PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 18-2202
ROB STAR, Derivatively and on behalf of all Nominal Defendants, Oldfield
Community Association, LLC, and Oldfield Club, LLC, and on behalf and for
Oldfield Community Association, LLC’s and Oldfield Club, LLC’s respective
members,
Plaintiff – Appellant,
v.
TI OLDFIELD DEVELOPMENT, LLC, TI OLDFIELD OPERATIONS, LLC, by
and through their respective Board of Directors, John Does 1-10, Individually and
as Directors between the time periods 2010-2017, including Phillip Galbreath and
I. William Stolz, III; OLDFIELD HOLDINGS GA, LLC; SF CAPITAL, LLC; SF
OPERATIONS, LLC; JAMIE D. SELBY, Individually and as Managing Member
of Elliot Group Holdings, LLC; ELLIOT GROUP HOLDINGS, LLC;
OLDFIELD COMMUNITY COUNCIL (2013-2015), including Jay Barr and
Richard Price, by and through its respective Board of Directors, John Does 11-20;
OLDFIELD CLUB (2010-2017), by and through its respective Board of Directors,
John Does 21-30, including Jay Barr, Phillip Galbreath and I. William Stolz, III;
OLDFIELD COMMUNITY ASSOCIATION (2010-2017), by and through its
respective Board of Directors, John Does 31-40, including Richard Price, Phillip
Galbreath, and I. Willian Stolz, III; BALD EAGLE PARTNERS LLC; BEP
OLDFIELD, LLC, by and through their respective Board of Directors (John Does
41-50); JAY BARR; RICHARD PRICE; WILLIAM STOLZ, III; PHILLIP
GALBREATH; OLDFIELD COMMUNITY ASSOCIATION, LLC; OLDFIELD
CLUB, LLC,
Defendants – Appellees.
No. 18-2205
ROB STAR, Derivatively and on behalf of all Nominal Defendants, Oldfield
Community Association, LLC, and Oldfield Club, LLC, and on behalf and for
Oldfield Community Association, LLC’s and Oldfield Club, LLC’s respective
members,
Plaintiff – Appellant,
v.
TI OLDFIELD DEVELOPMENT, LLC, by and through their respective Board of
Directors, John Does 1-10, Individually and as Directors between the time periods
2010-2017, including Phillip Galbreath and I. William Stolz, III; TI OLDFIELD
OPERATIONS, LLC, by and through their respective Board of Directors, John
Does 1-10, Individually and as Directors between the time periods 2010-2017,
including Phillip Galbreath and I. William Stolz, III; OLDFIELD HOLDINGS
GA, LLC; SF CAPITAL, LLC; SF OPERATIONS, LLC; JAMIE D. SELBY,
Individually and as Managing Member of Elliot Group Holdings, LLC; ELLIOT
GROUP HOLDINGS, LLC; OLDFIELD COMMUNITY COUNCIL (2013-
2015), including Jay Barr and Richard Price, by and through its respective Board
of Directors, John Does 11-20; OLDFIELD CLUB (2010-2017), by and through
its respective Board of Directors, John Does 21-30, including Jay Barr, Phillip
Galbreath, and I. William Stolz, III; OLDFIELD COMMUNITY ASSOCIATION
(2010-2017), by and through its respective Board of Directors, John Does 31-40,
including Richard Price, Phillip Galbreath, and I. Willian Stolz, III; BALD
EAGLE PARTNERS LLC; BEP OLDFIELD, LLC, by and through their
respective Board of Directors (John Does 41-50); JAY BARR; RICHARD PRICE;
WILLIAM STOLZ, III; PHILLIP GALBREATH; OLDFIELD COMMUNITY
ASSOCIATION, LLC; OLDFIELD CLUB, LLC,
Defendants – Appellees.
Appeals from the United States District Court for the District of South Carolina, at
Charleston. David C. Norton, District Judge. (9:17-cv-02489-DCN)
Submitted: March 26, 2020 Decided: June 10, 2020
Before AGEE, THACKER, and RUSHING, Circuit Judges.
2
Affirmed in part and dismissed in part by published opinion. Judge Agee wrote the opinion,
in which Judge Thacker and Judge Rushing joined.
Denise L. Savage, SAVAGE LAW, PLLC, Beaufort, South Carolina, for Appellant.
Merritt G. Abney, Matthew W. Orville, NELSON MULLINS RILEY &
SCARBOROUGH, LLP, Charleston, South Carolina, for Appellees TI Oldfield
Development, LLC; TI Oldfield Operations, LLC; SF Operations, LLC; SF Capital, LLC;
Oldfield Holdings GA, LLC; I. Williams Stolz; and Phillip Galbreath. Ian S. Ford, Ainsley
F. Tillman, FORD WALLACE THOMSON LLC, Charleston, South Carolina, for
Appellees Oldfield Club and its Post-Turnover Board of Directors. Krista M. McGuire, A.
Smith Podris, PARKER POE ADAMS & BERNSTEIN LLP, Charleston, South Carolina,
for Appellees Oldfield Community Council, LLC; Richard Price; and Jay Barr. Joseph E.
DaPore, Russell G. Hines, YOUNG CLEMENT RIVERS, LLP, Charleston, South
Carolina, for Appellees Oldfield Community Association, improperly named as “Oldfield
Community Association, LLC,” and Richard Price and John Does 31-40 in their capacity
as community-elected Board Members of the same Post-Turnover. Stephen Bucher,
BUCHER LEGAL, LLC, Mt. Pleasant, South Carolina, for Appellee Richard Price, in his
capacity as a community-elected member of the Board of Directors for Oldfield
Community Association Pre-Turnover. Matthew Tillman, WOMBLE BOND
DICKINSON (US) LLP, Charleston, South Carolina, for Appellee BEP Oldfield, LLC.
Keri M. Martin, WEINER SHEARHOUSE WEITZ GREENBERG & SHAWE, LLP,
Savannah, Georgia, for Appellee Bald Eagle Partners, LLC. Jared H. Garraux, Carmen V.
Ganjehsani, RICHARDSON PLOWDEN & ROBINSON, PA, Columbia, South Carolina,
for Appellee Oldfield Community Association, LLC, by and through its respective Board
of Directors, including Phillip Galbreath and I. William Stolz, III. Thomas C. Taylor, LAW
OFFICE OF THOMAS C. TAYLOR, LLC, Hilton Head, South Carolina, for Appellee
Jamie D. Selby, Individually and as Managing Member of Elliot Group Holdings, LLC.
3
AGEE, Circuit Judge:
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, filed a derivative action alleging 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). In the meantime, the Boards settled their lawsuits.
For the reasons that follow, we conclude the settlements mooted Star’s claims
insofar as they were related to the ones asserted by the Boards. We therefore dismiss his
appeal as to those claims for lack of subject matter jurisdiction. And to the extent Star
asserted claims falling outside the scope of those asserted by the Boards’ Complaints, we
conclude that those claims were either also rendered moot by the settlement agreements or
were otherwise properly dismissed by the district court.
I.
To begin, we review the history of Oldfield’s development and the competing
lawsuits which grew out of events during its development.
A.
Oldfield was created in 2000 by a Declaration of Covenants, Conditions, and
Restrictions (the “Governing Documents”)—recorded by Oldfield, LLC, the original
developer—as a planned community consisting of 540 residences, a golf course, and other
4
amenities. In turn, the Governing Documents created two not-for-profit limited liability
corporations to manage Oldfield, each of which is governed by its own Board of Directors.
The Oldfield Club (the “Club”) operates the golf course and recreational facilities, and
collects mandatory social dues from all members of the Oldfield community for the
maintenance of non-golf-related recreational facilities. 1 Meanwhile, the Oldfield
Community Association (the “Association”) is a homeowners’ association that conducts
all residential property duties and collects mandatory dues from property owners on a
monthly basis. A portion of the Association dues also goes to the Club for the maintenance
of non-golf facilities.
In 2010, Oldfield, LLC sold or assigned its remaining lots and development rights
to TI Oldfield Development, LLC and TI Oldfield Operations, LLC (collectively, “TI
Oldfield”). From 2010 until 2015, TI Oldfield had the right, as declarant and sponsor under
the Oldfield Governing Documents, to appoint a majority of directors on both the three-
member Club and five-member Association Boards. During this period, TI Oldfield
appointed three members to each Board, including TI Oldfield principals William Stolz
and Phillip Galbreath.
In 2013, TI Oldfield sold or assigned approximately 109 lots to BEP Oldfield, LLC,
and its wholly-owned subsidiary, Bald Eagle Partners, LLC (collectively, “BEP Oldfield”).
As part of this deal, TI Oldfield also conveyed certain declarant rights to BEP Oldfield.
1
Residents may also apply for an equity golf membership, which is accompanied
by additional golf member dues and voting rights with respect to golf facility issues.
5
These included the right to appoint a member to the Association Board (but not the Club
Board) and exemption from the requirement to pay Club dues. Thus, from late 2013 until
early 2016, the Association Board consisted of one director appointed by BEP Oldfield
(Scott DeCain), two directors appointed by TI Oldfield (Stolz and Galbreath), and two
directors elected by the Oldfield community.
In December 2015, TI Oldfield turned over control of Oldfield to the Club and the
Association (the “turnover”). In addition, its right to appoint a majority of directors on both
Boards expired (though it retained the right to appoint a minority of directors on both). In
early 2016, the Club and Association held Board elections; each has since had a majority
of Board members elected by the Oldfield community. Specifically, at turnover, the
composition of the Association’s five-director Board shifted to three community-elected
members and two TI Oldfield- and BEP Oldfield-appointed directors. 2 Similarly, the
Club’s Board increased its number of directors from three to seven, the majority of
whom—two community members and four equity golf members—are also community-
elected. 3
B.
2
Further, “at the time of the next annual meeting of the [Association], in the [f]all
of 2016,” the number of directors was increased to seven, with one appointed by TI
Oldfield and six “elected by members.” J.A. 685.
3
In turn, the one TI Oldfield-appointed director, Galbreath, has recused himself
from Board decisions involving these lawsuits.
6
In early 2017, both community-controlled Boards filed separate lawsuits against TI
Oldfield, Galbreath, Stolz, and Jaime Selby—previously the general manager of the Club
and Association—along with certain entities affiliated with these defendants. 4 5 Both suits
alleged that the defendants in their respective actions engaged in mismanagement during
the development and operation of Oldfield prior to the turnover, asserting among other
claims breach of fiduciary duty, self-dealing, breach of contract, interference with
prospective contractual relations, tortious interference with contractual relations, civil
conspiracy and declaratory relief, negligent misrepresentation, negligent and wrongful
acts, and a cause of action for preliminary injunction and declaratory judgment. See
Complaint at 18–29, Oldfield Comm. Ass’n v. TI Oldfield Dev., LLC, No. 9:17-cv-794-
DCN (D.S.C. March 24, 2017), ECF No. 1-1 (the “Association Complaint”); see also
Complaint at 7–15, Oldfield Club v. TI Oldfield Dev., LLC, No. 9:17-cv-452-DCN (D.S.C.
Feb. 15, 2017), ECF No. 1-1 (the “Club Complaint”).
The Association’s claims may be grouped into three categories: (1) mismanagement
of funds; (2) violation of various duties in the sale of the Greeters Store; and (3) divestment
of assets in an effort to become judgment-proof.
The first category—mismanagement of funds—concerns the three separate
accounts that fund the Association: (1) the General Operating Fund, (2) the Capital Reserve
4
The Club’s suit was originally filed in state court in January 2017 (and the
Association’s in February) but both were subsequently removed to federal court by the
defendants.
5
The Association also named BEP Oldfield and the BEP-appointed Association
Board director, DeCain, as defendants.
7
Fund (which accumulates funding for future repairs and replacement of community assets,
such as roads and sidewalks), and (3) the Community Enhancement Fund (which was “to
be used for such purposes as the Board determines to be beneficial to the general good and
welfare of Oldfield and [fall] outside the [G]eneral [O]perating budget,” J.A. 1692).
According to the Association Complaint, TI Oldfield and a number of directors failed to
appropriately manage these funds. Between 2011 and 2015, the defendants allegedly
transferred funds from the Community Enhancement Fund to the Capital Reserve Fund to
offset some of the contributions TI Oldfield was required to pay into the Capital Reserve
Fund, thereby inappropriately utilizing assets from the Enhancement Fund and creating a
shortfall to the Reserve Fund. 6 The Complaint also alleges the defendants failed to make
6
Specifically, the Association’s Governing Documents provided that the
Association Board could “assess owners for a Community Enhancement and Marketing
Fee,” J.A. 606, that would be incurred upon “each subsequent transfer of title to a Unit in
the Project (i.e., all resales).” J.A. 1692. “The amount of this transfer fee [was] to be
determined by the Board and . . . capped at [one percent] of the gross selling price.” J.A.
1692. These fees were then to be deposited in the Community Enhancement Fund, which
was to be “fully separate from the [O]perating and [R]eserve accounts.” Association
Complaint at 7. However, according to the Association, the defendant directors—acting at
the behest of TI Oldfield—voted to divert the fees permanently to the Capital Reserve
Fund. In sum, the Association’s Complaint alleged, “[a]ll sources used by the [d]efendants
from the [Enhancement Fund] inappropriately amounted to $480,392 between 2011 and
2015.” Id. at 9.
Meanwhile, the Governing Documents also required “budgeting and funding into
[the Reserve Fund] amounts sufficient to meet the projected needs of capital asset
replacement.” J.A. 552–53. From 2011 to 2015, TI Oldfield was to cover the budget deficits
in this Fund. However, during this period, TI Oldfield and the defendant directors failed in
two ways to properly fund this account. First, “the amount of money by which they
wrongfully offset their obligations with the [Community Enhancement assets] was based
on inaccurate and inflated ‘projected’ [transfer fee] revenue, not the actual realized
8
up a budget deficit in the General Operating Fund. In sum, according to the Association’s
Complaint, the accounts were underfunded by a total of nearly $2.5 million. In turn, the
Association Board increased member assessments by ten percent to address these deficits.
The second category of claims concerns the sale of the Greeters Store, a building at
the entrance of Oldfield that serves a variety of community functions. In October 2016, TI
Oldfield conveyed the Store to its subsidiary, Oldfield Holdings, which four days later sold
it to Elliot Group Holdings, which was founded by Selby. Upon discovering the sale, the
Club and Association terminated Selby’s employment. According to the Association, both
Selby and TI Oldfield knew that the Club and Association had an interest in acquiring the
Store as part of the turnover. But—as the Complaint alleges—by acting on the sale of the
Store for his own gain, Selby violated the terms of his employment contract. Likewise, the
Complaint alleges, TI Oldfield and the named directors violated their obligation to act in
good faith to Club and Association members as part of sale negotiations by intentionally
failing to bring this sale opportunity to their attention.
[transfer fee] revenue.” Association Complaint at 10–11. This resulted in a Reserve
shortfall of approximately $163,532 from 2011 to 2014. Second, TI Oldfield and the
defendant directors relied on an “outdated reserve study that severely underestimated the
actual costs necessary to fully account for the [Reserve Fund’s] future expenditures” and
thereby failed to ensure “that balances would remain sufficient to cover anticipated
maintenance, repairs, and replacements of the Common Assets of the community.” Id. at
11. The Board calculated the “total shortfall to the [Reserve Fund] to be approximately
$648,454” between 2011 and 2015. Id.
9
Finally, according to the Association Complaint, TI Oldfield divested itself of
assets—such as the Greeters Store—in an attempt to become judgment-proof with respect
to any claims that would arise out of the turnover.
The Club Complaint similarly asserts that TI Oldfield, Galbreath, and certain other
directors violated their fiduciary duties to the Club and its members by turning over the
golf and other country club facilities in deficient condition. These deficiencies included
neglected physical facilities; TI Oldfield’s limitation of “the number of certain types of
memberships to avoid reaching a number that might trigger turnover”; 7 an “artificial
limiting of certain types of memberships” that caused TI Oldfield “to turn over a club with
fewer [equity] members than contemplated by the original transfer documents” and thus
“significantly less annual revenue than contemplated,” Club Complaint at 4; 8 mismanaged
7
Although not specifically alleged in the Club Complaint, it appears that a number
of events could trigger turnover. As pertinent to this allegation, “192 outstanding golf
memberships” could trigger turnover, at which point Club members could vote to approve
turnover. J.A. 689; see also J.A. 674. However, an alternate triggering event was twelve
months of positive cash flow, at which point TI Oldfield—at any time and in its own
discretion—could initiate turnover; the record indicates that it was fulfillment of this
condition “during 2014” that in fact resulted in the turnover of the Club. J.A. 695. (This is
in contrast to turnover of the Association, which automatically occurred in December 2015
without community input.)
8
TI Oldfield had apparently guaranteed at least 250 golf memberships—both equity
and non-equity—before conveying title of Club facilities to the Club. Although such
transfer of Club facilities was to occur on or before turnover, it was not to occur “‘before
the sale of at least 250 Golf Memberships’ unless approved by [sixty-five percent] of the
Club’s equity memberships.” J.A. 957. However, as the Oldfield Community Council (the
“OCC”), a since-dissolved non-profit organization created by Oldfield homeowners to
oversee the turnover, observed, “many of the previously sold memberships ha[d] lapsed.”
J.A. 689.
10
finances; the sale of the Greeters Store to Selby; and divestment of assets in an attempt to
become judgment-proof.
C.
After the Boards filed their respective lawsuits, Star, an Oldfield resident who is a
social member of the Association and club member of the Club, 9 moved to intervene in
both actions. The district court denied his motions, finding that intervention would be
improper because he had failed to demonstrate that the Boards were not adequately
representing the interests of membership in their respective actions, and that Star could
seek to protect his own individual interests by pursuing a separate lawsuit. Star then filed
a derivative action pursuant to Rule 23.1 10—which is now before us—on behalf of the Club
and Association, raising similar claims against nearly identical defendants.
9
That is, not an equity golf member.
10
This Rule outlines the requirements for the filing of a derivative suit, providing
that it “applies when one or more shareholders or members of a corporation or an
unincorporated association bring a derivative action to enforce a right that the corporation
or association may properly assert but has failed to enforce.” Fed. R. Civ. P. 23.1(a).
Nonetheless, “[t]he derivative action may not be maintained if it appears that the plaintiff
does not fairly and adequately represent the interests of shareholders or members who are
similarly situated in enforcing the right of the corporation or association.” Id.
In turn, it sets forth a number of specific pleading requirements, providing the
complaint must:
(1) allege that the plaintiff was a shareholder or member at the time of the
transaction complained of, or that the plaintiff’s share or membership later
devolved on it by operation of law;
(2) allege that the action is not a collusive one to confer jurisdiction that the
court would otherwise lack; and
(3) state with particularity:
11
Star’s lawsuit was filed against TI Oldfield, BEP Oldfield, certain developer-
appointed directors, 11 and Selby. Like the Boards’ Complaints, Star’s alleged that TI
Oldfield misappropriated Oldfield’s funds by: (1) repurposing funds from the Community
Enhancement Fund to the Capital Reserve Fund, reducing TI Oldfield’s contributions to
the Reserve Fund; (2) failing to adequately fund the latter; and (3) underfunding the
General Operating Account. And like the Association Complaint, Star asserted that as the
result of a shortfall of approximately $2.5 million, the Association increased member
assessments by about ten percent. Similarly, according to Star, when TI Oldfield sold
certain lots to BEP Oldfield, it transferred only its declarant rights—but not the obligation
to pay dues to the Club—causing a shortfall in dues that was passed along to members.
Star’s Complaint also likewise alleged that TI Oldfield wrongfully converted the
Greeters Store for its own use rather than turning it over to the Club and Association, and
conspired with Selby to sell the store to the detriment of the Club and Association. Further,
Star asserted, TI Oldfield violated the terms of transfer by turning over to the Club a golf
(A) any effort by the plaintiff to obtain the desired action from the
directors or comparable authority and, if necessary, from the
shareholders or members; and
(B) the reasons for not obtaining the action or not making the effort.
Fed. R. Civ. P. 23.1(b).
11
However, it did not name DeCain or any directors appointed by BEP Oldfield.
12
facility with failing infrastructure, operational and funding deficits, and fewer equity
memberships sold than required to trigger a turnover. 12
After the Club and Association moved to dismiss Star’s action, the district court
appointed a Special Master, who reviewed the claims and recommended dismissal. As to
Star’s first through seventh causes of action, the Special Master concluded they had been
asserted by the Boards in their respective actions, and the Boards were therefore “already
enforcing the rights asserted” such that the claims were duplicative. J.A. 1359. As a result,
Star’s derivative suit with respect to these claims failed to meet Rule 23.1(a)’s requirement
that such a suit may be only be brought by a shareholder or corporation member “to enforce
a right that the corporation or association may properly assert but has failed to enforce.”
Fed. R. Civ. 23.1(a) (emphasis added). And as to Star’s eighth through seventeenth causes
of action, the Special Master concluded that although they were not duplicative of the
Boards’ claims, they failed to meet Rule 23.1(b)’s demand requirement because Star failed
12
His Amended Complaint alleged seventeen separate causes of action, which are
listed in the order in which they were asserted in Star’s Complaint: (1) breach of fiduciary
duty; (2) negligence and negligent misrepresentation; (3) breach of contract; (4) tortious
interference with contractual relations; (5) civil conspiracy and declaratory relief; (6)
quantum meruit; (7) cause of action for preliminary injunction and declaratory judgment;
(8) civil Racketeer Influenced and Corrupt Organizations (“RICO”) claims for mail and
wire fraud; (9) unconscionable contracts subject to modification; (10) ultra vires conduct;
(11) conflicts of interest; (12) improper and undisclosed amendment of bylaws; (13) failure
to properly maintain and produce records for inspection; (14) failure to report the
commenced Club and Association actions to the South Carolina Attorney General; (15)
cause of action for appointment of a receiver; (16) a deceptive and inaccurate property
report; and (17) theft of services. J.A. 569–88.
13
to “state with particularity” that he had made a pre-suit demand of the Boards. Fed. R. Civ.
P. 23.1(b)(3).
However, the Special Master also concluded that Star had satisfied Rule 23.1 as to
a narrow portion of the breach of fiduciary duty and quantum meruit claims against TI
Oldfield and BEP Oldfield set forth in Counts One and Six—specifically, the claims related
to the agreement in which TI Oldfield sold a number of lots to BEP Oldfield and assigned
to it certain declarant rights, yet exempted it from the requirement to pay Club dues.
Nonetheless, the Special Master recommended dismissing these claims. As to the claims
against BEP Oldfield, the Special Master concluded Star had failed to state a claim under
Rule 12(b)(6). As an initial matter, the Special Master found that the fiduciary duty claim
failed because Star had not shown that BEP Oldfield owed a duty to the Club or Association
“by virtue of its purchase of lots.” J.A. 1377. And as to the quantum meruit claim—in
which Star alleged that BEP Oldfield received a benefit to the disadvantage of the Club
and Association because it had obtained the lots without having to pay Club dues—the
Special Master concluded that Star had failed to show that it was the Club or Association
that had conferred a benefit to BEP Oldfield. Rather, “BEP [had] entered into a transaction
with TI Oldfield[.]” J.A. 1379.
As to the claims against TI Oldfield, the Special Master concluded that the Boards’
decisions not to pursue these claims was protected by the business judgment rule, which
under South Carolina law “precludes judicial review of actions taken by a corporate
governing board absent a showing of a lack of good faith, fraud, self-dealing[,] or
14
unconscionable conduct.” Dockside Ass’n, Inc. v. Detyens, 362 S.E.2d 874, 874 (S.C.
1987). 13 Here, the Special Master concluded that the only colorable allegations in Star’s
Complaint “arguably applicable to business judgment are that TI Oldfield controls the
boards and their failure to seek the remedies sought by [Star] shows the [B]oards are
conflicted from bringing this action.” J.A. 1381. However, the Special Master observed,
“that TI Oldfield may appoint one, minority director to the [B]oards does not support a
finding that it controls them. That the [B]oards chose not to assert [Star’s desired remedies]
does not show bad faith.” J.A. 1381. Thus, the Special Master concluded, the business
judgment rule protected the Boards’ decisions not to pursue these claims.
The district court adopted the recommendations and dismissed Star’s derivative
action. Star now appeals.
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). Among other terms, the settlements conveyed all sponsor and
13
More specifically, this rule presumes that in making a business decision, the
officers or directors of a corporation acted in an informed basis, in good faith, and in the
honest belief that the action taken was in the best interests of the company. See Aronson v.
Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746
A.2d 244 (Del. 2000). And since it operates as a presumption, a plaintiff must rebut that
presumption by pointing to specific instances of conduct that demonstrate the officers or
directors were acting in a culpable manner inconsistent with the presumption afforded them
by the rule. See id.
However, it does not protect all actions taken by corporate officers and directors.
For instance, the rule does not apply “where the business decision in question is tainted by
a conflict of interest”; is so careless that it amounts to an “abdicat[ion] of [the directors’]
functions”; or “results from prolonged failure to exercise oversight and supervision.” See
F.D.I.C. v. Baldini, 983 F. Supp. 2d 772, 780 (S.D.W. Va. 2013).
15
declarant rights to the Club, conveyed the Greeters Store to the Club, and paid the
Association $1.25 million. Further, the settlements ended the ongoing litigation, containing
broad releases providing that:
The Parties hereby release and forever discharge each other and their
respective agents, servants, representatives, legal counsel, directors, officers,
shareholders, successors-in-interest (by merger or otherwise), assigns,
affiliates . . . , related entities, corporate parents, corporate subsidiaries,
employees, former employees, members, managers, administrators, and
representatives, from any and all demands, actions, claims or rights to
compensation, known or unknown, which they had or now have in
connection with or in any way related to Oldfield (including actions
occurring before or after Turnover), Turnover, the Subject Matter or any
other matters pled or that could have been pled by the Parties against one
another in the Civil Action.
Club Settlement Agreement at 7, Star v. TI Oldfield, No. 18-2202 (4th Cir. Dec. 21, 2018),
ECF No. 62-1 (the “Settlement Agreement”); see also Association Settlement Agreement
at 4–5, Star v. TI Oldfield, No. 18-2202 (4th Cir. Dec. 21, 2018), ECF No. 62-1 (providing
substantially the same). The Club and Association then dismissed the two actions with the
stipulation of the other parties. The dismissals were with prejudice as to all of the Club’s
and the Association’s claims except for those against Selby and Elliott Group Holdings,
which were dismissed without prejudice. 14 The Association then assigned its claims against
14
Star moved to enjoin the dismissals and effectuation of the settlement agreements.
The Special Master recommended the district court deny Star’s motions to enjoin the
settlement agreements, finding that the parties’ stipulations of dismissal deprived the court
of jurisdiction over the Club and Association actions (and that, even if Star had established
standing to challenge the settlement agreements, his argument for an injunction lost on the
merits). Star did not object to the report and recommendation, which the district court
adopted, denying Star’s motions to enjoin the settlements. Star did not appeal that order.
16
Selby and Elliott Group Holdings to the Club, which has since litigated, settled, and
dismissed those claims in state court.
The Boards and the defendants then moved to dismiss Star’s appeal, contending the
settlement agreements had rendered it moot.
II.
We turn first to the question of whether the settlements have mooted Star’s appeal
such that this Court lacks subject matter jurisdiction. 15 In arguing that his claims are not
moot, Star takes issue with the validity of the settlement agreements by contending they
are the results of negotiations by Boards with a conflict of interest—specifically, that they
are controlled by TI Oldfield—thereby raising issues central to the dismissal of his action.
15
Two preliminary matters raised by Star warrant mention. As an initial matter, Star
contends that the motions to dismiss should be denied because the Club, the Association,
and TI Oldfield failed to comply with Fourth Circuit Rule 27(a), which provides that “all
motions [in counseled cases] shall contain a statement by counsel that counsel for the other
parties to the appeal have been informed of the intended filing of the motion.” We conclude
this argument is without merit, as mootness is a jurisdictional issue that this Court must
address “irrespective [of] whether the issue was raised by the parties, when [its] jurisdiction
is fairly in doubt.” Williams v. Ozmint, 716 F.3d 801, 809 (4th Cir. 2013).
Star’s invocation of the voluntary cessation doctrine is similarly unavailing. “[I]t is
well settled that a defendant’s voluntary cessation of a challenged practice does not deprive
a federal court of its power to determine the legality of the practice.” Deal v. Mercer Cty.
Bd. of Educ., 911 F.3d 183, 191 (4th Cir. 2018). And here, the doctrine is inapplicable
because rather than ceasing the challenged actions of their own accord, the defendants
contractually bound themselves to change their conduct through the settlements.
17
It has long been established that if “a live case or controversy ceases to exist after a
suit has been filed, the case will be deemed moot and dismissed for lack of standing.”
Pender v. Bank of Am. Corp., 788 F.3d 354, 368 (4th Cir. 2015). 16 A case “becomes moot
when the issues presented are no longer live or the parties lack a legally cognizable interest
in the outcome.” Williams, 716 F.3d at 809. “A change in factual circumstances can moot
a case on appeal, such as when the plaintiff receives the relief sought in his or her claim,
or when an event occurs that makes it impossible for the court to grant any effectual relief
to the plaintiff.” Id.
As an initial matter, we observe that 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), see,
e.g., Clark v. Lomas & Nettleton Fin. Corp., 625 F.2d 49, 52 (5th Cir. 1980) (observing
that the claims set forth in a derivative suit “belong not to [shareholders] but to [the
corporation]” 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
16
We have omitted internal quotation marks, alterations, and citations here and
throughout this opinion, unless otherwise noted.
18
proceeding moot so long as the board is disinterested, see Salovaara v. Jackson Nat’l Life
Ins. Co., 246 F.3d 289, 296 (3d Cir. 2001) (“A corporation may enter into a settlement
despite the existence of a derivative action when doing so is in the corporation’s best
interest.”). We therefore conclude that the settlements here have rendered most of Star’s
appeal moot.
At the outset, we agree that the Club and Association Boards “owned” the claims
against the TI Oldfield defendants 17 and had the absolute right—short of a conflict of
interest on the Boards—to resolve them in the manner they saw fit. This authority is such
that even if the Boards had declined to bring their own suits and Star’s derivative suit was
the only action pending that arose out of the allegations at issue, the Boards would generally
have the power to settle the derivative suit. After all, “courts have repeatedly held that
corporate directors are empowered to abort putative shareholder derivative suits, when it
is their business judgment that the cause ought not be enforced. Correlatively, corporate
17
Under South Carolina law,
Generally, a shareholder of a corporation has no standing to assert legal
claims based on harm to the corporation. Although the shareholder is
indirectly harmed by any harm to the corporation, only the corporation itself
may bring an action to redress this harm. Normally a corporation would act
through its officers and directors, but in cases where the officers and directors
wrongfully refuse to assert the corporation’s rights or have conflicts of
interest, a shareholder may bring an equitable “derivative” action in the name
of the corporation.
Bowen v. Houser, No. 3:12-cv-173-MBS, 2012 WL 2873873, at *2 (D.S.C. July 13, 2012).
“In essence, a derivative action is one in which the right claimed by the shareholder is one
the corporation could itself have enforced in court.” Id.
19
directors possess inherent authority to compromise such suits.” Clark, 625 F.2d at 52; see
also Wolf v. Barkes, 348 F.2d 994, 997–98 (2d Cir. 1965) (“The corporation’s interest in
achieving a favorable settlement does not cease because derivative litigation has
begun[.]”); Kahn v. Kaskel, 367 F. Supp. 784, 789 (S.D.N.Y. 1973) (“There is nothing in
Rule 23.1 which in any way prohibits a corporation from making an out-of-court settlement
and giving a general release merely because a derivative action, brought on its behalf, is
pending in a federal court.”). “As with other management functions, however, the power
to control corporate litigation presupposes that the directors have no interest in its
exercise.” Clark, 625 F.2d at 52.
However, this Court has not addressed the more nuanced issue of whether a
plaintiff’s derivative action on behalf of an entity is rendered moot by the entity’s
settlement of the same or similar claims in another action. In support of their respective
positions, both parties point to Clark, in which shareholders brought a derivative action on
behalf of a corporation, which the corporation subsequently settled without the plaintiffs’
knowledge. Id. at 51. The district court upheld the settlement over the plaintiffs’ objections,
but the Fifth Circuit vacated it. As an initial matter, the Fifth Circuit observed that although
corporate boards have the “inherent authority” to settle derivative actions, such authority
exists only when the boards are disinterested. Id. at 52. The court then considered the
settlement in the context of caselaw concerning the demand requirement of Rule 23.1,
which generally holds that “shareholders may sue derivatively, without first demanding
that the directors enforce the corporate cause, when the circumstances would render such
20
demand a futile gesture.” Id. at 53. And because the corporation’s controlling shareholders
were defendants in the action, Clark concluded that the board was conflicted, demand
would have been futile, and thus the corporation’s directors were “incompetent . . . to
[settle] all of [the plaintiffs’] derivative claims.” Id. at 53–54. Although Clark provides
some guiding principles—namely, that settlement of derivative suits by a board is generally
permissible so long as the board is not conflicted—it is not entirely on point because the
Boards in the cases at bar settled their own respective actions.
Salovaara offers more specific guidance. There, a shareholder appealed the district
court’s dismissal of a derivative action he had brought on behalf of a number of investment
funds against a life insurance company. On appeal, the insurance company argued the
derivative action was moot because it had since settled any outstanding claims with the
funds’ directors. 246 F.3d at 295. The insurance company observed that the funds’ directors
“voluntarily and knowingly surrendered their right to recover damages from this appeal”
and “that because none of the [funds’] officers or directors were named as defendants in
this lawsuit, there is no reason to suspect an internal conflict of interest led the [funds] to
settle this lawsuit for improper reasons.” Id. at 296. The funds agreed.
In considering whether the appeal had been rendered moot, the Third Circuit
observed that “[a] corporation may enter into a settlement despite the existence of a
derivative action when doing so is in the corporation’s best interests” and there is no
21
conflict on the part of the corporate directors entering the settlement. Id. 18 In considering
whether the settlement was in the funds’ best interest, the Third Circuit noted the insurance
company and the funds had argued that the benefits to the funds included resolution of
litigation, the limitation of any potential exposure to liability, and a recovery of $19 million.
In turn, the insurance company “maintain[ed] that it [was] not in the [funds’] best interests
to continue with this derivative suit, given the benefits it ha[d] received from the
settlement.” Id. But according to the shareholder, the insurance company had only provided
conclusory statements that the settlement was in the funds’ best interest and that this did
not necessarily demonstrate a lack of collusion on the part of the funds’ directors in
reaching the settlement. (Namely, the shareholder suggested that a single fund director had
a conflict of interest that prevented him from entering into a fair settlement agreement.)
The Third Circuit concluded that in considering mootness, it was not required to
accept the settlement agreement at face value. Rather, it had the equitable power—“if the
circumstances so warrant”—to review the settlement while a derivative suit was pending
for reasonableness and to enjoin the corporation from entering into it, either temporarily or
permanently, if it was “not in the best interests of the company.” Id. at 297. Thus, the court
could evaluate the settlement agreement in the first instance under a deferential
18
This standard was derived from Wolf, 348 F.2d at 997, in which the Second Circuit
held that then-Rule 23(c) regarding notice to class members of a class action settlement did
not forbid a corporation from settling its claims out of court during the pendency of a
stockholder plaintiff’s derivative class action. Id. That court left the door open to review
the propriety of settlement agreements in situations where “the beneficiaries of the alleged
improper dealing still dominated the board of directors and plaintiffs were able to make
some proof that wrongdoing was afoot.” Id. at 998.
22
“reasonableness” and “best interests of the company” approach. Id. After conducting such
a review, the court concluded that on the present facts, it did not see anything “trigger[ing]
a need for further scrutiny[.]” Id. The conflict the shareholder attributed to the single fund
director—a falling out with the shareholder—was “tenuous,” given that the director at issue
controlled less than five percent of the fund’s assets. Id. And there were no other
demonstrations of improper collusion or bad faith. Further, there were specific reasons,
noted above, as to why the settlement was in the best interests of the funds. Upon
concluding the agreement passed muster, the court dismissed the shareholder’s appeal as
moot, observing that he could “always file a new lawsuit against [the funds] if he believes
it breached a duty towards the shareholders by entering into the Settlement.” Id.
We see no reason why Salovaara’s framework and reasoning should not apply to
the settlements at issue here—that is, 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. As an initial
matter, it appears that the settlements are in the best interests of the Club and the
Association. Among other terms, the settlements: (1) convey all sponsor and declarant
rights to the Club; (2) convey the Greeters Store to the Club; and (3) pay the Association
$1.25 million. They also end the ongoing litigation.
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. To the extent
Star asserts conflicted Boards, it appears that only one Board director—Galbreath, who is
23
appointed by TI Oldfield—is a named defendant. (In turn, as discussed above, Galbreath
recused himself from Board decisions involving this litigation.) Cf. Clark, 625 F.2d at 51
(concluding that because controlling shareholders were defendants, the board was
conflicted). Further, it is undisputed that since 2016, the majority of each Board has been
comprised of community-elected members. Specifically, following turnover, the
Association’s Board consists of five directors, most of whom—at least three—are
community-elected. 19 In turn, the Club’s consists of seven directors, the majority of
whom—two community members and four equity golf members—are also community-
elected. The record contains no evidence that either of the Boards during the litigation or
settlement negotiation was controlled by TI Oldfield or any of the other defendants. Thus,
under both Clark and Salovaara, Star’s assertion of a conflict of interest as to either Board
is without merit, and we fail to observe anything “trigger[ing] a need for further scrutiny[.]”
Salovaara, 246 F.3d at 297; see id. (concluding allegedly conflicted director could not
demonstrate conflict of interest because he controlled less than five percent of assets). 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
19
The record indicates the Association Board may now consist of seven directors,
but either way, it is undisputed that the majority are community-elected. J.A. 685.
24
subject matter jurisdiction to consider Star’s appeal as it relates to these claims, and
therefore dismiss his appeal as to them. 20
III.
A.
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
20
For the same reasons, we conclude the settlement of the Club’s claims against
Selby and Elliott Group Holdings in the state court action renders Star’s appeal of his
claims against those defendants moot.
As part of the state court settlement, the Club paid an agreed-upon amount to Selby;
Selby and Elliott Group Holdings conveyed the Greeters Store to the Club; the Club
forgave Selby and Elliott Group Holding’s mortgage on the property; and the parties agreed
that any employment agreement or other obligations regarding Selby’s employment were
acknowledged to be null and void. Further, the parties fully released each other from all
related legal claims.
Given that: (1) Star’s claims against Selby and Elliott Group Holdings were covered
by the scope of the Club’s claims; (2) the settlement agreement appears to have been in the
best interests of the Club (and obtained the very relief that Star sought—specifically,
conveyance of the Greeters Store to the Club); and (3) there has been no demonstration of
improper collusion or bad faith in reaching the agreement, we conclude the state court
settlement moots Star’s derivative suit as to Selby and Elliott Group Holdings.
25
23.1’s demand requirements or that the Boards’ decision not to assert these causes of action
was protected by the business judgment rule. See Thigpen v. Roberts, 468 U.S. 27, 30
(1984) (“[W]e may affirm on any ground that the law and the record permit and that will
not expand the relief granted below.”). Finally, we conclude that a set of allegations
asserted by Star against the OCC has also been rendered moot by the settlement agreements
or fails to state a claim against the OCC.
B.
We first consider the ten claims asserted against the TI Oldfield defendants that
were not asserted by the Boards in their respective lawsuits (namely, Star’s eighth through
seventeenth causes of action). Given that these allegations stem from alleged impropriety
that related to the turnover, we conclude they are rendered moot by the broad language of
the settlements releasing any claims related to the “Turnover . . . or any other matters pled
or that could have been pled by the Parties against one another in the Civil Action.”
Settlement Agreement at 7.
In the alternative, we agree with the Special Master’s conclusion that these claims
failed to satisfy Rule 23.1’s demand requirements and affirm the dismissal of these claims
based on that failure. See Rivers v. Wachovia Corp., 665 F.3d 610, 616 (4th Cir. 2011)
(observing that a derivative action that does not meet Rule 23.1’s requirements must be
dismissed). In evaluating a derivative claim, a federal court must determine the adequacy
of pleading under federal law but determine the sufficiency of the pre-suit demand under
the substantive law of the state of incorporation—here, South Carolina. Kamen v. Kemper
26
Fin. Servs., Inc., 500 U.S. 90, 108–09 (1991). Under South Carolina law, a demand must
at a minimum identify the alleged wrongdoers, describe the factual basis of the wrongful
acts and the harm caused to the corporation, and request remedial relief. Carolina First
Corp. v. Whittle, 539 S.E.2d 402, 410 (S.C. Ct. App. 2000).
With this standard in mind, we briefly consider why each of these non-duplicative
claims failed to satisfy Rule 23.1’s demand requirements. As an initial matter, the Special
Master concluded that Star’s eighth cause of action, his RICO claim, failed to fulfill Rule
23.1 because his demand consisted only of his motion to intervene. But as the Special
Master correctly observed, “[a] post-suit demand simply does not meet [Rule 23.1’s]
procedural prerequisite” of demand upon the Boards. In re Sapient Corp. Derivative Litig.,
555 F. Supp. 2d 259, 263 (D. Mass. 2008); see also Wencoast Rests., Inc. v. Chart Capital
Partners, L.P., No. 2:05-1650-18, 2006 WL 490101, at *3 (D.S.C. Feb. 28, 2006) (“Since
[Rule 23.1’s] demand requirement is designed to give the directors an opportunity to take
the action requested by the shareholder prior to suit, a post-suit demand likely would not
suffice. Accordingly, most of the evidence of . . . post-suit demands . . . is irrelevant.”); cf.
Kamen, 500 U.S. at 96 (“The purpose of the demand requirement is to afford the directors
an opportunity to exercise their reasonable business judgment and waive a legal right
vested in the corporation in the belief that its best interests will be promoted by not insisting
27
on such right.”). 21 Similarly, with respect to his ninth cause of action—which sought
modification of the Governing Documents and transfer agreements on the basis that they
provided TI Oldfield and BEP Oldfield with control over the Boards, thereby amounting
to contracts of adhesion—the Special Master concluded Star failed to fulfill the demand
requirements because his only demand allegation was “that he demanded it by way of his
motion to intervene.” J.A. 1369. Altogether, we discern no error in the Special Master’s
analysis and affirm the dismissal of both of these claims.
As to Star’s next five causes of action, we agree with the Special Master’s
conclusion that Star failed to make a particularized demand upon the Boards. Star’s tenth
cause of action sought “damages from various acts of ultra vires conduct of the director
Defendants.” J.A. 1369. Although he alleged “repeated demands . . . made by [him] and
other [community] members . . . to pursue certain present and former board members,” the
Special Master concluded “[t]his is not a sufficiently particularized allegation of a demand
because it does not describe the factual basis of the wrongful acts, harm to the corporation,
or relief sought.” J.A. 1369. We agree that such failure to state with particularity the harm
to the Club and Association does not meet Rule 23.1’s demand requirements. Next, Star’s
eleventh cause of action asserted a host of conflicts of interest on the part of all
defendants—such as “fail[ure] to commence breach of fiduciary duty actions against post
21
To the extent that Star references a RICO claim in the Club Board meeting
minutes, we also agree with the Special Master’s conclusion that this fails to satisfy Rule
23.1’s particularity requirements because it does not state the factual basis of any wrongful
acts or harm caused to the Club.
28
Turnover [Club and Association] directors arising from their willful financial negligence,”
J.A. 582—in violation of S.C. Code § 33-31-831. But as the Special Master correctly
concluded, Star failed to allege that he demanded the Club or Association pursue these
claims. And we likewise conclude that Star’s twelfth cause of action—improper and
undisclosed amendment to the Club bylaws, 22 in violation of S.C. Code § 33-31-1021,
asserted against all director defendants—failed to allege that he demanded the Club or
Association take any action related to this purported amendment. 23 And as to Star’s
thirteenth cause of action, Star asserted that the directors failed to properly maintain and
produce certain records over the course of the Turnover, such as “accurate accounting of
utilization of funds by and between” the Club and Association. J.A. 535. The Special
Master concluded this claim failed to satisfy Rule 23.1 because it did not state the harm
caused to the Club or Association “from not providing an accurate accounting.” J.A. 1371.
We agree. Finally, with respect to Star’s fourteenth cause of action, he asserted that all
defendants were responsible for the alleged failure to report the Club and Association’s
actions to the South Carolina Attorney General pursuant to S.C. Code § 33-31-170.
22
Specifically, Star alleged that in 2013, the Club bylaws were amended so that
Club member dues could be applied to the upkeep of Club facilities, and that this
amendment was passed by the Board “without notice or an opportunity for the members to
vote on it.” J.A. 1371.
23
Although Star cited an email to the Club Board asking for a copy of the
amendment, as well as Board minutes stating that he wanted to bring a case related to a
pattern of fraud based on unilateral modifications to a set of unspecified documents, “[the
email did] not ask [the Club] to rescind or produce an amendment—the relief apparently
sought in this cause of action.” J.A. 1371. Given the failure to request such relief, we agree
with the Special Master’s view that the purported demand failed to meet the particularity
requirements set forth by South Carolina law.
29
However, as the Special Master correctly noted, Star failed to fulfill the demand
requirement because he did not allege that he demanded the Club or Association report
their actions. For these reasons, we affirm the dismissal of these claims.
Next, Star’s fifteenth cause of action sought the appointment of a receiver to engage
in oversight of TI Oldfield, BEP Oldfield, and the Boards to ensure “accurate accounting,
retention of assets, and credible reports of Oldfield’s operations.” J.A. 1372. The Special
Master again correctly concluded Star had failed to fulfill Rule 23.1 because the only
demand that Star alleged was through his motion to intervene, which, as discussed above,
was insufficient. Likewise, Star’s sixteenth cause of action—asserting that TI Oldfield
violated Title XIV of the Housing and Urban Development Act of 1968 (the “Interstate
Land Sales Full Disclosure Act”), 15 U.S.C. § 1701 et seq., by filing an allegedly deceptive
and inaccurate federally-mandated property report—failed to meet the demand
requirements because his only allegation of demand was made by way of his motion to
intervene. We therefore affirm the dismissal of these claims.
Finally, as to his seventeenth cause of action, Star asserted a claim for theft of
services. This claim arose out of TI Oldfield’s use of revenue generated from non-member
utilization of Oldfield facilities (such as for weddings and golf) to breakeven on operational
funds and offset its obligation to pay deficits. In his claim, Star argued that all such funds
should have gone to the Club and Association. And although he alleged demand in the
form of emails from other community members to the Boards stating that TI Oldfield’s use
of the revenue was “illegal” and amounted to “theft of services,” he failed to cite any
30
communications that he himself made. J.A. 1373. Because Rule 23.1 requires that the
named derivative plaintiff make the demand, 24 Star failed to meet Rule 23.1’s demand
requirements. In sum, to the extent these ten claims were not covered by the settlement
agreements, we affirm the district court’s dismissal of these claims for failure to satisfy
Rule 23.1. 25
Nonetheless, even if Star’s claims had fulfilled Rule 23.1’s demand requirements,
we would alternatively conclude that the Boards’ decision not to pursue them was protected
by the business judgment rule. As noted, this rule “presumes that the board made its
decision on an informed basis, in good faith and in the honest belief that the action was
taken in the best interests of the company.” Morefield v. Bailey, 959 F. Supp. 2d 887, 897
(E.D. Va. 2013). And in South Carolina, this rule “precludes judicial review of actions
taken by a corporate governing board absent a showing of a lack of good faith, fraud, self-
24
Given that Rule 23.1 refers to “the plaintiff” in three instances—that “the
plaintiff” fairly and adequately represent shareholder interests; allege he was a shareholder
at the time of the transaction; and make the demand, Rule 23.1(a), (b)(1), (b)(3)(A)—these
requirements would be rendered meaningless if “the plaintiff” meant every member or
shareholder. If this were the case, any member “would always fairly and adequately
represent the shareholder” and satisfy the requirement that he or she be a shareholder at the
time of the transaction. J.A. 1374–75. Given this, the only reasonable reading of Rule 23.1
is that the named derivative plaintiff must make the demand.
25
The district court also correctly concluded that Star failed to show that demand
would have been futile. Under South Carolina law, the plaintiff bears the burden of alleging
particularized facts in support of the assertion that demand would have been futile.
Carolina First Corp., 539 S.E.2d at 411. South Carolina courts have concluded that
demand requirements must be rigorously enforced such that conclusory allegations that the
alleged wrongdoers “controlled the board” are insufficient to establish futility, absent
particularized facts to support it. Id. at 412. As the Special Master correctly recognized,
Star failed to allege futility at all, much less with particularity.
31
dealing or unconscionable conduct.” Dockside Ass’n, 362 S.E.2d at 874. Here, the record
indicates that the only possible showing of “a lack of good faith, fraud, self-dealing or
unconscionable conduct” would stem from Star’s allegations of TI Oldfield’s control over
the Boards. Id. Nonetheless, as discussed at length previously, given that the Boards are
controlled by community-elected members, we discern no such conflict of interest or
control by TI Oldfield. Further, there is nothing in the record indicating that the Boards’
decision not to pursue these claims was made in bad faith or was the result of self-dealing
or unconscionable conduct, nor has Star offered any particularized facts indicating to the
contrary. Given this, we conclude such a decision not to pursue these claims was protected
by the business judgment rule.
C.
In addition, the Special Master concluded that Star had satisfied Rule 23.1 as to the
narrow remaining portion of the breach of fiduciary duty and quantum meruit claims
asserted against TI Oldfield and BEP Oldfield, but recommended dismissing them. As to
the causes of action against BEP Oldfield, the Special Master concluded Star had failed to
state a claim under Rule 12(b)(6). In the fiduciary duty claim, 26 Star alleged that the
26
To assert a breach of fiduciary duty, the plaintiff must establish the existence of
a fiduciary relationship. Steele v. Victory Sav. Bank, 368 S.E.2d 91, 94 (S.C. Ct. App.
1988). South Carolina law defines a fiduciary relationship as one “founded on trust and
confidence reposed by one person in the integrity and fidelity of another.” Id. at 93. And
to establish this relationship, “the facts and circumstances must indicate the party reposing
trust in another has some foundation for believing the one so entrusted will act not in his
own behalf but in the interest of the party so reposing.” Moore v. Moore, 599 S.E.2d 467,
472 (S.C. Ct. App. 2004).
32
“transfer to BEP of only rights but no obligations [to] pay [Club] dues ‘removed an
estimated 20% of the lots from contributing dues to the [Club]’ and resulted in an increase
in dues paid by the members.” J.A. 1376. However, the Special Master observed that “even
accepting all of this,” Star had failed to allege or otherwise show that BEP Oldfield owed
a duty to the Club or Association “by virtue of its purchase of lots.” J.A. 1377. And to the
extent BEP Oldfield could appoint a director to the Association (while abstaining from
paying dues to the Club), “it [was] unclear how the appointment of a director to [the
Association] could result in a breach of fiduciary duty to pay dues to another entity,” the
Club. J.A. 1377–78. In sum, there was no allegation of any facts supporting the existence
of a fiduciary relationship between BEP Oldfield and the Club. And even accepting Star’s
allegations as true, he had only alleged that BEP Oldfield purchased lots from TI Oldfield,
received an assignment of certain rights, and appointed an Association Board director. J.A.
540–41. We agree that this fails to establish a fiduciary relationship under South Carolina
law.
As to the quantum meruit claim 27—in which Star alleged that BEP Oldfield had
received a benefit via the transfer of the lots “to the disadvantage” of the Association and
Club because it was not required to pay Club dues—the Special Master concluded that Star
had failed to demonstrate a benefit conferred by the Club or Association upon BEP
27
The elements of a quantum meruit claim are: (1) a benefit conferred by the
plaintiff upon the defendant; (2) realization of that benefit; and (3) retention of the benefit
by the defendant under circumstances making it inequitable for him or her to retain it
without paying its value. Gignilliat v. Gignilliat, Savitz & Bettis, L.L.P., 684 S.E.2d 756,
764 (S.C. 2009).
33
Oldfield. Specifically, the Special Master concluded, Star had failed to allege the Club or
Association “had anything to do with the purchase transaction or that BEP requested
anything from them.” J.A. 1379. Rather, BEP Oldfield had entered into a transaction with
TI Oldfield. We agree and conclude that even if the settlement agreements did not moot
these claims, Star failed to state a quantum meruit claim against BEP Oldfield: Star did not
allege that the Association or the Club were involved in the transaction; that BEP Oldfield
requested anything from either Board; or that BEP Oldfield did anything to cause the Club
to rely upon it for payment of dues or induced the Club in any way.
The Special Master also recommended dismissing the claims against TI Oldfield
because the Boards’ decision not to pursue such causes of action against TI Oldfield to
recover the unpaid dues from BEP Oldfield was protected by the business judgment rule.
The Special Master concluded that the only colorable allegations in Star’s Complaint
“arguably applicable to business judgment are that TI Oldfield controls the [B]oards and
their failure to seek the remedies sought by [Star] shows the [B]oards are conflicted from
bringing this action.” J.A. 1381. However, the Special Master observed, “that TI Oldfield
may appoint one[] minority director to the [B]oards does not support a finding that it
controls them. That the [B]oards chose not to assert [Star’s desired remedies] does not
show bad faith.” J.A. 1381. We agree and conclude that even if the settlement agreements
did not moot these claims, Star has failed to meet his burden of demonstrating that the
Boards’ decision not to pursue these claims was not protected by the business judgment
rule. This decision is therefore shielded from further judicial review.
34
C.
Finally, we consider Star’s claims against the OCC, a since-dissolved non-profit
organization created by and comprised of Oldfield homeowners to oversee the turnover.
The factual allegations Star sets forth against the OCC assert that it “took no steps to
intervene in the destructive activity” by TI Oldfield and BEP Oldfield during the turnover.
J.A. 548. TI Oldfield and the Boards argue that these brief mentions of the OCC in Star’s
Complaint fail to state any claims against OCC. They also point out that the Boards elected
not to bring any claims against the OCC, and Star has failed to allege any facts suggesting
the Boards’ decision should not be protected by the business judgment rule.
We conclude that to the extent Star asserted claims against the OCC with the same
underlying factual allegations that were otherwise covered by either of the Boards’
lawsuits, (1) the Boards’ decision not to sue the OCC was protected by the business
judgment rule (for the same reasons discussed above) and/or (2) any claims that could have
been asserted were covered by the broad language of the settlements, which discharged
claims that could have been brought in relation to any of the parties’ “related entities.”
Settlement Agreement at 7. In the alternative, we also conclude that to the extent that Star
asserted claims that were not brought by the Club or Association, Star failed to state a claim
against the OCC, warranting dismissal under Rule 12(b)(6). Ostrzenski v. Seigel, 177 F.3d
245, 253 (4th Cir. 1999) (“[W]e may affirm the dismissal by the district court on the basis
of any ground supported by the record even if it is not the basis relied upon by the district
court.”).
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****
To the extent Star asserted claims that were not rendered moot by the settlement
agreements, we affirm the district court’s dismissal of those claims for failure to satisfy
Rule 23.1 or to state a claim under Rule 12(b)(6). Further, to the extent the Boards could
have asserted such claims but did not do so, we conclude their decision not to pursue them
was protected by the business judgment rule.
IV.
For the reasons set forth above, we dismiss the appeal as to those claims that were
rendered moot by the settlements and affirm the dismissal of the remaining claims. We
dispense with oral argument because the facts and legal contentions are adequately
presented in the materials before this Court and argument would not aid the decisional
process.
AFFIRMED IN PART; DISMISSED IN PART
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