Thanks for visiting! Welcome to a new way to research case law. You are viewing a free summary from Descrybe.ai. For citation and good law / bad law checking, legal issue analysis, and other advanced tools, explore our Legal Research Toolkit — not free, but close.
Ernst & Young, LLP v. Tucker
Citations: 940 So. 2d 269; 2006 WL 895234Docket: 1040643, 1040689 and 1041367
Court: Supreme Court of Alabama; April 7, 2006; Alabama; State Supreme Court
Wade Tucker initiated a shareholder-derivative action against HealthSouth Corporation and its officers and directors in August 2002, later adding Ernst & Young, LLP (E.Y.) as a defendant in March 2003. Tucker claimed that E.Y. failed to uncover wrongdoing by HealthSouth's corporate officers, constituting breaches of its employment agreements and supporting allegations of negligence, wantonness, and fraud. He also identified various instances of fraud, self-dealing, insider trading, and breaches of fiduciary duty by HealthSouth's management and board members, seeking recovery for damages incurred. E.Y. responded by filing a motion to compel arbitration based on an arbitration agreement outlined in its engagement letters with HealthSouth. This agreement mandated that any claims related to their services be submitted first to mediation and, if unsuccessful, to binding arbitration. The arbitration would be overseen by a panel of three arbitrators, adhering to American Arbitration Association rules, with the Federal Arbitration Act governing disputes regarding the arbitration's applicability and enforceability. The arbitrators were restricted from awarding non-monetary or punitive damages, and any award must align with what a court in the same jurisdiction could impose, ensuring no remedies beyond monetary damages were available. E. Y filed a motion to dismiss Tucker's claims, arguing non-compliance with Alabama Rule 23.1 due to Tucker's failure to demand action from HealthSouth's board before filing. On December 29, 2004, the trial court referred Tucker's claims against E. Y to arbitration, which Tucker acknowledged. Both E. Y and HealthSouth appealed this order, contending it improperly allowed the court to retain jurisdiction over arbitration-subject issues. The court's order confirmed Tucker's standing to pursue derivative claims and excused the demand requirement under Rule 23.1. Key points of the order included: 1. Claims against E. Y are referred to arbitration, with proceedings stayed pending this arbitration. 2. The referral pertains only to liability and damages, not to jurisdictional matters like demand issues or the choice of counsel, which remain under the court's jurisdiction. 3. The court retains authority to enforce arbitration awards, assess settlement fairness, enforce settlement agreements, and award attorneys' fees should Tucker recover for HealthSouth. E. Y raised questions about Tucker's stockholder status, but no evidence was presented, and the court did not rule on this. E. Y and HealthSouth challenge the trial court's jurisdiction over certain matters after referral to arbitration, and the context of similar derivative lawsuits is noted as relevant. Vice Chancellor Strine addressed the context of shareholder-derivative lawsuits against HealthSouth in an unpublished memorandum opinion related to Teachers' Retirement System of Louisiana v. Scrushy. The Teachers' Retirement lawsuit was filed about a year after the Tucker action, both alleging similar claims regarding HealthSouth's financial integrity. Strine noted that public scrutiny heightened in summer 2002 when HealthSouth announced a new reimbursement policy from the Centers for Medicare and Medicaid Services (CMS), which was expected to negatively impact revenues. Shareholders suspected that company insiders had concealed this information to maintain stock prices, especially following significant stock sales by insiders earlier that year. Two types of legal actions emerged: federal securities lawsuits filed on August 28, 2002, alleging violations of the Securities Exchange Act, and state derivative actions, beginning with the Tucker Complaint, which challenged various insider transactions and briefly addressed actions related to the CMS Policy, specifically involving then-CEO Richard Scrushy. The Tucker Complaint, however, was criticized for poor pleading practices, particularly failing to adequately plead demand excusal and including fictitious defendants. Subsequently, additional derivative actions were filed in Delaware, which were more focused than the Alabama actions, aiming to recover profits from improper trading by HealthSouth insiders during the period when the company failed to disclose the CMS Policy's adverse effects. The Delaware complaints demonstrated better research and understanding of legal requirements compared to the Tucker Complaint. On October 18, 2002, the first of two derivative suits, known as the Federal Derivative Actions, was filed in the Northern District of Alabama. These actions overlapped with claims in the Alabama and Delaware Derivative Actions, with minor exceptions. The Delaware Court's terminology will be used to classify these lawsuits: the Alabama Derivative Actions (initiated by the Tucker complaint), the Delaware Derivative Actions, and the Federal Derivative Actions. The Tucker complaint is the current focus of the case. The court in the Teachers' Retirement case acknowledged the need to determine the appropriate jurisdiction for fiduciary duty claims and encouraged collaboration among counsel from the Delaware, Alabama, and Federal Derivative Actions. Judge Karen O. Bowdre in Alabama promoted efficiency by appointing a steering committee to coordinate discovery across all related actions involving HealthSouth stockholders from 1998 to 2002. This federal committee was tasked with ensuring discovery coordination with a committee appointed by Alabama Circuit Court Judge Allwin E. Horn III, who oversaw the Alabama Derivative Actions. On August 24, 2003, Judge Horn appointed a state committee, which included representatives from the Alabama Derivative Actions. By this point, the Tucker Complaint had become central to the Alabama Derivative Actions, leading to the abatement of several other cases in favor of it. As a result of cooperation among various courts, a division of labor was established: the Federal Derivative Actions would be stayed in favor of the Alabama and Delaware Derivative Actions, with Delaware plaintiffs handling claims related to the 2000 stock Buyback in the federal court, while the remaining claims would be pursued under the Tucker Complaint in Alabama. Counsel from the Delaware and Alabama Derivative Actions collaborated on prosecution strategies, leading to a third amendment of the Tucker Complaint in August 2003, which encompassed claims from the Delaware Derivative Actions and additional claims similar to those in the original Teachers' Retirement complaint. Judges Bowdre and Horn facilitated confidential settlement discussions and coordinated discovery efforts to prevent duplicative processes that could burden HealthSouth's resources. By autumn 2003, judges had appointed lead counsel for ongoing actions, and these counsel collaborated on discovery steering committees. In December 2003, Judge Horn rejected a motion from another derivative plaintiff's counsel to join the HealthSouth steering committee, emphasizing the importance of maintaining the current litigation strategy. The court confirmed that the Delaware Derivative Actions were appropriately stayed while the Tucker complaint was addressed. The procedural history of this case began with E. Y's motion to compel arbitration of Tucker's claims, alternatively seeking dismissal based on Tucker's failure to comply with Rule 23.1, Ala. R.Civ. P., regarding demand on the HealthSouth board or because Tucker's claims duplicated those in Federal Derivative Actions. Tucker subsequently requested expedited resolution of the demand issue, leading to a hearing where the trial court ordered on May 10, 2004, that E. Y's motion to refer Tucker's derivative claims to arbitration was appropriate, although HealthSouth reserved its right to intervene and contest arbitrability. The order also planned for further briefings on the demand issue and Tucker's standing to pursue claims. During the litigation, the demand responsibility and Tucker's standing were extensively debated. In its May 28, 2004, answer, HealthSouth remained neutral on the demand issue but later, on July 16, 2004, filed a motion to realign itself as the real party in interest, seeking to take over Tucker's role as the plaintiff against E. Y. HealthSouth indicated its board had formed a special committee in April 2003 to manage the company during the litigation and proposed an amended complaint echoing some of Tucker's claims, alleging that its governance bodies could not detect the fraudulent actions before March 2003 due to the alleged fraud by Richard Scrushy and others, along with E. Y's failure to conduct proper audits. HealthSouth claimed it was the proper party in interest entitled to control the claims against E. Y. E. Y. informed the trial court on May 26, 2004, of its intention to address the issues concerning demand and party interest in a subsequent brief. On July 16, 2004, E. Y. argued for the dismissal of Tucker's claims on the basis that Tucker had not made a demand on HealthSouth and was not the proper party to assert claims on its behalf. Tucker was thus required to respond to both the demand issue and HealthSouth's assertion as the proper party in interest. In response, Tucker provided extensive arguments in his briefs, addressing the demand issue and raising concerns about potential insurance coverage risks, HealthSouth's proposed amendments excusing wrongful conduct by its management, and conflicts of interest in HealthSouth's efforts to protect its board while pursuing claims. Tucker also contended that both HealthSouth and E. Y. were judicially estopped from claiming he was not a proper party, given previous assertions in Teachers' Retirement that recognized him as such. After hearings, the trial court issued two orders on July 29, 2004: one denying HealthSouth's motion to realign and the other denying the motions to dismiss based on demand issues. The court noted the comprehensive arguments and documents submitted by both parties. It ruled that demand was excused as a matter of law for all defendants based on HealthSouth's neutral pleading on the demand issue and identified specific directors as being impaired or not disinterested, thus excusing demand for all claims. The court allowed E. Y. the chance to submit further briefs on demand but it did not do so. The order concluded with the denial of HealthSouth's motion to replace Tucker as the derivative plaintiff against E. Y. Parties presented arguments regarding motions to dismiss by E. Y, with the trial court requesting a form order for arbitration of claims against E. Y. On November 1, 2004, E. Y claimed that demand and proper party issues should be decided by the arbitration panel. Disagreements arose between Tucker and E. Y regarding the form order for arbitration, leading to each submitting their own proposals. On November 9, 2004, HealthSouth expressed no objection to arbitration but reserved its rights to pursue control of claims against E. Y, depending on future developments. HealthSouth did not argue at the subsequent hearings on motions to dismiss or arbitration referral. On December 29, 2004, the trial court ruled that Tucker had standing against E. Y and referred the case to arbitration, while retaining jurisdiction over the issues of demand and proper party to prevent re-litigation in arbitration. Both HealthSouth and E. Y appealed and sought a stay of proceedings, which was denied on March 31, 2005. The court found that E. Y and HealthSouth had previously litigated and lost on the demand and proper party issues without appealing those rulings, establishing them as the law of the case. The court noted that arbitrability and enforcement of awards would be determined post-arbitration, while approval of settlements and fee awards would also fall under the court's jurisdiction after arbitration completion. E. Y and HealthSouth petitioned the court for a stay in trial court case CV-02-5212, which was granted on April 7, 2005. While awaiting the stay, E. Y initiated a separate action (CV-05-1618) on March 18, 2005, against HealthSouth to toll the statute of limitations for claims intended for arbitration. E. Y alleged that HealthSouth provided fraudulent documents to inflate its stock value. Concurrently, E. Y requested the court to refer these claims to arbitration. HealthSouth responded with an answer and a counterclaim, mirroring claims from its proposed amended complaint in Tucker's action, which also aligned with Tucker's derivative claims against E. Y. HealthSouth consented to arbitration and sought to refer its counterclaim as well. The trial court consolidated E. Y's action with the Tucker case, granting E. Y's motion to compel arbitration. The court emphasized the need for efficiency in handling HealthSouth-related cases. E. Y's complaint was explicitly filed to toll the statute of limitations while indicating that claims would be pursued in arbitration, leading to the granting of the motion to refer to arbitration. HealthSouth then sought clarification on whether a prior order referring Tucker's claims to arbitration would impact its ability to assert its counterclaims. The trial court denied HealthSouth's request for clarification, prompting an appeal that was consolidated with other Tucker-related appeals. Both parties contended that the trial court's order improperly retained jurisdiction over issues meant for arbitration. Questions of arbitrability are determined by courts, following the standard set in *First Options of Chicago, Inc. v. Kaplan*, unless there is clear evidence that parties intended for arbitrators to decide such questions. This principle, supported by *AT&T Technologies, Inc. v. Communications Workers of America*, establishes that courts decide arbitrability unless parties indicate otherwise, creating an exception to the general preference for arbitration. Under Alabama law, a party can waive its right to arbitrate if it engages significantly in litigation, which may prejudice the opposing party. The waiver's determination depends on the specific facts of each case, with no strict rules governing what constitutes a waiver. The current legal matter involves whether collateral estoppel applies to prevent arbitration of aspects of a case that have already been litigated. E. Y and HealthSouth argue that prior litigation regarding the proper party in interest and demand issues should not affect their right to arbitration on those same issues. The trial court found that both parties had previously litigated these matters and were aware of their arbitration rights. E. Y chose to litigate demand and proper party issues, hoping for a dismissal of claims, while HealthSouth contested the proper party issue to replace Tucker in the litigation. All parties acknowledge that the case is subject to arbitration. Y and HealthSouth's argument regarding the First Options arbitration provision is ultimately irrelevant. Even if they initially had the right for the arbitration panel to decide arbitrability questions, the focus must now shift to the concept of collateral estoppel to determine if they forfeited this right by engaging in litigation over these questions. The Court previously acknowledged that collateral estoppel can apply to arbitration that follows judicial rulings. For instance, in Brown v. Denson, the Court ruled that a policyholder could not compel arbitration against an independent broker after already arbitrating claims against the insurer. Justice See's dissent highlighted that Unum could be bound in future arbitration by prior judicial decisions, which would prevent them from benefiting from their contract with the policyholder. The doctrine of collateral estoppel, along with res judicata, is applicable to arbitration outcomes as it is to court judgments, precluding the re-litigation of previously adjudicated matters. Res judicata typically refers to claim preclusion, while collateral estoppel pertains to issue preclusion, a specific aspect of res judicata. Saad Construction, the plaintiff, may not have been able to bring tort claims against the appellees, the defendants, before the Alabama Building Commission's director as arbitrator. However, collateral estoppel could still prevent Saad from relitigating factual issues that the director has already resolved, provided the necessary elements are met. These elements include: 1) the issue in the prior action must be identical to the one in the current case; 2) the issue must have been actually litigated in the prior action; 3) its resolution must have been necessary for the prior judgment; and 4) the same parties must be involved in both actions. If these criteria are satisfied, parties are barred from re-litigating issues that were previously settled. Moreover, while res judicata does not preclude claims where the first court lacked jurisdiction, decisions made in the first court on common issues can be carried over to a federal court case via collateral estoppel. The document also highlights that a prior arbitration award can bind subsequent judicial proceedings, just as a judicial determination can bind later arbitration awards. In Leon C. Baker, P.C. v. Merrill Lynch, Pierce, Fenner, Smith, Inc., the Alabama Supreme Court examined the validity of an injunction that prevented a professional corporation from arbitrating a claim against Merrill Lynch. The claim involved alleged wrongful disclosure of a brokerage account to a third party. Merrill Lynch's request for the injunction was based on a prior unfavorable ruling against the professional corporation in the same trial court. Central to the court's analysis was the doctrine of collateral estoppel, which prevents relitigation of issues already resolved in previous cases. The professional corporation argued that the applicability of collateral estoppel should be decided by arbitrators, not the trial court. In Alabama, collateral estoppel applies when the same issue and parties are present, the issue was actually litigated, and the resolution was necessary for the prior judgment. The court noted that the question of whether this determination is arbitrable had not previously been addressed in Alabama, but there are conflicting views in other jurisdictions. Some courts maintain that the preclusive effect of judicial determinations must be decided by a court, while others allow arbitrators to make that decision. Notable cases were cited to illustrate these differing approaches, highlighting that the resolution of whether prior judgments or arbitration awards operate as res judicata or collateral estoppel is contested among various jurisdictions. Appellants reference a limited case law that suggests the preclusive effect of a judgment on claims later pursued in arbitration is arbitrable. The critical case cited, United States Fire Ins. Co. v. National Gypsum Co., falls into a category where judicial preclusive effects are paramount, indicating that courts should intervene to prevent the reassertion of resolved claims. Furthermore, courts possess the authority to uphold their judgments as res judicata, allowing them to stay or enjoin subsequent arbitration proceedings. The courts also differentiate between cases involving prior judgments and those involving previous arbitrations. For instance, Olick highlights that while res judicata claims based on prior judgments are exceptions, those based on previous arbitration do not share the same institutional implications. Here, if a contractual clause prohibits re-arbitration of similar disputes, the arbitrator should determine the preclusive effect of any earlier arbitration. Alabama law emphasizes the finality of its court judgments, prohibiting advisory opinions except in specific circumstances. Adopting the appellants' position could convert binding judicial decisions into advisory opinions, contradicting Alabama's strong policy against such practices. Consequently, the trial court was deemed the appropriate venue for Merrill Lynch to assert its collateral-estoppel defense, leading to a substantive examination of that defense. In the case of Waterfront Marine Construction, the court clarified that arbitration panels are not bound by legal principles, are not required to justify their decisions, and their rulings are not subject to review for legal errors. Arbitrators can make determinations based on fairness and equity within the contractual scope, allowing them to revisit issues resolved in prior arbitrations, even if the legal criteria for res judicata are not met. This approach undermines the purpose of res judicata, which aims to conclude substantive disputes and prevent relitigation. In Leon C. Baker, P.C., the court ruled that the preclusive effect of a prior judgment in subsequent arbitration is a matter for trial courts, not arbitrators. In the current case, Tucker and HealthSouth have already litigated and received a trial court ruling on the issues of demand and proper party in interest, thus preventing the arbitration panel from readdressing these matters due to collateral estoppel. The trial court's acknowledgment of this in its December 29, 2004, order is upheld and not reversible. HealthSouth's claim that the trial court's denial of its motion for clarification was a refusal to refer its counterclaims to arbitration is incorrect, as the court's May 9, 2005, order indeed referred those claims. However, the issue of who is the proper party to assert HealthSouth's claims has been previously decided by the trial court and cannot be relitigated in arbitration. HealthSouth’s attempt to introduce new evidence suggesting a change in circumstances post-litigation does not alter the validity of the trial court's prior ruling. Additionally, E. Y and HealthSouth challenged the trial court's reservation of jurisdiction for various issues related to the arbitration award and settlement matters, arguing that the arbitration agreement's broad language encompasses these reserved issues. The arbitration agreement does not impact matters occurring post-arbitration. Specifically, the agreement permits judgment on any arbitration award to be entered in a court with proper jurisdiction. Any settlement resulting from arbitration is subject to Rule 23.1 of the Alabama Rules of Civil Procedure, requiring court approval for dismissals or compromises and notice to shareholders or members as directed by the court. The trial court retains authority to award attorney fees to Tucker from any recovery based on the arbitration outcome, though this remains speculative. The trial court's decisions are affirmed. Judges concur on the ruling that the parties agreed to arbitrate certain issues but are collaterally estopped from relitigating them due to prior litigation outcomes. A special concurrence notes that both parties initially waived their right to arbitration, later agreeing to arbitrate remaining disputes. Waiver is defined as the intentional relinquishment of a known right, and in this case, both parties demonstrated intent to abandon arbitration in favor of judicial processes. Notable events include E. Y's motion to compel arbitration or dismiss claims, Tucker's request for expedited determination, and HealthSouth's refusal to arbitrate while asserting its role as the proper party in interest. HealthSouth's neutrality on the demand issue and insistence on court resolution of both demand and proper-party-in-interest matters are highlighted. HealthSouth requested the trial court to substitute and realign parties to pursue Tucker's derivative claims against E. Y., and sought permission to file an amended complaint. Following oral arguments on demand and proper party issues, the trial court issued two orders on July 29, 2004: one excusing the demand on HealthSouth's board and denying E. Y's dismissal motion, and the other denying HealthSouth's motions to realign and file an amended complaint. Neither party appealed or contested the court's jurisdiction over these issues, indicating a preference for litigation over arbitration. Under Alabama law, a party can waive the right to arbitration by substantially invoking the litigation process. Both HealthSouth and E. Y. engaged in litigation rather than arbitration, thereby waiving their rights. Consequently, the trial court maintained jurisdiction over the demand and proper party issues, and the earlier order regarding arbitration was valid. Ultimately, the parties agreed to submit other claims to arbitration but did not include the previously litigated demand and proper party issues, which Tucker opposed. As a result, the trial court's jurisdiction over those issues remains intact, while the arbitrator has jurisdiction over the remaining claims. The principle of collateral estoppel applies to the issues already litigated. A derivative action can be initiated by shareholders or members to enforce a corporation's or unincorporated association's rights when the entity fails to act. The complaint must be verified, stating that the plaintiff was a shareholder or member at the time of the complained transaction or that their interest devolved by law. It must detail any efforts made by the plaintiff to obtain the desired action from the relevant authority and explain why those efforts were unsuccessful or absent. The action cannot proceed if the plaintiff does not adequately represent the interests of similarly situated shareholders or members. Court approval is required for any dismissal or compromise of the action, and notice must be provided to shareholders or members as directed by the court. Additionally, the argument that Tucker's claims were duplicative of those in the Federal Derivative Actions was not raised at the trial court level and is not relevant to the current appeal. In prior litigation, E. Y and HealthSouth acknowledged that Tucker could appropriately assert claims on behalf of HealthSouth. There is no principle preventing an individual from relinquishing a legal right obtained through litigation.