Wal-Mart Stores, Inc. v. Coughlin

• Court: Arkansas Supreme Court
• Writing for the Court: Robert L. Brown
• Citation: Wal-Mart Stores, Inc. v. Coughlin, 369 Ark. 365, 255 S.W.3d 424 (Ark. 2007)
• Decision Date: 12 April 2007
• Docket Number: No. 06-315.,06-315.
• Parties: WAL-MART STORES, INC., Appellant, v. Thomas M. COUGHLIN, Appellee.

255 S.W.3d 424

369 Ark. 365

WAL-MART STORES, INC., Appellant, v. Thomas M. COUGHLIN, Appellee.

No. 06-315.

Supreme Court of Arkansas.

April 12, 2007.

Gibson, Dunn & Crutcher, LLP, by: Theodore J. Boutrous, Jr., Eugene Scalia, and Julia W. Poon, Los Angeles, CA; Warner, Smith & Harris, PLLC, by: P.K. Holmes, III, and Matthew C. Carter, Fort Smith; Gettman & Mills LLP, by: Michael J. Mills, Omaha, NE, for appellant.

Barrett & Deacon, A Professional Association, by: D.P. Marshall Jr. and Brandon J. Harrison, Jonesboro; Taylor Law Firm, by: W.H. Taylor and Steven E. Vowell, Fayetteville; Zuckerman Spaeder LLP, by: William W. Taylor, III, Blair G. Brown and Caroline Judge Mehta, Washington, DC, for appellee.

ROBERT L. BROWN, Justice.

Appellant, Wal-Mart Stores, Inc., appeals from an order dismissing its First Amended Complaint filed against appellee, Thomas Coughlin. Wal-Mart raises issues on appeal relating to (1) Coughlin's duty as a fiduciary to disclose material facts before entering into a self-dealing contract, and (2) his fraudulent inducement of Wal-Mart to enter into the Retirement Agreement, which incorporated a Mutual General Release (Release) between the parties, by his failure to disclose material facts and by his affirmative misrepresentations. We agree with Wal-Mart that it sufficiently pled Coughlin's duty, as a fiduciary, to disclose material facts as well as fraudulent inducement by Coughlin's affirmative misrepresentations so as to withstand a motion to dismiss under Rule 12(b)(6) of the Arkansas Rules of Civil Procedure. We further agree that the circuit court made a premature finding of fact in its order of dismissal relating to Coughlin's fraudulent purpose in connection with the Retirement Agreement and Release. We reverse and remand for further proceedings.

The facts are taken from Wal-Mart's First Amended Complaint. In 1978, Coughlin began working for Wal-Mart as the Director for Loss Prevention, where he had the responsibility to investigate theft, fraud, and abuse by Wal-Mart associates, suppliers, and others who may have committed these offenses against the company. From 1983 until 2003, Coughlin held various executive positions within Wal-Mart and the company's Sam's Club division. He also eventually became a member of the Wal-Mart Board of Directors. During this time, he retained responsibility for management of the Loss Prevention Department. In 2003, Coughlin assumed the position of Executive Vice President and Vice Chairman of the Board of Wal-Mart Stores, Inc. (USA), and later became Vice Chairman of Wal-Mart's Board of Directors.

In 2004, Wal-Mart announced that Coughlin would retire in 2005. On January 22, 2005, Wal-Mart and Coughlin entered into a Retirement Agreement, which included the Release between the parties, under which Coughlin was to receive millions of dollars in benefits over the ensuing years. In February 2005, after the execution of the agreement, Wal-Mart learned of Coughlin's fraudulent conduct after a store associate alerted Wal-Mart's internal investigations group that Coughlin had used a Wal-Mart gift card, issued internally for associate relations, for personal purchases. Through the internal investigation that followed, Wal-Mart learned that Coughlin had abused his position of authority and conspired with subordinates to misappropriate hundreds of thousands of dollars in cash and property through various fraudulent schemes. Three months after Wal-Mart signed the Retirement Agreement and Release with Coughlin, Wal-Mart suspended Coughlin's retirement benefits.

On July 27, 2005, Wal-Mart filed suit against Coughlin to void the Retirement Agreement and Release and alleged ten claims for relief: fraud, fraudulent concealment, breach of fiduciary duty, conversion, accounting, restitution based on rescission of the Retirement Agreement, declaratory judgment that Coughlin is not entitled to retirement benefits under the Retirement Agreement, restitution based on unjust enrichment, judgment for money had and received by Coughlin, and conspiracy. Coughlin moved to dismiss the complaint for failure to state a claim upon which relief could be granted under Rule 12(b)(6) of the Arkansas Rules of Civil Procedure. On November 1, 2005, the circuit court dismissed Wal-Mart's complaint with respect to all allegations occurring prior to the execution of the Retirement Agreement and Release. The circuit court ruled in its order that Wal-Mart had failed to plead specifically that it was fraudulently induced to sign the Retirement Agreement and Release. The court further stated that whether Coughlin had a duty to disclose material facts to Wal-Mart before signing the Retirement Agreement and Release was an issue of first impression in Arkansas and that it would not reach such a conclusion, particularly in light of the Release. In its order, the circuit court said: "the Arkansas trial court is the wrong venue in which to make new case law."

On November 4, 2005, Wal-Mart filed its First Amended Complaint and added fraudulent inducement of the Retirement Agreement and Release as a new claim for relief. Wal-Mart alleged in that new claim that Coughlin had made repeated misrepresentations to Wal-Mart about his conduct by his execution of Certifications and Disclosures pursuant to SEC regulations and Wal-Mart's internal policies, which attested to no wrongdoing. Wal-mart asserted that these misrepresentations induced it to enter into the Retirement Agreement and Release. On January 23, 2006, the circuit court entered its final order, which found that "Wal-Mart failed to specifically plead a nex[u]s between Coughlin's alleged fraud and the signing of the Release" and dismissed the First Amended Complaint.

I. Fiduciary's Duty to Disclose

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...