Altrust Fin. Servs., Inc. v. Hughes, 1091610

Citation76 So.3d 228
Decision Date29 July 2011
Docket Numberand 1091759.,1091620,1091610
PartiesALTRUST FINANCIAL SERVICES, INC., et al. v. James R. ADAMS et al.Dixon Hughes, PLLC v. James R. Adams et al.James R. Adams et al. v. Altrust Financial Services, Inc., et al.
CourtSupreme Court of Alabama

OPINION TEXT STARTS HERE

Gerald P. Gillespy, Howard P. Walthall, Jr. (withdrew 01/26/2011), and Ellen T. Mathews of Burr & Forman LLP, Birmingham; S. Wayne Fuller and Matthew K. Carter of Fuller & Willingham, LLC, Cullman; and Finis St. John of St. John & St. John, LLC, Cullman, for appellants/cross-appellees Altrust Financial Services, Inc., Peoples Bank of Alabama, J. Robin Cummings, Whit Drake, N. Jasper Estes, Cecil A. Walker, Terry N. Walker, Timothy D. Walker, and Brian C. Witcher.

Katharine A. Weber and James L. Goyer of Maynard Cooper & Gale, PC, Birmingham; and Frederick K. Sharpless of Sharpless & Stavola, P.A., Greensboro, North Carolina, for Dixon Hughes, PLLC.

Andrew P. Campbell and Jason R. Smith of Leitman, Siegel, Payne & Campbell, P.C., Birmingham, for appellees/cross-appellants James R. Adams, Stanley Dye, and Ed Holcombe.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) 1 (Altrust, the Bank, and the individual defendants will be referred to collectively as “the Altrust defendants); and Dixon Hughes, PLLC, Altrust's and the Bank's public-accounting firm, on December 4, 2009, asserting a claim against all defendants for violating the Alabama Securities Act, § 8–6–1 et seq., Ala.Code 1975 (count I); a professional-negligence claim against Dixon Hughes (count II); and a negligence claim against the Altrust defendants (count III).2

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 pursuant to Rule 12(b)(6) to dismiss the plaintiffs' second amended complaint.

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). 3 The Altrust defendants appeal by permission pursuant to Rule 5, Ala. R.App. P., the denial of their Rule 12(b)(6) motion seeking a dismissal of the negligence claim asserted against them (case no. 1091610). Dixon Hughes appeals by permission pursuant to Rule 5, Ala. R.App. P., the denial of its Rule 12(b)(6) motion seeking a dismissal of the professional-negligence claim asserted against it (case no. 1091620). We have consolidated these three appeals for the purpose of writing one opinion.

Facts as Alleged in the Third Amended Complaint

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 company to elect Subchapter S status for taxation purposes. Altrust included with its letter a proxy statement, as required by the Securities and Exchange Commission (“the SEC”) to ensure full disclosure to the shareholders of the proposed transaction. Before Altrust's January 2008 letter and proxy statement to the shareholders, the SEC had issued a letter to Altrust commenting on Altrust's preliminary draft of the proxy statement and urging it to be forthcoming with the shareholders. The SEC letter stated:

We urge all persons who are responsible for the accuracy and adequacy of the disclosure in the filings reviewed by the staff to be certain that they have provided all material information to investors. Since the company and its management are in possession of all facts relating to a company's disclosure, they are responsible for the accuracy and adequacy of the disclosures they have made.”

The proxy statement provided to the shareholders by Altrust set forth the plan and purpose of the proposed reorganization:

“Reorganization

“The reorganization plan provides for substantially reducing the number of our shareholders to below 300 holders of record for SEC purposes so that we can suspend our obligation to file periodic reports with the SEC under the Securities Exchange Act of 1934. The reorganization is also intended to permit us to elect to be taxed under Subchapter S of the Internal Revenue Code of 1981 or the ‘Code’ at the earliest date when a Subchapter S election can become effective. The reorganization will be accomplished through the merger of Holly Pond Corp., an Alabama corporation and our wholly owned subsidiary that we organized solely to facilitate the reorganization stock (referred to in this proxy statement as Holly Pond), with and into Altrust. If the reorganization plan is approved by our shareholders, certain shares of Altrust common stock held by our smaller shareholders and persons who are not or who elect not to become eligible shareholders for Subchapter S purposes will be converted into the right to receive $17.25 in cash....

“Purpose of the Reorganization Plan

“The primary purposes of the reorganization plan are to eliminate our obligation to file periodic reports with the SEC under the Securities Exchange Act, which we expect will result in a significant decrease in expenses and administrative burdens related to ongoing regulatory compliance and reporting matters, and to promote more efficient capital utilization and enhance shareholder value by reducing the combined taxes we and our shareholders currently pay by electing to be taxed under Subchapter S of the Internal Revenue Code. We intend to elect to be taxed under Subchapter S as soon as possible following the effective time of reorganization. Under Internal Revenue Service rules, and assuming we qualify, we will not be taxed under Subchapter S until the tax year beginning January 1, 2009....”

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 $17.25 per share, then the reorganization plan would not be completed.

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.”...

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