Case Name: Pat HAMES and Ben Robinson v. Marybeth CRAVENS
Court: Arkansas Supreme Court
Jurisdiction: Arkansas
Decision Date: 1998-04-09
Citations: 332 Ark. 437
Docket Number: 97-687
Parties: Pat HAMES and Ben Robinson v. Marybeth CRAVENS
Judges: Newbern, Corbin, and Brown, JJ., dissent.
Reporter: Arkansas Reports
Volume: 332
Pages: 437–449

Head Matter:
Pat HAMES and Ben Robinson v. Marybeth CRAVENS
97-687
966 S.W.2d 244
Supreme Court of Arkansas
Opinion delivered April 9, 1998
Harrill & Sutter, PLLC, by: L. O’Neal Sutter and Sherri McDonough, for appellants.
Kemp, Duckett, Spradley & Curry, by: Stephen L. Curry, for appellee.

Opinion:
W.H. "Dub" Arnold, Chiefjustice.
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 fight most favorable to the plaintiff. Neal v. Wilson, 316 Ark. 588, 595-96, 873 S.W.2d 552 (1994) (citing Gordon v. Planters & Merchants Bancshares, Inc., 310 Ark. 11, 832 S.W.2d 492 (1992); Battle v. Harris, 298 Ark. 241, 766 S.W.2d 431 (1989)); Mid-South Beverages, Inc., 300 Ark. 204, 205, 778 S.W.2d (1989) (citing Battle, 298 Ark. 241)). Further, we note that a trial judge must look only to the allegations in the complaint to decide a motion to dismiss. Neal, 316 Ark. at 596 (citing Wiseman v. Batchelor, 315 Ark. 85, 864 S.W.2d 248 (1993); Deitsch v. Tillery, 309 Ark. 401, 833 S.W.2d 760 (1992)); Mid-South Beverages, Inc., 300 Ark. at 205 (citing Battle, 298 Ark. 241)).
On appeal, the appellants first query whether they have standing, in their individual capacities, to assert a claim for an injury suffered by Partners and its shareholders. In Arkansas, the well-settled answer is no. As a general rule, a corporation is a distinct entity from its stockholders. Wiseman v. State Bank & Trust, N.S., Inc., 313 Ark. 289, 854 S.W.2d 725 (1993). However, 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. See Taylor v. Terry, 279 Ark. 97, 649 S.W.2d 392 (1983); Ark. R. Civ. P. 23.1; Ark. Code Ann. § 4-26-714 (Repl. 1991). 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. Moreover, in Arkansas, a shareholder's derivative suit is an equity action maintainable in the chancery court. See Red Bud Realty Co. v. South, 153 Ark. 380, 241 S.W.2d 21 (1922).
In an apposite case, Walker v. Hyde, 303 Ark. 615, 798 S.W.2d 435 (1990), a plaintiff-shareholder sued defendants, also shareholders, for deprivation of majority control and ownership of the corporation, and loss of good will, business enterprise, future gross receipts, and net profits. Additionally, like the case at bar, the plaintiff sought relief from corporate indebtedness that she had personally guaranteed. Upon review of the complaint, this court affirmed the trial court's dismissal of the action. Specifically, this court reasoned that the relief sought by the plaintiff should be granted to the corporation and not to a shareholder. Any action to recover for the alleged losses was derivative in nature and an individual suit was not the proper route for relief. Walker, 303 Ark. at 618. Similarly, the trial court correctly concluded in the instant case that the appellants' claims essentially constituted a derivative action, which could be maintained pursuant to Ark. Rule Civ. P. 23.1.
Our decision in this case is not to imply that shareholders may never bring a direct suit. For example, a shareholder may sue individually in an action to enforce that shareholder's voting rights, to compel the payment of dividends, or to protect minority shareholders. Contrary to the case at bar, these actions contemplate a direct injury to the shareholder distinct and separate from harm caused to the corporation. See 12B Fletcher, Cyclopedia of Corporations § 5915, 5922 (Perm. Ed. 1984).
Significantly, plaintiffs may prefer characterizing their claims as direct rather than derivative. First, derivative actions impose more stringent procedural requirements. See Ark. R. Civ. P. 23.1. Second, any recovery in a derivative action accrues to the corporation and not to the shareholders, individually. Third, 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. For example, by alleging a direct injury, a plaintiff can maintain a direct action even if the corporation was similarly harmed. See Brandon v. Brandon Constr. Co., 300 Ark. 44, 48, 776 S.W.2d 349 (1989) (citing 12B Fletcher, Cyclopedia of Corporations § 5911 (Perm. Ed. 1984)). Here, we simply find that the appellants failed to plead any individual harm.
Arkansas has adopted a clear standard to require fact pleading. According to Ark. R. Civ. P. 8(a)(1), a pleading that sets forth a claim for relief shall contain "a statement in ordinary and concise language of facts showing . . . that the pleader is entitled to relief." Rule 12(b)(6) provides for the dismissal of a complaint for "failure to state facts upon which relief can be granted." This court has stated that these two rules must be read together in testing the sufficiency of the complaint; facts, not mere conclusions, must be alleged. Brown v. Tucker, 330 Ark. 435, 438, 954 S.W.2d 262 (1997) (citations omitted). 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. Id.; Ark. R. Civ. P. 8(f).
Although the appellants' complaint alleges that Cravens's conduct after Partners's incorporation caused Partners harm, it fails to plead facts demonstrating that any action prior to incorporation harmed them individually. Regarding direct harm, the appellants merely assert that Cravens "intended to deprive them of the fruits of their efforts at the time she agreed to incorporate Partners." In another paragraph of the complaint, the appellants claim that "but for Cravens's misrepresentation," they would not have developed Partners, given Cravens proprietary information, or guaranteed corporate debt. However, the proprietary information allegedly misappropriated by Cravens belonged to Partners and not to the appellants, individually, at the times relevant to the claimed misconduct. Here, the trial court properly concluded that the 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.
In any event, to plead a cause of action for fraud, the appellants must prove the existence of the following elements: (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 rebanee by the plaintiff, and (5) resulting damage to the plaintiff. Wiseman v. Batchelor, 315 Ark. 85, 88-89, 864 S.W.2d 248 (1993). Moreover, to be web pleaded, fraud must be specificaby abeged. Beam Bros. Cont. v. Monsanto Co., 259 Ark. 253, 263, 532 S.W.2d 175 (1976). In Burns v. Burns, 199 Ark. 673, 135 S.W.2d 670 (1940), this court noted that the complaint must state something more than mere conclusions and must clearly set forth the facts rebed upon as constituting the fraud. Additionaby, in the very early case of McIlroy v. Buckner, 35 Ark. 55 (1880), this court said:
It is not sufficient to plead fraud generally, or merely to characterize actions as fraudulent. The facts and circumstances constituting the fraud should be set forth. There should be some concealment, misrepresentation, craft, finesse, or abuse of confidence, by which another is misled, to his detriment; and these, or some of them, must be alleged and proved. Mere epithets, or adverbs characterizing conduct, which, in itself, may be innocent, amount to nothing.
Id. at 558-59.
Even drawing all reasonable inferences in favor of the complaint, the appellants fail to plead a case of fraud, which must include some facts regarding the alleged misrepresentation and Cravens's intent to defraud them. Where the complaint states only conclusions without facts, we will affirm the trial court's decision to dismiss the complaint pursuant to Rule 12(b)(6). See Brown, 330 Ark. at 438.
The appellants' second query is whether shareholders in closely held corporations should be required to bring a derivative action when the corporation is operated more as a partnership than as a corporation. Appellants urge us to decide that the answer to this question should be "no" and that a direct action is permissible. In addition to other persuasive authority from foreign jurisdictions, appellants cite Hikita v. Nichiro Gyogyo Kaisha, Ltd., 713 P.2d 1197 (Alaska 1986), to support their position urging this court to adopt the modern trend permitting a direct shareholder action. However, Hikita noted only two major exceptions to the general rule, barring individual shareholder actions for corporate injuries: (1) where the shareholder suffered an injury separate and distinct from that suffered by other shareholders, and (2) where a special duty, such as a contractual duty, exists between the shareholder and the alleged wrongdoer. Id. at 1199 (citations omitted).
Arguably, the two actions classified in Hikita as "exceptions" to the general rule are actually independent actions to redress injuries suffered primarily by the shareholder and secondarily, if at all, by the corporation. In any event, the appellants' complaint does not plead facts to support a distinct and separate harm, nor does it allege that Cravens was bound by and breached any type of pre-incorporation agreement regarding the proprietary information, which would give rise, to a direct cause of action. Reading the allegations in the appellants' complaint, any injury suffered by the appellants is secondary to the injury suffered by Partners, and that is the essence of a derivative action.
Viewing the facts alleged in the complaint as true and in the light most favorable to the appellants, the trial court prop erly dismissed the appellants' complaint for lack of subject-matter jurisdiction. Accordingly, we affirm.
Newbern, Corbin, and Brown, JJ., dissent.