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Insurance fund members can pursue breach of duties claim

By: Matt Chaney//November 26, 2018

Insurance fund members can pursue breach of duties claim

By: Matt Chaney//November 26, 2018

Members of the South Carolina Home Builders Self Insurers Fund can go forward with a lawsuit which alleges its Board of Trustees breached their fiduciary duties by attempting to use its assets to finance a new mutual insurance company, the South Carolina Supreme Court unanimously ruled Nov. 14.

The decision comes after the case had previously been dismissed twice, once for jurisdiction problems relating to concerns over whether the fund should be considered a trust, and a second time for failing to properly state a claim on the basis that the suit was a shareholder derivative action.

The fund was created by the Home Builders Association of South Carolina, Inc. as a way for participating entities to provide worker’s compensation insurance benefits to their employees, in compliance with South Carolina law. This sort of Workers’ Compensation fund is called a self-insured liability fund.

An agreement signed by the fund’s members established that its Board of Trustees can make amendments to the agreement, so long as it doesn’t change its purpose or divert “any of the funds of the [Fund] for any purpose other than those specified.” The agreement also said that in the event of termination, all funds that remain after paying outstanding obligations are to be redistributed to members through a formula determined by the board.

In the Fall of 2003, the board began discussing the idea of ending the fund and using any leftover money to create a mutual insurance company, and in May 2011, the board told the Workers’ Compensation Commission it planned to stop accepting new members beginning in July of that year so that it could withdraw from the self-insured program beginning in 2012.

The board asked that the WCC approve its plan to use $5 million taken from the fund to pay for the mutual insurance company. The WCC approved the request, allowing for the closure of the self-insured fund.

In February of 2012, members of the fund filed suit against it, the board and members of the board, alleging breach of fiduciary duty, breach of trust, breach of contract and breach of contract accompanied by a fraudulent act. They alleged that the $5 million that went toward creating the mutual insurance company should have been returned to them and that they were also owed compensation for tax consequences and liability exposure caused by the change.

The defendants asked that the court dismiss the claims, citing the circuit court’s lack of subject matter jurisdiction. They also argued that the action was derivative in nature and therefore didn’t meet the pleading requirements outlined in Rule 23(b)(1).

In January 2013, after a hearing on motions to dismiss, but before the Richland County Circuit Court issued an order, the members of the fund sent a demand letter in an effort to make their clients’ demands clear under Rule 23 of the rules of civil procedure. In March, the circuit court dismissed the claims without prejudice, saying they should be refiled in probate court.

The lawsuit was refiled in probate court in April, this time including a paragraph explaining the demand letter. The suit was removed to the circuit court where it was dismissed because the fund was considered an unincorporated association which failed to comply with Rule 23(b)(1).

The members then filed a motion arguing the circuit court erred and that their pre-suit demand was properly made. The circuit court denied their motion, and soon thereafter, the Court of Appeals affirmed. The Supreme Court then issued a writ of certiorari to review that decision.

The Court of Appeals found that while the agreement purported to create a trust, it was actually an unincorporated association for the purposes of the Rule 23 pleading requirements. The fund members argued on appeal that the Court of Appeals erred in this finding and that, even if the fund is not a trust, they properly meet the pleading requirements of Rule 23(b)(1).

Kittredge, writing for the unanimous court, said that regardless of whether the fund is a trust, the members meet the pleading requirements.

“[T]he question of whether the Fund is a trust need not be resolved, for we elect to follow the precedent from other jurisdictions applying Rule 23(b)(1) to all actions which are derivative in nature, even if the entity in question is a trust,” Kittredge said.

Ultimately, the court found that the Court of Appeals erred in ruling that the January demand letter does not constitute an adequate demand. Unlike in Carolina First Corp. v. Whittle, the members’ pre-suit demands are detailed, and when combined with the complaint, they satisfy Rule 23, Kittredge said.

“[I]n light of the parties’ submissions and the trial court’s willingness to consider multiple affidavits and documents outside the four corners of the complaint, we reject an approach that approves of a trial court’s consideration of everything except the pre-suit demand letter that was actually sent and received,” Kittredge said.

As a result, the case has been remanded to the trial court for further proceedings.

William Wilkins of Nexsen Pruet in Greenville represented the board, along with Burl Williams, also of Nexsen Pruit, James Werner and Lawrence Herson of Parker Poe Adams & Bernstein in Columbia and Pope Johnson of Johnson & Barnett in Columbia. Wilkins declined to comment on the case, citing the pending litigation.

James Bradley and S. Jahue Moore of Moore Taylor Law Firm of West Columbia represented the members of the Home Builders Association. As of press time they had not responded to requests for comment.

Follow Matt Chaney on Twitter @SCLWChaney

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