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Corporate – Amalgamation – Real Property – Developers – Breach of Fiduciary Duty

The defendant-developers promised – at the outset of development and periodically throughout the time leading up to this lawsuit – to transfer certain amenities to the project’s homeowners’ association. However, the developers made consideration-less transfers of the amenities among several of their own entities while shifting course again and again before secretly selling the amenities to a third party. The development entities may be amalgamated for purposes of this action.

We affirm the Court of Appeals’ holding that a purported recreational easement is invalid; otherwise, we reverse.

There is more than enough evidence that the creation of the various entities here furthered the defendant-Developers’ abilities to refrain from doing that which they repeatedly told the homeowners’ association (HOA) and the residents they would do: turn over the disputed amenities to the HOA. As we stated in Pertuis v. Front Roe Rests., Inc., 423 S.C. 640, 817 S.E.2d 273 (2018), “[T]he corporate structure should not shield . . . fraud, evasion of existing obligations, circumvention of statutes, monopolization, criminal conduct, and the like.”

The 1998 Property Report that Developers filed with the U.S. Department of Housing and Urban Development specifically provided that the HOA would own the disputed dock and park once the development was completed. Then, within a year, the plan changed, as Developers decided not to convey the amenities, including the community dock, completely disregarding the 1998 Property Report.

Next, Developers attempted to change from outright HOA ownership to mere HOA access by granting the HOA a recreational easement, despite not actually owning the property at the time. In an amended property report in 2000, the community dock was removed from the list of amenities owned by the HOA, thus purporting to accomplish the change from ownership to access without any input or consideration of the interests of the residents and the HOA.

Between 2006 and 2007, Developers had yet to turn over the community dock or boat ramp, and openly acknowledged, “The docks are too controversial and taking away even part of this community amenity would cause trouble.” Shifting course again, in 2008, Chad Besenfelder, Developers’ manager, wrote, “We are ready to deed this community dock and ramp to the homeowners and wish to comply with regulations.”

Ultimately, Developers reversed themselves yet again, and decided to sell the docks to Mike Russo without informing the HOA because they wanted to “keep the transaction quiet because of all the brew ha hah (sic) and filings.” Developers even went a step further when, instead of disclosing the outright sale of the properties to Russo, they told the president of the HOA that Russo was simply taking over management of the lots and amenities.

Thus, the evidence shows that, not only were the various entities intertwined and acting in concert with each other, but their conduct also demonstrates “bad faith, abuse, fraud, wrongdoing, or injustice resulting from the blurring of the entities’ legal distinctions.” Pertuis. Although the jury elected not to award punitive damages, its verdict did include a finding that the Developers’ conduct was “willful and wanton.”

Accordingly, the Court of Appeals erred in declining to apply the single-business enterprise theory. Because the trial court did not err in amalgamating the different entities, there is no need for a remand.

Breach of Fiduciary Duty

With regard to plaintiffs’ claim of breach of fiduciary duty, the Court of Appeals focused too narrowly on the Developers’ failure to convey the disputed properties, ignoring the plethora of other evidence presented of the Developers’ bad faith, broken promises, and self-dealing, all of which support the jury’s verdict on the homeowners’ breach of fiduciary duty cause of action.

Developers owe fiduciary duties to homeowners and homeowners’ associations regarding common areas. One in a fiduciary relationship with another party must not act to make use of that relationship to benefit his own personal interests.

Here, there was sufficient evidence of bad faith, promises made and broken, and self-dealing presented in addition to the breach of contract, to warrant submission of the fiduciary claim to the jury. This nefarious conduct includes, but is not limited to, the secretive sale to Russo, a false representation regarding the property’s rightful ownership, and an easement granted to third parties when the property had been promised to the HOA. This kind of conduct, though springing from contract, constitutes breaches of fiduciary duty.

We reverse the Court of Appeals and reinstate the jury verdict as to plaintiffs’ claim of breach of fiduciary duty.

Other Issues

The Court of Appeals ruled that a budgetary proposal in a 2005 usage agreement triggered the running of the statutes of limitations as a matter of law. However, as is clear from the recitation of the communications and events which transpired between the parties since the 1998 Property Report, the issue of when the HOA knew or should have known the Developers’ promises were not going to be fulfilled was a question of fact for the jury, not one capable of being decided as a matter of law. The jury’s determination that the claims were timely filed is supported by substantial evidence and should not have been overturned on appeal.

With respect to plaintiffs’ derivative claims on behalf of the HOA, the trial court properly denied defendants JNOV because, even if no formal demand was made, any attempt to do so would have been futile in light of the Developers’ control of the HOA through their veto power. Moreover, after the HOA was realigned as a plaintiff, the derivative-action device makes little sense. Accordingly, the Court of Appeals’ dismissal of the HOA’s claims is reversed.

Finally, in Developers’ cross-petition for certiorari, they assert the Court of Appeals erred in relying on the two-issue rule in upholding the trial court’s finding that a 2000 recreational easement was invalid. We affirm the Court of Appeals as to this issue.

Affirmed in part, reversed in part.

Walbeck v. I’On Co. (Lawyers Weekly No. 010-010-23, 21 pp. (Kaye Hearn, J.) On writ of certiorari to the Court of Appeals. Appealed from Charleston County Circuit Court (Stephanie McDonald, J.) Justin O’Toole Lucey, Joshua Fletcher Evans and Dabny Lynn for petitioners; Brian Duffy, Julie Lauren Moore and Patrick Coleman Wooten for respondents. S.C. S. Ct.

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