Premium Inv. Corp. v. Green

• Decision Date: 25 September 1984
• Docket Number: No. 0313,0313
• Parties: PREMIUM INVESTMENT CORPORATION, as a corporation and as a representative of a class, Respondent, v. D.W. GREEN, Jr., H.E. McArver, L.B. Rogers, Jane R. Sellers, Dan Rogers and Jake Rogers, Defendants, of whom D.W. Green, Jr. and H.E. McArver are Appellants. Appeal of D.W. GREEN, Jr. and H.E. McArver. . Heard
• Court: South Carolina Court of Appeals

Page 72

324 S.E.2d 72

283 S.C. 464

PREMIUM INVESTMENT CORPORATION, as a corporation and as a representative of a class, Respondent, v. D.W. GREEN, Jr., H.E. McArver, L.B. Rogers, Jane R. Sellers Dan Rogers and Jake Rogers, Defendants of whom D.W. Green, Jr. and H.E. McArver are Appellants Appeal of D.W. GREEN, Jr. and H.E. McArver.

No. 0313.

Court of Appeals of South Carolina.

Heard Sept. 25, 1984.

Decided Nov. 8, 1984.

David R. Gravely of Bellamy, Rutenberg, Copeland, Epps, Gravely & Bowers, P.A., Myrtle Beach, and Joseph F. Singleton of Cross, Singleton & Burroughs, Conway, for appellants.

J. Jackson Thomas of Stevens, Stevens, Thomas, Hearn & Hearn, P.A., Myrtle Beach, for respondent.

CURETON, Judge:

This is a class action to recover the proceeds of the settlement of an alleged prior class action. Respondent Premium Investment Corporation alleged that the appellants McArver and Green, class representative and class counsel, respectively, in the previous action, breached their fiduciary duties to notify class members of the institution and subsequent settlement of the action. The circuit court ordered the appellants to convey the proceeds of the settlement to a trustee for the benefit of the class and they appeal. We affirm.

McArver, a homeowner in Cherry Grove Beach Subdivision, initiated an action "individually and as representative of a class of property owners" in the subdivision against the developer. The action sought an injunction prohibiting further draining and filling of a lake in the subdivision and mandating its restoration. Appellant Green, an attorney, represented McArver.

On April 26, 1973, the trial court entered an order enjoining further alteration and mandating restoration of the lake. Among other things, the order stated that McArver brought "two class actions ... first as a member of a class ... owning property adjoining the Recreational Lake and secondly, as a member of a class ... owning property within the ... subdivision." The court found that McArver and "those persons owning lots on the ... Lake have an easement appurtenant in said lake" and that he "and others similarly situated" were riparian owners of the lake. Further, the court found that "plaintiffs" were entitled to the injunction sought. The developer appealed.

During the pendency of the appeal, appellants Green and McArver negotiated a settlement with the developer which, among other things, required the developer to convey two lots to McArver and two lots to the L.B. Rogers family, a homeowner in the subdivision which had supported McArver's action. McArver conveyed one lot to Green's law firm for legal services. On July 11, 1973, on motion of Green and with the consent of the developer, a circuit judge, unaware of the class allegations, signed an order vacating and setting aside the April order and entering a voluntary nonsuit without prejudice.

Approximately a year later, McArver, with the advice of Green, agreed to a modification of the earlier agreement in exchange for the conveyance of five additional lots. McArver then conveyed one of the five lots to Green's law firm and one lot to Green, individually.

The testimony is in conflict as to whether any other homeowners in the subdivision had knowledge of the lawsuit. It is undisputed that McArver and Green never undertook formal notification of the class and were not ordered to do so by the court.

Four years after the dismissal of the lawsuit, respondent Premium Investment Corporation, a subdivision property owner, brought this action individually and as representative of other property owners in the subdivision against McArver, Green and the Rogers family to recover the proceeds of the two settlements. Nearly five years later, the circuit court found that Green and McArver disregarded their fiduciary responsibilities to the class and ordered that they convey to the trustee for the class title to the three unsold lots and $85,000, representing the present market value of the four lots sold by the appellants. The court directed a verdict for the Rogerses because it found that they assumed no duty to represent the class.

The appellants' numerous exceptions raise six basic issues: (1) Was McArver's lawsuit a class action; (2) If it was, did the court-approved voluntary dismissal without prejudice extinguish the class action; (3) Is the class entitled to the proceeds of the second settlement as a part of the first transaction; (4) Does the evidence show that the respondent is guilty of laches or is equitably estopped from asserting an interest in the settlement; (5) Did the court err in charging appellants with receipt of all the seven lots, in valuing the lots, and in requiring that they account for the entire amount of the settlement; and (6) Did the respondent give proper notice of this lawsuit to the class members.

A. Class Action

The appellants contend that the court erred in finding that the prior action was a class action which placed them in the roles of fiduciaries to the purported class members. They support the contention with three arguments. First, they argue that the trial court failed to certify the alleged class which effectively eliminated any class aspects of the action. Second, a class action must be res judicata to the assertion of further claims by absent class members and, admittedly, the prior action in this case had no such effect since at least some of the members had no notice of the suit. Third, the inconsistent findings of the trial court in this suit in first finding that a class action involving Cherry Grove Subdivision homeowners was maintained, but also in finding that the Rogerses, though homeowners there, were not parties to it, reveal the erroneousness of the finding that the prior suit was a class action. Additionally, the appellants argue that even if they compromised a class action by settling and dismissing the suit, the respondents suffered no damages because the dismissal was without prejudice to the right of the respondents themselves to sue the developer.

It is now generally conceded that a plaintiff who sues on behalf of a class and the attorney representing the class assume a fiduciary obligation to absent members of the class, including the obligation to inform them of proposed compromises of the group action. Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949); La Sala v. American Savings & Loan Association, 5 Cal.3d 864, 97 Cal.Rptr. 849, 852, 489 P.2d 1113 (1971). The class representative also surrenders the right to settle the action in return for individual gain, alone. Id. at 852, 489 P.2d at 1116.

If the class representative or class counsel breaches the fiduciary duties he assumes and receives and retains benefits flowing from the breach, he holds what he receives upon a constructive trust for the class. Bank of America National Trust & Savings Association v. Ryan, 207 Cal.App.2d 698, 706, 24 Cal.Rptr. 739, 744 (1962). This is true although the benefit received by the class representative is not at the expense of the class. Id. at 706, 24 Cal.Rptr. 739. Under no circumstances will the fiduciary be permitted to profit from a breach of his duty as fiduciary. Crowder v. Lyle, 225 Cal.App.2d 439, 449, 37 Cal.Rptr. 343, 350 (1964).

The appellants argue that until the class is certified, it is owed no obligation by the purported class representative. They contend no certification occurred in this case. We agree that court certification of the class is an important step in a class action.

It represents a judicial finding that injured parties other than the named plaintiff exist. It also provides a definition by which they can be identified. Certification identifies and sharpens the interests of unnamed class members in the outcome; only thereafter will they be bound by the outcome. After certification, class members can be certain that the action will not be settled or dismissed without appropriate notice.

United States Parole Commission v. Geraghty, 445 U.S. 388, 415 n. 8, 100 S.Ct. 1202, 1218 n. 8, 63 L.Ed.2d 479 (1980) (Powell, J., dissenting).

Our class action statute, Section 15-5-50 of the South Carolina Code of Laws of 1976, ¹ provides no help in determining what constitutes proper certification. Resorting to decisions interpreting the more stringent requirements of Rule 23 of the Federal Rules of Civil Procedure, the federal class action statute, it becomes apparent that something less than a separate, formal order of certification may suffice. Justice Douglas points out in Board of School Commissioners of the City of Indianapolis v. Jacobs, 420 U.S. 128, 131, 95 S.Ct. 848, 43 L.Ed.2d 74 (1975) (Douglas, J., dissenting), that the fact that the record contains no written order formally certifying the class is "too slender a reed" to support the failure of the class action "in the face of incontrovertible evidence that certification was intended and did, in fact, take place."

Likewise, our own Supreme Court held in O'Quinn v. Beach Associates, 272 S.C. 95, 104, 249 S.E.2d 734 (1978) that an imperfect certification, if not appealed, becomes the law of the case. As noted by Justice Douglas in Jacobs, supra, many judges are careless in their dealings with class actions or, in this State, have few procedural guidelines to aid them in handling class actions. We will not permit the appellants the defense of lack of certification where the trial court constructively certified the class when it identified those persons with an interest in and entitled to benefit from this action. Here, although certification occurred simultaneous with judgment on the merits of the action, we hold that it was proper.

We can dispose of the other arguments of the appellants in summary fashion. We need not decide whether the McArver action was res judicata to the assertion of the claims of class members who had no notice of the suit. Clearly the members may waive their...