Karl & Terri Hager v. McCabe, Trotter & Beverly

THE STATE OF SOUTH CAROLINA
In The Court of Appeals

Karl & Terri Hager, Robert Singleton & Teresa
Singleton, Jay & Susan Welborn, Erik Arnold, and
Bowers Caravelle, LLC, derivatively and on behalf of
Caravelle Resort Association, Inc. and on behalf of
themselves and those similarly situated, Appellants,

v.

McCabe, Trotter & Beverly, P.C. and Gold Crown
Management Company, Inc., Defendants,

Of Which McCabe, Trotter & Beverly, P.C. is the
Respondent.

Appellate Case No. 2019-000413

Appeal From Horry County
Benjamin H. Culbertson, Circuit Court Judge

Opinion No. 5894
Heard December 9, 2021 – Filed February 23, 2022

AFFIRMED IN PART AND REVERSED IN PART

Andrew Sims Radeker and Sarah Megan Larabee, both of
Harrison, Radeker & Smith, P.A., of Columbia, for
Appellants.

Andrew W. Countryman, of Countryman Law Firm, of
Mount Pleasant, and Robert P. Wood, of Rogers
Townsend, LLC, of Columbia, both for Respondent.
HEWITT, J.: The appellants (the owners) in this case are several owners of
condominium units at Caravelle Resort (Caravelle) in Myrtle Beach. The circuit
court dismissed their claims against a law firm that advised Caravelle's homeowners'
association (the HOA) after a hurricane damaged Caravelle. The owners argue
dismissing their claims was error.

The owners attempted to bring two sets of claims against the law firm. In one, the
owners purported to sue on their own behalf for damage to personal property taken
out of their individual units and stored in a parking garage during Caravelle's repair.
In the other, the owners professed to bring derivative claims against the firm on
behalf of the HOA. All of these claims share the common basis that the owners
allege the firm gave the HOA inaccurate advice in helping the HOA navigate
repairing Caravelle.

We hold the circuit court correctly dismissed the owners' personal claims but erred
by dismissing the derivative claims. Though we will identify concerns we have with
the derivative claims, we see no defects in how they are pled, and we believe the
prudent course is to exercise restraint instead of foreclosing the suit at the start of
litigation.

FACTS
Hurricane Matthew struck Myrtle Beach in October 2016. It destroyed many
windows in Caravelle and exposed several units to the elements. McCabe, Trotter
& Beverly, P.C. (the law firm) served as counsel for the HOA. The HOA also
worked with Gold Crown Management Company (Gold Crown). At that time, Gold
Crown was Caravelle's property manager.

The HOA took several actions to repair Caravelle after the storm. Below, we have
summarized the actions the owners claim were unlawful and taken on the advice of
the law firm and/or Gold Crown.

First, the HOA began gutting and restoring the entire building and hired Delta
Restoration, LLC (Delta) to perform these services. Delta removed the personal
property from the owners' units and placed everything in temporary storage in
Caravelle's parking garage across the street. The owners claim Caravelle's
governing documents did not give the HOA power to remove belongings from units
or gut the building without owner approval. They further allege the HOA did not
properly notify them it decided on this course of action and the HOA wrongfully
prevented them from visiting the property, assessing the situation, and judging the
condition of their belongings for themselves.

Second, the HOA billed the owners for costs incurred in the repair process. Owners
were charged a "content manipulation fee" to recover the costs of storing their
belongings. They were also charged for a "soft goods package" to pay for replacing
items like mattresses, linens, and upholstery that had been damaged during the
hurricane or while in storage. The owners alleged they did not agree to the HOA
storing their property or to having the property replaced. The owners further alleged
the law firm and/or Gold Crown misrepresented the amount of damage done to their
belongings and inflated the cost of the soft goods package. Finally, the owners
claimed the firm and/or Gold Crown wrongfully pressured them into paying these
charges by threatening actions against them.

Caravelle's master deed required property owners to purchase insurance covering the
personal property, fixtures, decorations, and furnishings in their units. These
policies were issued by Lloyd's of London (Lloyd's).

Two letters the law firm sent Lloyd's during the repair process are important to the
issues here. First, the firm wrote Lloyd's that the parking garage would soon become
an unsuitable location for the owners' belongings due to the spring and summer
weather. The firm sent this letter several months after the storm. Nobody moved
the owners' items from the parking garage. Then, at the end of summer, the firm
warned Lloyd's that the HOA "and its members" would hold Lloyd's responsible for
not protecting the property.

Though the law firm began both letters by noting it represented the HOA, the owners
claim the firm was negotiating on their behalf because they, not the HOA, were the
named insureds on the Lloyd's policies. The owners claim nothing authorized the
HOA or its attorneys to handle issues related to their personal property.

The law firm also sent letters to the owners. In one, the firm explained the storm
contaminated many "soft goods"—things like mattresses, linens, and upholstery.
This letter discussed coverage under the Lloyd's policies and informed the owners
the HOA would dispose of these items and replace them if owners authorized the
HOA to do so. Later, the firm wrote individuals who had not authorized the HOA
to handle the process and said those owners needed to either have the items moved
by a moving company or permit the HOA to move them. This letter also said
authorizing the HOA was likely the better option because the cost of moving the
items would be at the owners' individual expense.
Though the firm sent these letters on behalf of the HOA, the owners claim the letters
gave them legal advice and could have caused them to reasonably believe the firm
represented them as individuals in addition to representing the HOA.

The law firm moved to dismiss the amended complaint under Rule 12(b)(6), SCRCP.
The circuit court granted the motion in a Form 4 order after a hearing. The owners
filed a motion to reconsider. The circuit court denied reconsideration but issued a
formal order with detailed reasons for its earlier ruling. This appeal followed.

ISSUE
Did the circuit court correctly find the owners' amended complaint failed to state any
claims on which relief could be granted?

STANDARD OF REVIEW
"On appeal from the dismissal of a case pursuant to Rule 12(b)(6), an appellate court
applies the same standard of review as the trial court." Rydde v. Morris, 381 S.C.
643, 646, 675 S.E.2d 431, 433 (2009). "That standard requires the Court to construe
the complaint in a light most favorable to the nonmovant and determine if the 'facts
alleged and the inferences reasonably deducible from the pleadings would entitle the
plaintiff to relief on any theory of the case.'" Id. (quoting Williams v. Condon, 347
S.C. 227, 223, 553 S.E.2d 496, 499 (Ct. App. 2001)). If the facts and inferences
would entitle the plaintiff to relief on any theory, then the grant of a motion to
dismiss for failure to state a claim is improper. Spence v. Spence, 368 S.C. 106, 116,
628 S.E.2d 869, 874 (2006); Clearwater Tr. v. Bunting, 367 S.C. 340, 343, 626
S.E.2d 334, 335 (2006). "Furthermore, the complaint should not be dismissed
merely because the court doubts the plaintiff will prevail in the action." Spence, 368
S.C. at 116-17, 628 S.E.2d at 874.

PERSONAL CLAIMS

A. Fraud and Conversion
The owners brought claims against the law firm for fraud and conversion. The
circuit court correctly found these claims could not survive a motion to dismiss.

"[A]n attorney is immune from liability to third persons arising from the
performance of his professional activities as an attorney on behalf of and with the
knowledge of his client." Gaar v. N. Myrtle Beach Realty Co., 287 S.C. 525, 528,
339 S.E.2d 887, 889 (Ct. App. 1986). An exception provides an attorney is not
immune if "in addition to representing his client, . . . [the lawyer] breaches some
independent duty to a third person or acts in his own personal interest, outside the
scope of his representation of the client." Stiles v. Onorato, 318 S.C. 297, 300, 457
S.E.2d 601, 602 (1995). Immunity also does not cover two unusual malpractice
scenarios we will discuss later.

Immunity is a function of the fact that an attorney acting within the scope of
representation is not acting on his or her own behalf, but on the client's behalf. In
Gaar, for example, this court affirmed summary judgment on a malicious
prosecution claim against two lawyers because the lawyers "acted solely in their
capacity as attorneys" when they sued the plaintiff for their client. 287 S.C. at 529,
339 S.E.2d at 889. The proper party to sue for malicious prosecution was "the party
to the original action, not the attorney[s] representing him." Id. Stiles recognized
that a lawyer can be liable to a third party when the lawyer acts outside the scope of
his engagement for a client, but affirmed the case's dismissal against a lawyer (there,
the claims were civil conspiracy and allegedly filing a frivolous case) because the
"complaint . . . fail[ed] to set forth sufficient facts to remove [the attorney] from the
ambit [of the general rule of immunity]." 318 S.C. at 300, 457 S.E.2d at 602.

The order in this case specifically noted the owners did not claim the law firm acted
outside the scope of its representation of the HOA. This forecloses the firm's liability
for fraud and conversion under Gaar and Stiles—an attorney is not liable to a third
party merely because the firm gave its client incorrect advice. We agree with the
circuit court that no one has alleged the firm acted to serve its own interests rather
than or in addition to the HOA's interests. Again, the core allegation is that the firm
gave the HOA incorrect advice. That allegation will not support a viable claim for
fraud or conversion by a third party against a lawyer.

The allegation that the firm made representations to Lloyd's on the owners' behalf
does not change this conclusion. Here as well, the claim is based on the firm's
supposedly incorrect interpretation of Caravelle's governing documents. The owners
say those documents do not make the HOA the "insurance trustee" for damage to the
owners' personal property. Even if that is right—the point is disputed and we express
no opinion on it—any advice to the contrary (that the HOA was the insurance trustee
for these losses) would be advice rendered in the scope of representing the HOA.
The "outside-of-scope" exception does not apply. The rule in Gaar and Stiles shields
the firm from liability to the owners on these claims.

B. Legal Malpractice
There are two species of malpractice claims in this case. We deal first with the claim
the owners attempted to bring on their own behalf (not on behalf of the HOA).
The first element "[a] claimant in a legal malpractice action must establish [is] the
existence of an attorney-client relationship." Stokes-Craven Holding Corp. v.
Robinson, 416 S.C. 517, 525, 787 S.E.2d 485, 489 (2016). The owners repeatedly
acknowledge the law firm represented the HOA. The owners do not allege the firm
also represented them or that they believed the firm represented them.

Instead, the owners claim that letters the law firm sent could have led them to believe
the firm represented them even though they did not want or authorize the firm to
represent them. As part of the support for this argument, they point to the firm's
letters to Lloyd's even though the letters went to Lloyd's, not to the owners.

This claim leads to a different dead end. The owners have not alleged an
attorney-client relationship. Indeed, they allege the opposite—that there was no
such relationship and that the firm erred in acting as if there was one. See Marshall
v. Marshall, 282 S.C. 534, 539, 320 S.E.2d 44, 47 (Ct. App. 1984) (noting that
attaining the status of a client requires seeking legal advice). Beyond that, the
owners are not suing over the unsolicited advice the firm supposedly gave them.
Instead, the owners allege the firm gave incorrect advice to the HOA. We are not
aware of a rule allowing one client to sue for advice a lawyer gave a different client.
If the firm gave the HOA bad advice, the proper plaintiff would be the HOA.

The owners' last avenue for direct relief against the lawyers is a request to expand
the small list of scenarios (there appear to only be two) in which South Carolina
allows a third party to sue a lawyer for malpractice. Despite the rule of immunity in
Gaar and Stiles, a third party can occasionally sue an attorney even though the
attorney stayed within the scope of representation. The key cases on this are Fabian
v. Lindsay, 410 S.C. 475, 765 S.E.2d 132 (2014), and Sentry Select Insurance Co. v.
Maybank Law Firm, LLC, 426 S.C. 154, 826 S.E.2d 270 (2019).

In Fabian, an intended beneficiary of a trust sued the settlor's attorney over a drafting
error that thwarted the settlor's intention. 410 S.C. at 478, 765 S.E.2d at 134. Our
supreme court observed a client intends for an estate plan to follow his or her wishes
and that "[t]he focus of a will or estate document is, inherently, on third-party
beneficiaries." Id. at 491, 765 S.E.2d at 141. It also noted that when an estate
planning document does not carry out the client's intent, the client typically may not
sue for malpractice because the client is deceased. Id. at 490, 765 S.E.2d at 140.

In Sentry, an insurance company filed a malpractice claim against the attorney it had
hired to represent its insured in a personal injury case. 426 S.C at 156, 826 S.E.2d
at 271. Similar to Fabian, our supreme court allowed an exception to the general
rule that attorneys are immune from liability to third parties because, like in Fabian,
not allowing the suit "'would . . . improperly immunize this particular subset of
attorneys from liability for their professional negligence.'" Id. at 159, 826 S.E.2d at
272 (alteration in original) (quoting Fabian 410 S.C. at 490, 765 S.E.2d at 140).
There, the potential "escape hatch" for the allegedly inadequate lawyer arose from
the fact that the client (the insured) had no motive to sue for malpractice as long as
the settlement or judgment was within the policy limits. See id. at 152, 826 S.E.2d
at 272 (explaining the insurer bears the financial burden of malpractice in that
scenario).

We agree that some of the notes struck in Fabian and Sentry echo in this case given
that the HOA exists to serve the common interests of Caravelle property owners and
that costs the HOA incurs are passed on to its members. Still, both Fabian and
Sentry noted the critical need to allow those "third-party" suits because of structural
issues preventing a traditional malpractice claim. Indisputably, that concern is not
present here. The HOA could sue the firm for malpractice but has chosen not to do
so. Our supreme court specifically limited Fabian and Sentry to the circumstances
that were before the court in those cases. See Fabian, 410 S.C. at 492, 765 S.E.2d
at 141 ("Recovery . . . is limited to persons who are named in the estate planning
document or otherwise identified in the instrument by their status."); Sentry, 426
S.C. at 161, 826 S.E.2d at 273 ("[W]e expressly limit the scope of this opinion so
that it does nothing beyond what it expressly states."). We will not read Fabian and
Sentry to authorize more than they advertise. We accordingly affirm the circuit
court's dismissal of the legal malpractice claim the owners brought on their own
behalf.

DERIVATIVE CLAIMS
The last claims are the two derivative claims the owners brought on the HOA's
behalf; one for legal malpractice and the other for breach of fiduciary duties.

No authority in South Carolina addresses whether people can derivatively sue
attorneys for malpractice. Some states permit these claims. See, e.g., Deep
Photonics Corp. v. LaChapelle, 385 P.3d 1126 (Or. Ct. App. 2016). California does
not. See McDermott, Will & Emery v. Superior Ct., 99 Cal. Rptr. 2d 622 (Cal. Ct.
App. 2000).

Even though the cases come out differently, the attorney-client privilege is a main
consideration on both sides. For example, in Deep Photonics, the Oregon Court of
Appeals held derivative malpractice claims would be allowed when they do not
"implicate the attorney-client privilege as a barrier to defendants mounting a
defense" such as when an exception to the rules of professional conduct allows the
attorney to reveal privileged communications. 385 P.3d at 1137-38. Conversely, in
McDermott, the California Second District Court of Appeal held derivative legal
malpractice claims would not be allowed because they have the "dangerous potential
for robbing the attorney defendant of the only means he or she may have to mount
any meaningful defense" and "effectively place[] the defendant attorney in the
untenable position of having to 'preserve the attorney client privilege (the client
having done nothing to waive the privilege) while trying to show that his
representation of the client was not negligent.'" McDermott, 99 Cal. Rptr. 2d at 626
(quoting Kracht v. Perrin, Gartland & Doyle, 268 Cal. Rptr. 637, 640-41 (Cal. App.
1990)).

South Carolina allows an attorney to reveal information that is protected under the
attorney-client privilege "to respond to allegations in any proceeding concerning
[his] representation of the client." Rule 1.6(b)(6), RPC, Rule 407, SCACR. Even
so, we share California's concern that allowing derivative lawsuits compromises the
attorney-client relationship and places the client and lawyer in a difficult position.

We can envision other issues on the horizon as well. Derivative lawsuits represent
a challenge to the rule that a corporate entity is managed by its directors, not its
members. Carolina First Corp. v. Whittle, 343 S.C. 176, 187, 539 S.E.2d 402, 408
(Ct. App. 2000). These claims are thus a direct challenge to the HOA's decision not
to file a malpractice suit. We are concerned about these sorts of derivative claims
given that the relationship between homeowners and homeowners' associations are
often contentious and commonly involve dissent.

Still, we must recognize there are counterpoints to these concerns. There are
heightened pleading requirements designed to deter plaintiffs from filing baseless
claims. There is also the possibility that a derivative lawsuit might spur an HOA to
file a valid malpractice claim it has resisted filing, that the HOA might choose to
waive the attorney-client privilege, or that the parties could agree that certain legal
issues control. The HOA might also foreclose further litigation by settling the
potential malpractice claim or voting to terminate the derivative suit; decisions that
may be the HOA's to make subject to the business judgment rule. See Star v. TI
Oldfield Dev., LLC, 962 F.3d 117, 131 (4th Cir. 2020) (stating homeowners'
association owned the derivative claims asserted by a resident and had the right to
resolve the derivative lawsuit as it saw fit, including by settling or aborting it);
Boland v. Boland, 31 A.3d 529, 551 (Md. 2011) (stating special litigation
committees composed of disinterested directors can recommend terminating
derivative lawsuits). Our concerns about allowing these derivative claims are
genuine, but they are also our attempt to imagine issues that may arise in the future,
and we do not see the future better than anyone else.
There are no defects in how the owners pled these claims. See Rule 23(b)(1), SCRCP
(setting out the pleading requirements for derivative claims). The firm argues the
owners did not claim the HOA suffered any damages, but the amended complaint
does allege, albeit very generally, that the HOA was damaged. See Brown v. Stewart,
348 S.C. 33, 49, 557 S.E.2d 676, 684 (Ct. App. 2001) (stating a derivative claim
"seek[s] to remedy a loss to the corporation"). Under the liberal rules governing
motions to dismiss and sufficiency of complaints, this general averment is enough.
See Skydive Myrtle Beach, Inc. v. Horry County, 426 S.C. 175, 180, 826 S.E.2d 585,
588 (2019) ("At the Rule 12 stage, . . . the first decision for the trial court is to decide
only whether the pleading states a claim.").

The owners submitted an expert affidavit supporting their complaint as required by
section 15-36-100 of the South Carolina Code. See S.C. Code Ann. § 15-36-100(B)
(Supp. 2021) (stating a contemporaneous affidavit of an expert specifying the
professional's negligence is required in actions for damages alleging professional
negligence). While, like the amended complaint, this affidavit is generic in some
ways, it too contains the minimal information necessary to survive a motion to
dismiss. Our supreme court has held that section 15-36-100 requires only that the
affidavit specify the "breach" element of malpractice. Grier v. AMISUB of S.C., Inc.,
397 S.C. 532, 537, 725 S.E.2d 693, 696 (2012). This affidavit does that.

Dismissing this case at the pleading stage would require us to look past the fact that
the derivative claims were properly alleged and rely exclusively on public policy.
The first place we look for public policy is to the legislature. The second is to
binding precedent. Because neither precludes this suit's filing, we believe the better
course is to exercise restraint.

CONCLUSION

We affirm the circuit court's decision to dismiss the direct claims and reverse the
circuit court's decision to dismiss the derivative claims.

AFFIRMED IN PART AND REVERSED IN PART.

KONDUROS and HILL, JJ., concur.