Opinion ID: 1760438
Heading Depth: 1
Heading Rank: 1

Heading: Fiduciary's Duty to Disclose

Text: Wal-Mart concedes that the issue of a fiduciary's duty to disclose improper conduct to the corporation has never been decided in Arkansas. It urges, nonetheless, that this court should bring Arkansas in line with the view held by the vast majority of other state and federal courts. It asserts that this court has long held that corporate officers and directors owe a fiduciary duty to their corporations, but it contends that we now should take the additional step and hold that this duty obligates officers and directors to disclose material facts of past fraud to the corporation before entering into a self-dealing contract. This fiduciary duty, according to Wal-Mart, applies to directors and officers when entering into agreements with the corporation, and it is those directors and officers who have the burden of proving good faith and fairness with respect to the agreement with the corporation. Wal-Mart maintains that Coughlin breached his fiduciary duty of disclosure by concealing his prior theft from Wal-Mart when negotiating and signing his Retirement Agreement and Release. Coughlin, for his part, does not dispute that he breached his fiduciary duty by stealing from Wal-Mart but rather insists that the Release in the Retirement Agreement bars any known or unknown claim Wal-Mart has against him. He contends that Arkansas case law does not support Wal-Mart's position that fiduciaries have a duty to disclose past fraud to corporations before entering into an agreement with those corporations. Rather, he argues that this state strongly supports freedom of contract between two sophisticated parties and that the general principles of contract law must apply to this case. He contends that Wal-Mart, which insisted that he sign the Release as part of the Retirement Agreement, was capable of excluding claims arising from a breach of the fiduciary's duty to disclose but chose not to do so. He further contends, and the circuit court agreed, that Wal-Mart's position regarding a fiduciary's duty to disclose renders the Release clause moot. Thus, he concludes, Wal-Mart should now be bound by the clear terms of the Release. This court has stated its standard of review for Rule 12(b)(6) dismissals to be as follows: We review a trial court's decision on a motion to dismiss by treating the facts alleged in the complaint as true and by viewing them in the light most favorable to the plaintiff. In viewing the facts in the light most favorable to the plaintiff, the facts should be liberally construed in plaintiff's favor. Our rules require fact pleading, and a complaint must state facts, not mere conclusions, in order to entitle the pleader to relief. Biedenharn v. Thicksten, 361 Ark. 438, 441, 206 S.W.3d 837, 840 (2005) (internal citations omitted). With those principles in mind, we turn to the merits of this issue. Arkansas jurisprudence imposes a high standard of conduct upon an officer or director of a corporation. . . . Raines v. Toney, 228 Ark. 1170, 1178, 313 S.W.2d 802, 808 (1958). This court has held that an officer or director of a corporation owes a fiduciary duty to the corporation and its shareholders. See Raines, supra . The high standard of conduct owed by an officer to his corporation has also been codified in the Arkansas Business Corporation Act: (a) An officer with discretionary authority shall discharge his duties under that authority: (1) in good faith; (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner he reasonably believes to be in the best interests of the corporation. Ark.Code Ann. § 4-27-842(a) (Repl.2001); see also Ark.Code Ann. § 4-27-830(a) (Repl.2001) (establishing an identical standard of conduct for directors). This court imposes an even greater duty on a person who serves as both an officer and a director of a corporation. See Raines, supra . We have said that one who owes a fiduciary duty to a corporation may be subject to liability to the corporation for any harm resulting from a breach of his or her fiduciary duty. See Long v. Lampton, 324 Ark. 511, 922 S.W.2d 692 (1996). We have further said that a director is a `fiduciary' as to any agreements between the corporation and himself individually.  Hall v. Staha, 303 Ark. 673, 681, 800 S.W.2d 396, 401 (1990) ( Hall I ). The burden of proving that the transaction between the director and the corporation is made in good faith and is fair to the corporation lies with the director. See id. Finally, this court has said that [i]n the search for inherent fairness and good faith to a corporation and shareholders, conduct of directors must be subjected to `rigorous scrutiny' when conflicting self-interest is shown. Hall v. Staha, 314 Ark. 71, 79, 858 S.W.2d 672, 676 (1993) ( Hall II ) (citing Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939)). The Release included in the Retirement Agreement provides: The Associate and Wal-Mart hereby release, acquit and forever discharge each other and (to the extent applicable) their respective directors, officers, shareholders, employees, successors and assigns, of and from any and all liability for claims, causes of actions, demands, damages, attorneys fees, expenses, compensation, or other costs or losses of any nature whatsoever, whether known or unknown, which the Associate or Wal-Mart may have arising out of or in any way related to the Associate's employment with Wal-Mart, including, but not limited to, claims for wages, back pay, front pay, promotion or reinstatement opportunities. This release does not, however, preclude the Associate or Wal-Mart from pursuing a claim for breach of the Agreement or the Non-Compete Agreement. Both parties are correct that the Release in this case is a type of contract between the parties and is interpreted pursuant to the rules of contract interpretation. See Green v. Owens, 254 Ark. 574, 495 S.W.2d 166 (1973). Our standard of review for contract interpretation has been stated often: The first rule of interpretation of a contract is to give to the language employed the meaning that the parties intended. In construing any contract, we must consider the sense and meaning of the words used by the parties as they are taken and understood in their plain and ordinary meaning. The best construction is that which is made by viewing the subject of the contract, as the mass of mankind would view it, as it may be safely assumed that such was the aspect in which the parties themselves viewed it. It is also a well-settled rule in construing a contract that the intention of the parties is to be gathered, not from particular words and phrases, but from the whole context of the agreement. Alexander v. McEwen, 367 Ark. 241, 244, 239 S.W.3d 519, 522 (2006) (internal citations omitted). We address then the question of a fiduciary's failure to disclose fraud perpetrated against the corporation and the impact it has on the validity of a subsequent Retirement Agreement and Release. As an initial matter, we conclude that the language of the Release is clear and unambiguous. Despite that clear language, a significant majority of other jurisdictions, both state and federal, have held that a fiduciary owes a duty of full disclosure when entering into a transaction with the fiduciary's corporation and that the fiduciary's failure to disclose material facts relating to a mutual release of claims between the parties is sufficient to set aside the release. See, e.g., In re Mi-Lor Corp., 348 F.3d 294, 303 (1st Cir.2003) (fiduciaries owe a duty of full disclosure of material facts in connection with a self-dealing transaction, and in the case of a self-dealing release, information about the conduct of the potential recipients of the release is necessary for deciding whether to grant the release . . .); Street v. J.C. Bradford & Co., 886 F.2d 1472, 1481 (6th Cir.1989) (holding that federal law applies to the validity of releases and that federal law at a minimum requires the standards of the Restatement of Contract 2d § 173, which states [i]f a fiduciary makes a contract with his beneficiary relating to matters within the scope of the fiduciary relation, the contract is voidable by the beneficiary unless . . . all parties beneficially interested manifest assent with full understanding of their legal rights and of all relevant facts that the fiduciary knows or should know.); Shane v. Shane, 891 F.2d 976, 986 (1st Cir.1989) (a release will not bar subsequent claims if the release was obtained by fraud or misrepresentation, and where a release is obtained without full disclosure of the relevant facts by one who is under a duty to reveal them, it can be set aside.); Cwikla v. Sheir, 345 Ill.App.3d 23, 280 Ill.Dec. 158, 801 N.E.2d 1103, 1112 (2003) (Parties in a fiduciary relationship owe one another a duty of full disclosure of material facts when . . . obtaining a release. . . . [A] severance agreement arising out of a fiduciary relationship is voidable if one party withheld facts that were material to the agreement. . . . A withheld fact is material if plaintiff would have acted differently had he been aware of the withheld fact.); Blue Chip Emerald LLC v. Allied Partners, Inc., 299 A.D.2d 278, 750 N.Y.S.2d 291 (N.Y.App.Div.2002) (a release is voidable if a fiduciary, in furtherance of his individual interests, fails to make full disclosure of all material facts that could reasonably bear on the corporation's decision to grant the release); Old Harbor Native Corp. v. Afognak Joint Venture, 30 P.3d 101, 105 (Alaska 2001) (a release is susceptible to attack under the legal theories of mistake, fraud, and misrepresentation and a release may be ineffective if a fiduciary breaches his affirmative duty of full disclosure of material facts); Soderquist v. Kramer, 595 So.2d 825, 830 (La.App.1992) (The duty imposed on a fiduciary embraces the obligation to render a full and fair disclosure to the beneficiary of all facts which materially affect his rights and interest and a material question of fact existed as to whether an attorney disclosed to his client the extent of a conflict of interest when obtaining a release as the release would not bar a claim for legal malpractice if full disclosure was not made); Pacelli Bros. Transp., Inc. v. Pacelli, 189 Conn. 401, 456 A.2d 325, 329 (1983) (a general release cannot shield an officer or director who has failed in his fiduciary duty to disclose information relevant to a transaction with those whose confidence he has abused . . .); State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co., 64 Wash.2d 375, 391 P.2d 979, 986 (1964) (corporation's release of former president was not binding because the president had failed to make full disclosure of material facts, and [a] corporation cannot ratify the breach of fiduciary duties unless full and complete disclosure of all facts and circumstances is made by the fiduciary and an intentional relinquishment by the corporation of its rights); Norris v. Cohen, 223 Minn. 471, 27 N.W.2d 277, 281 (1947) (a general release does not extend to claims of which one party thereto was wrongfully kept in ignorance by the other and the wrongful concealment of facts by one party to a release affords sufficient ground to the other for setting it aside, particularly where the information concealed is not equally within the knowledge of both parties.). [1] The authority adduced by Coughlin, while supportive of his position in certain respects, is distinguishable on the facts. See Fitzwater v. Lambert & Barr, Inc., 539 F.Supp. 282 (W.D.Ark.1982) (a duty owed by a fiduciary not involved); K3 Equipment Corp. v. Kintner, 233 A.D.2d 556, 649 N.Y.S.2d 535 (N.Y.App.Div.1996) (some facts suggested that plaintiff corporation should have been aware of fraud by the fiduciary at time release executed); Talton v. Mac Tools, Inc., 118 N.C.App. 87, 453 S.E.2d 563 (1995) (fiduciary duty not involved, and no fraud alleged in procurement of release); Ristau v. Wescold, Inc., 318 Or. 383, 868 P.2d 1331 (1994) (plaintiff conceded that release was not fraudulently induced). We hold, first, that Wal-Mart sufficiently stated a claim for relief in its First Amended Complaint that Coughlin had a duty as a fiduciary to disclose material facts, including fraud and misappropriation of goods. We further hold that Wal-Mart has sufficiently stated a claim that it would not have entered the Retirement Agreement and Release had it known of Coughlin's misconduct. We are persuaded, in addition, that the majority view is correct, which is that the failure of a fiduciary to disclose material facts of his fraudulent conduct to his corporation prior to entering into a self-dealing contract with that corporation will void that contract and that material facts are those facts that could cause a party to act differently had the party known of those facts. We emphasize, however, that this duty of a fiduciary to disclose is embraced within the obligation of a fiduciary to act towards his corporation in good faith, which has long been the law in Arkansas. Stated differently, we are not adopting a new principle of fiduciary law by our holding today but simply giving voice to an obvious element of the fiduciary's duty of good faith. We reverse the order of dismissal on this point and remand the matter for further proceedings. [2] In holding as we do, we have considered Coughlin's arguments that Wal-Mart, which drafted the Release, could have used more precise language in its Release regarding a fiduciary's duty and that, in any event, the Release should be upheld, as a matter of law, and construed against Wal-Mart as the drafter. On the latter point, however, we have already held in this opinion that the language of the Release is clear and unambiguous. We, furthermore, have considered Coughlin's contention that Arkansas has strong jurisprudence favoring freedom of contract. Nevertheless, we conclude that it is for a jury to decide whether Coughlin breached his fiduciary duty to disclose material facts to Wal-Mart and whether the parties intended the Release to bar claims of fraudulent inducement related to that duty to disclose.