Morgan Keegan & Co., Inc. v. Cunningham, 1031431.

• Decision Date: 20 May 2005
• Docket Number: 1031431.
• Citation: 918 So.2d 897
• Parties: MORGAN KEEGAN & COMPANY, INC., Regions Financial Corporation, and Jay Higgenbotham v. Patricia CUNNINGHAM and Judge Preston Cunningham III.
• Court: Alabama Supreme Court

Page 897

918 So.2d 897

MORGAN KEEGAN & COMPANY, INC., Regions Financial Corporation, and Jay Higgenbotham v. Patricia CUNNINGHAM and Judge Preston Cunningham III.

1031431.

Supreme Court of Alabama.

May 20, 2005.

Opinion Overruling Rehearing July 8, 2005.

Stephen A. Rowe and Elizabeth R. Floyd of Adams & Reese, LLP/Lange Simpson, Birmingham, for appellants.

Lewis W. Page, Jr., and Will J. Parks III of Page Parks, LLC, Birmingham, for appellees.

WOODALL, Justice.

Morgan Keegan & Company, Inc., and Regions Financial Corporation (hereinafter referred to collectively as "Regions"), and Jay Higgenbotham, an investment officer of Regions, appeal from a judgment entered on a jury verdict, awarding $10,000 compensatory damages and $50,000 punitive damages in an action by Patricia Cunningham and her son, Judge Preston Cunningham III ("Preston"), against Regions and Higgenbotham for improperly withholding federal income taxes on their investment account. Regions explains the relationship between the corporate entities as follows:

"Regions Investment Company, Inc., merged with Morgan Keegan & Company, Inc., in April of 2001. Morgan Keegan & Company, Inc., was the surviving entity. Prior to the merger, Regions Financial Corporation was the parent company of Regions Investment Company, Inc. Upon the merger, Regions Financial Corporation became the parent company of the surviving entity, Morgan Keegan & Company, Inc."

Regions' brief, at 4 n. 1. We affirm in part, reverse in part, and remand.

The facts underlying this dispute began with a discussion between Patricia Cunningham and Higgenbotham in the summer of 2000 regarding investment opportunities provided by Regions. Later, on September 5, 2000, Patricia Cunningham purchased 2,655.337 shares in a mutual fund managed by Regions, namely, a "Regions Aggressive Growth Fund—B" ("the growth fund"), for $50,000.¹ This purchase resulted in the opening of a joint account in the names of Patricia and Preston. The Cunninghams' decision to open the joint account was communicated to a Regions by telephone. Consequently, the Cunninghams did not sign any documents in connection with opening the account.

Procedures for the opening of accounts such as the Cunninghams' were set out in a manual entitled "Regions Investment Company, Inc., Compliance with Supervisory Procedures" ("the manual"). In particular, the manual stated, "Prior to the entry of an initial order, the registered representative must obtain a completely executed New Account [Application] Form, duly signed." (Emphasis added.) The "New Account Application Form" ("the new account form") contained a section that stated, in pertinent part:

"Certification.—Under penalties of perjury, I certify that

"1. The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me).

"2. I am not subject to backup withholding, and

"3. A copy of Form W-9 Instructions has been provided.

"Certification instructions.—You must cross out item (2) above if you have been notified by IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return."

(Emphasis added.)

Backup withholding tax has been explained as follows:

"[Backup withholding is] [t]ax withheld from investment income, such as interest and dividends, to ensure that tax is collected on the income. Banks and other organizations are required to report to the IRS all interest and dividend payments you received, along with your Social Security number or other taxpayer identification number. If you don't give them correct reporting information for you, they are required to withhold 31 percent of your investment income. The IRS may also require the bank or other organization to withhold tax if it determines you have underreported your investment income. If backup withholding is taken out of your earnings, it will show up as `Federal income tax withheld' on the Form 1099-INT or Form 1099-DIV that the bank sends you each January."

(On the date this opinion was released this information could be found at Definitions of Tax Terms: B-C, at www.bankrate.com /wsjr/itax/edit/definitions/definitions_taxes 2.asp (on file in the office of the clerk of the Supreme Court)(emphasis added).) The Cunninghams never completed or executed a new account form.

By December 2000, the value of the Cunninghams' investment had decreased to approximately $47,000. However, at that time, Higgenbotham learned that the growth fund was going to declare a 22 per cent taxable gain for the year 2000. The gain was based on the performance of the growth fund in the first three quarters of 2000, that is, before the Cunninghams had purchased their shares of the growth fund. Consequently, the Cunninghams were about to incur a taxable capital gain of approximately $10,000, even though the value of their shares had declined.

In December 2000, Higgenbotham informed the Cunninghams, and 10 to 20 other customers similarly situated, of their impending tax liability and advised them to transfer their investment temporarily from the growth fund to a "Regions treasury money market fund" ("the money market fund"). The Cunninghams accepted Higgenbotham's advice, and, on December 15, 2000, sold the 2,655.337 shares of the growth fund in order to transfer $46,627.72 from the growth fund to the money market fund. However, because Regions did not have an executed new account form on record as a basis for avoiding backup withholding, that transaction triggered a computer-generated 31 percent backup-withholding payment of $14,454.59, which Regions sent to the Internal Revenue Service ("the IRS").

Regions sent the Cunninghams a transaction confirmation showing the sale of 1,832.183 shares of the growth fund and a transfer of the sales proceeds of $32,173.13 to the money market fund. The remaining 823.154 shares of the growth fund were sold, and the proceeds of $14,454.59 were used to pay the backup withholding (hereinafter referred to as "the first withholding").

Inexplicably, the first withholding was followed five days later by a redundant second backup-withholding payment of $9,973.67 (calculated as follows: $46,627.72-$14,454.59 = $32,173.13 × 31%) ("the second withholding"). It is undisputed that Regions received no compensation or gain from either withholding. After the first withholding and the second withholding, approximately $22,000 remained in the Cunninghams' account.

Regions sent a four-page account statement to the Cunninghams for the year 2000 ("the year-end summary"). That statement purported to represent the "total portfolio" value as the sum of the "market value/market price" of three categories: (1) $32,220.32 in a "Regions treasury money market fund"; (2) $11,532.39 in a "Regions aggressive growth fund"; and (3) $32,173.13 in a second "Regions treasury money market fund"; for a "total portfolio" value of $75,925.84. It is undisputed that the statement was "misleading" and that the "true market value" of the portfolio was approximately $22,000. However, in the "Transactions/Activity Detail" section, the year-end summary revealed that only $32,173.13 had been removed from the growth fund and placed in the money market fund.²

The year-end summary also listed the second withholding as "Regions Aggressive Growth Fund 31% Withholding Non-Certified T[axpayer] I[dentification] N[umber]," in the amount of a $9,973.67 charge. The second withholding appeared on the year-end summary as a negative cash transaction. Moreover, it showed the net of the transactions for the year. Specifically, it showed the "Total Amounts Credited" ($114,414.65), as opposed to the "Total Amounts Charged" ($92,146.80), for a net of $22,267.85 in the account. Finally, two Form 1099 statements were sent to the Cunninghams in January 2001, each one describing one of the two withholding payments.

Regions sent the Cunninghams monthly statements on essentially the same format as the year-end summary. However, after the merger of Regions Investment Company, Inc., and Morgan Keegan & Company, Inc., in April 2001, the format of the monthly statements changed. The statement for the month of May 2001, for the first time, expressly showed a "bottom-line" "Market Value" of the money market fund. The bottom line of the Cunninghams' account was $22,378.45. Subsequent monthly statements were similarly revealing.

In September or October 2001, Patricia "discovered" in a conversation with Andrew Fort, Higgenbotham's assistant, that her account balance was approximately $22,000, and she expressed concern. Fort and Higgenbotham investigated her inquiry and discovered the two withholding payments. They acknowledged that the payments had been erroneously made, but they told Patricia that Regions could not merely refund the money because it had already been sent to the IRS. They advised her to request a refund from the IRS on her tax return. Pursuant to the Cunninghams' requests of the IRS, the Cunninghams received tax refunds in the following two years totaling $24,856.³ The Cunninghams sold their shares in the money market fund in October 2003.

Meanwhile, on December 10, 2002, the Cunninghams sued Regions and Higgenbotham. They averred that "the proceeds of their investments" were "wrongfully and without reason transferred to the U[nited] S[tates] government," and that they were "caused to report excessive amounts of taxable income," and that they "paid taxes on such amounts." The Cunninghams sought relief on claims of fraud, suppression, conversion, breach of contract, and violation of the Alabama Securities Act, Ala.Code 1975, § 8-6-1 et seq.

The case was tried to a jury in March 2004. At the close of all the evidence, Regions moved for a judgment as a matter of law ("JML"), challenging the sufficiency of the evidence as to all the claims. The jury returned a general verdict, awarding the Cunninghams $10,000 in compensatory damages....