Ernst & Young, Llp v. Tucker

• Decision Date: 07 April 2006
• Docket Number: 1041367.,1040643.,1040689.
• Citation: 940 So.2d 269
• Parties: ERNST & YOUNG, LLP v. Wade TUCKER, derivatively, for the benefit of and on behalf of HealthSouth Corporation. HealthSouth Corporation v. Wade Tucker, derivatively, for the benefit of and on behalf of HealthSouth Corporation. HealthSouth Corporation v. Ernst & Young, LLP.
• Court: Alabama Supreme Court

940 So.2d 269

ERNST & YOUNG, LLP v. Wade TUCKER, derivatively, for the benefit of and on behalf of HealthSouth Corporation.

HealthSouth Corporation v. Wade Tucker, derivatively, for the benefit of and on behalf of HealthSouth Corporation.

HealthSouth Corporation v. Ernst & Young, LLP.

1040643.

1040689.

1041367.

Supreme Court of Alabama.

April 7, 2006.

Henry E. Simpson, Elizabeth R. Floyd, and Kate Thornton of Adams & Reese/Lange Simpson LLP, Birmingham; and Steven M. Farina of Williams & Connolly, LLP, Washington, D.C., for Ernst & Young, LLP.

John W. Haley, Ralph D. Cook, and Bruce J. McKee of Hare, Wynn, Newell & Newton, Birmingham; John Q. Somerville of Galloway & Somerville, Birmingham; and Frank P. DiPrima, Covent Station, New Jersey, for Wade Tucker.

Julia Boaz Cooper and Marc James Ayers of Bradley Arant Rose & White, LLP, Birmingham; Scott Burnett Smith of Bradley Arant Rose & White, LLP, Huntsville; and Peyton D. Bibb, Jr., and Michael K.K. Choy of Haskell Slaughter Young & Rediker, L.L.C., Birmingham, for HealthSouth Corporation.

HARWOOD, Justice.

These appeals began as a shareholder-derivative action brought by Wade Tucker in August 2002. Tucker asserted contractual and tort claims against various officers and directors of HealthSouth Corporation and various business entities that had had dealings with HealthSouth.¹ In March 2003, Tucker's second amended complaint in this case added as a defendant HealthSouth's former auditor, Ernst & Young, LLP ("E & Y"). Tucker asserted that E & Y's failure to discover multiple instances of wrongdoing by various corporate officers employed by HealthSouth constituted breaches of its employment agreements with HealthSouth and supported Tucker's claims against it of negligence, wantonness, and fraud. Tucker also alleged numerous instances of wrongdoing by various individual managers and members of the board of directors of HealthSouth, including fraud, self-dealing, insider trading, and breaches of fiduciary responsibility. He seeks recovery for the damage resulting from that alleged wrongdoing.

E & Y responded on May 22, 2003, by filing a motion to compel arbitration pursuant to an arbitration agreement indisputably established by its engagement letters with HealthSouth.² The arbitration provision included in those letters states:

"Any controversy or claim arising out of or relating to the services covered by this letter or hereafter provided by us to [HealthSouth] (including any such matter involving any parent, subsidiary, affiliate, successor in interest, or agent of [HealthSouth] or of E & Y LLP) shall be submitted first to voluntary mediation, and if mediation is not successful, then to binding arbitration, in accordance with the dispute resolution procedures set forth in the attachment to this letter. Judgment on any arbitration award may be entered in any court having proper jurisdiction."

In addition to including the above provision, the engagement letters refer to an attachment entitled "Dispute Resolution Procedures." In pertinent part, that attachment states:

"The arbitration will be conducted before a panel of three arbitrators, regardless of the size of the dispute, to be selected as provided in the [American Arbitration Association] Rules. Any issue concerning the extent to which any dispute is subject to arbitration, or concerning the applicability, interpretation, or enforceability of these procedures, including any contention that all or part of these procedures are invalid or unenforceable, shall be governed by the Federal Arbitration Act and resolved by the arbitrators. No potential arbitrator may serve on the panel unless he or she has agreed in writing to abide and be bound by these procedures.

"The arbitrators may not award non-monetary or equitable relief of any sort. They shall have no power to award punitive damages or any other damages not measured by the prevailing party's actual damages, and the parties expressly waive their right to obtain such damages in arbitration or in any other forum. In no event, even if any other portion of these provisions is held to be invalid or unenforceable, shall the arbitrators have power to make an award or impose a remedy that could not be made or imposed by a court deciding the matter in the same jurisdiction."

As an alternative to its motion to compel arbitration, E & Y also filed a motion to dismiss Tucker's claims against E & Y because he "has failed to comply with Rule 23.1 of the Alabama Rules of Civil Procedure by failing to make a demand upon the board of directors in control of HealthSouth Corporation prior to the filing of this action against [E & Y]." The trial court on December 29, 2004, issued an order referring Tucker's claims against E & Y to arbitration.

Tucker has conceded that his claims against E & Y are subject to arbitration. However, both E & Y and HealthSouth appeal from the trial court's order referring the case to arbitration, arguing that the order purportedly permits the trial court to retain jurisdiction over issues that they say are subject to arbitration under the agreement. This Court has consolidated those appeals (case no. 1040643 and case no. 1040689) and a third appeal by HealthSouth (case no. 1041367) for purposes of issuing one opinion.

The trial court's December 29, 2004, order states, in pertinent part:

"WHEREAS, E & Y has contended that the claims asserted by Plaintiff Tucker must be arbitrated in compliance with the arbitration provisions of the engagement contracts between HealthSouth, on whose behalf Plaintiff Tucker maintains this action, and E & Y;

"WHEREAS, the Court has determined that Plaintiff Tucker has standing to maintain the derivative claims in this action and, together with his counsel, has the power and authority to make all strategic and tactical decisions with respect to the prosecution of the claims against E & Y, subject in the event of settlement to the approval of the Court;¹

"WHEREAS, this Court has entered various orders relating to the management of this case, including an order appointing lead counsel, an order ruling that demand is excused as to all claims and all defendants (including but not limited to E & Y) under Alabama Rule of [Civil Procedure] 23.1, and an order denying the motion by HealthSouth to realign and substitute for Tucker's counsel.

"NOW, THEREFORE, IT IS HEREBY ORDERED as follows:

"1. The claims against E & Y stated in the Third and Fourth Amended Complaints herein are hereby referred to arbitration, and the claims against E & Y are hereby stayed pending arbitration. Plaintiff Tucker and E & Y are hereby directed to proceed expeditiously to the arbitration of those claims.

"2. Referral to arbitration hereunder relates solely to the substance of [Tucker's] claims, i.e., determination of liability and damages and other relief, but does not extend to matters which are within the province and jurisdiction of this Court, including the determination of the issues of demand under Rule 23.1 and choice of derivative counsel to prosecute the case, which issues shall not be re-litigated in arbitration.

"3. This Court hereby retains jurisdiction to (a) enforce the arbitration award, (b) rule on the fairness of any settlement under Alabama [Rule of Civil Procedure] 23.1; (c) enforce any settlement agreement; and (d) award attorneys fees should Plaintiff Tucker obtain a recovery for HealthSouth in connection with the arbitration.

"¹ At oral argument E & Y raised the issue of whether Tucker was a stockholder when this derivative action was filed and whether Tucker is a present stockholder. No evidence concerning Tucker's status as a stockholder of HealthSouth at any time relevant hereto has been presented to this Court and no decision has been made by this Court as to this precise issue. This Court has decided that Tucker, and not HealthSouth, is the proper party to pursue the derivative claims against E & Y and that these claims are due to be submitted to arbitration."

On appeal, E & Y and HealthSouth contest the trial court's authority, under the circumstances of this case, to retain jurisdiction over the matters expressed in paragraphs 2 and 3 of its order referring Tucker's claims against E & Y to arbitration.

As previously noted, the allegations of wrongdoing by the management of HealthSouth and E & Y have given rise to a number of other lawsuits, and a review of those other derivative suits is helpful for an understanding of the cases before us. Vice Chancellor Strine in the Delaware Court of Chancery summarized the essential nature of these various lawsuits in an unpublished memorandum opinion in Teachers' Retirement System of Louisiana v. Scrushy, Civ.A. 20529, March 2, 2004 (Del. Ch.2004)(not reported in A.2d). Teachers' Retirement, another shareholder-derivative lawsuit asserting similar claims, was filed against HealthSouth approximately one year after the instant action was filed by Tucker. In discussing whether it was appropriate to stay the proceedings in Teachers' Retirement in light of the pending litigation in Tucker, the Delaware Chancery Court stated:

"As discussed in prior opinions of this and other courts, public scrutiny of HealthSouth's financial integrity first became intense in the summer of 2002. At that time, HealthSouth announced that a new policy regarding reimbursement issued by the federal Centers for Medicare and Medicaid Services (the `CMS Policy') would have a large, detrimental effect on the company's revenues. Put simply, many stockholders— and their attorneys—were deeply suspicious about HealthSouth's announcement, given that the CMS Policy had, according to them, been expected for some time. In particular, they suspected that HealthSouth insiders—many of whom had engaged in large transactions involving sales of HealthSouth stock earlier that year—had concealed the effect of the CMS Policy in order to keep HealthSouth's stock price artificially high.

"The expected...