Clearwater Trust v. Bunting

• Decision Date: 06 February 2006
• Docket Number: No. 26108.,26108.
• Citation: 626 S.E.2d 334
• Court: South Carolina Supreme Court
• Parties: CLEARWATER TRUST and Russell B. Lentz Trust, Appellants, v. Boyd G. BUNTING and Media General Communications, Inc., Respondents.

626 S.E.2d 334

CLEARWATER TRUST and Russell B. Lentz Trust, Appellants, v. Boyd G. BUNTING and Media General Communications, Inc., Respondents.

No. 26108.

Supreme Court of South Carolina.

Reheard November 30, 2005.

Decided February 6, 2006.

Marshall Winn, Wallace K. Lightsey, and Troy A. Tessier, all of Wyche, Burgess, Freeman & Parham, of Greenville, for Appellants.

Brent O. Clinkscale and Heather Ruth, both of Womble, Carlyle, Sandridge & Rice, of Greenville, F. Dean Rainey, of Greenville, and Leslie H. Weisenfelder, of Dow, Lohnes & Albertson, of Washington, DC, for Respondents.

Justice PLEICONES:

This is an appeal from a circuit court order dismissing appellants' amended complaint alleging breach of fiduciary duty and securities fraud pursuant to Rule 12(b)(6), SCRCP. We affirm.

STANDARD OF REVIEW

The decision to grant a Rule 12(b)(6) motion to dismiss must be based solely upon the allegations set forth in the complaint. Carolina Care Plan, Inc. v. United Healthcare Services, Inc., 361 S.C. 544, 606 S.E.2d 752 (2004). The question is whether, viewing the allegations in the light most favorable to the plaintiff, the complaint states any valid claim for relief, even if the court doubts that the plaintiff will prevail. Id.

FACTS

The amended complaint alleges that the appellants are trusts which owned stock in a closely held corporation known as Spartan Communications, Inc. (Spartan). Respondent Bunting was an officer of Spartan, and is alleged to have been a shareholder in the corporation and an "insider." Appellants' representatives consulted Bunting when deciding whether to sell some of their Spartan stock, and he reassured them that "there was no contemplation, consideration, discussion or activity within Spartan relating to a possible merger, sale, or other transaction concerning Spartan or its stock up to that point." Prior to these conversations, Bunting had told the beneficiaries of the trusts that Spartan would prefer them to sell any Spartan stock to the corporation rather than "outsiders" in order to keep it within the close corporation's "family." In addition to alleging that Bunting was an officer, shareholder and insider of Spartan, the complaint alleges that Bunting attended shareholder meetings and occasionally drove a beneficiary of one of the trusts to these meetings.

The complaint alleges that Bunting knowingly made false and misleading affirmative representations that no changes were contemplated at Spartan, and that in reliance on his representations the appellants sold some of their shares (2,300) back to Spartan at $200/share.

Approximately six months later, in December 1999, Spartan announced its merger into respondent Media General. When the merger was consummated in March 2000, all Spartan shareholders received approximately $800/share. Had the appellants retained the 2,300 shares sold back to Spartan in May and June 1999, appellant Clearwater Trust would have received an additional $660,000 (approximately) and appellant Lenz Trust would have received $720,000 (approximately) more.

The complaint alleged four causes of action. Three were directed to both Spartan and Bunting: breach of fiduciary duty, breach of fiduciary duty-unjust enrichment, and negligent misrepresentation. One was directed to Spartan alone, and alleged a violation of the South Carolina Securities Act, specifically S.C.Code Ann. § 35-1-1210(2) (Supp.2004). The circuit court held that § 35-1-1210 does not create a private cause of action, and concluded that appellants' three other claims alleged a single wrong, and that this claim arose under S.C.Code Ann. § 33-8-420 (1990). The circuit court held this claim was precluded by the two-year statute of limitation found in § 33-8-420(e), and granted respondents' motion to dismiss.

ISSUES

On appeal, appellants raise the following issues:

(1) Whether there is a private cause of action pursuant to § 35-1-1210?

(2) Whether § 33-8-420 codifies common law causes of action against a corporate officer who owes a fiduciary duty to a party separate and apart from his status as an officer?

(3) If § 33-8-420(e) applies, what is the statute of limitations where the officer is alleged to have fraudulently concealed his breach of fiduciary duty?

ANALYSIS

I. Private Cause of Action

Appellants' third cause of action alleged Spartan committed fraud and deceit in purchasing appellants' stock, thereby rendering it liable under the Securities Act, § 35-1-1210(2). Appellants argue the circuit court erred in dismissing this claim. We hold the claim was properly dismissed.

Section 35-1-1210(2) makes it unlawful for any person:

in connection with the offer, sale, or purchase of any security, directly or indirectly, to:

...

(2) make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; or

....

Appellants acknowledge that this Court has held that there is no implied private cause of action for aiding and abetting fraud under § 35-1-1210, but argue that decision does not answer the question whether there can be a direct private action under the statute. See Atlanta Skin & Cancer Clinic, P.C. v. Hallmark Gen. Partners, Inc., 320 S.C. 113, 463 S.E.2d 600 (1995). They also concede that the Court of Appeals has stated in dicta that there is no such private right, see Garrett v. Snedigar, 293 S.C. 176, 359 S.E.2d 283 (Ct.App.1987), and acknowledge that in another appeal decided by this Court, the appellant conceded the issue. Carver v. Blanford, 288 S.C. 309, 342 S.E.2d 406 (1986). Appellants point out that these cases were all decided prior to 1997, when S.C.Code Ann. § 35-1-510 (Supp.2004) was amended, and argue this amendment evidences the General Assembly's intent to create a private cause of action under § 35-1-1210.

In Atlanta Skin, the Court stated that the primary statute creating a private cause of action under the Securities Act is § 35-1-1490, which imposes liability on sellers of securities. The Court held that while § 35-1-1210 makes "fraud or deceit in [securities] offers, sales, or purchases "unlawful," [it does] not, by itself, create a private cause of action." Id. at 119, 463 S.E.2d at 603. Contrary to appellants' contention that Atlanta Skin only decided the aiding and abetting question, it held there was no private action under § 35-1-1210.

Appellants rely on a post-Atlanta Skin amendment to § 35-1-510. This section authorizes the securities commissioner to "require registered broker-dealers, agents, and investment advisors¹ who have custody of or discretionary authority over client funds or securities, to post surety bonds ... Every bond shall provide for suit thereon by any person who has a cause of action under Section 35-1-1210...." While this statutory amendment may be read to give rise to a private cause of action under § 35-1-1210, such a private action exists merely to the extent the alleged violator has posted a surety bond under § 35-1-510. Here, there is no allegation that a "510 bond" has been required or posted, and thus § 35-1-510 does not support a finding that these appellants have a private cause of action under § 35-1-1210. This cause of action was properly dismissed pursuant to Rule 12(b)(6). Carolina Care Plan, supra.

II. Applicability of § 33-8-420

Appellants contend that they pled that Bunting owed them a fiduciary duty separate and apart from that owed as an officer of Spartan, based upon an alleged special relationship. Thus, the first question we address is whether they have pled facts sufficient to give rise to a separate duty. See, e.g. Huggins v. Citibank, N.A., 355 S.C. 329, 585 S.E.2d 275 (2003) (existence of duty is question of law for the court). We find no such duty was pled.

A. Basis of Duty

Appellants concede that their special relationship was predicated in part on Bunting's status as an officer, but allege that other facts gave rise to a special relationship and consequent duty. First, they alleged that Bunting was a fellow shareholder and therefore owed them a fiduciary duty by virtue of that relationship. Our decisions imposing a fiduciary duty on fellow shareholders are limited to situations that involve oppression of a minority shareholder by a controlling shareholder. See e.g., Lesesne v. Lesesne, 307 S.C. 67, 413 S.E.2d 847 (Ct.App. 1992). There is no contention that Bunting was a controlling shareholder, or that he used fraud or oppression to procure the appellants' shares for himself. There is no breach of shareholder fiduciary duty alleged here.

Second, appellants would impose a special relationship and a fiduciary duty upon Bunting as a result of their decision to repose trust in him, and on their repeated questioning of him. We decline to impose a fiduciary duty as a consequence of such unilateral actions. Compare Jacobson v. Yaschik, 249 S.C. 577, 155 S.E.2d 601 (1967) (officer owes fiduciary duty of full disclosure when purchasing shares from shareholders); Manning v. Dial, 271 S.C. 79, 245 S.E.2d 120 (1978) (same).

There are no allegations that Bunting undertook to advise the appellants. Instead, appellants sought information from Bunting, based on their belief that he had special knowledge, in order to make their own informed financial decisions. If Bunting had misrepresented the facts to any shareholder who had inquired, then he would have breached the identical fiduciary duty to that individual that appellants contend was owed specially to them. The only breach of fiduciary duty pled here was that owed by Bunting as a corporate officer.

Finally, while appellants repeatedly argue they are not basing the claim that Bunting owed them a duty solely on the basis of his status as an officer of Spartan, this contention is belied by their pleadings.

In the first cause of action for Breach of Fiduciary Duty, the appellants allege:

39. Spartan and Mr. Bunting were...