After the petitioner-members of the South Carolina Home Builders’ Self Insurance Fund learned of actions by the fund’s trustees that petitioners believed were in violation of the “Agreement and Declaration of Trust” that established the fund, petitioners sent the trustees’ counsel a letter detailing the steps petitioners believed needed to be taken. This letter was sufficient to fulfill Rule 23(b)(1)’s demand requirement for derivative actions.
We reverse the Court of Appeals’ decision, which upheld the circuit court’s grant of summary judgment for respondents.
The circuit court dismissed petitioners’ first complaint without prejudice. The court determined that the fund was a trust, so the action had to be brought in probate court.
Before petitioners filed their action in probate court, they sent the letter mentioned above. Their second action was removed from probate court to circuit court, where it was determined that the fund was not a trust.
The circuit court granted summary judgment for respondents on the ground that the complaint failed to comply with Rule 23(b)(1), SCRCP. The Court of Appeals affirmed.
The 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. The key inquiry is whether the underlying challenge is properly characterized as derivative in nature.
Petitioners claim that the removal of $5 million from the fund affected the fund’s ability to cover its risk. This claim is derivative in nature. However, though discovery has not been conducted, one or more of petitioners’ additional claims may be direct in nature.
Thus, petitioners’ complaint includes both direct and derivative claims. To the extent the Court of Appeals affirmed the dismissal of petitioners’ direct claims based on Rule 23, this was error.
Even if all of petitioners’ claims are derivative and Rule 23(b)(1) applies, petitioners met the demand and pleading requirements of the rule.
Although petitioners’ Jan. 30, 2013, pre-suit demand letter was not expressly incorporated by reference into the complaint, the letter does constitute an adequate demand.
Another issue here is petitioners’ failure to include the magic phrase “which is incorporated herein by reference” in their discussion of the letter in paragraph eight of their complaint. Certainly, when the Jan. 30, 2013, letter is considered in conjunction with the complaint, there is ample evidence that Rule 23 is satisfied. The trial court simply found it was precluded from looking at the Jan. 30, 2013, letter, which was error.
Moreover, in light of the parties’ submission 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. Accordingly, we reverse the dismissal of petitioners’ complaint on the basis that it failed to comply with Rule 23(b)(1), SCRCP.
Reversed and remanded.
Patterson v. Witter (Lawyers Weekly No. 010-099-18, 21 pp.) (John Kittredge, J.) Substituted opinion. Appealed from the Circuit Court in Richland County (G. Thomas Cooper, J.) James Edward Bradley and S. Jahue Moore for petitioners; William Wilkins, Burl Williams, James Lynn Werner, Lawrence Hershon and Pope Johnson for respondents. S.C. S. Ct.