A group of condo owners in Myrtle Beach will be able to move forward with a lawsuit against the law firm that provided legal advice to their homeowners’ association after the South Carolina Court of Appeals said in a case of first impression that it would “exercise restraint” and allow them to press on with their derivative claims brought on behalf of the HOA.
After condo units at Caravelle Resort were damaged by Hurricane Matthew in 2016, its HOA took steps to make repairs. The owners allege that some of these actions were unlawful and taken on the advice of the HOA’s law firm—McCabe, Trotter & Beverly—and/or its property manager. These alleged actions included misrepresenting the amount of damage done to the owners’ belongings and wrongfully pressuring the owners into paying inflated charges by threatening legal actions against them.
The owners also cited two letters the law firm sent to the resort’s insurer. Though the firm began both letters by noting it represented the HOA, the owners claim the firm was actually negotiating on their behalf because they, not the HOA, were the named insureds on the policies and nothing authorized the HOA or its attorneys to handle issues related to their personal property. They also claim the firm sent them letters that gave them legal advice and could have caused them to reasonably believe the firm represented them as individuals in addition to the HOA.
Horry County Circuit Court Judge Benjamin H. Culbertson granted the firm’s motion to dismiss the complaint against it, but in a unanimous Feb. 23 opinion written by Judge Blake Hewitt, the Court of Appeals reversed in part. Although the court had concerns about the derivative claims, it saw no defects in how they were pleaded, and concluded that the prudent course would be to exercise restraint instead of foreclosing the suit at the start of litigation.
The owners brought two derivative claims on the HOA’s behalf, one for legal malpractice and the other for breach of fiduciary duties. Hewitt noted that no authority in South Carolina addresses whether people can derivatively sue attorneys for malpractice, and some states permit these claims while others don’t. Even in the states that permit them, courts have raised concerns that such suits may compromise the attorney-client relationship and place the client and lawyer in a difficult position—concerns that the Court of Appeals shared.
The court envisioned 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, and are thus a direct challenge to an HOA’s decision not to file a malpractice suit. Hewitt expressed particular worry “given that the relationship between homeowners and homeowners’ associations are often contentious and commonly involve dissent.”
Nevertheless, the court recognized counterpoints to these concerns, such as the heightened pleading requirements designed to deter plaintiffs from filing baseless claims, and the possibility that a derivative lawsuit might spur an HOA to file a valid malpractice claim it has resisted filing. An HOA might choose to waive the attorney-client privilege or foreclose further litigation by settling the potential malpractice claim or voting to terminate the derivative suit, decisions that may be an HOA’s to make subject to the business judgment rule.
“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,” Hewitt wrote.
Hewitt said that there were no defects in how the owners pleaded their claims, and so he concluded that they should be allowed to proceed with them, at least for the time being.
“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,” Hewitt wrote. “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.”
The appeals court did affirm the decision to dismiss the legal malpractice claims the owners brought on their own behalves because the owners conceded that they had no attorney-client relationship with the firm.
Traditionally, attorneys are immune to liability to any third parties arising from the performance of their duties to their clients. But in the last decade, South Carolina courts have recognized two exceptions in which a third party can sue a lawyer for malpractice—one for beneficiaries of trusts and estates, and one for insurance companies who hire counsel to represent their insureds. But Hewitt said that those exceptions involved situations where structural issues prevented a traditional malpractice claim, and the court declined to extend the exceptions any further.
The court also affirmed the dismissal of the owners’ claims against the law firm for fraud and conversion.
Drew Radeker and Sarah Larabee of Harrison, Radeker & Smith in Columbia represented the condo owners. Larabee said that the court’s ruling reflected the fact that South Carolina’s courts are generally accessible at the pleading stage and do not have overly restrictive rules for pleading claims.
“I think it’s a pretty important decision because before this South Carolina didn’t really recognize derivative suits for legal malpractice, but now we do,” Larabee said. “When people are frustrated with their HOA, what we usually see is that there’s no power structure to effect any chance, so recognizing claims for legal malpractice gives a little foot in the door for those people when they see their HOA receiving bad legal advice or having been affected by some legal malpractice. Before this they might not have been able to do much about it, but now they can.”
Andy Countryman of Mount Pleasant and Bob Wood of Rogers Townsend in Columbia represented the law firm. Countryman could not be reached for comment on the ruling.
The nine-page opinion is Hager v. McCabe, Trotter & Beverly, P.C. (Lawyers Weekly No. 011-009-22). The full text of the opinion is available online at sclawyersweekly.com.
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