West Columbia, for Petitioners.
William W. Wilkins and Burl F. Williams, both of Nexsen
Pruet, LLC, of Greenville, James Lynn Werner and Lawrence M.
Hershon, both of Parker Poe Adams & Bernstein, LLP, and
Pope D. Johnson, of Johnson & Barnett, LLP, all of
Columbia, for Respondents.
careful consideration of Respondents' petition for
rehearing, the Court grants the petition for rehearing,
dispenses with further briefing, and substitutes the attached
opinion for the opinion previously filed in this matter.
W. Beatty C.J., John W. Kittredge J., Kaye G. Hearn J., John
Cannon Few J., George C. James, Jr. J.
case involves the South Carolina Home Builders Self Insurers
Fund (Fund), which was created by the Home Builders
Association of South Carolina, Inc. "for the purpose of
meeting and fulfilling an employer's obligations and
liabilities under the South Carolina Workers'
Compensation Act." The Fund at issue here was
established in September 1995 by an "Agreement and
Declaration of Trust" (Agreement) between the Home
Builders Association of South Carolina, Inc. (Association)
and the Fund's Board of Trustees (Board). The underlying
dispute arose after the Board announced plans to wind down
the Fund and use the Fund's remaining assets to finance a
new mutual insurance company. Petitioners, who were members
of the Fund, disagreed with that decision and challenged the
Board's authority to use the Fund's assets in such a
way. The trial court twice dismissed Petitioners' suit,
first on the basis that it involved the internal affairs of a
trust and therefore should have been filed in probate court,
then in a subsequent proceeding, on the basis that the
lawsuit was a shareholder derivative action and that the
complaint failed to comply with the pleading requirements of
Rule 23(b)(1), SCRCP.
appeal, the court of appeals affirmed the dismissal of
Petitioners' complaint, finding the trial court properly
concluded (1) the Fund was not a trust; (2) Petitioners'
claims were derivative in nature; and (3) Petitioners'
complaint was properly dismissed as it did not properly
allege a pre-suit demand as required by Rule 23(b)(1).
Patterson v. Witter, 418 S.C. 66, 791 S.E.2d 294
(Ct. App. 2016). We issued a writ of certiorari to review the
court of appeals' decision. We reverse and remand, for
Petitioners have satisfied the pleading requirements of Rule
23(b)(1), irrespective of whether the Fund is properly
characterized as a trust.
employers conducting business in South Carolina must secure
the payment of compensation to their injured employees. S.C.
Code Ann. § 42-5-10 (2015). This may be accomplished
either by purchasing workers' compensation liability
insurance or by qualifying as a "self-insured"
employer. To become self-insured, an employer must
demonstrate to the Workers' Compensation Commission
(Commission) that it has the "financial ability to pay
directly the compensation in the amount and manner and when
due as provided" by the Act. S.C. Code Ann. §
also allows employers to create a self-insured workers'
compensation liability fund or "pool." Id.
§ 42-5-20 ("The [C]omission may, under such rules
and regulations as it may prescribe, permit two or more
employers in businesses of a similar nature to enter into
agreements to pool their liabilities under the Workers'
Compensation Law for the purpose of qualifying as
self-insurers."). For a self-insurance fund to be
approved, an officer of the proposed organization must submit
to the Commission various documents, financial statements,
and notably, "[a]n indemnity agreement which jointly and
severally binds each member of the fund, signed by each
proposed member." S.C. Code Ann. Regs. 67-1501(E)(1)-(8)
(2012). A self-insured fund must be approved by
the Commission before it may begin operation. Id.
§ 67-1502 (2012).
Agreement identified its purpose as:
meeting and fulfilling an employer's obligations and
liabilities under the South Carolina Workers'
Compensation Act; to form an overall self-insurers
fund pursuant to Laws of the State of South Carolina,
which provides for workers' compensation coverage and
benefits; to provide, as appropriate, allowable advance
discounts on premium payments made by employers for
workers' compensation coverage; and to minimize the cost
of providing workers' compensation coverage by developing
and refining specialized claim services and a loss prevention
program within the South Carolina Home Building Industry.
addition to establishing the authority of Board members and
extensive guidelines for the administration of the Fund, the
Agreement further provided that amendments to the Agreement
may be made by a majority of the Board, "However, this
Agreement may not be amended so as to change its purpose as
set forth [above] or to permit the diversion or
application of any of the funds of the [Fund]
for any purpose other than those specified
herein." (emphasis added). The Agreement also
provided that "In the event of termination, the
remaining funds available in the [Fund], after providing for
all outstanding obligations, shall be distributed, through a
formula determined by the [Board], to the participating
fall of 2003, the Board began discussing the idea of winding
down the Fund and using the remaining monies on hand to
capitalize a mutual insurance company, presumably to be
comprised of the members of the Fund. Over the next several
years, the Board continued to explore this
"conversion" with the Association, the Commission,
and the Department of Insurance (DOI); the two biggest
challenges were identified as accumulating the $5 million
necessary for the mutual insurance company's starting
capital reserve and upgrading the Fund's existing
computer systems to enable compliance with DOI's
furtherance of the plan to create a mutual insurance company,
the Board authorized expenditures from the Fund to purchase a
custom computer software program; purchase office space
costing $1.6 million; include "operations of the
insurance company" in the scope of its directors and
officers insurance coverage; and to subscribe to a national
workers' compensation insurance-rating and
2011, the Board notified the Commission it planned to cease
accepting new members into the Fund effective July 1, 2011,
and planned to withdraw the Fund from the self-insured
program effective January 1, 2012. The Board also sought and
received "approval" from the Commission to use $5
million in Fund assets to capitalize the reserve fund for the
mutual insurance company; however, this "approval"
included no evaluation of whether this use of Fund monies
complied with the terms of the Agreement. Indeed, the
director of the self-insurance division of the Commission
wrote to the Fund's administrator:
In response to your request[, ] we have approved the release
of $5 million in non-pledged assets of the S.C. Home Builders
Self-Insurers Fund to be used solely to capitalize the S.C.
Builders Insurance Group, Inc., in conjunction with the
closure of the self-insured [F]und. It is understood that the
[F]und will cease accepting new members effective July 1,
2011[, ] and will become no longer self-insured for
workers' compensation in South Carolina effective January
1, 2012. The outstanding liabilities of the
[F]und at the time of closure, January 1, 2012,
will remain the responsibility of the self-insured
[F]und and its membership under joint and
several liability. The [F]und is required to provide a
final audited financial statement following closure and will
continue to provide the Commission[']s Form 11, Fund
Quarterly Financial Report, until further notice. The [F]und
will also be required to comply with Self-Insurance Tax and
Second Injury Fund Assessment requirements following the
are members of the Fund who, in February 2012, filed suit
against the Fund, the Board, and the individual members of
the Board (collectively, Respondents). Petitioners alleged
breach of fiduciary duty; breach of trust; breach of
contract; and breach of contract accompanied by a fraudulent
act. Petitioners alleged that the Board committed ultra
vires acts in breach of its fiduciary duties by removing
more than $5 million from the Fund to establish the mutual
insurance company-monies which should have been returned to
the Fund's members under the terms of the Agreement.
Petitioners also alleged that in addition to not receiving
their share of the $5 million paid-in surplus, they have
suffered or will individually suffer additional tax
consequences and additional liability exposure to cover the
Fund's obligations. Petitioners alleged that all improper
expenditures should be reimbursed to the Fund to reduce the
amounts for which Fund members might ultimately be jointly
and severally liable. Additionally, Petitioners sought an
accounting and a declaration that Fund assets could not be
used for the purpose of establishing a mutual insurance
moved to dismiss the complaint, asserting eight separate
bases for dismissal, including (1) the circuit court's
lack of subject matter jurisdiction because the complaint
involved the internal affairs of a trust, which fell within
the exclusive jurisdiction of the probate
court; and (2) that the action was derivative in
nature and did not meet the pleading requirements of Rule
23(b)(1), SCRCP.Respondents' motions sought protection
from responding to Petitioners' discovery requests during
the pendency of the motions; incorporated by reference an
affidavit of the Fund's administrator, to which twelve
separate exhibits were ...