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Nichols v. HealthSouth Corp.

Supreme Court of Alabama

March 23, 2018

Steven R. Nichols et al.
HealthSouth Corporation

          Appeal from Jefferson Circuit Court (CV-03-2023)

          MENDHEIM, Justice.

         Steven R. Nichols, Deborah Deavours, Terry Akers, Thomas Dryden, and Gary Evans appeal from the Jefferson Circuit Court's dismissal of their action against HealthSouth Corporation ("HealthSouth"). We reverse and remand.

          I. Facts

         Nichols, Deavours, Akers, Dryden, and Evans (hereinafter referred to collectively as "the employee shareholders") at one time were all HealthSouth employees and holders of HealthSouth stock. On March 28, 2003, the employee shareholders sued HealthSouth, Richard Scrushy, Weston Smith, William Owens, and the accounting firm Ernst & Young, [1]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

"published financial statements of Healthsouth from 1987 forward. Those representations were made ... with the intent that investors such as [the employee shareholders] would rely upon them in making decisions to buy, sell, or hold HealthSouth stock. [The employee shareholders] relied upon the false statements about HealthSouth's financial condition in making those decisions. As a result of that reliance, [the employee shareholders] suffered damage[]."

         When the employee shareholders filed their action, this Court's precedent held (1) that "[n]either Rule 23.1[, Ala. R. Civ. P., ] nor any other provision of Alabama law requires that 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." Boykin v. Arthur Andersen & Co., 639 So.2d 504, 508 (Ala. 1994) (emphasis omitted).

         This Court overruled Boykin, however, in Altrust Financial Services, Inc. v. Adams, 76 So.3d 228 (Ala. 2011). The plaintiffs in Altrust brought securities-fraud claims against Altrust, Peoples Bank of Alabama, and related defendants. Discussing Boykin, the Court noted:

"[T]he 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."

76 So.3d at 245. This Court further explained:

"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[ v. James], 768 So.2d [356] at 358-59 [Ala. 2000)], citing Pegram[ v. Hebding], 667 So.2d [696] at 703 [(Ala. 1995)]. 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."

76 So.3d at 246 (emphasis added).[2]

          In the present case, in an effort to ensure that the claims they were asserting were direct claims against HealthSouth, the employee shareholders filed their eighth amended complaint on November 25, 2014, and recast their factual allegations of fraud in a way they believed satisfied the law as declared in Altrust. Specifically, they alleged:

"1. ... [D]efendant HealthSouth, by and through its Chief Operating Officer Richard Scrushy and other HealthSouth employees, made fraudulent statements to these particular plaintiffs as to the financial status of the company.
"10. The plaintiffs in this case had multiple in-person contacts with HealthSouth CEO Richard Scrushy personally. As an example, plaintiff Nichols was a physician practicing at HealthSouth's sole full-service hospital located in Birmingham, Alabama. The other plaintiffs also worked at that hospital. Scrushy, who apparently viewed the hospital as a pet project of the company, was often at the hospital, either alone or with various other HealthSouth executives.
"11. During these visits, Scrushy and other HealthSouth executives would speak to plaintiffs. During the time from 1997 until the end of 2002, Scrushy and other HealthSouth employees would make statements directly to the plaintiffs such as 'the company is doing great, ' 'the company is making tons of money, ' 'don't listen to any rumors you may hear, the company is doing great, ' 'you shouldn't sell any stock in the company, you should buy all you can buy, ' and the price is going to keep going up because we are making tons of money.'
"12. Indeed, Dr. Nichols and the other plaintiffs had more than one conversation with Scrushy about concerns about HealthSouth. In the time period 1997-2002, there were rumors in the Birmingham healthcare community concerning HealthSouth's financial well-being and about the amazing run the company's stock had had in the market. There were also rumors to this effect at the HealthSouth hospital where they all worked based on information not disclosed to the general stock-buying public. These plaintiffs worked closely with HealthSouth employees. The rumors were that the company could not possibly be doing as well as the public disclosures HealthSouth was making pursuant to federal securities laws. Scrushy told Nichols and the other plaintiffs on multiple occasions prior to their stock purchases not to listen to such rumors, that the company was doing great, and that Nichols should spend every spare dime he had on buying more HealthSouth stock."

         In short, the employee shareholders alleged that "ultimately their decisions to buy and hold HealthSouth stock were made in reliance upon the personal reassurances of Richard Scrushy himself" and that this constituted a direct fraud upon them that did not affect other HealthSouth stockholders.

         On December 10, 2016, HealthSouth filed a Rule 12(b)(6), Ala. R. Civ. P., motion to dismiss the employee shareholders' eighth amended complaint on the ground that -- under both Alabama and Delaware law[3] -- the claims asserted in that complaint were derivative in nature rather than direct and were therefore due to be dismissed because the employee shareholders had "failed to comply with the demand-pleading requirements of Alabama Rule of Civil Procedure 23.1[, Ala. R. Civ. P.]." In the alternative, HealthSouth argued that regardless of whether the claims asserted in the eighth amended complaint were derivative or direct, the claims were barred by Alabama's 2-year statute of limitations for fraud claims because they presented new allegations based on actions that occurred between 1997 and 2002 -- over 12 years before the filing of the eighth amended complaint.

         On April 8, 2016, the employee shareholders filed their response to HealthSouth's motion to dismiss the eighth amended complaint. The employee shareholders conceded that, if their claims were derivative in nature, the claims were due to be dismissed. They contended, however, that under either Alabama or Delaware law their claims were direct because, they argued, the wrongs alleged were unique to these particular plaintiffs and were not injuries to the corporation or to shareholders of the corporation as a whole. The employee shareholders also contended that their claims were not barred by the two-year statute of limitations because, they said, the claims "arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, " and therefore, under Rule 15(c)(2), Ala. R. Civ. P., the claims related back to the date of the original complaint.

         On May 26, 2016, the trial court entered an order dismissing the employee shareholders' complaint. The trial court reasoned:

"This court has before dealt with similar kinds of claims. See Ex parte Morgan Asset Mgmt., Inc., 86 So.3d 309, 317 (Ala. 2011); Ex parte Regions Fin. Corp., 67 So.3d 45, 47 (Ala. 2010). If those cases applied, HealthSouth's motion would clearly have to be granted. The defendants in those actions were Maryland entities, however, while HealthSouth is a corporation organized under the laws of the State of Delaware. For the same reason, Altrust Fin. Servs., Inc. v. Adams, 76 So.3d 228, 240 (Ala. 2011) -- which would also mandate the dismissal of this action -- does not govern since it applied Alabama law.
"The question is whether Delaware law leads to a different result under the particular circumstances of this case. The court concludes that it does not. Under Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031 (Del. 2004), and its progeny, the focus i[s] on the nature of the plaintiffs' claimed injury, not on the nature of the wrongdoing, as the Tooley court described:
"'That is, a court should look to the nature of the wrong and to whom the relief should go. The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.'
"Tooley, 845 A.2d at 1039. Here, while Scrushy is alleged to have committed fraud against these plaintiffs, in truth he committed fraud against all shareholders of his company. As alleged in the plaintiffs' various complaints, Scrushy and other executives devised a scheme of hiding the company's true financial condition from everyone. ...

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