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South Carolina
JUDICIAL DEPARTMENT
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2008-09-19-01

STATE OF SOUTH CAROLINA

COUNTY OF GREENVILLE

Patrick J. Brown, Jr. and Spiros Anthony,

Plaintiffs,

                        vs.

Michael E. Brown, Director, Officer, Stockholder of B & B Industries, Inc. Individually and Personally and

Barbara Brown, Officer, Employee, Bookkeeper, Individually and Personally,

Defendants.


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THIRTEENTH JUDICIAL CIRCUIT

Civil Action No.  2008-CP-23-0007

ORDER OF DISMISSAL

On July 11, 2008, the Defendants, Michael and Barbara Brown, by and through their undersigned counsel, moved this Court for an order dismissing the Plaintiffs' Complaint pursuant to Rule 12(b)(6) of the South Carolina Rules of Civil Procedure and other relevant provisions of South Carolina law.  The Defendants' Motion to Dismiss came before this Court for hearing on September 5, 2008 and based upon the oral arguments from the respective parties, as well as the briefs, authorities, and other materials submitted to this Court, the Defendants' Motion to Dismiss is hereby GRANTED, and the Plaintiffs' Complaint is dismissed, without prejudice, for failure to state a viable cause of action under Rule 12(b)(6) of the South Carolina Rules of Civil Procedure.

Factual Background

On January 2, 2008, the Plaintiffs, Patrick J. Brown, Jr. and Spiros Anthony, filed suit in the Greenville County Court of Common Pleas, alleging in substantial part, that the Defendants wrongfully deprived them of various corporate proceeds from the operation of B&B Industries, Inc. ("B&B Industries").  (See Plaintiffs' Complaint).  More specifically, the Complaint filed by the Plaintiffs alleges various causes of action for breach of fiduciary duties, conspiracy to commit such breaches, negligence, fraud, conversion, embezzlement, unjust enrichment, abuse of control, and gross mismanagement.   (See id.).

The genesis of this lawsuit centers primarily on the management and operation of B&B Industries—a small family operated machine shop with six (6) employees.  Each cause of action is largely predicated upon injuries suffered by the Corporation as a result of the alleged misconduct of the Defendants.  (See id.).  Consequently, the Defendants filed a Motion to Dismiss requesting, among other forms of relief,[1] that this Court dismiss all causes of action against the Defendants as contained in the Plaintiffs' Complaint, as such causes of action were improperly postured as direct causes of action as opposed to derivative causes of action on behalf of the Corporation.  For the reasons discussed herein, the Court finds that the Plaintiffs have failed to state a cause of action and their Complaint should be dismissed pursuant to Rule 12(b)(6) of the South Carolina Rules of Civil Procedure.

Legal Analysis

Under South Carolina law, the authority to direct the activities of a corporation is vested exclusively in the Board of Directors.  See S.C. Code Ann. § 33-8-101 (2008) (delineating the statutory authority afforded to the directors of a South Carolina corporation).  However, a shareholder nevertheless maintains the authority to commence a derivative action in order to enforce the collective rights of the corporation.  See id. at § 33-7-400 (2008) ("Derivative suits may be maintained on behalf of South Carolina corporations in federal and state court in accordance with the applicable rules of civil procedure."); see also Brown v. Stewart, 348 S.C. 33, 49, 557 S.E.2d 676, 684 (Ct. App. 2002) ("The fiduciary obligation of dominant or controlling stockholders or directors is ordinarily enforceable through a stockholder's derivative action.").

Of significant importance, courts in South Carolina have continually reaffirmed that "actions seeking to remedy a loss to the corporation" must generally be pursued as derivative suits with the corporation as the named plaintiff.  Brown at 49, 557 S.E.2d at 684 (emphasis added); Johnson v. Baldwin, 221 S.C. 141, 69 S.E.2d 585 (1952); see also Hite v. Thomas & Howard Co., 305 S.C. 358, 361, 409 S.E.2d 340, 342 (1991) ("Generally, an action seeking to remedy a loss to the corporation is a derivative one."), overruled on other grounds, Huntley v. Young, 319 S.C. 559, 560, 462 S.E.2d 860, 861 (1995); Fletcher Cyclopedia of Corporations § 5908 (2000) ("Where the basis of the action is a wrong to the corporation, redress must be sought in a derivative action.").  Indeed, any lawsuit seeking to recover a corporate asset inherently belongs to the corporation as opposed to the individual shareholders, and consequently must be pursued as a derivative action.  Todd v. Zaldo, 304 S.C. 275, 278, 403 S.E.2d 666, 668 (1991) ("The courts of this state recognize that a cause of action for recovery of an asset of a corporation belongs to the corporation as opposed to the individual shareholders."); see Bradley v. Hullander, 272 S.C. 6, 249 S.E.2d 486 (1978); Ward v. Griffin, 295 S.C. 219, 367 S.E.2d 703 (Ct. App. 1988).

The Complaint filed by the Plaintiffs in this matter clearly evidences allegations and grievances that, if proven true, constitute causes of action that belong to the corporation—not individual shareholders.  For example, the Plaintiffs' Complaint commences with direct allegations that the assets of B&B Industries have been converted by Directors, Officers, and Employees of the Corporation.  (See Plaintiffs' Complaint at ¶ 3) ("This is an action brought by Plaintiffs seeking relief for conversion of B&B Industries, Inc. (B&B) assets . . .").  Prior to articulating the precise causes of action being plead, the Defendants set forth a litany of accusations, all of which centering upon damages to the corporate entity:

In South Carolina, a "shareholder's suit is derivative if the gravamen of his complaint is an injury to the corporation and not to the individual interest of the shareholder."  Hite at 361, 409 S.E.2d at 342; see also Brown at 51, 557 S.E.2d at 685 ("[W]e must rely on the general rule that individuals may not sue corporate directors or officers for losses suffered by the corporation.").  Shareholders are permitted to maintain an individual action, such as the matter at bar, only in those limited cases where the alleged "loss is separate and distinct from that of the corporation."  Id.; see also South Carolina National Bank v. Mortgage Loan Co., 159 S.C. 359, 157 S.E. 74 (1930); Stewart v. Ficken, 151 S.C. 424, 149 S.E. 164 (1929) ("It appears well settled that, if the mismanagement of the directors has caused a loss to the corporation, and not to any particular . . . stockholder, the liability of the directors on account thereof is an asset of the corporation, remediable only by an action in the name or in the right of the corporation.); Todd at 278, 557 S.E.2d at 668 ("If an individual stockholder has suffered a particular loss due to mismanagement of a corporation then the stockholder may bring an action for his loss . . . but this loss must be personal and not a loss of the corporation.").

Consequently, it becomes necessary to ascertain whether the alleged mismanagement and misappropriation of which the Plaintiffs complain, "affected the plaintiffs directly, or as their interests were submerged in the corporation whose assets were thus dissipated."  Stewart v. Ficken, 151 S.C. 424, 427, 149 S.E. 164, 165 (1929).  When "the categories of claimed damages are clearly corporate in nature," courts in South Carolina steadfastly require that such claims be plead as derivative actions on behalf of the corporation.  Todd at 278, 557 S.E.2d at 668.  The Plaintiffs in the current matter have levied accusations that are classic to derivative suits—breach of fiduciary duties on the part of officers and directors, conversion of corporate properties, embezzlement, and mismanagement.  Moreover, as clearly stated on numerous occasions in the Plaintiffs' Complaint, the harms being alleged have caused damage to the Corporation—not any individual shareholder.

South Carolina law provides that when determining whether a cause of action should be derivative in nature, the Court must look to the four corners of the Plaintiffs' Complaint in determining the true nature of the allegations, which in this case are most certainly allegations as to damages suffered by the corporate entity.  See Fletcher at § 5911 ("In determining the nature of the wrong alleged, the court must look to the body of the complaint, not to the plaintiff's designation or stated intention.").  Even the more generalized allegations relating to decreased shareholder value are improperly being pursued as direct actions, considering that the diminution in shareholder value, even if true, would be suffered by all shareholders equally.  See Brown at 51, 557 S.E.2d at 685 ("Permitting Brown to maintain his action as an individual action would not protect the interests of all stockholders because the diminution in the value of the stock was suffered by all of the stockholders.").

Conclusion

Based upon the foregoing, along with the briefs, authorities, and other materials submitted to this Court by the respective parties, the Defendants' Motion to Dismiss is hereby GRANTED, and the Plaintiffs' Complaint is dismissed, without prejudice, for failure to state a viable cause of action under Rule 12(b)(6) of the South Carolina Rules of Civil Procedure.

IT IS SO ORDERED.

_____________________________
Hon. Edward W. Miller
Thirteenth Judicial Circuit

Greenville, South Carolina
September 19, 2008


[1] Through their Motion to Dismiss, the Defendants also prayed upon this Court to (1) dismiss all causes of action with regard to Plaintiff Anthony for lack of proper standing; (2) dismiss Counts V (Fraud) and VI (Conversion) of the Plaintiffs' Complaint as being barred by the applicable statute of limitations period; and alternatively, if the foregoing relief was denied; (3) require the Plaintiffs to provide a more definite statement under Rule 12(e) of the South Carolina Rules of Civil Procedure with regard to Counts I, II, III, IV, VII, VIII, XI, and X of their Complaint.  While these issues may have merit, this Court does not address these issues at this time, and the Defendants may re-raise these arguments, if appropriate, in the event that the Plaintiffs refile their lawsuit.