Boykin v. Arthur Andersen & Co.

• Decision Date: 25 February 1994
• Citation: 639 So.2d 504
• Court: Alabama Supreme Court
• Parties: Samuel H. BOYKIN, Jr., and Apon, Inc. v. ARTHUR ANDERSEN & COMPANY, et al. 1920683.

Page 504

639 So.2d 504

62 USLW 2578

Samuel H. BOYKIN, Jr., and Apon, Inc. v. ARTHUR ANDERSEN & COMPANY, et al.

1920683.

Supreme Court of Alabama.

Feb. 25, 1994.

As Modified on Denial of Rehearing

April 8, 1994.

Andrew P. Campbell and Shawn Hill Crook of Leitman, Siegel, Payne & Campbell, P.C., Birmingham, for appellants.

Asa Rountree, James L. Goyer III and Jeffrey R. McLaughlin of Maynard, Cooper & Gale, P.C., Birmingham, for Arthur Andersen & Co.

Hobart A. McWhorter, Jr. of Bradley, Arant, Rose & White, Birmingham, for Jack H. Shannon.

Samuel H. Franklin and S. Douglas Wiliams, Jr. of Lighfoot, Franklin, White & Lucas, Birmingham, for William L. Watson III, B.K. Goodwin III, Edwin I. Gardner and C. Whit Walter.

Jack Drake, Tuscaloosa, and Bruce J. McKee of Hare, Wynn, Newell and Newton, Birmingham, for amicus curiae Alabama Trial Lawyers Ass'n.

Robert M. Girardeau and Nancy S. Akel of Huie, Fernambucq & Stewart, Birmingham, for amicus curiae Alabama Society of Certified Public Accountants.

Henry E. Simpson of Lange, Simpson, Robinson & Somerville, Birmingham, for amici curiae AmSouth Bancorporation, Compass Bancshares, Inc., Energen Corp., First Alabama Bancshares, Inc., Protective Life Corp. and SouthTrust Corp.

SHORES, Justice.

This case involves claims of fraud, conspiracy, professional negligence, and breach of fiduciary duty, brought by two stockholders of Secor Bank against four former officers or directors of Secor Bank, one current but inactive director of Secor Bank, and the independent certified public accountants for Secor Bank. The damages claimed are 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. The claims asserted by the plaintiffs are asserted on their own behalf and not derivatively on behalf of the corporation. Secor Bank is not a party.

Samuel H. Boykin, Jr., and Apon, Inc., the plaintiffs, are shareholders in Secor Bank and have been since before 1988. They allege that defendants Jack H. Shannon, B. K. Goodwin III, William L. Watson III, Edwin I. Gardner, and C. Whit Walter (hereinafter collectively referred to as "the individual defendants"); Arthur Andersen & Company; and other fictitious parties who were directors, officers, employees, representatives, or agents of Secor Bank, deliberately entered into a scheme to defraud the stockholders of the bank by misrepresenting its true financial condition. Boykin and Apon claim that the defendants, acting in concert, mismanaged the bank and refused to disclose material liabilities, particularly a pending lender liability action brought by Cahaba Land Associates, Inc., in July 1988 against the bank, ¹ and failed to disclose three years of losses resulting from millions of dollars of bad commercial loans. They claim that the defendants knew the true financial condition of Secor and yet failed to mention material losses or liabilities on three years of annual reports. Of the individual defendants, only William L. Watson is still associated with Secor Bank, and he is a director on inactive status.

The trial court granted the defendants' Rule 12(b)(6), Ala.R.Civ.P., motion to dismiss for failure to state a claim upon which relief can be granted. The court said that Boykin and Apon's claims against the individual defendants were derivative in nature, and, therefore, that the plaintiffs lacked procedural standing because they had failed to make a demand upon the board of directors in compliance with Rule 23.1, Ala.R.Civ.P. With regard to Boykin and Apon's claims against defendant Arthur Andersen, the trial court held that the plaintiffs' claims failed to meet the "Credit Alliance standard" for accountant's liability adopted by this Court in Colonial Bank of Alabama v. Ridley & Schweigert, 551 So.2d 390, 394-95 (Ala.1989). See Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 483 N.E.2d 110, 493 N.Y.S.2d 435, order amended by 66 N.Y.2d 812, 489 N.E.2d 249, 498 N.Y.S.2d 362 (1985).

The issue before us is whether the trial court erred in entering the Rule 12(b)(6) dismissal on the holding that no remedy exists for individual shareholders' claims of fraud, breach of fiduciary duty, negligence, and conspiracy to defraud where an accounting firm and a corporation's officers and directors failed to disclose material liabilities to the shareholders.

We hold that the trial court erred in granting the motion to dismiss. On a Rule 12(b)(6) motion to dismiss, the burden is initially on the movant to show that the plaintiff's complaint fails to state a claim upon which relief can be granted. Fontenot v. Bramlett, 470 So.2d 669, 674 (Ala.1985); see Moore v. Liberty Nat'l Life Ins. Co., 581 So.2d 833, 834 (Ala.1991). A dismissal pursuant to Rule 12(b)(6) for failure to state a claim should seldom be granted. Garrett v. Hadden, 495 So.2d 616, 617 (Ala.1986); Williams v. Kasal, 429 So.2d 1008, 1009 (Ala.1983). The standard of review applicable to Rule 12(b)(6) dismissals is set forth in Seals v. City of Columbia, 575 So.2d 1061 (Ala.1991):

" 'It is a well-established principle of law in this state that a complaint, like all other pleadings, should be liberally construed, Rule 8(f), Ala.R.Civ.P., and that a dismissal for failure to state a claim is properly granted only when it appears beyond a doubt that the plaintiff can prove no set of facts entitling him to relief. Winn-Dixie Montgomery, Inc. v. Henderson, 371 So.2d 899 (Ala.1979). Stated another way, if under a provable set of facts, upon any cognizable theory of law, a complaint states a claim upon which relief could be granted, the complaint should not be dismissed, Childs v. Mississippi Valley Title Insurance Co., 359 So.2d 1146 (Ala.1978).

" 'Where a [Rule] 12(b)(6) motion has been granted and this Court is called upon to review the dismissal of the complaint, we must examine the allegations contained therein and construe them so as to resolve all doubts concerning the sufficiency of the complaint in favor of the plaintiff. First National Bank v. Gilbert Imported Hardwoods, Inc., 398 So.2d 258 (Ala.1981). In so doing, this Court does not consider whether the plaintiff will ultimately prevail, only whether he has stated a claim under which he may possibly prevail. Karagan v. City of Mobile, 420 So.2d 57 (Ala.1982).' "

575 So.2d at 1063, quoting from Fontenot v. Bramlett, 470 So.2d 669, 671 (Ala. 1985). (Emphasis in original.)

The trial court's rationale for dismissing the claims against the individual defendants was that the plaintiffs had failed to make a demand on the board of directors pursuant to Rule 23.1, Ala.R.Civ.P. The individual defendants would have us affirm the dismissal of the claims against them for failure to state a claim upon which relief can be granted, on the grounds that the only harm suffered by the plaintiffs is the diminution in value of their corporate stock, and that that harm is not a personal harm, but a harm to the corporation. The accountants argue that the plaintiffs' claim must be rejected, because, they say, the plaintiffs do not allege an injury to them as individuals for which the law provides a remedy and because, they say, that the only remedy the law provides is a derivative action on behalf of the corporation.

We disagree. Neither Rule 23.1 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. Moreover, demand may be excused in a derivative action if a demand would be futile. Elgin v. Alfa Corp., 598 So.2d 807, 814 (Ala.1992). However, the plaintiffs' claims asserted here against Arthur Andersen and the individual defendants, former officers and directors of Secor Bank, are not derivative in nature. They do not seek compensation for injury to the bank as a result of negligence or mismanagement. The plaintiffs' claims allege fraud, intentional misrepresentations and omissions of material facts, suppression, conspiracy to defraud, and breach of fiduciary duty. The plaintiffs have asserted that they relied to their detriment on inaccurate financial reports certified by Arthur Andersen; that Arthur Andersen was aware that the annual reports of Secor Bank upon which they placed their certification were to be specifically directed and addressed to the shareholders of the bank; and that the purpose for disseminating the annual reports was to communicate to them, as shareholders, the financial condition of the corporation.

As we stated earlier, the burden was on the movants, on their Rule 12(b)(6) motion to dismiss, to show initially that the plaintiffs could prove no set of facts entitling them to relief. Fontenot, supra. Therefore, in regard to the Rule 12(b)(6) motion as to the claims against the individual defendants, the onus was on the defendants to show that all claims made by the plaintiffs were derivative in nature. We conclude that the plaintiffs' claims are not derivative in nature, and are claims upon which relief can be granted. Therefore, we reverse the trial court's judgment as to the individual defendants.

The trial court's rationale for dismissing the claims against the accountants was that the test for holding accountants liable for professional negligence in this state includes a "near-privity" requirement, which it says the plaintiffs failed to meet. We believe, however, that the plaintiffs alleged conduct on the part of the accountants that evidences that the accountants understood the shareholders' reliance. They aver that Arthur Andersen certified the 1988, 1989, and 1990 annual reports of Secor Bank in spite of direct knowledge that the bank had serious and material liabilities that were not stated on the reports. We conclude that this averment states a claim upon which relief can be granted; see Colonial Bank of Alabama v....