Shelton v. Thompson

• Decision Date: 13 January 1989
• Citation: 544 So.2d 845
• Parties: Jessie Willard SHELTON, et al. v. Wallace H. THOMPSON, et al. 86-771.
• Court: Alabama Supreme Court

Page 845

544 So.2d 845

Jessie Willard SHELTON, et al. v. Wallace H. THOMPSON, et al.

86-771.

Supreme Court of Alabama.

Jan. 13, 1989.

Rehearing Denied May 5, 1989.

Frank J. Tipler, Jr. and John M. Pennington of Tipler and Tipler, Andalusia, and Michael L. Weathers, Montgomery, for appellants.

J.R. Brooks of Ford, Caldwell, Ford & Payne, Huntsville, for appellee Wallace H. Thompson.

Palmer C. Hamilton and George A. LeMaistre, Jr. of Miller, Hamilton, Snider & Odom, Mobile, for appellees Colonial Bank of Northwest Alabama and The Colonial Bancgroup, Inc.

John R. Chiles of Sirote, Permutt, McDermott, Slepian, Friend, Friedman, Held & Apolinsky, Birmingham, for appellee, G. Scott Ray.

Robert O. Cox of Poellnitz, Cox & Jones, Florence, for appellees Neil G. Wilcoxson, Sam Hammond, and Malcolm Davis.

PER CURIAM.

This appeal is from a summary judgment in favor of all the defendants in a derivative action involving the merger of the Bank of Lexington ("Lexington") and Colonial BancGroup ("Colonial").

On January 12, 1985, a proposal was made to the stockholders of Lexington to merge Lexington into Colonial by means of a two-part transaction: 1) Lexington shares would be exchanged for shares in Colonial; and 2) Lexington would be merged into Colonial's wholly-owned subsidiary, Colonial Bank of Northwest Alabama. A majority of Lexington stockholders accepted the proposal and the transaction was completed on June 19, 1985. On that date Lexington ceased to exist as a corporate entity.

The plaintiffs (former Lexington stockholders) filed this lawsuit on November 5, 1985, on behalf of themselves, other unnamed stockholders similarly situated, and derivatively on behalf of Lexington against the defendants (certain officers and directors of Lexington and, by amendment, of Colonial). The plaintiffs claimed that the individual defendants had made bad or fraudulent loans of approximately $5 million in breach of their fiduciary duties with regard to the proposed merger between Lexington and Colonial, thereby causing injury to Lexington and to the individual plaintiffs (specifically, that the loans depleted the assets of Lexington and damaged the business and reputation of Lexington). The amended complaint, which added Colonial as a defendant, also alleged that Colonial had acted in duplicity with the originally named defendants to wrongfully deprive the plaintiffs of their cause of action through the means of merger.

The defendants filed motions to dismiss, asserting that 1) the plaintiffs had failed to allege facts sufficient to allow the plaintiffs to sue and recover individually; 2) that the plaintiffs had failed to comply with Rule 23.1, A.R.Civ.P.; and 3) that as nonstockholders of Lexington, the plaintiffs lacked standing to sue derivatively (i.e., that the corporation on whose behalf the plaintiffs were suing had been merged out of existence and the plaintiffs could not have been stockholders at the time suit was filed).

The grounds asserted in the motions to dismiss were supported by the affidavit of defendant G. Scott Ray (former Lexington officer and director). Ray stated that the plaintiffs, at the time of the merger, had exchanged their Lexington shares for Colonial shares, and that the defendants did not constitute a majority of the directors of either Colonial BancGroup or Colonial Bank of Northwest Alabama or the now non-existent Lexington; and, therefore, that demand on the Board would not have been futile. The plaintiffs admitted that they had not made demand upon the Lexington directors to institute this action; rather, they contended that the totality of their averments comported with the "futility of notice" exception of Rule 23.1.

The motions to dismiss were accompanied by motions for protective orders, requesting a stay of discovery until the court could rule on the motions to dismiss. The motions for protective orders were granted pending a "status conference" to determine the discovery necessary for the plaintiffs to adequately respond to the motions to dismiss. However, the protective orders were never lifted after the status conference was held.

The trial court, treating the defendants' motions to dismiss as motions for summary judgment under Rule 12(b), entered a summary judgment in favor of all the defendants, reasoning that the plaintiffs did not have standing to sue on behalf of Lexington because they were no longer stockholders of Lexington, and that the plaintiffs did not have standing to sue on their own behalf because the alleged wrongs were to the corporation. The trial court also found that the amended complaint was due to be dismissed because it alleged a conspiracy to keep the plaintiffs from suing individually when, in fact, the plaintiffs had no right to sue individually. The trial court did not address the issue of noncompliance with the notice requirements of Rule 23.1.

We affirm that portion of the summary judgment as it relates to the plaintiffs' claim on their own behalf. Whatever damages the plaintiffs may have suffered were incident to their status as stockholders; and whatever recovery may be effected by the derivative action inures to the benefit of all innocent stockholders and not to the plaintiff stockholders individually. Green v. Bradley Construction, Inc., 431 So.2d 1226 (Ala.1983); see, also, Stevens v. Lowder, 643 F.2d 1078 (5th Cir.1981).

Initially, we were also disposed to affirm the summary judgment in favor of defendant Colonial. Certainly, the mere fact of merger, even in the face of Lexington's depleted worth resulting from the alleged wrongdoing of the originally named defendants, creates no liability on the part of Colonial; and the plaintiffs bear the burden of proving that Colonial, acting in duplicity with the individual defendants, who were former officers and directors of Lexington, committed tortious actionable conduct. Where, as here, however, the trial court barred discovery until the "standing" issue could be resolved, summary disposition of the claim in favor of Colonial was premature. Moreover, particularly if the derivative plaintiffs fail to prove Colonial's culpability, nothing in this opinion, nor other legal principles, to our knowledge, would preclude Colonial, as a matter of law, from exercising its right to seek realignment as a party-plaintiff, if it so chooses, with permission of the court, to prosecute the claims on behalf of the innocent former stockholders of Lexington. Therefore, the summary judgment in favor of Colonial is reversed.

As to the plaintiffs' derivative claim against the remaining defendants, the summary judgment appealed from is reversed and the cause is remanded for further proceedings. (All future references to "the plaintiffs" and "the defendants" are to the derivative plaintiffs and to the parties defendant as named in the complaint as amended.)

We agree with the plaintiffs' contention that, because of the trial court's ban on discovery, the entry of summary judgment, with respect to certain of its aspects, was premature. We further agree with the defendants' position, however, that not only is the trial court's stated "substantive standing" ground reviewable, but that we are not limited in our review to those grounds stated in the trial court's order. The defendants asserted in the trial court, and have asserted on appeal, in support of affirmance, that the plaintiffs had failed to meet the threshold procedural requirements of Rule 23.1, which provides:

"In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs."

Because neither the "substantive standing" issue nor the "procedural notice" issue, including the "futility of notice" exception, is dependent on, or subject to, the plaintiffs' opportunity for further discovery, and because the judgment is due to be affirmed if either the defendants' "procedural noncompliance" argument or their "substantive standing" argument is sustained on appeal, we now address those issues.

The Substantive Standing Issue

The defendants' first "lack of standing" contention is that, as a matter of substantive law, once the plaintiffs lost their stockholder status in Lexington, they lost their standing to prosecute a derivative action. Unquestionably, this is the rule where, under ordinary circumstances, the stockholder voluntarily divests himself of any interest in the corporation. Of course, where a stockholder sells his stock, either to the corporation or to a third party, that stockholder, generally speaking, can not claim standing to maintain a derivative action on behalf of the corporation in which he no longer owns an interest. Green v. Bradley Construction, Inc., supra; see, also, Empire Realty Co. v. Harton, 176 Ala. 99, 57 So. 763 (1911) (holding that the plaintiff, who had surrendered his stock...