Ex parte AmSouth Bancorporation

• Decision Date: 19 June 1998
• Citation: 717 So.2d 357
• Parties: Ex parte AmSOUTH BANCORPORATION et al. (Re James W. KERR et al. v. AmSOUTH BANCORPORATION et al.). 1961212.
• Court: Alabama Supreme Court

Page 357

717 So.2d 357

Ex parte AmSOUTH BANCORPORATION et al.

(Re James W. KERR et al. v. AmSOUTH BANCORPORATION et al.).

1961212.

Supreme Court of Alabama.

June 19, 1998.

Fournier J. Gale III, A. Inge Selden III, and Luther M. Dorr, Jr., of Maynard, Cooper & Gale, P.C., Birmingham; and James J. Restivo, Jr., Gregory B. Jordan, and Perry A. Napolitano of Reed, Smith, Shaw & McClay, Pittsburgh, PA, for petitioners AmSouth Bancorporation, AmSouth Bank of Alabama, and AmSouth Investment Services, Inc.

M. Clay Ragsdale and E. Ansel Strickland of Law Offices of M. Clay Ragsdale, Birmingham; Alan Schulman, Jan M. Adler, and Pamela M. Parker of Milberg, Weiss, Bershad Hynes & Lerach, L.L.P., San Diego, CA; and Steven E. Cauley, Little Rock, AR, for respondents.

Russell Jackson Drake of Cooper, Mitch, Crawford, Kuykendall & Whatley, L.L.C., Birmingham, for amicus curiae Alabama Trial Lawyers Ass'n.

PER CURIAM.

The defendants in an action pending in the Jefferson Circuit Court, AmSouth Bancorporation and certain of its affiliates, petition this Court for a writ of mandamus directing the trial court to set aside its order certifying the action as a class action under Rule 23(b)(3), Ala. R. Civ. P. We grant the petition.

The defendant AmSouth Bank of Alabama ("the Bank") is a wholly owned subsidiary of the defendant AmSouth Bancorporation. The defendant AmSouth Investment Services, Inc. ("AIS"), is, in turn, a wholly owned subsidiary of the Bank. AIS brokers sell a variety of investments, such as mutual funds, interests in unit investment trusts, and corporate securities and bonds that are not insured by the Federal Deposit Insurance Corporation ("FDIC") or otherwise guaranteed against loss of principal. The original plaintiff in this action, James W. Kerr, is a depositor of the Bank who purchased, through AIS, non-FDIC-insured securities that he alleges lost value. On April 16, 1996, Kerr filed a class-action complaint asserting that he and others similarly situated had been victimized by a systematic, management-directed policy of deception and fraud engaged in by the defendants. Kerr maintained that the defendants had conspired to implement a fraudulent scheme targeting customers of the Bank for high-pressure sales pitches aiming to induce them to switch their money from FDIC-insured investments with the Bank, such as savings and checking accounts and certificates of deposit ("CDs"), to uninsured, and therefore riskier, securities sold by AIS. The complaint charges that the defendants utilized "uniform sales practices which included misleading statements and omissions" in order to induce purchases of uninsured securities, which produce greater revenue for the defendants than guaranteed Bank deposits. More specifically, the complaint alleges that the defendants (1) exploited the trust depositors placed in the Bank, by sharing confidential information regarding Bank depositors and their accounts; (2) misled investors by stating or implying that AIS and the Bank were one and the same and that AIS brokers were actually employees of the Bank itself; (3) marketed uninsured securities sold by AIS as being equally safe alternatives to, and yielding higher rates of return than, the Bank's FDIC-insured investments; and (4) failed to disclose that the securities sold by AIS included costs such as sales charges, administrative fees, and penalties for early withdrawal.

Based upon these factual allegations, the claims stated in Kerr's class complaint can be separated into the following categories: (1) securities fraud claims based on §§ 8-6-17 and 8-6-19, Ala.Code 1975, parts of the Alabama Securities Act; (2) "standard" fraud claims alleging misrepresentation, suppression, and deceit, based on §§ 6-5-100 through 6-5-104, Ala.Code 1975; (3) negligent and wanton supervision; (4) breach of implied contract; (5) breach of fiduciary duties; and (6) invasion of privacy.

After Kerr filed his class complaint, Jennifer L. Donaldson and Maggie E. Petty, both of whom had also purchased securities through AIS, were joined as plaintiffs. The plaintiffs moved to have the trial court certify a class of all depositors of the Bank who had purchased non-FDIC-insured securities from the defendants between January 1992 and February 1996. The defendants responded by moving to dismiss the claims of the three named plaintiffs. Before determining whether a class should be certified, the trial court held a hearing on the defendants' motion to dismiss, treating it as a motion for summary judgment. On February 10, 1997, the trial court entered summary judgments in the defendants' favor on all claims of Kerr and Donaldson, ¹ but denied a summary judgment as to Petty's claims.

On March 21, 1997, the trial court held a hearing on the motion for class certification under Rule 23, Ala. R. Civ. P. ² At this hearing, Petty introduced her affidavit, which described her dealings with AIS after she had sought to invest $160,000 she had inherited. The 67-year-old Petty, a customer of the Bank since the 1960s, alleged that in January 1992 she advised a trusted officer at her local Bank branch that she was interested in investing her inheritance in "something that was paying more than CDs, but was guaranteed like CDs." She alleged that the officer suggested she speak with the "Bank's investment department" and referred her to Sheila Smith, an AIS broker who worked in the AmSouth building in downtown Mobile. Petty, who stated that she was uneducated about investments and had never put her money in anything but FDIC-insured accounts, reiterated to Smith that she wanted a guaranteed investment like a CD. Petty said Smith said she understood Petty wanted a guaranteed return and recommended that she invest in the "U.S. Government Income Fund." Petty invested in the fund, believing that her investment principal was Government-insured against loss. In actuality, though, the value of her principal was subject to fluctuation and was not guaranteed. Petty claims that she was unaware of this risk until she received a telephone call from Smith in December 1994, at which time she learned that her principal had lost value. Upset that her investment was not guaranteed, Petty withdrew her funds; she sustained a loss on her principal of approximately $17,000. ³

Petty also attempted at the hearing to show similar malfeasance by the defendants against other class members generally. She offered affidavits of three former AIS brokers, who testified that the Bank had routinely shared information on Bank depositors so that AIS might target them as potential securities investors. These brokers also stated that they had been admonished by their superiors when they complained that the incentive structure developed by AIS management greatly overstressed sales of AmSouth-managed mutual funds, for which AmSouth received administration fees. This emphasis, the brokers charged, pressured brokers to choose sometimes between their personal interest in commissions and recommending investments that the brokers truly believed were most appropriate for a customer's needs.

Petty also introduced testimony from Vicki Kidder, who had served AIS as a consultant and later as one of its vice presidents for five months in 1992. Kidder recounted how she received rebukes from her superiors at AIS when she complained that brokers routinely breached company procedures and applicable securities regulations, primarily by failing to have customers complete new account application documents at all or by having such documents "backdated" after trades had already been made for customers.

Finally, Petty presented documentation indicating that AIS had been the subject of disciplinary action by regulatory agencies for certain of its practices. First, she offered a certificate issued by the Alabama Securities Commission ordering AIS to show cause why its registration and that of one of its brokers should not be suspended or revoked. This document listed the accusations of seven persons who had allegedly sought investments without risk to principal and who complained that one AIS broker had deceived them into purchasing nonguaranteed securities. Second, she introduced a consent judgment that was based upon an agreement entered into between AIS and the National Association of Securities Dealers in July 1996. Under that judgment, AIS was to pay a $150,000 fine for various violations of regulations, primarily regarding matters similar to those previously described: improper account documentation and record keeping, misleading statements by the AIS broker who was the subject of the "show cause" order from the Alabama Securities Commission, AIS's inadequate supervision of that broker, and improper payment of commissions to unlicensed employees of AIS's affiliate Bank.

On April 14, 1997, the trial court issued an order finding that the plaintiff Petty had presented evidence satisfying all the requirements of Rule 23(a) and (b)(3), Ala. R. Civ. P. Based on the plaintiff's evidence presented at the certification hearing, the trial court found that the class had an "overriding common interest" in litigating the "core liability issue of this case," which the court interpreted as being whether there existed "a centrally orchestrated, management-led scheme to deceive Bank customers into purchasing risky securities through, among other means, the use of substantially similar oral misrepresentations and omissions." Relying upon this Court's decision in Harbor Ins. Co. v. Blackwelder, 554 So.2d 329 (Ala.1989), the trial court concluded that the plaintiff had alleged fraud claims "with a common thread" and, therefore, it reasoned that the claims were maintainable as a class action. The trial court granted the motion for certification, in order to hold an initial trial to resolve on a class-wide basis the single issue whether the defendants had engaged in such a management-led common scheme.

The trial court defined the...