Commercial – Settlement of direct action renders derivative action moot

Where a direct action brought by the company was resolved in a broad release, and there was no evidence of collusion or bad faith, a derivative action asserting identical or similar claims arising out of the same underlying facts was moot.

Background

After the Boards of Directors responsible for the management of Oldfield, a residential community in South Carolina, filed lawsuits raising claims related to its development, Rob Star, a resident, moved to intervene in both actions. The district court denied his motions.

Star then filed a derivative action on behalf of the club and association, raising similar claims against nearly identical defendants. The district court thereafter dismissed his derivative action for failure to meet the requirements of Federal Rule of Civil Procedure 23.1 and for failure to state a claim under Rule 12(b)(6).

Following the filing of this appeal, the club and association settled their respective actions (with the exception of claims regarding two specific defendants who are not relevant to this case). The settlements ended the ongoing litigation, containing broad releases. The boards and the defendants then moved to dismiss Star’s appeal, contending the settlement agreements had rendered it moot.

Analysis

This court has not specifically considered whether a company’s settlement of a similar action renders a derivative action moot, particularly when the derivative plaintiff asserts that the settlement was entered by a conflicted board. However, we are cognizant of the (1) more general caselaw stating that corporations own any claims arising out of injury to the corporation, and thereby have the absolute right to resolve them (short of a conflict of interest on the part of the board) and thus it is generally left to the corporate directors to decide “whether to enforce corporate rights of action” and (2) more specific, albeit limited, precedent concluding that settlement of a corporation’s related suit may render a derivative proceeding moot so long as the board is disinterested. We therefore conclude that the settlements here have rendered most of Star’s appeal moot.

We see no reason why settlements that are in the best interests of the company, entered by a disinterested board, should not moot a related derivative suit asserting identical or similar claims arising out of the same underlying facts. In turn, there is no evidence of collusion in the negotiation of the settlement agreements or any cognizable conflict of interests on the part of the boards.

In sum, given that the settlements appear to be in the best interests of the club and association and there is no demonstration of improper collusion or bad faith, we conclude the settlement agreements are valid and thereby moot the derivative suit insofar as Star’s claims were covered by the scope of the boards’ complaints. Consequently we lack subject matter jurisdiction to consider Star’s appeal as it relates to these claims, and therefore dismiss his appeal as to them

Although most of Star’s claims of wrongful conduct against the club and association’s directors have been rendered moot by the settlement agreements, we observe that some were arguably not covered by the scope of the boards’ complaints. For that reason, we must look in the first instance to see if these claims have been otherwise rendered moot by the settlement agreements.

As an initial matter, we conclude that given the broad language of the release in the settlement agreements, these claims were rendered moot. In the alternative, we affirm the district court’s dismissal of these claims on either the basis that they failed to meet Rule 23.1’s demand requirements or that the boards’ decision not to assert these causes of action was protected by the business judgment rule. Finally, we conclude that a set of allegations asserted by Star against the Oldfield Community Council has also been rendered moot by the settlement agreements or fails to state a claim against the Oldfield Community Council.

Affirmed in part, dismissed in part.

Star v. TI Oldfield Development LLC (Lawyers Weekly No. 001-068-20, 36 pp.) (G. Steven Agee, J.) Case Nos. 18-2202 and 18-2205. June 10, 2020. From D.S.C. (David C. Norton, J.) Denise L. Savage for Appellant; Merritt G. Abney, Matthew W. Orville, Ian S. Ford, Ainsley F. Tillman, Krista M. McGuire, A. Smith Podris, Joseph E. DaPore, Russell G. Hines, Stephen Bucher, Matthew Tillman, Keri M. Martin, Jared H. Garraux, Carmen V. Ganjehsani, and Thomas C. Taylor for Appellees.