Reed v. Regions Bank (Ex parte Morgan Asset Mgmt., Inc.)

• Decision Date: 16 December 2011
• Docket Number: 1100714.
• Citation: 86 So.3d 309
• Parties: Ex parte MORGAN ASSET MANAGEMENT, INC., et al. (In re Jean W. Reed et al. v. Regions Bank et al.).
• Court: Alabama Supreme Court

86 So.3d 309

Ex parte MORGAN ASSET MANAGEMENT, INC., et al.

(In re Jean W. Reed et al.

v.Regions Bank et al.).

1100714.

Supreme Court of Alabama.

Sept. 9, 2011.

Rehearing Denied Dec. 16, 2011.

Peter S. Fruin, Scott S. Brown, and Kathryn J. Bushby of Maynard, Cooper & Gale, P.C., Birmingham, for petitioners.

J. Michael Rediker, John M. Fraley, Page A. Poerschke, Vincent J. Graffeo, Laura S. Dunning, and Rebecca A. Beers of Haskell Slaughter Young & Rediker, LLC, Birmingham; and Peter J. Mougey of Levin, Papantonio, Thomas, Mitchell, Echsner & Proctor, P.A., Pensacola, Florida, for respondents.

WOODALL, Justice.

Jean W. Reed, Mary W. Haynes, and Susan W. Stockham (hereinafter referred to collectively as “the sisters”) sued Regions Bank (“Regions”), Morgan Asset Management, Inc. (“MAM”), Morgan Keegan & Company, Inc. (“Morgan Keegan”), and Regions Financial Corporation (“RFC”), alleging several claims related to the investment of assets belonging to two trusts set up for the benefit of Reed and Haynes, respectively. MAM, Morgan Keegan, and RFC moved the Jefferson Circuit Court to dismiss the claims against them, arguing, among other things, that the claims were derivative in nature and could be asserted only in compliance with Rule 23.1, Ala. R. Civ. P.,¹ with which the sisters have not complied. The circuit court denied the motion to dismiss, and MAM, Morgan Keegan, and RFC now petition this Court for a writ of mandamus directing the circuit court to vacate that order and to enter an order granting their motion to dismiss. We grant the petition and issue the writ.

Facts and Procedural History

In July 1982, Elizabeth Walter simultaneously created separate trusts for the benefit of her three daughters—Reed, Haynes, and Stockham. The trusts were created to provide each daughter with income during her lifetime. Stockham was designated as the sole trustee and contingent-remainder beneficiary of the trusts established on behalf of Reed and Haynes (“the subject trusts”).

In April 1983, Regions entered into an agreement by which it became the custodian for the assets of the subject trusts. In April 1994, Regions also agreed to manage the investments of the subject trusts.² According to the sisters' amended complaint, Regions, a subsidiary of RFC, “is and has been one of the key units and components of the RFC group of brother-sister corporations operating for years and holding themselves out together as a Team under the operating trade name of ‘Regions Morgan Keegan Trust’ [‘RMKT’].” The sisters allege that the entities forming the RMKT team, including MAM and Morgan Keegan, which are also subsidiaries of RFC, participated in investment activities related to the subject trusts.

In March 2004, Walter died. Stockham, as trustee for the subject trusts, met with representatives of RMKT to discuss the investment goals for the subject trusts. In their amended complaint, the sisters alleged that “Stockham reminded Regions that she and her sisters were all older and unemployed, needing the income from their trusts to provide stable security and support them, their health expenses and living expenses for their lifetime,” but that “Regions, acting by and for itself and in concert with Defendants MAM and [Morgan Keegan] as the investment manager, investment advisor, and agent ... of the [subject trusts], ... made extensive investment in certain funds ... that were established and operated by companies closely affiliated with Regions.”

The sisters went on to allege that, at the time that the assets of the subject trusts were invested in funds established and operated by companies affiliated with Regions (“the RMK funds”), Regions, MAM, and Morgan Keegan knew that the RMK funds were “high-risk” and “unsuitable” for the sisters, who needed “stable, conservative, low-risk holdings that procured a secure and steady stream of income.” Further, the sisters alleged that “[t]he [RMK] [f]unds held assets that were overwhelmingly invested in illiquid, high-risk, complex structured investment vehicles ..., many of which were backed by subprime mortgages,” and that “[e]ach of the six RMK [f]unds (four of which are at issue here) suffered the same undisclosed defects and had the same (but similarly misrepresented) risk profiles.” Nevertheless, the sisters said, “MAM, in its capacity as a RMKT Team participant, advised Regions and the [sisters] to invest in and to retain their investments in the [RMK funds], knowing that the [RMK] [f]unds were plagued with extremely severe problems, as described above.”

The sisters also alleged in their amended complaint that, through both personal communications and in written account statements regarding the subject trusts, Regions, along with MAM and Morgan Keegan, made material misrepresentations and omitted material facts, including “(1) that such RMK [f]und investments were suitable for acquisition, retention, holding and for the investment of the corpus of the [s]ubject [t]rusts (which they were not); [and] (2) that such RMK [f]und investments were in fact correctly priced and valued (which they were not—they were consistently overvalued and listed as such by the RMKT Defendants in the course of RMKT operations and Fund operations.” The sisters alleged that, “[i]n reliance on these material misrepresentations, [they] continued to allow Regions to serve as investment manager, investment adviser, and fiduciary for the [s]ubject [t]rusts, continued to allow Morgan Keegan and MAM to serve as resources for Regions in its investment of the corpus of the [s]ubject [t]rusts, and continued to hold the investment in the RMK [f]unds in the [s]ubject [t]rusts.”

The sisters alleged further that, during 2007,

“the as-reported value of the RMK [f]unds decreased materially (despite the continued mis-valuation and mispricing of [RMK] [f]und assets which assisted in masking the true extent of the [RMK] [f]unds' problems). As [the sisters] observed such reported declines, several times in 2007 and extending into 2008, [the sisters] made inquiries with Regions and MAM representatives as to the stability of the RMK [f]unds and as to Defendants' opinion of the wisdom in continuing to hold the RMK [f]unds as assets of the trusts and accounts described above. In response, representatives and agents of Regions and MAM, on behalf of all Defendants and the RMKT Team, assured [the sisters] that the RMK [f]unds remained solid investments and that there was no need for undue concern. Representatives of Defendants MAM and Regions advised [the sisters] that the value of the RMK [f]unds would soon stabilize and that a recovery of the lost value of their positions in the [f]unds should be expected. Defendants made misrepresentations to [the sisters], informing [them] that the assets of the RMK [f]unds were substantial and safe and thus that the recent reduction in value was a temporary market reaction. Despite knowing that the RMK [f]unds faced calamity and that the [f]unds' financial strength and stability were ever-worsening, representatives of Regions and MAM, acting on behalf of all Defendants, suppressed such information and told [the sisters] to ‘stand pat.’

“... In reliance upon this information, the [sisters] did as the Regions and MAM representatives advised and took no action to force Regions to divest the [subject] trusts of their investments in the [RMK] [f]unds.”

According to the sisters, as the value of the RMK funds declined, Regions and its RMKT affiliates sold off their own investments in the RMK funds, but did not warn the sisters of the precarious situation of the RMK funds or take any steps to divest the subject trusts of their investment in the RMK funds. The sisters alleged that, before November 2008, no one ever informed Stockham that there were any problems with the RMK funds or that Reed's and Haynes's income stream would be affected by the drop in the value of the RMK funds.

In November 2008, Stockham fired Regions as custodian of and investment advisor to the subject trusts, and the sisters filed an action in the Jefferson Circuit Court naming as defendants Regions and MAM. Reed and Haynes each sued in their individual capacities as beneficiaries of the subject trusts. Stockham sued as both contingent-remainder beneficiary and trustee of the subject trusts.³

In October 2010, the sisters amended their complaint, purporting to “ ‘clean up’ the pleadings in this case ... and to restate and refine the[ir] claims” and adding Morgan Keegan and RFC as defendants. In their amended complaint, the sisters asserted claims of breach of fiduciary duties, negligence, wantonness, fraud, reckless and/or negligent misrepresentation, suppression, deceit, common-law indemnity, violation of the Alabama Securities Act, conspiracy to deceive and defraud, and breach of statutory duty pursuant to § 19–3B–807, Ala.Code 1975.

In December 2010, MAM, Morgan Keegan, and RFC moved the circuit court to dismiss the claims against them, arguing that the circuit court lacked subject-matter jurisdiction over the claims. MAM, Morgan Keegan, and RFC argued that, pursuant to our decision in Ex parte Regions Financial Corp., 67 So.3d 45 (Ala.2010) (hereinafter “RFC ”), the sisters' claims against them were derivative in nature and, therefore, were subject to the requirements of Rule 23.1. MAM, Morgan Keegan, and RFC also argued that, because the sisters had not complied with Rule 23.1, they did not have standing to assert the derivative claims and that, therefore, the circuit court should have dismissed those claims for lack of subject-matter jurisdiction.

On February 10, 2011, the circuit court issued an order denying the motion to dismiss. MAM, Morgan Keegan, and RFC now petition this Court for a writ of mandamus “directing the Circuit Court to vacate its February 10, 2011 Order and to enter an order dismissing [the sisters'] claims.”

Standard of Review

We have stated:

“ ‘Mandamus review is available where the petitioner...