Brandon v. Brandon Const. Co. Inc., 89-82

• Decision Date: 25 September 1989
• Docket Number: No. 89-82,89-82
• Citation: 776 S.W.2d 349,300 Ark. 44
• Parties: , 58 USLW 2257 Betty BRANDON, on her own Behalf, and on Behalf of all other Shareholders of Brandon Construction, Co., Appellant, v. BRANDON CONSTRUCTION COMPANY INC., et al., Appellees.
• Court: Arkansas Supreme Court

Page 349

776 S.W.2d 349

300 Ark. 44, 58 USLW 2257

Betty BRANDON, on her own Behalf, and on Behalf of all other

Shareholders of Brandon Construction, Co., Appellant, v. BRANDON CONSTRUCTION COMPANY INC., et al., Appellees.

No. 89-82.

Supreme Court of Arkansas.

Sept. 25, 1989.

Kelly Carithers, Fayetteville, for appellant.

John R. Elrod, Siloam Springs, E. Lamar Pettus, Peter G. Estes, Fayetteville, for appellees.

PURTLE, Justice.

The appellant is a minority shareholder in a closely held family corporation. She filed suit in her capacity as a minority shareholder and as a representative of other shareholders similarly situated. The trial court granted a summary judgment and held that the appellant did not meet the requirements of fair and adequate representation of a class as required by ARCP Rule 23.1, and, further, that she did not have standing to maintain an individual action. The appellant argues that she fairly and adequately represented the interests of the minority shareholders, and, alternatively, that she should have been allowed to bring the suit as her individual action.

Fred and Maxine Brandon, the parents of the appellant, and their children are the shareholders in the Brandon Construction Company. The parents own 30 shares each and the four children own 10 shares each. The parents commenced a divorce action in 1987. At the same time they also entered into an employment agreement with each other and the corporation providing that both would receive a minimum monthly salary of $12,500.00 each. The appellant and her siblings signed a consent to this contract on March 7, 1988. On May 13, 1988, the appellant notified the corporation that she was revoking her consent. She filed suit in chancery court on October 10, 1988, in both her individual and representative capacities. She sought to halt the payment of the salaries as agreed upon, alleging waste, fraud, and a breach of the fidiciary duties to the shareholders, which resulted in injuries to the corporation. Her allegations are essentially that Fred and Maxine Brandon, officers and employees of the corporation, are dismantling the corporation and distributing its assets to themselves, without regard to the minority shareholders' rights. (Fred and Maxine Brandon are also owners of a majority of the shares in the corporation.)

The other minority shareholders responded that the appellant did not represent their interests as minority shareholders. They disavowed her action and stated that they were content with the salaries being paid to their parents. The other minority shareholders joined the parents in a motion for summary judgment on the basis that the appellant did not adequately represent their interests, as is necessary to maintain a shareholder's derivative action. Moreover, they argued that she had no basis for bringing her individual action against the corporation. The court ruled that she did not meet the requirements of Rule 23.1 to "adequately represent the interests of the other shareholders." No evidence to support such holding was presented. Moreover, the court held that the appellant had no standing to bring an individual action against the corporation.

Did the appellant have standing to bring a class action on behalf of her own interests and those of the other minority shareholders? Arkansas Rules of Civil Procedure, Rule 23.1 states in part:

The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association.

The pertinent part of Rule 23.1 provides that a derivative action may not be maintained unless the plaintiff fairly and adequately represents the interests of other shareholders similarly situated. We dealt with a derivative action by a minority shareholder in the case of Taylor v. Terry, 279 Ark. 97, 649 S.W.2d 392 (1983), where we stated: "Certainly, the president of a corporation owes a duty not to do an unfair or fraudulent act which will result in his private gain at the expense of the corporation." We went on to point out that a high standard of conduct is required of an officer or director of a corporation because the office is predicated upon his having voluntarily accepted such a position of trust concerning the property of others.

Prior to the adoption of our Rules of Civil Procedure, this court discussed the rights of minority stockholders in the case of Stout v. Oates, 217 Ark. 938, 234 S.W.2d 506 (1950). Like the present case, Stout dealt with a closely held corporation in which the majority of the stock was held by a husband and wife. In upholding the action of a minority stockholder in bringing the action, this court noted that the statute of limitations does not run against preferential treatment or fraud on the part of the officers or majority shareholders until the minority stockholders know, or have an opportunity to know, that the funds have been mismanaged. In Stout, we held that the officers and directors who received illegal benefits became trustees of a constructive trust for the benefit of the stockholders, and the statute did not begin to run until the concealed wrong was discovered or should have been discovered. Obviously, under such circumstances only a minority stockholder could be expected to file an action.

Derivative suits permitted by this rule are to be undertaken on behalf of the corporation. The action may be against third parties or it may be against the officers and directors of the corporation. In Morgan v. Robertson, 271 Ark. 461, 609 S.W.2d 662 (1980), we stated:

It is, in fact, inherent in the nature of the suit itself that it is the corporation whose rights are being redressed rather than those of the individual plaintiff. It follows that the corporation is regarded as the real party in interest.

The fact that the appellant is the only person willing to continue this suit does not automatically disqualify her from individually maintaining a derivative action. The first sentence of Rule 23.1 refers to "a derivative action brought by one or more shareholders [emphasis added] or members to enforce a right of a corporation...." If the rule intended to prevent one person from maintaining such an action, it would have been simple enough to require that an action be brought by "two or more shareholders." A corporation does business through its officers and agents. However, it is the shareholders who own it. Unless individual shareholders are allowed to act to protect the corporate assets, the officers and agents could deprive the shareholders of this property by fraudulent or other illegal means.

The real distinction between a derivative and an individual action is whether it is the corporation that has been injured by the action complained of or whether it is only the individual shareholder who has suffered harm. The primary purpose of the derivative action is to allow one or more shareholders to bring a suit on behalf of the corporation. If the alleged wrong is one primarily against the corporation, the action should be brought in a derivative capacity, whether by one or more minority shareholders. On the other hand, a shareholder may sue to redress injuries received by him regardless of whether the same wrong may have injured the corporation. See 12B Fletcher, Cyclopedia of Corporations, § 5911 (Perm.Ed.1984). Apparently the trial court believed the appellant brought this action to recover for injuries allegedly suffered by her individually. We do not so interpret the allegations.

In Thomas v. Dickson, 250 Ga. 772, 301 S.E.2d 49 (1983), the Supreme Court of

Georgia stated the general rule that a shareholder seeking to recover misappropriated corporate funds may only bring a derivative action. However, it noted there were exceptions to the general rule. The Thomas opinion stated the reasons for allowing a derivative action:

(1) it prevents the multiplicity of lawsuits by shareholders; (2) it protects corporate creditors by putting the proceeds of the recovery back in the corporations; (3) it protects the interests of all shareholders by increasing the value of their shares, instead of allowing recovery by one shareholder to prejudice the rights of others not a party to the suit; and (4) it adequately compensates the injured shareholder by increasing the value of his shares.

Thomas explained that the reason for limiting suits for recovery of misappropriated corporate funds to derivative actions is to protect all interested parties: i.e. creditors, other shareholders, and directors.

The Georgia Court concluded by noting that "Mrs. Dickson was the sole injured shareholder" and that therefore the rationale undergirding the "general rule calling for corporate recovery" did not exist. The court, however, held that Mrs. Dickson was "properly allowed to bring this direct [individual] action." (Mrs. Dickson's derivative action was not treated in the opinion.)

The very nature of the right created by this rule is to "enforce a right of a corporation." In the present case it appears that the appellant brought a suit on behalf of all of...