BOLIN, Justice.
James R. Adams, Stanley Dye, and Ed Holcombe (collectively referred to as "the plaintiffs"), individual shareholders in Altrust Financial Services, Inc. ("Altrust"), sued Altrust; Peoples Bank of Alabama ("the Bank"); J. Robin Cummings, Whit Drake, N. Jasper Estes, Cecil Alan Walker, Terry Neal Walker, Timothy Dudley Walker, and Brian C. Witcher ("the individual defendants")
On January 7, 2010, the Altrust defendants moved the trial court pursuant to Rule 12(b)(6), Ala. R. Civ. P., to dismiss the claims asserted against them by the plaintiffs. On January 8, 2010, the plaintiffs amended their complaint to add 10 additional plaintiffs. The Altrust defendants then moved the trial court pursuant to Rule 12(b)(6) to dismiss the plaintiffs' first amended complaint. On January 25, 2010, Dixon Hughes moved the trial court pursuant to Rule 12(b)(6) to dismiss the claims asserted against it.
On February 12, 2010, the plaintiffs amended their complaint a second time to add two additional plaintiffs and to assert additional claims of aiding and abetting a fraud against two of the individual defendants and conspiracy against the Altrust defendants. All the defendants moved
On March 9, 2010, the plaintiffs amended their complaint a third time, restating the prior complaint and adding allegations of fraudulent suppression in count III as to the Altrust defendants. On March 23, 2010, all defendants moved the trial court pursuant to Rule 12(b)(6) to dismiss the claims asserted against them in the plaintiffs' third amended complaint. On April 6, 2010, the trial court entered an order denying the motions to dismiss the plaintiffs' claims asserted in the third amended complaint.
On April 21, 2010, the Altrust defendants moved the trial court to set aside its April 6, 2010, order denying their motions to dismiss and moved the trial court to set a hearing on the motions to dismiss the plaintiffs' third amended complaint. In the alternative, the Altrust defendants sought a permissive appeal pursuant to Rule 5, Ala. R.App. P. On April 23, 2010, Dixon Hughes joined the motion to set aside or, in the alternative, for a permissive appeal pursuant to Rule 5, Ala. R.App. P. The trial court granted the motions to set aside and set a hearing on the motions to dismiss the plaintiffs' third amended complaint. On July 30, 2010, the plaintiffs filed their consolidated response in opposition to the motions to dismiss the third amended complaint.
Following the hearing, the trial court, on August 10, 2010, entered an order dismissing the claims alleging securities fraud, aiding and abetting, and conspiracy. The trial court denied the motions to dismiss as to the professional-negligence claim against Dixon Hughes and the negligence claims against the Altrust defendants. The trial court certified the judgment as final pursuant to Rule 54(b), Ala. R. Civ. P. The plaintiffs appeal the dismissal of their claim alleging securities fraud (case no. 1091759).
Altrust is a holding company that fully owns, controls, and directs the operations of the Bank. Altrust and the Bank share common officers and directors and issue consolidated financial statements. Dixon Hughes is a public-accounting firm that completed audits of and prepared financial reports for Altrust and the Bank in 2005 and 2006.
In January 2008, Altrust notified its shareholders of a meeting of the shareholders to be held on February 12, 2008, in order to vote on an agreement and plan of reorganization of the company. Altrust sought to reorganize the company by changing its status from a publicly held company to a privately held company. The change in status from a publicly held company to a privately held company was to be accomplished by reducing the number of shareholders to below 300, which would free the company of certain reporting obligations imposed by the Securities Exchange Act of 1934 and would also allow
The proxy statement provided to the shareholders by Altrust set forth the plan and purpose of the proposed reorganization:
As part of the reorganization, Altrust contemplated a mandatory repurchase of stock from some shareholders. The proxy statement provided that Altrust intended to pay $17.25 per share to any shareholder not eligible to be an S-corporation shareholder, any holder of 6,400 or fewer shares, or any shareholder who elected not to remain a shareholder of Altrust. Those shareholders who did not elect to sell their shares of Altrust stock would remain shareholders of Altrust. The proxy statement also provided that if the shareholder elections required Altrust to purchase more than 950,000 shares of stock at
The proxy statement also included references to Altrust's financial reports for the years ending December 31, 2005, and December 31, 2006. These financial statements were audited by Dixon Hughes, who reported that the financial statements were "free from material misstatements." In forms filed by Altrust with its 2006 annual financial report, Altrust represented that Dixon Hughes had evaluated its internal financial-reporting controls and noted "no material weaknesses" in those controls.
Relying upon the information contained in the proxy statement, including the financial reports, the plaintiffs elected not to sell their shares of Altrust stock at $17.25 per share. Instead, the plaintiffs voted in favor of the proposed reorganization of Altrust and signed new shareholders' agreements thereby remaining shareholders in Altrust. As set forth in the proxy statement, the reorganization of Altrust was facilitated by merging Holly Pond Corp., a wholly owned subsidiary of Altrust, with and into Altrust, with Altrust remaining as the surviving corporation. There was no exchange of shares of stock in a new company, and no new stock certificates were issued by Altrust.
The plaintiffs allege that the proxy statement and the financial reports contained material misrepresentations and omissions that induced them to sign the shareholders' agreements agreeing to remain shareholders in Altrust. Specifically, the plaintiffs allege that the proxy statement and the financial reports failed to disclose the following:
We review the trial court's rulings on the plaintiffs' claims de novo.
Nance v. Matthews, 622 So.2d 297, 299 (Ala.1993). We note further that, as to the trial court's dismissal of the plaintiffs' securities-fraud claim:
Nance, 622 So.2d at 299.
The plaintiffs sued all the defendants asserting a claim of securities fraud under the Alabama Securities Act, § 8-6-1 et seq., Ala.Code 1975 ("the Act"). Specifically, the plaintiffs alleged that the defendants issued the proxy statement that contained material misrepresentations and omissions of material facts; that the misrepresentations and omissions of material facts were made in connection with the offer, sale, or purchase of shares of Altrust stock; and that, as a proximate result of the defendants' acts and omissions in violation of the Act, the plaintiffs "relied upon the misrepresentations and omissions and were induced to sign the shareholders agreement[s], agreeing to remain as shareholders in [Altrust], instead of receiving $17.25 per share for their stock in [Altrust]. At the times they signed the shareholder agreement[s], plaintiffs did so without knowledge of the facts concerning the misstatements or omissions alleged herein."
The plaintiffs appear to allege that the defendants violated § 8-6-17(a) of the Act, which provides:
The civil remedy provided by the Act is found at § 8-6-19, Ala.Code 1975, which provides, in part, as follows:
(Emphasis added.)
The express language of § 8-6-19(a) provides a civil remedy for violations of the Act only to purchasers of a security under the Act. See Van Hoof v. Van Hoof, 997 So.2d 278 (Ala.2007) (affirming a summary judgment in favor of defendant where the plaintiff did not assert any claims by which she sought to recover consideration paid for a security that was offered or sold). See also White v. Sanders, 650 F.2d 627, 629 (5th Cir.1981) (stating that Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1981), which is virtually identical to § 8-6-17(a), provides "redress for defrauded purchasers and sellers of securities, whereas the Alabama blue sky law [the Act] allows recovery by purchasers only"); and Hunt v. American Bank & Trust Co. of Baton Rouge, La., 606 F.Supp. 1348, 1353 (D.C.Ala.1985) (stating that "[t]he primary distinction between the Alabama Blue Sky law [the Act] and the federal securities law 10b-5 claim is that the Alabama securities fraud remedies can only be sought by a purchaser whereas the federal remedy is open to both sellers and purchasers").
The plaintiffs' theory of the case, as it relates to the claim asserting securities fraud, is that the defendants issued or participated in the issuance of the proxy statement that contained material misrepresentations and omissions of material facts in connection with the offer to purchase the plaintiffs' shares of Altrust stock. The plaintiffs further allege that they relied upon the misrepresentations and omissions contained in the proxy statement and that they were induced into signing the shareholders' agreements agreeing to remain shareholders in Altrust instead of receiving the offered price of $17.25 per share for their Altrust stock, which they state is, and at all relevant times has been, worth far less than $17.25 per share. The plaintiffs have not alleged any facts indicating or asserted any claims alleging that they were purchasers of Altrust stock. Accordingly, the plaintiffs cannot assert a claim of securities fraud under the Act, and the trial court did not err in dismissing the plaintiffs' securities-fraud claim.
The plaintiffs alleged in count III of their original complaint that the Altrust defendants had negligently breached certain duties of care owed in the management and administration of Altrust's affairs, including the duty to "exercise reasonable and prudent supervision over the management, practices, controls and financial affairs of [Altrust]." However, the plaintiffs, in their third amended complaint, amended count III of the original complaint to allege that the Altrust defendants failed to disclose the breaches of duty, including the instances of alleged wrongdoing set out above, that proximately resulted in the plaintiffs'
In granting the defendants' motions for a permissive appeal pursuant to Rule 5, Ala. R.App. P., the trial court certified the controlling question of law as whether the plaintiffs have standing to bring a "direct action"—as opposed to a derivative action pursuant to Rule 23.1, Ala. R. Civ. P.—like the action asserted by the plaintiffs in counts II and III of their third amended complaint. The trial court noted that the plaintiffs cited Boykin v. Arthur Andersen & Co., 639 So.2d 504 (Ala.1994), as controlling, whereas, the defendants relied on a number of other decisions the trial court noted were in direct conflict with the Boykin decision.
The Altrust defendants strenuously argue that the plaintiffs' claims of wrongdoing, which the plaintiffs say resulted in a loss in what the plaintiffs could have received for their shares of stock, is a quintessential derivative claim that must be brought on behalf of Altrust and that cannot be maintained as a direct action by the plaintiffs. The plaintiffs contend that the trial court properly denied the Altrust defendants' motion to dismiss their claims because, they say, they have properly alleged a direct claim of fraud against the Altrust defendants under Boykin.
"[I]n analyzing whether a claim is derivative or direct, this Court looks to the nature of the alleged wrong rather than the designation used by the plaintiff in the complaint." Baldwin County Elec. Membership Corp. v. Catrett, 942 So.2d 337, 345 (Ala.2006). In Boykin, the plaintiffs, two stockholders in Secor Bank, sued certain officers and directors of the bank, as well as the bank's independent public-accounting firm, asserting claims of fraud, conspiracy, professional negligence, and breach of fiduciary duty alleging that the defendants had deliberately entered into a scheme to defraud "the stockholders of the bank by misrepresenting its true financial condition." Boykin, 639 So.2d at 506. The plaintiffs later amended their complaint to assert claims on behalf of all shareholders in a class action.
The Boykin plaintiffs claimed that the defendants, acting in concert, mismanaged the bank and refused to disclose material liabilities and failed to disclose three years of losses resulting from millions of dollars of bad commercial loans. The Boykin plaintiffs alleged that the defendants knew the true financial condition of the bank and yet failed to mention material losses or liabilities on three years of annual reports. The claims asserted by the Boykin plaintiffs were asserted on their own behalf and not derivatively on behalf of the bank. The damages claimed by the Boykin plaintiffs were based on the "purchase, retention, and/or sale of stock with a fair market value substantially less than that represented by the defendants, and on the diminution of the value of the plaintiffs' stock." Boykin, 639 So.2d at 506.
In reversing the judgment of the trial court, this Court in Boykin stated:
Boykin, 639 So.2d at 507-08.
Justice Maddox stated the following in his dissent in Boykin:
Boykin, 639 So.2d at 511-12 (Maddox, J., dissenting).
The Boykin decision appears to conflict with settled principles in this area of the law. "It is well settled that when individual damages sought to be recovered by a plaintiff are incidental to his or her status as a stockholder in a corporation, the claim is a derivative one and must be brought on behalf of the corporation." Pegram v. Hebding, 667 So.2d 696, 702 (Ala.1995). "It is only when a stockholder alleges that certain wrongs have been committed by the corporation as a direct fraud upon him, and such wrongs do not affect other stockholders, that one can maintain a direct action in his individual name." Green v. Bradley Constr., Inc., 431 So.2d 1226, 1229 (Ala.1983). Justice Houston noted the general rule in his special writing concurring in the result in Gilliland v. USCO Power Equipment Corp., 631 So.2d 938 (Ala.1994):
631 So.2d at 940 (quoting Andrew P. Campbell, Litigating Minority Shareholder Rights and the New Tort of Oppression, 53 Ala. Law. 108, 114 (March 1992)).
The principles of law set forth above in Justice Maddox's dissent in Boykin and Justice Houston's special writing in Gilliland have been consistently applied in a number of decisions decided both before and after Boykin. In Green, supra, the plaintiff stockholder sued the defendants, alleging that their fraudulent conduct caused him to suffer a loss of his share of certain income and equities of the corporation. The defendants moved to dismiss the complaint, and the trial court granted their motion. The plaintiff stockholder argued on appeal that the defendants' fraudulent conversion of his funds from the corporation was, in effect, a conversion of his personal assets. He contended that his status to maintain suit was not based on its being a derivative action but, instead, on the establishment of a constructive trust for funds that had accrued to him but that had been fraudulently converted by the defendants for their personal use. This Court determined that because the acts alleged would affect all stockholders, the plaintiff lacked standing to prosecute his direct action. "It is only when a stockholder alleges that certain wrongs have been committed by the corporation as a direct fraud upon him, and such wrongs do not affect other stockholders, that one can maintain a direct action in his individual name." Green, 431 So.2d at 1229.
In Shelton v. Thompson, 544 So.2d 845 (Ala.1989), the plaintiff stockholders of a bank sued certain officers and directors of the bank on behalf of themselves, other unnamed stockholders similarly situated, and derivatively on behalf of the bank, alleging that the defendant officers and directors of the bank had made bad or fraudulent loans in breach of their fiduciary duties, thereby causing injury to the bank and to the individual plaintiffs. The defendants moved to dismiss the complaint against them, arguing, among other things, that the plaintiffs had failed to allege facts sufficient to allow the plaintiffs to sue and recover individually. In granting the defendants' motion, the trial court reasoned in part that the plaintiffs did not have standing to sue on their own behalf because the alleged wrongs were to the bank. This Court affirmed the trial court's dismissal of the plaintiffs' individual claims, stating: "Whatever damages the plaintiffs may have suffered were incident to their status as stockholders; and whatever recovery may be effected by the derivative action inures to the benefit of all innocent stockholders and not to the plaintiff stockholders individually." Shelton, 544 So.2d at 847.
In McLaughlin v. Pannell Kerr Forster, 589 So.2d 143 (Ala.1991), a group of stockholders sued an independent accounting firm on behalf of themselves, other stockholders, and, derivatively, the corporation, asserting claims of breach of contract and fraud and alleging that the accounting firm and two of its employees had failed to disclose in annual audits of the corporation that certain commissions were being improperly paid to and by several of the corporations' principal officers and directors. The plaintiffs claimed that as a result of the defendants' actions the corporation had been deprived of the use of a large sum of its money over an extended period. The defendants argued, among other things, that the plaintiffs lacked standing to sue on their own behalf because, they argued, the alleged injury was to the corporation. In affirming a summary
In Pegram, supra, a case decided after Boykin, the plaintiff, a stockholder and officer in the company, sued another corporate officer of the company, alleging, among other things, that the defendant corporate officer had forced the plaintiff from the company in order to implement and perpetuate a fraudulent accounting scheme. The plaintiff also sought damages from the defendant based on allegations that the defendant had suppressed information from the company's board of directors concerning the defendant's involvement in a scheme to defraud the company. The trial court directed a verdict in favor of the defendant on the plaintiff's fraudulent-suppression claim. The plaintiff argued on appeal that the defendant had a duty to disclose the fraudulent accounting scheme and that the defendant had failed to make that disclosure. The defendant argued that the suppression claim was a claim asserted on behalf of the company that could not support an award of damages to the plaintiff personally. Pegram, supra.
In affirming the judgment entered on the directed verdict in favor of the defendant, this Court stated:
Pegram, 667 So.2d at 702. The Court did not mention Boykin in its analysis.
In Stallworth v. AmSouth Bank of Alabama, 709 So.2d 458 (Ala.1997), AmSouth Bank had served as the executor of two estates that controlled a majority of a family-owned timber company's stock. The bank had appointed three of its employees to the company's board, thereby gaining a majority of the board of directors. The plaintiff, a stockholder in the timber company, sued the bank and its employees, asserting, among other things, individual claims of minority-shareholder oppression. The plaintiff alleged that the bank had sought to "squeeze" him out of the company, to deny him his share of benefits from the company, and to force him to sell his stock at a price disproportionately below the market value. The trial court entered a summary judgment in favor of the bank and its employees on the plaintiff's individual claims. In affirming the summary judgment in favor of the bank on the plaintiff's individual claims, this Court stated:
Stallworth, 709 So.2d at 466-67.
In James v. James, 768 So.2d 356 (Ala. 2000), the plaintiff, a minority shareholder in a company, sued the majority shareholder, alleging individual claims of fraudulent suppression and oppression/squeeze out and alleging, on behalf of the corporation, a breach of fiduciary duty. In determining that the individual claims asserted by the plaintiff were actually derivative claims, this Court stated:
James, 768 So.2d at 358-59.
The Altrust defendants and Dixon Hughes (in case no. 1091620) ask this Court to overrule Boykin or, in the alternative, to limit its scope because it is in direct conflict with the above-discussed authorities insofar as it holds that a plaintiff stockholder has standing to maintain a direct action based on fraud in the stockholder's individual name without alleging that certain wrongs have been committed as a direct fraud upon him and that such wrongs do not affect other stockholders. The decision in Boykin was a divergence in the law as it pertains to shareholder standing to bring a direct action alleging fraud against a corporation and its officers and directors. The main opinion in Boykin offered no guidance or analysis on how that decision might be reconciled with the contrary authority. Specifically, the main opinion in Boykin failed to discuss how the damage suffered by the plaintiffs as the result of the alleged fraud by officers, directors, and accountants differed from the damage suffered by other shareholders and whether the plaintiffs suffered an injury unique to them. Our research indicates that the decision in Boykin has not been followed as it pertains to this point of law. Accordingly, we hereby overrule Boykin. We reaffirm the rule as set forth in Pegram, supra, Green, supra, Justice Houston's special writing in Gilliland, supra, and Justice Maddox's dissent in Boykin. We now apply this rule to the allegations in the plaintiffs' complaint.
The plaintiffs contend that they have standing to assert a direct action alleging fraud against the Altrust defendants because, they say, they have sufficiently alleged that they suffered a harm that was unique to them. The plaintiffs argue in their brief to this Court:
We disagree. The reorganization plan as set forth in the proxy statement contemplated a mandatory repurchase of stock from shareholders owning 6,400 or fewer shares of stock and from those shareholders otherwise ineligible to own stock in a Subchapter S corporation. The remaining class of eligible shareholders, to which the plaintiffs belong, were given the option of voting in favor of the reorganization plan and remaining shareholders in Altrust or accepting the offer from Altrust to purchase their stock at $17.25 per share.
We note that the damages the plaintiffs seek to recover here are incidental to their status as part of the remaining eligible shareholders in Altrust not covered by the mandatory repurchase provision. Where the damages sought to be recovered are incidental to the plaintiff's status as a shareholder, including damages based on a claim of fraudulent suppression, the claim is a derivative one and must be brought on behalf of the corporation. James, 768 So.2d at 358-59, citing Pegram, 667 So.2d at 703. Although the plaintiffs have cast their claim for damages as a fraudulent-suppression claim, the actual harm—the diminution of their Altrust stock based on the actual state of affairs at the company—was caused by the alleged mismanagement and wrongdoing of the Altrust officers and directors. This harm is not unique to the plaintiffs; rather, it is suffered equally by all remaining eligible shareholders in Altrust. Because the harm suffered by the plaintiffs also affects all other remaining eligible shareholders in Altrust, the plaintiffs do not have standing to assert a direct action. Green, supra. Accordingly, we conclude that the trial court erred in denying the Altrust defendants' motion to dismiss the action against them because the plaintiffs do not have standing to maintain a direct action in this case.
In asserting their professional-negligence claim against Dixon Hughes, the plaintiffs alleged that Dixon Hughes performed accounting and auditing services in connection with the financial statements contained in the proxy statement; that Dixon Hughes was aware that the financial statements were being prepared for the benefit of the plaintiffs and other shareholders; that Dixon Hughes was aware that the plaintiffs and other shareholders would rely upon the financial statements in making investment decisions; that Dixon Hughes was aware that the financial statements it certified would be relied upon by the plaintiffs and other shareholders as stating the true and correct financial status and condition of Altrust; that Dixon Hughes owed a duty of care to the plaintiffs to ensure that the financial statements were accurate and did not contain any fraudulent or misleading financial information; that Dixon Hughes reported that the financial statements were free of material misstatement; that because of Dixon Hughes's expertise in matters of accounting and auditing the plaintiffs properly relied upon Dixon Hughes's report; that Dixon Hughes failed to exercise its duty of diligence and due care; and that because of Dixon Hughes's negligence the plaintiffs have suffered substantial harm.
As discussed above under the heading "Case No. 1091610," the "substantial harm" actually suffered by the plaintiffs was caused by the alleged mismanagement and wrongdoing of the Altrust officers and directors. The damages the plaintiffs seek
Because the harm alleged to be suffered by the plaintiffs also affects all other remaining eligible shareholders in Altrust, the plaintiffs do not have standing to assert a direct action. Green, supra. Because the plaintiffs' action is derivative in nature and they do not have standing to assert a direct action for an individual injury, the trial court erred in denying Dixon Hughes's motion to dismiss. See McLaughlin, 589 So.2d at 144.
Accordingly, we conclude that the trial court erred in denying Dixon Hughes's motion to dismiss the professional-negligence claim against it because the plaintiffs do not have standing to maintain a direct action claiming professional negligence for any alleged harm suffered that was incidental to their status as shareholders and that was not unique to them.
We affirm the trial court's dismissal of the plaintiffs' claim alleging securities fraud. We reverse the trial court's denial of the Altrust defendants' motion to dismiss the fraudulent-suppression claim against it. We also reverse the trial court's denial of Dixon Hughes's motion to dismiss the professional-negligence claim against it. We remand the cause to the trial court for proceedings consistent with this opinion.
1091759—AFFIRMED.
1091610—REVERSED AND REMANDED.
1091620—REVERSED AND REMANDED.
COBB, C.J., and WOODALL, STUART, PARKER, SHAW, MAIN, and WISE, JJ., concur.
MURDOCK, J., concurs in the result.
MURDOCK, Justice (concurring in the result).
I concur in the result reached by the main opinion in each of these consolidated cases.
As a preliminary matter, I wish to note that the issue of "standing" referenced in
Of more substantive concern is the fact that the Court today, in pursuing the legitimate need to limit the reach of this Court's opinion in Boykin, chooses to overrule Boykin in its entirety, rather than only to the extent that it speaks to the specific type of circumstances presented in the case before us. Concomitantly, I am concerned by the analysis by which this Court reaches its decision today to overrule Boykin and, in turn, to reverse the judgment of the trial court. As to the analysis, I am concerned that the choice of certain language in Green v. Bradley Construction, Inc., 431 So.2d 1226 (Ala.1983), has set both the dissenting opinion of Justice Maddox in Boykin and the main opinion in the present case, which relies upon both Green and Justice Maddox's dissent in Boykin, upon an incorrect analytical path of considering "direct claims" by shareholders as possible only when the losses complained of are not suffered by other shareholders.
As to the former concern, I first note that the main opinion in Boykin tells us merely that the damages claimed in that case were "based on the purchase, retention, and/or sale" of stock. 639 So.2d at 506 (emphasis added). It is unclear from this passage whether the claim in that case was anything other than one made by "retaining" shareholders for alleged losses caused by the failure of management to disclose mismanagement of the corporation at issue.
It may further be noted, however, that the dissenting opinion of Justice Maddox, upon which the majority relies today, apparently considered Boykin to be a case in which the plaintiffs merely sought to recover "for diminution in the value of their stock caused by a breach of fiduciary duties by corporate officers and directors." 639 So.2d at 511 (emphasis added).
The present case involves only a retention of stock, specifically a retention of stock by preexisting shareholders who retained their stock in reliance upon what they say was a fraudulent suppression by management of material information, which suppression allegedly resulted in an artificially high price for the stock of which the shareholders chose not to take advantage. Today's case does not involve a purchase or sale of securities in reliance upon a fraudulent misrepresentation or suppression. Consequently, to decide the present case, I do not see it necessary to overrule Boykin except to the extent Boykin holds that shareholders retaining their stock under such circumstances as described above have a direct action against those in management responsible for the suppression. That is, it is not necessary to overrule Boykin to the extent it stands for the proposition that shareholders who actually sell or purchase securities in reliance upon fraudulent representations or suppression directed to them have no "direct action" for their injuries.
Moreover, in conjunction with overruling Boykin in its entirety, even to the extent Boykin stands for the proposition that a purchase or sale of securities made in reliance upon a fraudulent representation or suppression may be brought as a direct action, the main opinion employs the following statement from this Court's opinion in Green v. Bradley Construction, Inc., 431 So.2d 1226, 1229 (Ala. 1983) (emphasis added): "`It is only when a stockholder alleges that certain wrongs have been committed by the corporation as a direct fraud upon him, and such wrongs do not affect other stockholders, that one can maintain a direct action in his individual name.'" 76 So.3d at 241 and 242 (quoting Green, 431 So.2d at 1229, and Justice Maddox's dissent in Boykin, 639 So.2d at 511, which likewise invoked the quoted passage from Green). As I indicate at the outset of this writing, I am concerned that in so doing this Court draws too much from the use of the term "fraud" and, as a result, indicates with its analysis today that even a fraudulent representation or suppression that is directed to a shareholder and that results in a sale or purchase of a security is not directly actionable if the shareholder possesses his or claim in common with other shareholders.
The gravamen of so-called "direct claims" is misconduct directed at shareholders, causing each of them to act or to fail to act to their individual detriment, rather than misconduct (such as waste or conversion of corporate assets, or intentional mismanagement) that simply lessens the value of the corporation as an entity. Conceptually, it is only misconduct and injury of the latter variety that makes for a claim in the corporation against members of its own management. The issue is whether the wrong is one committed against stockholders as individuals or
A close look at Green reveals that, unlike the claim in the present case, the claim filed in Green was in fact a derivative claim, and that the only issue in that case was simply whether Alabama law prevented the plaintiff from filing this derivative claim because he was not a stockholder at the time he filed his action. That, of course, is not the issue in the present case. Further, because of the nature of the issue presented in Green, it may be argued that the quoted passage relied upon in Boykin and in this case, addressing as it does what is required in order for a stockholder to be able to maintain a direct action, was dictum.
More importantly, it should be noted that, although the Court in Green referred to "fraud" upon the plaintiff, that case did not involve fraudulent representations or suppression; neither did it involve a purchase or sale of corporate stock in reliance upon the same. Instead, the "fraud" referenced in the above-quoted passage was that of an alleged "conversion" of the plaintiff's share of certain corporate assets, which the opinion spoke of as an event that worked a "fraud" on the shareholder-plaintiff. In other words, the complaint concerned alleged mismanagement, or a breach of fiduciary duty, as to the corporation itself. So understood, the quoted passage cannot fairly be read as limiting direct actions for actual fraudulent representations or suppressions directed to and relied upon by a selling or buying shareholder to only those cases where "such wrongs do not affect other stockholders"; it can be read only as limiting breach-of-fiduciary actions to such cases. I believe we overread Green if we read it as requiring a different conclusion merely by virtue of its use of the term "fraud," by which I believe the Court was merely referring to an act of the defendants that wronged the plaintiff in a general sense.
The main opinion in the present case states at one juncture in its analysis, however, that "[a]lthough the plaintiffs have cast their claim for damages as a fraudulent-suppression claim, the actual harm— the diminution of their Altrust stock based on the actual state of affairs at the company—was caused by the alleged mismanagement" of Altrust by its officers and directors. 76 So.3d at 246 (emphasis added). To the extent this statement is consistent with the notion that claims in a case such as this must fail for a lack of causation, I agree. It is on this basis that I believe (a) that Boykin should in fact be overruled, but only to the extent it holds that a direct action may be premised upon a mere retention of stock in reliance upon a suppression that served only to create an
As the individual defendants note, "the plaintiff's theory of loss assumes [that] had the facts concerning mismanagement been disclosed, there would nonetheless have been the same opportunity to sell stock at $17.25 per share that existed when these facts were not known. . . . Logically, had the facts of the supposed mismanagement been disclosed [earlier and in a timely manner], the stock would have been valued at some lower price, not $17.25 per share." The defendants contend, and I agree, that the plaintiffs cannot logically contend that the corporation, as a practical matter, could have, or would have, gone to its stockholders and told them of the facts indicating that their stock was worth less than $17.25 per share, but offer to buy their stock for $17.25 per share anyway. Put differently, the suppression did not cause any loss of value in the stock; rather, it caused only a temporary inflation in the price at which the stock could be sold (a price of which the plaintiffs chose not take advantage). The lower, true value of the plaintiffs' stock that obtained before and after the pendency of the temporary offer was a function of the truth, not the fraudulent suppression. As it happens in this particular case, that "truth," at least as alleged by the plaintiffs, is that the individual defendants intentionally mismanaged the corporation and breached their fiduciary duty. Accordingly, insofar as this particular case is concerned, I agree that the only viable claim under the circumstances presented here would have been a derivative claim on behalf of the corporation.
The decision of the United States Court of Appeals for the Eighth Circuit in Arent v. Distribution Sciences, Inc., 975 F.2d 1370 (8th Cir.1992), pertains to allegations sufficiently similar to those at issue here to be instructive:
975 F.2d at 1374.
Buffo v. State, 415 So.2d 1158, 1161-62 (Ala. 1982).
Baldwin County Elec. Membership Corp. v. Catrett, 942 So.2d 337, 345 (Ala.2006). See also, e.g., Stevens v. Lowder, 643 F.2d 1078, 1080 (5th Cir. Unit B 1981) (explaining that a claim is a direct one, rather than a derivative one, "where the shareholder shows a violation of duty owed directly to him" and that "[e]very injury alleged [in that case] is an injury directly to the corporation. Plaintiffs' individual injury arises only from the loss in value of their stock as a result of injury to the corporation. Under these circumstances, plaintiffs have no independent cause of action.").
