Title: Pat Hames and Ben Robinson v. Marybeth Cravens

State: arkansas

Issuer: Arkansas Supreme Court

Document:

Pat HAMES and Ben Robinson v. 
Marybeth CRAVENS

97-687                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
                 Opinion delivered April 9, 1998


1.   Motions -- motion to dismiss -- standard of review. -- In reviewing a
     trial court's decision on a motion to dismiss, the appellate
     court treats the facts alleged in the complaint as true and
     views them in the light most favorable to the plaintiff; a
     trial judge must look only to the allegations in the complaint
     to decide a motion to dismiss.

2.   Corporations -- corporation generally distinct from stockholders. -- As a
     general rule, a corporation is a distinct entity from its
     stockholders.

3.   Corporations -- derivative action -- when shareholder entitled to bring. -
     - When a shareholder believes that the corporation has been
     harmed, he may be entitled to bring an action in a derivative
     suit, in the corporation's name, to seek redress for that
     injury; although the shareholder also may be injured
     secondarily, the primary injury is to the corporation, and the
     shareholder's cause of action is derivative and not direct.

4.   Corporations -- derivative action -- equity action. -- In Arkansas, a
     shareholder's derivative suit is an equity action maintainable
     in the chancery court.

5.   Corporations -- derivative action -- trial court correctly found
     appellants' claims constituted. -- The trial court correctly
     concluded that appellants' claims essentially constituted a
     derivative action, which could be maintained pursuant to Ark.
     R. Civ. P. 23.1.

6.   Corporations -- derivative and direct actions contrasted -- appellants
     failed to plead individual harm. -- Plaintiffs may prefer
     characterizing their claims as direct rather than derivative;
     first, derivative actions impose more stringent procedural
     requirements; secondly, any recovery in a derivative action
     accrues to the corporation and not to the shareholders,
     individually; thirdly, a derivative action in chancery court
     precludes a trial by jury; therefore, a plaintiff may
     carefully plead facts in a complaint in order to proceed in a
     direct action; by alleging a direct injury, a plaintiff can
     maintain a direct action even if the corporation was similarly
     harmed; here, the supreme court simply found that appellants
     failed to plead any individual harm. 

7.   Civil procedure -- fact pleading required. -- Arkansas has adopted a
     clear standard to require fact pleading; under Ark. R. Civ. P.
     8(a)(1), a pleading that sets forth a claim for relief must
     contain "a statement in ordinary and concise language of facts
     showing ... that the pleader is entitled to relief"; Ark. R.
     Civ. P. 12(b)(6) provides for the dismissal of a complaint for
     "failure to state facts upon which relief can be granted"; 
     these two rules must be read together in testing the
     sufficiency of the complaint; facts, not mere conclusions,
     must be alleged. 

8.   Civil procedure -- testing sufficiency of complaint -- pleadings liberally
     construed. -- In testing the sufficiency of the complaint on a
     motion to dismiss, all reasonable inferences must be resolved
     in favor of the complaint, and pleadings are to be liberally
     construed.

9.   Corporations -- trial court correctly found appellants lacked standing to
     assert claims relating to harm suffered by company. -- Although
     appellants' complaint alleged that appellee's conduct after
     incorporation caused the closely held corporation harm, it
     failed to plead facts demonstrating that any action prior to
     incorporation harmed them individually; the trial court
     properly concluded that appellants lacked standing to assert
     the claims arising from their allegations because, by their
     very nature, the claims related to harm suffered by the
     company.

10.  Fraud -- elements. -- To plead a cause of action for fraud, the
     existence of the following elements must be proved: (1) a
     false representation, usually of a material fact; (2)
     knowledge or belief by the defendant that the representation
     is false; (3) intent to induce reliance on the part of the
     plaintiff; (4) justifiable reliance by the plaintiff; and (5)
     resulting damage to the plaintiff. 

11.  Fraud -- must be specifically alleged. -- To be well pleaded, fraud
     must be specifically alleged; the complaint must state
     something more than mere conclusions and must clearly set
     forth the facts relied upon as constituting the fraud.

12.  Fraud -- appellants failed to plead facts -- trial court's decision to
     dismiss affirmed. -- Even drawing all reasonable inferences in
     favor of the complaint, appellants failed to plead a case of
     fraud; some facts regarding the alleged misrepresentation and
     appellee's intent to defraud appellants were required; where
     the complaint states only conclusions without facts, the
     supreme court will affirm the trial court's decision to
     dismiss the complaint pursuant to Ark. R. Civ. P. 12(b)(6).

13.  Corporations -- derivative action -- injury suffered by appellants
     secondary to injury suffered by corporation. -- Where appellants'
     complaint neither pleaded facts to support a distinct and
     separate harm nor alleged that appellee was bound by and
     breached a pre-incorporation agreement regarding proprietary
     information that would give rise to a direct cause of action,
     the supreme court, reading the allegations in appellants'
     complaint, concluded that any injury suffered by appellants
     was secondary to the injury suffered by the corporation, which
     is the essence of a derivative action.

14.  Jurisdiction -- subject-matter jurisdiction -- complaint properly dismissed
     for lack of. -- The supreme court held that the trial court
     properly dismissed the appellants' complaint for lack of
     subject-matter jurisdiction and accordingly affirmed.


     Appeal from Pulaski Circuit Court; Chris Piazza, Judge;
affirmed.
     Harrill & Sutter, PLLC, by: L. O'Neal Sutter and Sherri
McDonough, for appellants.
     Kemp, Duckett, Spradley & Curry, by: Stephen L. Curry, for
appellee.

     W.H. "Dub" Arnold, Chief Justice.
     This is an appeal from the Pulaski County Circuit Court,
Second Division, and from an order dismissing the appellants'
complaint for lack of subject-matter jurisdiction.  Finding no
merit in appellants' arguments, we affirm.
     Appellants, Ben Robinson and Pat Hames, are husband and wife
and, respectively, own 1% and 49% of the issued and outstanding
common stock of Partners in Rehab, Inc., a closely held Arkansas
corporation.  Appellee Marybeth Cravens owns the remaining 50% of
the Partners stock.  Hames and Cravens are the sole directors of
Partners.  On May 16, 1996, the appellants filed suit against
Cravens in the Pulaski County Circuit Court, alleging fraud and
breach of fiduciary duty.  Specifically, Robinson and Hames claim
that, at the time of Partners's incorporation, Cravens intended to
defraud them of proprietary information they contributed to
Partners.  Additionally, Robinson and Hames maintain that Cravens
violated her fiduciary duty by appropriating the proprietary
information for the benefit of Rehab. Plus, Inc., a corporation
allegedly organized by Cravens or by members of Cravens's family
and in which Cravens plays some management role.  In particular,
appellants allege that Cravens solicited contracts with two
Partners clients who then terminated contracts with Partners
shortly after the incorporation of Rehab Plus.
     According to the complaint, Robinson and Hames are personal
guarantors of most of Partners's corporate debt, and Cravens's
actions have altered the value of corporate debts for which the
appellants are liable.  Notably, at the time of the circuit court
hearing, Partners was also the subject of a dissolution proceeding
pending in the Pulaski County Circuit Court, styled In re The
Judicial Dissolution of Partners in Rehab, Inc., civil docket No.
CV-96-6911.
     On June 10, 1996, Cravens filed a motion to dismiss the
appellants' complaint pursuant to Ark. R. Civ. P. 12(b)(1) and
12(b)(6), reasoning that the case was actually a derivative action
to redress harm to Partners and not to appellants, individually. 
After a hearing on January 28, 1997 and based upon a reading of the
complaint, Judge Chris Piazza agreed that, although the appellants
alleged that Cravens harmed them, either individually or through a
competitive business, the facts asserted and relief requested, by
their very nature, involved the question of whether Partners
suffered damages.  The circuit court recognized that the
allegations in the complaint constituted grounds for a derivative
action, which sounds in equity and must be maintained in chancery
court.  Concluding that the appellants lacked standing to assert
their claims individually, Judge Piazza dismissed the complaint
pursuant to Rule 12(b)(1) for lack of subject-matter jurisdiction.
     In reviewing a trial court's decision on a motion to dismiss,
we treat the facts alleged in the complaint as true and view them
in the light most favorable to the plaintiff.  Neal v. Wilson, 316
Ark. 588, 595-96,