Real Property – Business Judgment Rule – Breach of Fiduciary Duty

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Although developers may have owed a fiduciary duty to homeowners and the Association due to their continued control of the Board, developers were not Board members, and therefore did not take any action in calculating a funding option.

We affirmed the circuit court’s grant of Declarants’ and Individuals’ motions for summary judgment.

In this derivative action filed by Representatives on behalf of the Association, Representatives appealed the circuit court’s orders granting summary judgment in favor of various current and former corporate owners of a residential golf development in Conway, South Carolina, and current and former members of the Board of Directors of the Association.

The Association was created as a nonprofit corporation and subsequently filed a “Declaration of Protective Covenants, Restrictions, Easements, Charges, and Liens.” The Association, in turn, is subject to both the Covenants and its bylaws. The Bylaws state the Association must be governed by the Board, and the Covenants and Bylaws create a number of rights and obligations for the owner of the development (Declarant), including the right to name all members of the Association’s Board. The Covenants require the Declarant, as the owner of the unsold lots, to pay any such annual and special assessments. However, the Covenants also allow the Declarant an option for a “funding alternative”; it may either pay (1) a single annual assessment of “a sum equal to the actual amount of actual operating expenditures incurred by the Association for that portion of the calendar year less an amount equal to the total assessments made by the Association against [o]wners of [l]ots other than those owned by the Declarant” or (2) a per-lot assessment. In other words, the Declarant’s minimum annual obligation is to “fund any shortfall between the Association’s actual operating expenditures and the assessments made against all other owners during that year.” The funding option was originally set to expire on December 31, 2010.

In 2017, Representatives filed a Complaint asserting breach of fiduciary duty, unjust enrichment, and piercing the corporate veil/alter ego/amalgamation. Representatives based these claims on their allegations that the defendants “breached their duty of loyalty by failing to comply with the requirements of the [Organizing] Documents and failing to use GAAP in calculating their contributions to the Association,” resulting in the diversion of funds from the Association to the Declarants.

On appeal, Representatives argued, among other things, that the circuit court erred in holding that Representatives failed to offer evidence that Declarants breached their fiduciary obligations to the Association and in ruling that Representatives’ claims are barred by the business judgment rule and the South Carolina Nonprofit Act. We disagreed. We held the circuit court properly granted summary judgment as to the breach of fiduciary duty claim. Although Declarants, as the development’s developers, may have owed a fiduciary duty to the homeowners and the Association due to their continued control of the Board, Declarants were not Board members, and thus, did not take any action in calculating the funding option.

Affirmed.

Dykes v. Wild Wing Company LLC (Lawyers’ Weekly No. 012-057-25, 15 pp.) (Per Curiam) Appealed from Horry County Circuit Court (R. Markley Dennis, Jr., J.) Robert T. Lyles, Jr., of Lyles & Associates, LLC, of Sullivan’s Island, for Appellants. William Douglas Smith, of Johnson Smith Hibbard & Wildman, LLP, and Scott Franklin Talley, of Talley Law Firm, P.A., both of Spartanburg, for Respondents Stratford Land Manager, L.P. and Stratford Land Fund IV, L.P. Eugene Hamilton Matthews and C. Cliff Rollins, both of Richardson Plowden & Robinson, PA, of Columbia, for Respondents Rick Schultz, Thomas Plankers, and Rick Taylor. David B. Miller and Zachary James Crowl, both of Bellamy, Rutenberg, Copeland, Epps, Gravely & Bowers, P.A., of Myrtle Beach, for Respondents Wild Wing Company, LLC; Sunstar, LLC; SLF IV/SBI Wild Wing, LLC; SLF IV/SBI JV, LLC; SLF IV/SBI Properties MM, LLC; SLF IV/SBI Development Holdings, LLC; Wild Wing Residential Development, LLC; SB Investments, LLC; Realstar Management, LLC; Founders Wild Wing, LLC; Founders Group International, LLC; and Dan Liu. Douglas Walker MacKelcan, III, and Skyler Cole Wilson, both of Copeland, Stair, Valz & Lovell, LLP, of Charleston; and William Joseph Farley, III, of Troutman Pepper Locke LLP of Charlotte, North Carolina, all for Respondents Ralph R. Teal, Jr., Graeme T. Black, and H. Gilford Edwards. South Carolina Court of Appeals Unpublished