Tucker v. Ernst & Young, LLP

Citation159 So.3d 1263
Decision Date13 June 2014
Docket Number1121048.
PartiesWade TUCKER and Wendell Cook Testamentary Trust, derivatively for HealthSouth Corporation v. ERNST & YOUNG, LLP.
CourtSupreme Court of Alabama

David G. Hymer, Joseph B. Mays, Anne Marie Seibel, Kevin C. Newsom, Marc James Ayers, and Anna M. Manasco of Bradley Arant Boult Cummings LLP, Birmingham, for HealthSouth Corporation; and John W. Haley of Hare, Wynn, Newell & Newton, LLP, Birmingham, for appellants Wade Tucker and Wendell Cook Testamentary Trust.

Steven M. Farina and Stephen J. Fuzesi of Williams & Connolly LLP, Washington, D.C.; Robert D. Eckinger and Aaron G. McLeod of Adams & Reese, LLP, Birmingham; Sybil Vogtle Newton of Starnes Davis Florie, LLP, Birmingham; and Dan K. Webb and Bruce R. Braun of Winston & Strawn LLP, Chicago, Illinois, for appellee.

Opinion

MAIN, Justice.

Wade Tucker and Wendell Cook Testamentary Trust, on behalf of shareholders of HealthSouth Corporation (hereinafter referred to collectively as “HealthSouth”), brought this shareholder-derivative action against Ernst & Young, LLP (“E & Y”), asserting claims of “audit malpractice” based on E & Y's failure to discover and, if discovered, to report accounting fraud. The “audit malpractice” claims included various claims of negligence, breach of contract, and fraud.1 The action was referred to arbitration, and an arbitration award was entered in favor of E & Y. HealthSouth filed a motion in the Jefferson Circuit Court seeking to vacate the award. The circuit court denied the motion to vacate and entered a final judgment in favor of E & Y based on the award. HealthSouth appeals. We affirm.

I. Facts and Procedural Background

This action began as a shareholder-derivative action brought on behalf of HealthSouth Corporation by shareholders Wade Tucker and Wendell Cook Testamentary Trust, John P. Cook, trustee. It arises from accounting fraud at HealthSouth Corporation, which took place during the late 1990s and early 2000s. As a result of that accounting fraud, HealthSouth Corporation's earnings were falsely inflated by more than $2.6 billion; numerous HealthSouth Corporation officers, directors, and managerial employees were convicted of federal crimes for their roles in the fraud; and, upon discovery of the fraud, HealthSouth Corporation purportedly sustained billions of dollars in out-of-pocket losses. This shareholder-derivative action asserted contractual and tort claims against various officers and directors of HealthSouth Corporation and various business entities that had had dealings with HealthSouth Corporation, including E & Y, HealthSouth Corporation's independent auditor during the period when the accounting fraud occurred. This Court is no stranger to this litigation; various aspects of the action have previously come before us. See Scrushy v. Tucker, 70 So.3d 289 (Ala.2011) ; Scrushy v. Tucker, 955 So.2d 988 (Ala.2006) ; and Ernst & Young, LLP v. Tucker, 940 So.2d 269 (Ala.2006).

This particular appeal concerns only the claims against E & Y and the subsequent arbitration award related to those claims. HealthSouth asserted audit-malpractice claims against E & Y premised upon E & Y's failure to discover the accounting fraud at HealthSouth Corporation, or, alternatively, E & Y's failure to report its discovery of the accounting fraud. Pursuant to the arbitration provision of the engagement agreement between HealthSouth Corporation and E & Y pursuant to which E & Y was to audit the financial statements of HealthSouth Corporation, the circuit court, on December 29, 2004, entered an order referring HealthSouth's claims against E & Y to arbitration. This Court affirmed the circuit court's arbitration order in Ernst & Young, LLP v. Tucker, supra. For a detailed procedural background concerning the claims against E & Y and the referral of those claims to arbitration, see Ernst & Young, 940 So.2d at 270–80.

Following the referral of this case to arbitration, the parties selected a panel of three neutral arbitrators.2 The arbitration hearing began on July 12, 2010. In September 2011, E & Y sought leave to file a dispositive motion at the close of HealthSouth's case-in-chief based on affirmative defenses raised in E & Y's answer. HealthSouth objected to the request on the grounds that the applicable arbitration rules contained no provision permitting the dispositive motion and that the motion would require HealthSouth to recalibrate its strategy to rebut E & Y's affirmative defenses during its case-in-chief. The arbitration panel overruled HealthSouth's objections, finding that the panel had the authority to permit dispositive motions at the close of evidence and noting that HealthSouth had been aware of the specific defenses from the outset of the hearing.3

The panel, however, ruled that HealthSouth would be allowed the opportunity to present all relevant evidence and witnesses it thought necessary to oppose E & Y's dispositive motion before that motion would be heard. HealthSouth rested on March 1, 2012. During its case-in-chief, HealthSouth called 14 live witnesses who testified over 81 days spread over nearly 2 years. HealthSouth also presented the testimony of 61 witnesses by video designation and thousands of pages of exhibits.

Upon the close of HealthSouth's case-in-chief, E & Y filed its dispositive motion requesting an award in favor of E & Y on all of HealthSouth's claims against it. The motion was based on Alabama's Hinkle rule4 and the doctrine of in pari delicto. E & Y also argued that HealthSouth's negligence claims were barred by the doctrine of contributory negligence. In short, E & Y contended that the fraud committed by HealthSouth Corporation's officers and directors, imputed to HealthSouth, precluded HealthSouth's recovery under Alabama law. HealthSouth responded that accepting E & Y's affirmative defenses would be to allow an auditor a “free pass” to engage in malpractice. HealthSouth argued that E & Y had contractually agreed to provide HealthSouth Corporation “reasonable ... assurance” that its financial statements were “free of material misstatement caused by” management fraud. Thus, HealthSouth argued that granting E & Y's dispositive motion would essentially immunize E & Y and render the engagement agreement illusory.

HealthSouth and E & Y submitted extensive briefing concerning E & Y's motion. The panel then held a three-day oral argument. A review of the record of the oral argument reveals that each member of the panel actively engaged and questioned counsel for E & Y and HealthSouth regarding their respective positions. The transcript indicates that the panel was familiar with the cases and authorities cited by the parties and that it worked hard, and in apparent good faith, to understand the parties' positions and applicable Alabama law.

On December 18, 2012, the panel issued its unanimous decision, denying and dismissing all of HealthSouth's claims. The panel's award was supported by a 25–page decision, setting forth various findings of fact and applying Alabama law. The panel summarized some of the evidence presented during the proceedings as follows:

“As part of their jobs, HealthSouth [Corporation] officials entered hundreds of fraudulent journal entries into [HealthSouth Corporation's] general ledger, designed computer programs to distribute the fraud among the over 1800 HealthSouth [Corporation] facilities, created false accounting records, and issued fraudulent financial statements, press releases, and other public disclosures. Day after day—and year after year—[HealthSouth Corporation's] officers, directors and employees labored to conceal the fraud from the investing public, governmental entities, and especially [E & Y]. Regular meetings were presided over by the most senior HealthSouth [Corporation] officials at HealthSouth [Corporation] offices during regular working hours to develop and execute plans and strategies to perpetuate the fraud. Significantly, the record establishes that the actions of the HealthSouth [Corporation] officers, directors and employees engaged in the fraud were intended by them to benefit HealthSouth [Corporation] rather than create benefits for themselves, individually.”

After summarizing the evidence, the panel engaged in an analysis of Alabama law.5 First, the panel concluded that, under Alabama law, the misconduct and knowledge of HealthSouth Corporation's officers, directors, and employees who had engaged in the fraud must be imputed to HealthSouth. The panel reasoned that § 8–2–7, Ala.Code 1975, could be invoked to impute to HealthSouth the conduct of HealthSouth Corporation's officers, directors, and employees.6 The panel also relied on Todd v. Modern Woodmen of America, 620 So.2d 591 (Ala.1993), in which this Court held that the conduct of an agent may be imputed to the principal where, as the panel found here, the agent's wrongful acts were (1) ‘in the line and scope of his employment’ or (2) ‘in furtherance of the business of [the principal].’ 620 So.2d at 593 (quoting Joyner v. AAA Cooper Transp., 477 So.2d 364, 365 (Ala.1985) ). The panel also rejected HealthSouth's argument that imputation of conduct is available only to support a plaintiff's claims, and not a defendant's affirmative defenses.7 Likewise, the panel imputed the knowledge of HealthSouth Corporation's officers, directors, and employees of the fraud to the company, citing § 8–2–8, Ala.Code 1975;8 Stone v. Mellon Mortg. Co., 771 So.2d 451, 457 (Ala.2000) (“An agent's knowledge can bind the principal if the agent acquired the knowledge while acting within the line and scope of his authority....”); and American Cent. Life Ins. Co. v. First Nat'l Bank, 206 Ala. 535, 536, 90 So. 294, 294 (1921) ([W]hen, in the course of his employment, an agent acquires knowledge or receives notice of any fact material to the business he is employed to transact, his principal is deemed to have notice of such fact.”).9 The panel concluded:

“In sum, dozens of
...

To continue reading

Request your trial
5 cases
  • Hoskins v. Hoskins
    • United States
    • Texas Supreme Court
    • 20 Mayo 2016
    ...268 (2016) ; Visiting Nurse Ass'n of Fla., Inc. v. Jupiter Med. Ctr., Inc., 154 So.3d 1115, 1132 (Fla.2014) ; Tucker v. Ernst & Young, LLP, 159 So.3d 1263, 1273–75 (Ala.2014) (all foreclosing manifest disregard).10 See, e.g., Whitehead v. Pullman Grp., LLC, 811 F.3d 116, 120–21 (3d Cir.2016......
  • J. Don Gordon Constr., Inc. v. Brown
    • United States
    • Alabama Supreme Court
    • 5 Junio 2015
    ...Section 10(a) of the FAA establishes very limited grounds upon which a court may vacate an arbitration award. Tucker v. Ernst & Young, LLP, 159 So.3d 1263 (Ala.2014). The defendants first argue that the award should be vacated under § 10(a)(4), which allows a court to vacate an arbitration ......
  • Mosley v. Educ. Corp. of Am.
    • United States
    • U.S. District Court — Northern District of Alabama
    • 25 Junio 2020
    ...Cir. 2006), and leaves undisturbed a party's ability to enforce in court an award entered by the arbitrator, see Tucker v. Ernst & Young, LLP, 159 So. 3d 1263, 1271 (Ala. 2014).V. CONCLUSION For the foregoing reasons, Defendant's Motion To Compel Arbitration And Dismiss Action, Doc. 8, is g......
  • Escapes! To the Shores Condo. Ass'n v. Hoar Constr.
    • United States
    • Alabama Supreme Court
    • 17 Febrero 2023
    ... ... fundamentally unfair." Tucker v. Ernst & Young, ... LLP, 159 So.3d 1263, 1278 (Ala. 2014); see also ... Tempo Shain ... ...
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT