NOT DESIGNATED FOR PUBLICATION

ARKANSAS COURT OF APPEALS

JOHN B. ROBBINS, JUDGE

DIVISION III

JOHN E. ATKINS

APPELLANT

V.

BOB E. FEWELL, ROBERT O. SMITH, JR., TONEY REALTY CO., WHIPPOORWILL HEIGHTS SUBDIVISION PARTNERSHIP, and WHIPPOORWILL HEIGHTS, INC.

APPELLEES

CA 00-1302

SEPTEMBER 12, 2001

APPEAL FROM THE PULASKI

COUNTY CHANCERY COURT

[NO. OT 96-2175]

HONORABLE ALICE S. GRAY,

CHANCERY JUDGE

REVERSED AND REMANDED

This is an appeal from an order of the Pulaski County Chancery Court that dismissed with prejudice appellant's complaint, first amended complaint, and second amended and substituted complaint for failure to include a corporate party as a plaintiff. We reverse and remand.

Appellant John E. Atkins ("Atkins") is an investment partner and shareholder who brought an action for an accounting and dissolution of the partnership and the corporation. On August 28, 1984, appellees Robert O. Smith ("Smith"), John D. Toney ("Toney"), and Bob Fewell ("Fewell") formed a partnership with appellant called Whippoorwill Heights Subdivision Partnership ("WHSP"). The purpose of the partnership was to buy, develop, and sell land in Saline County. Fewell borrowed the capital to fund the development, and the other partners agreed to execute promissory notes including interest to Fewell, whichwere to be secured by mortgage liens on the real estate purchased by the partnership for their

respective shares. The interest rate on the promissory notes was to be adjusted annually based on the prime lending rate then in effect. On January 2, 1992, three of the partners, Atkins, Smith, and Fewell, formed a sub-chapter "S" corporation called Whippoorwill Heights, Inc. ("WHI"), for tax purposes. They transferred their previously-owned individual interests in WHSP to WHI. This left WHSP with two partners, Toney Realty Company1 and WHI. Despite having conveyed their individual interests into the corporation, on January 4, 1992, Atkins and appellees Fewell, Smith, and Toney Realty Company entered into an "Amended and Re-Stated Partnership Agreement for Whippoorwill Heights Subdivision."

Apparently, Atkins first sued appellees in 1996 for an accounting and dissolution of the partnership and corporation. That complaint, however, was not made a part of the record for this appeal. Atkins also filed a first amended complaint against the appellees, which also was not made a part of the record.

On August 24, 1999, Atkins filed a motion in limine, objecting to appellees presenting evidence that would establish WHI as a corporate entity separate from the partnership. Atkins stated in the motion that he was told during discovery that the formation of WHI did not change the way the partnership business was handled and, as a result, he did not inquire further into the actual separate-entity status of WHI. However, he said that helater discovered that it was an issue. A hearing was held on his motion on August 24, 1999. On September 17, 1999, Atkins filed a second amended and substituted complaint. The second amended complaint alleged inter alia that Fewell breached the partnership agreement and that he violated his duties to the partners and WHI and that Atkins's requests for an accounting had been refused. He prayed for an accounting and a dissolution of the partnership and the corporation. On October 11, 1999, appellees filed a motion to dismiss and/or strike Atkins's second amended and substituted complaint. On December 21, 1999, the trial court entered a nunc pro tunc order dated August 24, 1999. The order was entered in response to the August 24 hearing, and the court found that Atkins was not the proper party to bring the lawsuit and allowed Atkins thirty days to amend the complaint to substitute the proper plaintiff. The court further ordered that if the complaint was not amended, it would be dismissed in its entirety. This December 21 order neither addressed nor made reference to Atkins's second amended and substituted complaint or appellees' motion to strike. On December 30, 1999, Atkins filed a motion to amend or modify the December 21 order and argued that a corporation is not required to be made a plaintiff in a minority stockholder suit on behalf of the corporation. Appellees filed responses and asked that Atkins's motion to amend be dismissed.

On April 20, 2000, a hearing was held on the motions to dismiss and motion to modify the judgment. The court entered an order on July 18, 2000, in which it found that the parties acknowledged at the August 24, 1999, hearing that the legal partners in WHSP were WHI and Toney Realty Co., Inc.; that it was undisputed that Atkins was not a partnerin WHSP and individually had no interest therein; that Atkins requested and was granted additional time in which to amend his complaint to include the corporation as a plaintiff, but that he failed to do so; and that he filed a second amended and substituted complaint for an accounting and dissolution of partnership, which raised issues previously addressed by the court and which failed to comply with the court's December 21, 1999, order. The court dismissed the complaint, first amended complaint, and second amended and substituted complaint with prejudice.

Atkins appeals from the July 18, 2000, order and raises three issues: 1) whether the court erred in dismissing the second amended and substituted complaint because the corporation was not included as a plaintiff; 2) whether the court erred in dismissing the second amended and substituted complaint for an accounting against Bob Fewell as managing partner and officer; and 3) whether the court erred in finding that the second amended and substituted complaint failed to state a cause of action.

We agree with Atkins's argument that the trial court erred in dismissing his second amended complaint for failure to include the corporation as a plaintiff. Therefore, we reverse and remand.

The appellees contend in their briefs that, to the extent that the second amended complaint could be construed as a derivative action, it failed to comply with Rule 23.1 of the Arkansas Rules of Civil Procedure, which provides:

In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it,the complaint shall be verified and shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort. 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 action shall not be dismissed or compromised without the approval of the court and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs.

Specifically, the appellees contend that Atkins failed to comply with the rule because: (1) the second amended complaint was not verified; (2) the complaint failed to allege with particularity any efforts made to obtain the action desired from the directors or shareholder; and (3) Atkins made no effort to establish that he fairly and adequately represented any similarly situated minority shareholders.

We hold that Atkins's second amended complaint adequately apprised the trial court that it purported to be a derivative action and that there was substantial compliance with Rule 23.1. Contrary to appellees' assertion, Atkins filed a verification on October 14, 1999. Moreover, in accordance with Rule 23.1, the complaint averred:

That Defendants, Fewell, with 57.14%, and Smith, with 14.28%, represent the controlling amount of stock of Whippoorwill, Inc., and Fewell controls the financial and record keeping as Treasurer and Secretary, and operates the corporation as his own without stockholder or director's meetings, and without other officer involvement. That Fewell has refused, and Fewell and Smith have opposed an accounting from the Managing Partner and de facto manager of the corporation, and both have vigorously opposed the need for an accounting from Fewell and Smith; and, that any formal action by the corporate entity which is controlled by stockholders Fewell and Smith, to require Fewell and Smith to account for their/Fewell's wrongful actions, would be a futile gesture and a useless demand[.]

In support of his position, Atkins correctly cited Morgan v. Robertson, 271 Ark. 461, 609 S.W.2d 662 (1980), which held:

The law does not require a futile ceremony. Therefore, where a majority of the directors are under the control of a majority of the stockholders, and an action is brought against them by an innocent shareholder in his own name, charging wrongdoing on their part in the manner above indicated, it is not necessary for him to allege and prove, as a condition precedent to the maintenance of the action, that, before instituting the same, he protested to the board of directors against their own mismanagement and appealed to them for redress. Such protest would fall upon deaf ears, because a majority of the directors could not be expected to authorize, or to institute, an action against themselves charging themselves with fraud.

Id. at 467, 609 S.W.2d at 665 (citing Red Bud Realty Co. v. South, 153 Ark. 380, 241 S.W.2d 21 (1922)). Finally, Atkins's complaint asserted that "Atkins, as a minority stockholder of Whippoorwill, Inc., is uniquely qualified to and will fairly and adequately represent the interest of the stockholders similarly situated." The burden of showing that the party bringing a derivative action does not fairly and adequately represent the interests of the shareholders is always on the defendant, Brandon v. Brandon Construction Co., 300 Ark. 44, 776 S.W.2d 349 (1989), and the record in the instant case fails to reflect that the appellees met that burden.

Rule 41(b) of the Arkansas Rules of Civil Procedure gives the trial court the authority to dismiss cases in which the plaintiff has failed to comply with any order of the court. Wolford v. St. Paul Fire & Marine Ins. Co., 331 Ark. 426, 961 S.W.2d 743 (1998). Our standard of review of such a dismissal is whether the trial court abused its discretion. Id. We hold that the chancery court abused its discretion in dismissing Atkins's derivative action because the corporation was not a necessary plaintiff.

We are unable to address Atkins's remaining two arguments due to deficiencies in the record. In its final order, the chancery court found that Atkins's second amended complaint was being dismissed in part because the complaint raised "issues previously addressed by the court[.]" Prior complaints and orders of the trial court in this proceeding are absent from the record. The original complaint was filed in 1996, but Atkins has failed to provide any record preceding August 24, 1999. Because we are unable to ascertain the previous rulings by the trial court pertaining to Atkins's personal claims for an accounting and dissolution, our reversal pertains only to the dismissal of his derivative action.

Reversed and remanded for further proceedings consistent with this opinion.

Bird and Vaught, JJ., agree.

1 It is not clear from the record when John Toney incorporated and transferred his partnership interest into his corporation.