Trondheim Capital Partners, LP v. Life Ins. Co. of Ala.
| Decision Date | 08 December 2020 |
| Docket Number | Case No. 4:19-CV-1413-KOB |
| Citation | 505 F.Supp.3d 1213 |
| Parties | TRONDHEIM CAPITAL PARTNERS, LP, et al., Plaintiffs, v. LIFE INSURANCE COMPANY OF ALABAMA, et al., Defendants. |
| Court | U.S. District Court — Northern District of Alabama |
Sharonda Childs Fancher, Baker Donelson Bearman Caldwell & Berkowitz PC, Birmingham, AL, Joseph David Sibley, IV, Pro Hac Vice, Camara & Sibley LLP, Houston, TX, for Plaintiff Trondheim Capital Partners LP.
Charles A. Dauphin, Dauphin Paris LLC, Birmingham, AL, F. Michael Haney, Inzer Haney McWhorter & Haney LLC, Gadsden, AL, for Defendants.
In 2019, Netflix released a television series featuring Marie Kondo1 , a Japanese home organization professional and bestselling author of The Life-Changing Magic of Tidying Up.2 In the series based on her bestseller, Kondo shows her acclaimed organizational method in action and provides viewers with tips on how to implement it in their homes and lives. And the series spawned a new viral verb phrase: "spark joy." As the cornerstone of Kondo's method, the phrase helps viewers and readers decide whether to keep an object in their lives. If, when a person picks up the object, it does not "spark joy" in the person, the person should discard the object.
The current organization of this case—with its two operative complaints, two motions to dismiss, a motion to abstain, a motion to strike, and a motion to stay discovery—does not "spark joy" or clarity of legal issues. As such—and more precisely for the legal reasons discussed below—the court will discard these motions and pleadings in their current state in an attempt to declutter this case and to bring clarity and organization as the case moves forward.
This case includes direct and derivative shareholder actions several Shareholders brought against the Life Insurance Company of Alabama (LICOA) and six of its Directors. The court must attempt to organize and dispose of the following motions: LICOA's and the Directors' motion to dismiss the Shareholders' second amended consolidated complaint (doc. 27); LICOA's motion asking this court to abstain from hearing the Shareholders' corporate dissolution claim (doc. 28); the Directors' motion to dismiss the Shareholders' second amended consolidated derivative complaint (doc. 37); the Directors' motion to stay discovery as to the derivative counts (doc. 40); and the Shareholders' motion to strike certain arguments in LICOA's and the Directors' briefs on these motions (doc. 43). For ease of reference and in an attempt to clear up the confusion wrought by the numerous pleadings and motions, the court will refer to the second amended consolidated complaint (doc. 25) as the "Direct Complaint" and to the amended complaint asserting the derivative claims (doc. 32) as the "Derivative Complaint."
For the reasons discussed more fully below, the court will GRANT IN PART and DENY IN PART LICOA's and the Directors' motion to dismiss the Direct Complaint, as the court concludes that the Shareholders inadequately pled all but one count challenged by that motion. The court will GRANT the Directors' motion to dismiss the Derivative Complaint because the Shareholders did not seek leave of the court before filing it; accordingly, the court will DENY AS MOOT the Directors' motion to stay discovery as to the Derivative Complaint. The court will also DENY in its entirety the Shareholders' motion to strike. Finally, the court will follow the unanimous weight of authority and will GRANT LICOA's motion to abstain; the court will accordingly DISMISS the Shareholders' claim to dissolve LICOA (Count Two of the Direct Complaint) without prejudice to their ability to refile that claim in the appropriate state forum. And because the Shareholders seek money damages in all their other counts, the court will STAY this case pursuant to the principles enunciated by the Supreme Court in Quackenbush v. Allstate Insurance Company to give the Shareholders an opportunity to litigate their dissolution claim in state court. 517 U.S. 706, 721, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996) (). The Shareholders may seek leave of this court to file one final single amended complaint containing all causes of action against all defendants when the stay in this case is lifted.
As stated above, the plaintiffs in this case are certain shareholders of the Life Insurance Company of Alabama. LICOA's shares trade publicly. (Doc. 25 at 4, 22). Trondheim Capital Partners and the MTP Trust, the original Shareholder plaintiffs, purchased their shares "between 2017 and the present;" the intervening Shareholders do not provide the dates on which they purchased their LICOA shares. (Doc. 15 at 10–11). The Shareholders learned about the potential mismanagement of LICOA by some members of its board of directors3 in 2018 when Colin Peterson, Trondheim's principal, met with Clarence William Daugette III, LICOA's president and board chairman, to discuss LICOA's "poor operating results and [the] nonsensical capital allocation policy of the company." (Doc. 25 at 11). In this meeting, the Shareholders allege, Mr. Daugette admitted that he and at least some of LICOA's Directors had allowed LICOA to become overcapitalized. According to Mr. Daugette, he "did not mind" LICOA's overcapitalized status because it allowed the defendant Directors and their families to buy LICOA stock at depressed prices, thereby ensuring the defendant Directors' continued control of the company. (Doc. 25 at 11, 14).
After his meeting with Mr. Daugette, Mr. Peterson obtained a copy of a report authored by the Alabama Department of Insurance summarizing the results of its examination of LICOA. According to the report, the Department expressed concern over the defendant Directors' "nepotistic practices," including issues with "the hiring and salaries of family members." (Doc. 25 at 12).
Indeed, the Shareholders allege that the defendant Directors abused their continued control of LICOA by setting exorbitant salaries for themselves and for family members employed by LICOA, all while they and their family members worked shockingly low hours for the company. Instead of managing LICOA for the Shareholders' benefit, they allege that the defendant Directors ran LICOA "[l]ike a family jobs and vacation club for [the Directors] and their families." (Doc. 25 at 15).
In sum, the Shareholders allege a concerning cycle within LICOA that began when the defendant Directors intentionally overcapitalized it to drive its stock prices down. The defendant Directors and their families then took advantage of the low stock prices to accumulate stock for themselves, which allowed them to keep control of the company. Finally, the defendant Directors then used their control of the company to employ their family members at LICOA and to set high salaries for both themselves and for their family members. And the cycle continues to this day, according to the Shareholders. The Shareholders also allege that LICOA "lacked the internal controls to prevent" this alleged mismanagement and that at least some of the Directors rejected offers to sell LICOA without consulting the shareholders. (Doc. 25 at 23).
After discovering this alleged destructive cycle within LICOA, Shareholders Trondheim and MTP exercised their statutory right of inspection of LICOA's books, papers, and records pursuant to Ala. Code § 10A-2-16.02(b). (Doc. 25 at 18). That section allows certain shareholders to inspect the records of the corporation in which they hold shares provided the shareholder gives the corporation five business days' notice of its intent to inspect the records. LICOA does not dispute that Alabama law entitled Trondheim and MTP to inspect its records. (See doc. 27 at 19–21).
But according to Shareholders Trondheim and MTP, LICOA did not provide the records for their inspection until "approximately five months" after their initial demand. And according to Trondheim and MTP, LICOA tendered a "woefully and deficient and incomplete" response to their inspection demands. (Doc. 25 at 19).
Yet LICOA's production apparently furnished the Shareholders with enough information to file this suit against both LICOA and six of its Directors. After several amendments and an intervention by additional Shareholder plaintiffs who seek to recover from the Directors derivatively on LICOA's behalf, the court must now delve into the smorgasbord of claims and motions set out by the parties.
After the intervenor Shareholder plaintiffs joined this case, the court ordered all plaintiffs to file one consolidated complaint (doc. 24). The Shareholders' subsequent pleading (doc. 25, the "Direct Complaint") originally contained both direct and derivative shareholder claims, but after LICOA moved to dismiss the Direct Complaint (doc. 27), the Shareholders filed another amended complaint containing only derivative claims (doc. 32, the "Derivative Complaint") but incorporating the direct claims in the Direct Complaint (doc. 27) by reference (doc. 32 at 2 n.1). The Shareholders' Derivative Complaint made LICOA's motion to dismiss the Direct Complaint moot to the extent the motion addressed the derivative claims in the Direct Complaint.
While certainly not a method of pleading to which plaintiffs should aspire, the Shareholders' Derivative Complaint properly incorporated by reference the direct counts in the Direct Complaint. Although an amended complaint generally supersedes any prior complaints, this court recognizes an exception to that rule "when the pleader incorporates by reference allegations...
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In Dime We Tr., RLT v. Armadillo Distribution Enters.
...has ‘fail[ed] to state a claim upon which relief can be granted.'”); see also Trondheim Cap. Partners, LP v. Life Ins. Co. of Alabama, 505 F.Supp.3d 1213, 1225 (N.D. Ala. 2020) (same). The Trust is suing on its own behalf and possesses this legal right through the transfer of the entirety o......