Articles Posted in Supreme Court of Alabama

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Employee-shareholders Steven Nichols, Deborah Deavours, Terry Akers, Thomas Dryden, and Gary Evans appealed a circuit court’s dismissal of their action against HealthSouth Corporation ("HealthSouth"). The employee shareholders at one time were all HealthSouth employees and holders of HealthSouth stock. In 2003, the employee shareholders sued HealthSouth, Richard Scrushy, Weston Smith, William Owens, and the accounting firm Ernst & Young, alleging fraud and negligence. The action was delayed for 11 years for a variety of reasons, including a stay imposed until related criminal prosecutions were completed and a stay imposed pending the resolution of federal and state class actions. In their original complaint (and in several subsequent amended complaints) the employee shareholders alleged that HealthSouth and several of its executive officers mislead investors by filing false financial statements of HealthSouth from 1987 forward. When the employee shareholders filed their action, the Alabama Supreme Court's precedent held: (1) that "[n]either Rule 23.1[, Ala. R. Civ. P.,] nor any other provision of Alabama law required stockholders' causes of action that involve the conduct of officers, directors, agents, and employees be brought only in a derivative action," and (2) that claims by shareholders against a corporation alleging "fraud, intentional misrepresentations and omissions of material facts, suppression, conspiracy to defraud, and breach of fiduciary duty" "do not seek compensation for injury to the [corporation] as a result of negligence or mismanagement," and therefore "are not derivative in nature." In the present case, the Alabama Supreme Court concluded the employee shareholders' claims were direct rather than derivative and that, the trial court erred in dismissing the employee shareholders' claims for failure to comply with Rule 23.1, Ala. R. Civ. P. Furthermore, the Court found employee shareholders' eighth amended complaint related back to their original complaint and thus the claims asserted therein were not barred by the statute of limitations. Accordingly, the judgment of the trial court was reversed and the cause remanded for further proceedings. View "Nichols v. HealthSouth Corporation" on Justia Law

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Employee-shareholders Steven Nichols, Deborah Deavours, Terry Akers, Thomas Dryden, and Gary Evans appealed a circuit court’s dismissal of their action against HealthSouth Corporation ("HealthSouth"). The employee shareholders at one time were all HealthSouth employees and holders of HealthSouth stock. In 2003, the employee shareholders sued HealthSouth, Richard Scrushy, Weston Smith, William Owens, and the accounting firm Ernst & Young, alleging fraud and negligence. The action was delayed for 11 years for a variety of reasons, including a stay imposed until related criminal prosecutions were completed and a stay imposed pending the resolution of federal and state class actions. In their original complaint (and in several subsequent amended complaints) the employee shareholders alleged that HealthSouth and several of its executive officers mislead investors by filing false financial statements of HealthSouth from 1987 forward. When the employee shareholders filed their action, the Alabama Supreme Court's precedent held: (1) that "[n]either Rule 23.1[, Ala. R. Civ. P.,] nor any other provision of Alabama law required stockholders' causes of action that involve the conduct of officers, directors, agents, and employees be brought only in a derivative action," and (2) that claims by shareholders against a corporation alleging "fraud, intentional misrepresentations and omissions of material facts, suppression, conspiracy to defraud, and breach of fiduciary duty" "do not seek compensation for injury to the [corporation] as a result of negligence or mismanagement," and therefore "are not derivative in nature." In the present case, the Alabama Supreme Court concluded the employee shareholders' claims were direct rather than derivative and that, the trial court erred in dismissing the employee shareholders' claims for failure to comply with Rule 23.1, Ala. R. Civ. P. Furthermore, the Court found employee shareholders' eighth amended complaint related back to their original complaint and thus the claims asserted therein were not barred by the statute of limitations. Accordingly, the judgment of the trial court was reversed and the cause remanded for further proceedings. View "Nichols v. HealthSouth Corporation" on Justia Law

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In 2014, Traci Salinas and Sharon Lee Stark, as shareholders of Sterne Agee Group, Inc. ("SAG") filed a shareholder-derivative action, on behalf of nominal defendant SAG, against James and William Holbrook and the nonHolbrook directors, who together composed the SAG board of directors. Salinas and Stark alleged that the Holbrooks had breached their fiduciary duty to the SAG shareholders by misusing, misappropriating, and wasting corporate assets and that the non-Holbrook directors had knowledge of, and had acquiesced in, the Holbrooks' alleged misconduct. In 2015, while Salinas and Stark's action was pending, SAG entered into a merger agreement with Stifel Financial Corp. ("Stifel") pursuant to which Stifel would acquire SAG ("the merger"). As a result of the merger, each share of certain classes of SAG stock was to be converted into a right of the shareholder to receive a pro rata share of merger consideration in cash and/or shares of Stifel common stock. The Holbrooks moved for summary judgment in which they argued that, under Delaware law, when a plaintiff in a shareholder-derivative action ceases to be a shareholder of the corporation on whose behalf the action was brought, the shareholder was divested of standing to continue prosecuting the derivative action. Thus, the Holbrooks argued, because Salinas and Wainwright were no longer SAG shareholders following the merger, they lacked standing to prosecute their derivative action and, the argument continued, the Holbrooks were entitled to a judgment as a matter of law. In response, Salinas and Wainwright amended their complaint to allege that a merger "cannot absolve fiduciaries from accountability for fraudulent conduct that necessitated the merger." Rather, they maintained, "such conduct gives rise to a direct claim that survives the merger, as the injury caused by such misconduct is suffered by the shareholders rather than the corporation, and thereby supports a direct cause of action." Subsequently, the parties filed a stipulation of dismissal in which they dismissed Salinas from the action, leaving Wainwright as the sole plaintiff. The Alabama Supreme Court determined that a May 2017 trial court order did not come within the subject-matter-jurisdiction exception to the general rule that the denial of a motion to dismiss or a motion for a summary judgment was not reviewable by petition for a writ of mandamus. “The petitioners have an adequate remedy by way of appeal should they suffer an adverse judgment. Accordingly, we deny the petitions.” View "Ex parte Jon S. Sanderson et al." on Justia Law

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In case no. 1130590, Kathryn L. Honea appealed the denial of her motion to vacate an arbitration award entered in favor of Raymond James Financial Services, Inc. ("Raymond James"), and Bernard Michaud, an employee of Raymond James (collectively, "RJFS"). In case no. 1130655, RJFS appealed the trial court's denial of its motion to dismiss for lack of jurisdiction; that appeal was dismissed. Honea opened several investment accounts with Raymond James. Honea and Raymond James executed a "client agreement" that included an arbitration provision. Honea filed a complaint in the Jefferson Circuit Court asserting that she had opened four accounts with Raymond James and that Michaud had acted as her financial advisor as to those accounts. She alleged that RJFS engaged in "abusive brokerage practices" in that her investments were not diversified, "were far too risky," and "were of poor quality." The arbitration panel dismissed Honea's breach-of-fiduciary-duty, negligence, wantonness, fraud, and Alabama Securities Act claims and proceeded to hear the breach-of-contract claims. An arbitration panel entered an award in favor of RJFS. The arbitration panel found that "Michaud did not sufficiently know his client nor make sufficient inquiry to attempt to know his client, her holdings, and/or her investment experience. These failures contributed to losses in [Honea's] account." However, the arbitration panel "denied" Honea's breach-of-contract claims, stating that they were "barred by the applicable statutes of limitations." Although the Alabama Supreme Court found one contract appeared to govern this case and that RJFS breached its duties by failing to properly understand Honea's investment knowledge before March 2000, Honea contended that allegedly improper transactions--the excessive use of margin and overly aggressive, high-risk trading occurring after March 2000--represented independent breaches of the FINRA rules. Those claims accrued within the six-year limitations period before her complaint was filed. Further, any knowledge by Honea of her losses did not mean that the trading activity was proper. Thus, to the extent that any transactions after March 2000 would be considered separate breaches of contract unrelated to the failure to properly know Honea, her holdings, or her investment experience, or setting up an "unsuitable" account, the Court found Honea demonstrated probable merit--for purposes of a Rule 59(g) hearing--that those claims would not be barred by the statute of limitations. Honea demonstrated that, in relation to the certain breach-of-contract claims, she was entitled to a Rule 59(g) hearing on her motion to vacate the arbitration award. View "Honea v. Raymond James Financial Services, Inc." on Justia Law