Ex Parte Regions Financial Corp.., 1090425.

• Decision Date: 14 January 2011
• Docket Number: 1090425.
• Citation: 67 So.3d 45
• Parties: Ex parte REGIONS FINANCIAL CORPORATION, Morgan Asset Management, Inc., and James C. Kelsoe.(In re Grantland Rice II et al.v.Regions Financial Corporation, Morgan Asset Management, Inc., and James C. Kelsoe).
• Court: Alabama Supreme Court

67 So.3d 45

Ex parte REGIONS FINANCIAL CORPORATION, Morgan Asset Management, Inc., and James C. Kelsoe.(In re Grantland Rice II et al.

v.Regions Financial Corporation, Morgan Asset Management, Inc., and James C. Kelsoe).

1090425.

Supreme Court of Alabama.

Sept. 30, 2010.Rehearing Denied Jan. 14, 2011.

Peter S. Fruin, Scott S. Brown, and Kathryn J. Bushby of Maynard, Cooper & Gale, P.C., Birmingham, for petitioners.Andrew P. Campbell, Caroline S. Gidiere, and M. Clayborn Williams of Leitman Siegal Payne & Campbell, P.C., Birmingham, for respondents.STUART, Justice.

Grantland Rice II, Joseph Robinson, Richard Robinson, Marvin E. Bruce, Michael S. Starnes, Laura M. Starnes, J.N. Raines, Julie Raines, the Michael S. Starnes Charitable Remainder Unitrust, Fischer Lime & Cement Co., TCX, Inc., the Bryce Family Limited Partnership, the Hope Christian Community Foundation, the Urban Child Institute, the Mayer & Morris Kaplan Foundation, Daniel R. Lewis, Jan R. Lewis, RJKB Investments, LLLP, and DJMD, LP (hereinafter referred to collectively as “the shareholders”), sued Regions Financial Corporation (“RFC”), the RFC subsidiary Morgan Asset Management, Inc. (“MAM”), and MAM employee James C. Kelsoe (hereinafter referred to collectively as “the defendants”), in the Jefferson Circuit Court, asserting multiple counts of securities fraud stemming from the collapse of six Regions Morgan Keegan investment funds (“the RMK funds”).¹ The defendants moved to dismiss the complaint, arguing, among other things, that the claims asserted by the shareholders were derivative claims that belonged to the RMK funds themselves—not to the individual investors in those funds—and that the claims could therefore be asserted only by a shareholder derivatively and in compliance with Rule 23.1, Ala. R. Civ. P., with which it is undisputed the shareholders have not complied. The trial court denied the defendants' motion to dismiss, and the defendants now petition this Court for a writ of mandamus directing the trial court to vacate its order denying their motion to dismiss and to enter an order granting the motion. We grant the petition and issue the writ.

I.

The shareholders described the basic facts underlying their claims as follows in their second amended complaint:

“14. [Shareholders] are investors who were seeking a high-yield bond fund as either a component to their investment portfolio or were specifically seeking an income-producing investment.

“15. Between December 2002 and July 2007, [the shareholders] were fraudulently induced to invest in one of the six RMK funds advised, managed, and/or controlled by [the defendants]. Though marketed as different funds, the six RMK funds were actually the same fund and their performance is almost identical. In making their investment decisions, [the shareholders] relied upon the representations and omissions of MAM and Kelsoe in both the written materials and the direct presentations made by MAM and Kelsoe.

“16. By December 2007, all six of the RMK funds collapsed, causing [the shareholders] to lose most if not all of their investment. The six RMK funds lost $2 billion between March 31, 2007, and March 31, 2008. As set forth below, the losses in the funds were not the result of a flight-to-quality or a decline in value of high-yield, mortgage-backed or asset-backed debt as represented by [the defendants]. The losses were the result of over-concentration of investments in the highest-risk mortgage- or asset-backed debt investment, an investment strategy that was fraudulently concealed from investors until well after losses were incurred. Upon information and belief, the RMK funds never were the high-yield, low-risk, stable, diversified bond funds MAM and Kelsoe represented. This misrepresentation and concealment caused [the shareholders] to buy, sell and/or hold certain interests in the RMK funds at various times under the false impression that the losses were due to other innocent factors, i.e., factors unrelated to the defendants' malfeasance and serial disregard for applicable investing standards.”

Since the collapse of the RMK funds, more than 20 lawsuits—including class actions, derivative suits, and individual actions—have been filed against RFC, MAM, Kelsoe, and other affiliated companies and individuals, similarly alleging that MAM had mismanaged and misrepresented the nature of the RMK funds, had failed to properly value the assets held by the RMK funds, and had failed to follow the guidelines of the RMK funds with regard to liquidity and asset concentration. Many of the lawsuits have been consolidated in federal court in the United States District Court for the Western District of Tennessee by the Judicial Panel on Multidistrict Litigation pursuant to 28 U.S.C. § 1407.² The defendants have twice attempted to remove the underlying action to federal court; however, the United States District Court for the Northern District of Alabama has remanded the action to the Jefferson Circuit Court on both occasions, holding that the federal court did not have subject-matter jurisdiction over the claims asserted by the shareholders.³ The shareholders have also all pursued claims against their investment broker—Morgan Keegan & Company, Inc. (“Morgan Keegan”), another RFC-affiliated company—in arbitration proceedings pending before the Financial Industry Regulatory Authority (“FINRA”), and the United States Securities and Exchange Commission, FINRA, and regulators from Alabama, Kentucky, Mississippi, and South Carolina have all initiated administrative proceedings against MAM, Morgan Keegan, and/or Kelsoe.

As was the case when the defendants attempted to remove this action to federal court, the issue now before this Court is one of subject-matter jurisdiction. Specifically, the defendants argue that the shareholders' ownership interests in the RMK funds subject them to the requirements of Rule 23.1, Ala. R. Civ. P., which mandate that they make demand upon the “directors or comparable authority” of the RMK funds before initiating a derivative action—which, the defendants argue, this action in fact is regardless of the label the shareholders have attached to it—and that the shareholders accordingly lack standing because they failed to comply with Rule 23.1 by making such demand. See Baldwin County Elec. Membership Corp. v. Catrett, 942 So.2d 337, 344 n. 9 (Ala.2006) (“Rule 23.1 states that to maintain a derivative action, the plaintiff must ‘allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority....’ ... There is no evidence in the record indicating that the plaintiffs made a demand upon the board of trustees before filing this action. In addition, the plaintiffs did not allege in their complaint that they had made a demand upon the cooperative's board of trustees. If the plaintiffs should have brought this action derivatively, as [the defendants] contend[ ], then the plaintiffs lack standing to maintain the action because no evidence was presented indicating that they met the director-demand requirement.”). We have further stated:

“Mandamus review is available where the petitioner challenges the subject-matter jurisdiction of the trial court based on the plaintiff's alleged lack of standing to bring the lawsuit.

“ ‘ “ ‘ “Mandamus is a drastic and extraordinary writ, to be issued only where there is (1) a clear legal right in the petitioner to the order sought; (2) an imperative duty upon the respondent to perform, accompanied by a refusal to do so; (3) the lack of another adequate remedy; and (4) properly invoked jurisdiction of the court.” Ex parte Integon Corp., 672 So.2d 497, 499 (Ala.1995). The question of subject-matter jurisdiction is reviewable by a petition for a writ of mandamus. Ex parte Flint Constr. Co., 775 So.2d 805 (Ala.2000).’

“ ‘ “ Ex parte Liberty Nat'l Life Ins. Co., 888 So.2d 478, 480 (Ala.2003) (emphasis added). ‘When a party without standing purports to commence an action, the trial court acquires no subject-matter jurisdiction.’ State v. Property at 2018 Rainbow Drive, 740 So.2d 1025, 1028 (Ala.1999). Under such a circumstance, the trial court has ‘no alternative but to dismiss the action.’ 740 So.2d at 1029.” '

“ Ex parte Richardson, 957 So.2d 1119, 1124 (Ala.2006) (quoting Ex parte Chemical Waste Mgmt., Inc., 929 So.2d 1007, 1010 (Ala.2005)).”

Ex parte HealthSouth Corp., 974 So.2d 288, 292 (Ala.2007). A trial court has no discretion to preside over an action when subject-matter jurisdiction is lacking; accordingly, we review de novo whether the shareholders' claims are derivative or direct claims in order to determine whether the trial court erred by denying the defendants' motion to dismiss. See Jones v. Regions Bank, 25 So.3d 427, 434 (Ala.2009) (citing BT Sec. Corp. v. W.R. Huff Asset Mgmt. Co., 891 So.2d 310, 312 (Ala.2004)) (“Questions of law are reviewed de novo.”).

II.

We first note that the RMK funds are incorporated in Maryland and that the determination whether the shareholders' claims are derivative or direct must accordingly be made in accordance with Maryland law. Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 108–09, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991); and Massey v. Disc Mfg., Inc., 601 So.2d 449, 454–55 (Ala.1992). In Strougo v. Bassini, 282 F.3d 162, 169–71 (2d Cir.2002), the United States Court of Appeals for the Second Circuit summarized the relevant Maryland law as follows:

“ Waller v. Waller, 187 Md. 185, 49 A.2d 449 (1946), remains the leading Maryland case on shareholder standing. There, a shareholder brought a direct action against, inter alios, a corporation's sales manager alleging that he and others had caused injury to the shareholder through the improvident discharge of employees, diversion of customers to competitors, choice of detrimental pricing policies, embezzlement of corporate funds, and disruption of corporate...