# Trondheim Capital Partners LP v. Life Insurance Company of Alabama

> District Court, N.D. Alabama · December 8, 2020

URL: https://www.frixlaw.com/law-library/cases/9989998

## Case

- **Court:** District Court, N.D. Alabama
- **Decided:** December 8, 2020
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
MIDDLE DIVISION

TRONDHEIM CAPITAL )
PARTNERS, LP, et al., )
)
Plaintiffs, )
)
v. ) Case No. 4:19-CV-1413-KOB
)
LIFE INSURANCE COMPANY )
OF ALABAMA, et al., )
)
Defendants. )

MEMORANDUM OPINION
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.

1 TIDYING UP WITH MARIE KONDO (Netflix 2019).

2 MARIE KONDO, THE LIFE-CHANGING MAGIC OF TIDYING UP (2014).
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 (1996) (federal courts, when invoking
abstention doctrines, may dismiss only those claims in which the plaintiff seeks equitable relief;

courts must stay claims seeking money damages). 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.
I. Factual and Procedural Background
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).

3 The Shareholders’ complaint does not state how many directors currently serve on LICOA’s board. Accordingly,
the court is unsure if the six Director defendants in this case constitute the entirety of LICOA’s board.
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 from prior pleadings into the new pleading.” Liberty Mut. Ins. Co. v. Fleet Force,
Inc., No. CV-09-S-773-NW, 2013 WL 3357167, at *8 n.54 (N.D. Ala. July 1, 2013) (citing

Boelens v. Redman Homes, Inc., 759 F.2d 504, 508 (5th Cir. 1985)). But the court will use this
opportunity to point the Shareholders to some advice from the leading treatise on federal
practice:
[T]o ensure that the pleadings give notice of all the issues that are in controversy
so they can be handled and comprehended expeditiously, the safer practice is to
introduce an amended pleading that is complete in itself, rather than one that
refers to the prior pleading or seeks to incorporate a portion of it.

6 Arthur R. Miller, Mary Kay Kane & A. Benjamin Spencer, Federal Practice and Procedure
§ 1476 (3d ed. 2020) (emphasis added). And finally, the court notes that it specifically ordered
the Shareholders to file one consolidated complaint—an order with which their disjointed,
confusing, and frustrating method of bringing their claims does not comply. (Doc. 24).
Consequently, the Shareholders’ seven causes of action against LICOA and the six
Directors currently span two applicable pleadings. In the Direct Complaint (doc. 25), the
Shareholders claim that three of LICOA’s Directors intentionally devalued LICOA’s stock in
violation of Ala. Code § 10A-2-8.32 (Direct Count One); ask this court to dissolve LICOA under
Ala. Code § 10A-2-14.30(2) (Direct Count Two); bring a Rule 10b-5 claim against the Directors
(Direct Count Three); and seek a penalty against both LICOA and the Directors for denying
them their statutory rights of inspection in violation of Ala. Code § 10A-2-16.02(b) (Direct
Count Four). LICOA and the Directors have moved to dismiss Counts One, Three, and Four
(doc. 27), and LICOA has moved this court to abstain from exercising jurisdiction over Count
Two, the corporate dissolution claim (doc. 28).
The Shareholders’ Derivative Complaint (doc. 32) asserts three common-law claims
against the Directors, putatively on LICOA’s behalf: two claims alleging that the Directors took
corporate opportunities belonging to LICOA (Derivative Counts One and Two) and a claim for
waste (Derivative Count Three). The Directors filed separate motions to dismiss the Derivative

Complaint (doc. 37) and to stay discovery on the claims in the Derivative Complaint (doc. 40).
Finally, the Shareholders moved to strike certain arguments made by LICOA and the Directors
in their reply briefs on the motions to dismiss and to abstain (doc. 43). The parties have fully
briefed all motions.
II. Legal Standards
A. Motion to Dismiss
LICOA, and, where applicable, the Directors, have moved under Fed. R. Civ. P. 12(b)(6)
to dismiss Direct Counts One, Three, and Four, and all Derivative Counts. When reviewing a
motion to dismiss brought under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court
must accept as true all factual allegations in the plaintiff’s complaint. McCullough v. Finley, 907

F.3d 1324, 1333 (11th Cir. 2018) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). However,
the court disregards “conclusory allegations” and “‘naked assertions’ devoid of ‘further factual
enhancement.’” Finley, 907 F.3d at 1333; Iqbal, 556 U.S. at 678 (quoting Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 557 (2007)). In other words, the court does not honor “unadorned, the-
defendant-unlawfully-harmed-me accusations” with the presumption of truth. McCullough, 907
F.3d at 1324 (quoting Iqbal, 556 U.S. at 678). Such impermissible assertions include mere
“‘labels and conclusions’ and ‘formulaic recitations of a cause of action.’” Iqbal, 556 U.S. at 678
(quoting Twombly, 550 U.S. at 555).
After disregarding all assertions not entitled to a presumption of truth, the court examines
the remaining factual allegations to ensure that they “plausibly give rise to an entitlement to
relief.” McCullough, 907 F.3d at 1324 (quoting Iqbal, 556 U.S. at 679) (emphasis added). “A
claim has facial plausibility when the plaintiff pleads factual content that allows the court to

draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556
U.S. at 678 (citing Twombly, 550 U.S. at 556). In short, “only a complaint that states a plausible
claim for relief survives a motion to dismiss.” Iqbal, 556 U.S. at 679. Motions to dismiss operate
to root out claims with no legal basis. White v. Bank of Am. Nat. Ass’n, 599 F. App’x 379, 381
(11th Cir. 2015) (quoting Cty. of McHenry v. Ins. Co. of the W., 438 F.3d 813, 818 (7th Cir.
2006)).
B. Motion to Abstain
LICOA has moved this court to abstain from exercising jurisdiction over Direct Count
Two, the Shareholders’ claim for dissolution of LICOA, under an abstention doctrine set out by
the United States Supreme Court in Burford v. Sun Oil Co., 319 U.S. 315 (1943).

Federal courts rarely invoke abstention doctrines, because “federal courts have a
virtually unflagging obligation to exercise the jurisdiction given them.” Ambrosia Coal &
Constr. Co. v. Pagés Morales, 368 F.3d 1320, 1328 (11th Cir. 2004) (quoting Colo. River Water
Conservation Dist. v. United States, 424 U.S. 800, 817 (1976)). Federal district courts sitting in
diversity, however, do have discretion to abstain from hearing certain state-law equitable claims
under the “ill-defined contours” of the Burford doctrine. S. Ry. Co. v. State Bd. of Equalization,
715 F.2d 522, 527 (11th Cir. 1983); Rindley v. Gallagher, 929 F.2d 1552, 1554 (11th Cir. 1991)
(courts of appeals review district courts’ decisions to abstain for abuse of discretion).
Although the Supreme Court has not set out any “formulaic test for determining when
dismissal under Burford is appropriate,” the Eleventh Circuit has interpreted the doctrine to
allow federal district courts to abstain when “exercise of federal review of the question in a case
and in similar cases would be disruptive of state efforts to establish a coherent policy with

respect to a matter of substantial public concern.” Quackenbush v. Allstate Ins. Co., 517 U.S.
706, 728 (1996); Rindley v. Gallagher, 929 F.2d 1552, 1556 (11th Cir. 1991) (quoting Colorado
River, 424 U.S. at 814).
District courts must approach abstention requests with particular care, as the Supreme
Court admonished that the doctrine “only rarely favors abstention, and the power to dismiss
recognized in Burford represents an extraordinary and narrow exception to the duty of the
District Court to adjudicate a controversy properly before it.” Quackenbush, 517 U.S. at 728
(quoting Colorado River, 424 U.S. at 813).
C. Motion to Strike
The Shareholders have moved to strike several arguments that they claim LICOA and the

Directors raised for the first time in reply briefs on these motions.
As this court has repeatedly held, “new arguments are improper if presented for the first
time in a reply brief.” Dates v. Frank Norton, LLC, 190 F. Supp. 3d 1037, 1040 (N.D. Ala. 2016)
(citing Herring v. Sec’y, Dept. of Corr., 397 F.3d 1338, 1342 (11th Cir. 2005)). But the court will
strike or decline to consider new arguments in reply briefs only if those arguments are truly
“new.” If, for example, a movant’s “new” argument in a reply brief merely responds to
arguments raised by the non-movant in its response to the motion, the argument is not truly
“new;” the court may properly consider it. Williams v. Seacrest Invs., Inc., No. 2:12-cv-1919-
KOB, 2015 WL 1383941, at *7 n.4 (N.D. Ala. Mar. 23, 2015) (citing First Specialty Ins. Corp.
v. 633 Partners, Ltd., 300 F. App’x 777, 777–78 (11th Cir. 2008)) (reply evidence submitted to
respond to arguments raised in opposition to motion to dismiss were properly considered by the
trial court).
III. Analysis

As stated above, LICOA and the Directors have three motions currently pending before
the court: a motion to dismiss Direct Counts One, Three, and Four; a motion asking the court to
abstain from exercising jurisdiction over Direct Count Two; and a motion to dismiss the
Derivative Counts. The court will consider these motions in turn and will address the
Shareholders’ motion to strike where applicable. The Directors also raise a time-bar defense as to
Direct Counts One and Three and as to the entire Derivative Complaint. (Doc. 27 at 16; doc. 37
at 2). But because the court will dismiss each of these counts for independent reasons, the court
need not reach the time-bar issue in the context of these motions.
A. Motion to Dismiss (Direct Complaint)
LICOA and, where applicable, the Directors, have moved to dismiss three of the

Shareholders’ Direct Counts under Rule 12(b)(6): Direct Count One, a devaluation claim under
Ala. Code § 10A-2-8.32 against three of the Directors; Direct Count Three, a claim under Rule
10b-5 of the Securities Exchange Act against all six of the defendant Directors; and Direct Count
Four, a claim for a penalty against both LICOA and six of its Directors for their alleged denial of
the Shareholders’ inspection rights under Ala. Code § 10A-2-16.02(b). The court will consider
each Count in turn.
1. Devaluation Claim under Ala. Code § 10A-2-8.32
In Direct Count One, the Shareholders seek to recover from Directors Daugette, Causey,
and Raymond Renfrow for their alleged wrongful devaluation of LICOA’s stock. (Doc. 25 at
20). Alabama Code § 10A-2-8.32 provides a private right of action when a director or officer of
a corporation “do[es] or omit[s] to do any act…with the intent to depreciate the market value of
the stock…of the corporation…and with the further intent to enable the [director or officer] to
buy any stock…at less than the real value thereof.” But the parties disagree as to whom this

statute bestows the private right of action in this case.
The Directors’ motion to dismiss this count does not attack the adequacy with which the
Shareholders pled the requisite elements of their devaluation claim. Instead, the parties spar over
whether this devaluation claim is direct—and can be maintained against the Directors by the
Shareholders individually—or derivative, in which case the court must dismiss the count so that
Shareholders may bring the claim against the Directors derivatively on LICOA’s behalf.
The court notes here that the Shareholders have moved to strike the Directors’ argument
that the Shareholders should have brought the claim derivatively, an argument that the Directors
included for the first time in their reply brief. (Doc. 43 at 3; see also docs. 27, 38). But because
the Directors categorized the Shareholders’ devaluation claim as a derivative claim in their

motion to dismiss the Direct Complaint (doc. 27 at 3), the Shareholders objected to the
Directors’ characterization of the devaluation claim as derivative and argued in their response to
the motion that the devaluation claim belongs to them as a direct claim. (Doc. 33 at 13).
Accordingly, because the Directors’ reply brief argument merely responded to an argument that
the Shareholders put forth in their response brief, the argument in the Directors’ reply brief was
not truly “new.” As such, the court may properly consider it. Seacrest Investments, 2015 WL
1383941 at *7 n.4; 633 Partners, 300 F. App’x at 788 (trial court properly considered reply
evidence submitted to respond to arguments raised in opposition to motion to dismiss). The court
will therefore DENY the motion to strike to the extent it asserts that the Directors argued for the
first time in their reply brief that the Shareholders improperly pled their devaluation claim as a
direct claim.
As to the merits of the motion, the court must determine whether the Shareholders
properly brought their devaluation claim directly in their individual capacities or if they should

have brought it derivatively on LICOA’s behalf. If the Shareholders should have brought the
claim derivatively, then they do not have standing—or, at the very least, are not the proper
parties—to assert the claim against the Directors. The Alabama Supreme Court has held in the
past that “the primary difference between derivative and individual claims is one of standing”
and has explained that if a claim is in substance derivative, a shareholder does not have standing
to assert that claim directly. Altrust Fin. Servs., Inc. v. Adams, 76 So. 3d 228, 241–42 (Ala. 2011)
(citing Gilliland v. USCO Power Equip. Co., 631 So. 2d 938, 940 (Ala. 1994)). More recently,
however, the Court has pointed out that whether a claim is derivative or direct is better classified
as raising a “real party in interest” question, as opposed to a standing question. Ex parte
4tdd.com, Inc., ---So. 3d----, ----, 2020 WL 1482376, at *6 (Ala. Mar. 27, 2020).

Academic technicalities aside, the court may properly address this issue in a Rule
12(b)(6) motion to dismiss, because if “the plaintiff is not the person who should be bringing the
suit, the plaintiff has failed to state a claim upon which relief can be granted” such that the court
may dismiss the claim under Rule 12(b)(6). Pro Premium Fin. Co. v. US Premium Fin. Serv.
Co., No. 0:16-cv-60009-UU, 2016 WL 6248599, at *5 (S.D. Fla. Oct. 26, 2016) (quoting Whelan
v. Abell, 953 F.2d 663, 672 (D.C. Cir. 1992)) (internal alterations omitted). And Alabama law on
this point is not murky.
Under Alabama law, “[w]hen a plaintiff seeks recovery of damages that are incidental to
his or her status as a shareholder in a corporation, the claim is a derivative one and must be
brought on behalf of the corporation.” Ex parte 4tdd.com, 2020 WL 1482376 at *3 (quoting
Pegram v. Hebding, 667 So. 2d 696, 702 (Ala. 1995)) (internal quotation marks omitted).
Alabama law allows a plaintiff shareholder to bring a direct claim only when the shareholder
alleges that the corporation or its directors directly wronged that shareholder; in other words, if

the alleged wrong necessarily harmed other shareholders as well, the plaintiff must bring the
claim derivatively on behalf of the corporation. Ex parte 4tdd.com, 2020 WL 1482376 at *3
(quoting Green v. Bradley Constr., Inc., 431 So. 2d 1226, 1229 (Ala. 1983)) (emphasis added).
And importantly, when “analyzing whether a claim is derivative or direct, [the court]
looks to the nature of the alleged wrong rather than the designation used by the plaintiff in the
complaint.” Ex parte 4tdd.com, 2020 WL 1482376 at *6 (quoting Baldwin Cty. Elec.
Membership Corp. v. Catrett, 942 So. 2d 337, 345 (Ala. 2006)). That the Shareholders’
complaint “clearly delineates this claim as a direct and not [a] derivative claim” makes no
difference in the court’s analysis. (Doc. 33 at 13).
Here, the Shareholders do not allege that the Directors devalued the shares of LICOA “as

a direct fraud upon” the plaintiff Shareholders specifically. Altrust, 76 So. 3d at 241 (quoting
Green, 431 So. 2d at 1229) (emphasis added). Instead, the Shareholders’ devaluation claim
demonstrates merely that they suffered a “consequential decrease in the value” of their shares
because of the Directors’ alleged mismanagement. Altrust, 76 So. 3d at 241. And, as the
Alabama Supreme Court has held, “[if] the wrong directly damages the corporation and its assets
from…intentional mismanagement, the claim is the corporation’s.” Altrust, 76 So. 3d at 241
(quoting Gilliland, 631 So. 2d at 940) (emphasis added).
Specifically, the problem with the Shareholders’ assertion that their devaluation claim is
direct—and accordingly belongs only to them—is that it is not just the plaintiff Shareholders’
shares that have allegedly been devalued the Directors’ alleged misconduct. Based on the
allegations in the complaint, all LICOA’s shares suffered devaluation by the Directors, and other
shareholders beyond the ones here hold devalued LICOA shares as well. Because LICOA’s
shares trade publicly, numerous other shareholders also suffered a decrease in the value of their

shares because of the Directors’ alleged mismanagement. The plaintiff Shareholders, for
example, noted in their complaint that LICOA’s shares were “trading” well below their book
value and that “[p]laintiffs’ shares have all been devalued by nearly 75%.” (Doc. 25 at 22). But if
LICOA’s shares were “trading” well below their book value, as the Shareholders claim they
were, then it is necessarily also true that not just the “plaintiffs’ shares [were] devalued by nearly
75%.” But without such an allegation, the Shareholders cannot bring their devaluation claim
individually.
Because the Shareholders make no allegation that the Directors devalued the shares of
LICOA to intentionally harm the Plaintiff shareholders and no others, the alleged loss resulting
from the Directors’ fraud “falls directly on the corporation as a whole and collectively, but only

secondarily, upon [the Shareholders] as a function and in proportion of their pro rata investment
in the corporation.” Ex parte 4tdd.com, 2020 WL 1482376 at *8 (quoting Ex parte Regions Fin.
Corp., 67 So. 3d 45, 55 (Ala. 2010)). Accordingly, the intentional devaluation claim belongs to
LICOA and the Shareholders can only assert it derivatively.
The cases upon which the Shareholders rely do not help their argument; in fact, they
work to bring the muddy distinction between direct and derivative claims into sharp relief. In
Fulton v. Callahan, for example, the Alabama Supreme Court found that a minority shareholder
in a close corporation had a direct claim for intentional stock devaluation against the majority
shareholders, who also acted as the close corporation’s directors. 621 So. 2d 1235, 1237, 1247
(Ala. 1993). But in Callahan, the plaintiff was the only minority shareholder of the corporation.
621 So. 2d at 1239. And the plaintiff in Callahan presented sufficient evidence from which a
jury could conclude that the majority shareholder directors intentionally devalued the shares of
the corporation to buy him and only him out at a lower price. 621 So. 2d at 1247.

Because the plaintiff in Callahan was the only minority shareholder, the directors in that
case necessarily intended to harm only him, giving rise to his direct claim against the
corporation’s directors. But here, any intentional devaluation of LICOA’s shares harmed not
only the plaintiff Shareholders, but all the other unnamed shareholders as well.
The Shareholders’ reliance on Brooks v. Hill is likewise misplaced. 717 So. 2d 759, 760,
762–63 (Ala. 1998). Brooks also involved a single minority shareholder that alleged intentional
harm by the single majority shareholder.
The court concludes that the intentional devaluation claim under Ala. Code § 10A-2-8.32
belongs to LICOA, not to the Shareholders. Because the Shareholders in their individual
capacities do not have standing, or in the alternative, are not the proper parties to bring this claim

against the Directors, they did not plausibly plead their direct claim for intentional stock
devaluation. See McCullough, 907 F.3d at 1324 (quoting Iqbal, 556 U.S. at 679). Accordingly,
the court will GRANT the Directors’ motion to dismiss as to Direct Count One, intentional stock
devaluation under Ala. Code. § 10A-2-8.32, and will DISMISS Direct Count One without
prejudice to the Shareholders’ ability to seek leave of the court to allege it as a derivative claim
when the stay in this case is lifted.
2. Rule 10b-5 Claim
The Shareholders, in Direct Count Three, bring a claim against all defendant Directors
under Rule 10b-5 of the Securities Exchange Act.4 17 C.F.R. § 240.10b–5. In the Eleventh
Circuit, a private plaintiff bringing an action under Rule 10b-5 must show:

(1) a material misrepresentation or omission; (2) scienter—a wrongful state of
mind; (3) a connection between the misrepresentation and the purchase or sale of
a security; (4) reliance, often referred to in cases involving public securities
markets (fraud-on-the market cases) as transaction causation; (5) economic loss;
and (6) loss causation, i.e., a causal connection between the material
misrepresentation and the loss.

Meyer v. Greene, 710 F.3d 1189, 1194 (11th Cir. 2013) (quoting Dura Pharms., Inc. v. Broudo,
544 U.S. 336, 341–42 (2005)) (internal quotation marks omitted). Importantly, the Shareholders
here attempt to invoke the so-called “fraud-on-the-market” theory, under which a court may
presume the reliance element of a Rule 10b-5 claim. (Doc. 33 at 27). FindWhat Inv’r Grp. v.
FindWhat.com, 658 F.3d 1282, 1310 (11th Cir. 2011) (citing Basic, Inc. v. Levinson, 485 U.S.
224, 247 (1988)).
The Shareholders’ invocation of the fraud-on-the-market theory carries significant
implications vis-à-vis the pleading requirements of a Rule 10b-5 claim. The Supreme Court in
Basic, Inc. v. Levinson put its imprimatur on the fraud-on-the-market theory, which finds its
roots in the “efficient market hypothesis.” 485 U.S. 224, 248 (1988). The efficient market
hypothesis “provides that in an open and developed securities market, the price of a company’s
stock is determined by the available material information regarding the company and its

4 The Shareholders styled the 10b-5 claim in the Direct Complaint as a “derivative” claim. (Doc. 25 at 23). But
because the Shareholders, in their response brief, allege that they brought the claim directly, the court will examine
the substance of the Shareholders’ Rule 10b-5 claim. (Doc. 33 at 11). The court also notes that while plaintiffs may
bring Rule 10b-5 claims either derivatively or directly, the capacity in which a plaintiff brings a Rule 10b-5 action
does not affect the underlying elements of the claim. See Medkser v. Feingold, 307 F. App’x 262, 264 (11th Cir.
2008) (citing Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 528–29 (1984)).
business.” FindWhat, 658 F.3d at 1309–10 (citing Basic, 485 U.S. at 241)). Accordingly, the
market “bakes” a company’s statements and omissions—both fraudulent and truthful—in to the
price of the company’s stock. FindWhat, 658 F.3d at 1311. In other words, “the market price of
shares traded on well-developed securities markets reflects all publicly available information,

and, hence, any material misrepresentations[.]” Meyer, 710 F.3d at 1195 (quoting Basic, 485
U.S. at 246)). And “[b]ecause an informationally efficient market rapidly and efficiently
translates public information into the security’s price, the market price will reflect the
defendant’s fraudulent statement, and everyone who relies on the market price as a reflection of
the stock’s value in effect relies on the defendant’s misrepresentation.” FindWhat, 658 F.3d at
1310 (citing Basic, 485 U.S. at 241)).
Assuming without deciding that an efficient market exists for the shares of LICOA, the
fraud-on-the-market theory also carries with it a strict pleading standard for the sixth Rule 10b-5
element—loss causation—an element that the Directors claim the Shareholders inadequately
pled. (Doc. 27 at 15; doc. 38 at 8). Implemented by the Private Securities Litigation Reform Act

of 1995, the “loss causation” element ensures that private Rule 10b-5 plaintiffs only recover
when they can show that the defendant proximately caused their losses. 15 U.S.C. § 78u-4(b)(4);
Dura, 544 U.S. at 344.5 The loss causation element serves the important purpose of ensuring that
the “federal securities laws do not become a system of investor insurance that reimburses
investors for any decline in the value of their investments.” Meyer, 710 F.3d at 1196 (quoting

5 The Shareholders incorrectly allege that the PSLRA and the Supreme Court’s decision in Dura “are inapplicable to
this case.” (Doc. 33 at 29). The court disagrees. The PSLRA and its loss causation requirement apply to “any private
action arising under [the Securities Exchange Act],” including private actions under Rule 10b-5 of the Securities
Exchange Act. 15 U.S.C. § 78u-4(b)(4); Dura, 544 U.S. at 338 (“A private plaintiff who claims securities fraud must
prove that the defendant’s fraud caused an economic loss”) (emphasis added).
Robbins v. Koger Props., Inc., 116 F.3d 1441, 1447 (11th Cir. 1997)) (internal quotation marks
omitted).
To show loss causation in the Eleventh Circuit, a plaintiff relying on the fraud-on-the-
market theory must show “that a fraudulent misrepresentation artificially inflated the security’s

value [and] that the fraud-induced reliance that was baked into the plaintiff’s purchase price was
subsequently removed from the stock’s price, thereby causing losses to the plaintiff.” Hubbard v.
BankAtlantic Bancorp, 688 F.3d 713, 725 (11th Cir. 2012) (quoting FindWhat, 658 F.3d at 1311)
(internal quotation marks omitted). And the Eleventh Circuit “explicitly require[s] proof of a
causal connection between the misrepresentation and the investment’s subsequent decline in
value.” Robbins, 116 F.3d at 1448 (emphasis added). All told, a fraud-on-the-market plaintiff can
only prove loss causation by showing that (1) the defendant’s material misstatements or
omissions artificially inflated the security’s price; (2) the plaintiff purchased the security at the
artificially inflated price; and (3) that the market subsequently learned the truth about the
company’s misrepresentation or omission, causing the stock price to “decline…in reaction to the

revelation.” Meyer, 710 F.3d at 1196; FindWhat, 658 F.3d at 1311; Hubbard, 688 F.3d at 725.
And finally, to show the causal connection between the misrepresentation or omission
and a security’s subsequent decline in value, plaintiffs generally must plead the existence of a
“corrective disclosure.” Meyer, 710 F.3d at 1196. A “corrective disclosure” consists of a “release
of information that reveals to the market the pertinent truth that was previously concealed or
obscured by the company’s fraud.” Meyer, 710 F.3d at 1196–97. In other words, the corrective
disclosure works to “pull the wool from the market’s eyes” and reveal the truth about a
company’s misrepresentation. Meyer, 710 F.3d at 1196.
The court concludes that the Shareholders’ Rule 10b-5 claim as currently pled falls
woefully short of these important standards. To start, the Shareholders claim that the Directors
defrauded the market for LICOA’s stock through material omissions. According to the
Shareholders, the Directors failed to disclose in LICOA’s annual reports that “[they] were

purposefully suppressing value of the LICOA shares,” that they “were rejecting offers to buy
LICOA,” and that “LICOA lacked the internal controls to prevent corporate waste, fraudulent
business expenses, and excessive compensation.” (Doc. 25 at 23–24). But the Shareholders do
not allege that these omissions caused them to buy LICOA’s shares at an inflated price. They
also do not allege that their shares subsequently declined in value after they purchased them and
after the market learned the truth about the Directors’ omissions through a corrective disclosure.
In short, if the Shareholders suffered any actual loss from the Directors’ alleged
omissions, such loss does not appear on the face of the complaint. The market could have learned
the truth about the Directors’ omissions before the Shareholders purchased LICOA shares, for
example, in which case the Directors’ alleged fraud caused the Shareholders no loss. Likewise, if

the Directors’ alleged fraud did not cause LICOA’s stock price to decline from the price the
Shareholders paid for it, “[they] have quite literally suffered no loss.” Meyer, 710 F.3d at 1195
(citing Dura, 544 U.S. at 342). Because the complaint does not allege a subsequent decline in the
price of LICOA’s stock caused by the Directors’ omissions, the court concludes that the
Shareholders have not plausibly pled loss causation.
Indeed, as to loss causation, the Shareholders claim only that “their share values will
never reach the expectancy value or benefit of [their] bargain because, due to Defendants’
conduct that is the subject of the material omissions, [they] will never achieve even book or
liquidation value for the shares.” (Doc. 25 at 24). But the Shareholders point to no authority that
stands for the proposition that expectancy value plays any role in a fraud-on-the-market case.
Instead, as discussed at length above, fraud-on-the-market plaintiffs must show some actual
pecuniary loss to recovery under Rule 10b-5. The Shareholders have not plausibly done that
here.

And in a deficient pleading dovetail, the Shareholders’ failure to allege loss causation
also unmasks their pleading failure as to the damages element of their Rule 10b-5 claim, as “loss
causation provides the bridge between reliance and actual damages.” FindWhat, 658 F.3d at
1312 (citing In re Cooper Cos. Sec. Litig., 254 F.R.D. 628, 638 (C.D. Cal. 2009)) (internal
quotation marks omitted). Although the Eleventh Circuit treats loss causation and damages as
“discrete inquiries,” the loss causation element necessarily informs the damages measure.
Robbins, 116 F.3d at 1447 n.5. The law’s limitation on Rule 10b-5 damages to “actual pecuniary
loss suffered by the defrauded party” while excluding “any speculative loss of profits” carries out
in practice the theoretical purpose of the loss causation rule: plaintiffs may only recover for
actual loss caused by the defendant’s fraud. Pelletier v. Stuart-James Co., 863 F.2d 1550, 1557–

58 (11th Cir. 1989).
As such, “out-of-pocket loss is generally the proper measure of damages” in a fraud-on-
the-market Rule 10b-5 case. Pelletier, 863 F.2d at 1558. Under the out-of-pocket loss rule, the
plaintiff can recover “the difference between the price paid and the ‘real’ value of the security,
i.e., the fair market value absent the misrepresentations, at the time of the initial purchase by the
defrauded buyer.” Robbins, 116 F.3d at 1447 n.5 (emphasis added). Using the words of the
Supreme Court, the Eleventh Circuit has held that “the correct measure of damages is the
difference between the fair value of all that the plaintiff received and the fair value of what he
would have received had there been no fraudulent conduct.” Pelletier, 863 F.2d at 1557 (quoting
Randall v. Loftsgaarden, 478 U.S. 647, 661 (1986)).
The Shareholders here allege that their damages consist of “the difference between the
current (depressed value) and, at minimum, liquidation value.” (Doc. 33 at 29; doc. 25 at 24).

But as shown above, neither the current price of the shares nor their liquidation value have any
relevance to the out-of-pocket damages measurement demanded by Rule 10b-5. Instead, as
discussed above, the loss causation and damages elements of a Rule 10b-5 claim work in tandem
to provide the proper measurement: the difference between the price of the stock inflated by
fraud and the price of the stock after the market learns the truth, all determined at the time of
purchase.
And finally, to the extent the Shareholders claim “benefit of the bargain” damages, their
complaint does not show an entitlement to that measure of damages. (Doc. 25 at 24). The law of
this circuit only allows Rule 10b-5 plaintiffs to recover “benefit of the bargain” damages when
the plaintiff and the defendant actually had a “‘bargain’ or contract[;] [s]pecifically, there must

be an enforceable contract for the ‘purchase or sale’ of securities” in order to support such
damages. Pelletier, 863 F.2d at 1559 (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
723 (1975)). And as the leading treatise points out, “benefit of the bargain” damages under Rule
10b-5 are contractual in nature and are generally only awarded where the plaintiff and defendant
are in contractual privity or where the defendant breached a promise to sell or purchase certain
securities from the plaintiff. 4 Thomas Lee Hazen, Treatise on the Law of Securities Regulation
§ 12:98 (2020).
The Shareholders here do not allege that they had any securities contract directly with the
Directors or that they were otherwise in contractual privity with them. Instead, from what the
court can glean from the complaint and briefs, the Shareholders apparently bought their LICOA
stock on the public market and had no direct contractual dealings with the Directors vis-à-vis the
stock purchase, a fact that in practice generally limits Rule 10b-5 claims to the application of the
“fraud-on-the market” theory discussed above. Basic, Inc. v. Levinson, 485 U.S. 224, 241 (1988).

The Shareholders have therefore shown no plausible entitlement to “benefit of the bargain”
damages.
In sum, the Shareholders’ Rule 10b-5 claim suffers from the “fatal defect” of failing to
plausibly allege loss causation and damages. Pelletier, 863 F.2d at 1558. As such, the court will
GRANT the Directors’ motion to dismiss as to Direct Count Three, the Shareholders’ Rule 10b-
5 claim. The court will DISMISS Direct Count Three without prejudice to the Shareholders’
ability to seek leave of the court to replead it once the stay in this case is lifted, provided they can
do so while remaining in compliance with their ethical obligations under Fed. R. Civ. P. 11.
The court will also DENY AS MOOT the Shareholders’ motion to strike to the extent it
relates to arguments on the Rule 10b-5 claim because the court did not consider the arguments

attacked by their motion to strike.
3. Claim for Denial of Shareholder Rights under Ala. Code § 10A-2
16.02(b)

In Direct Count Four, the Shareholders seek a penalty against both LICOA and six of its
Directors for their alleged failure to produce corporate records for the Shareholders’ inspection
under Ala. Code § 10A-2-16.02(b).
That Code section furnishes a two-step process courts must employ to determine whether
a corporation or its directors wrongly withheld corporate records from eligible shareholders. A
finding in the affirmative entitles the shareholders to a statutory penalty “of an amount not to
exceed 10 percent of the value of the shares owned by the shareholder.” Ala. Code § 10A-2-
16.02(c).
To recover the penalty, shareholders must show: (1) that the Code entitled them to
inspect the records they requested; (2) that they sought the records for a proper purpose; and (3)

that an officer or agent of the corporation refused to allow the shareholders to inspect the
records. Ala. Code § 10A-2-16.02(b)-(c).
Then, the burden shifts to the corporation and its officers to show that they had
“reasonable cause” for withholding the documents from the shareholders. Ala. Code § 10A-2-
16.02(c); Smith v. Flynn, 155 So. 2d 497, 504 (Ala. 1963) (“The burden is upon the corporate
officers…to show that…they had reasonable cause for such refusal”).
The parties in this case do not contest either that Alabama law entitled the Shareholders
to inspect the records they requested or that they stated a proper purpose for their requested
inspection. (See docs. 27, 38). Instead, LICOA and the Directors move to dismiss the
Shareholders’ penalty claim on two alternative grounds: LICOA first claims that it did not

“refuse” to allow the Shareholders to inspect its records; and, if it did, then it did so for
“reasonable cause.” (Doc. 27 at 19–21; doc. 38 at 9–10).
The court finds that the Shareholders have plausibly alleged that LICOA and the
Directors “refused” to allow them to inspect LICOA’s records. First, the Alabama Code
provision allowing for inspection requires that eligible shareholders give only five days’ notice
to the corporation for it to provide the documents to the shareholder for inspection. Ala. Code §
10A-2-16.02(b). But the Shareholders allege in their Direct Complaint that LICOA and the
Directors did not allow them to inspect and copy the records until “approximately five months”
after their initial inspection request. (Doc. 25 at 19).
LICOA and the Directors claim that the statute merely “requires the shareholder to give
five days’ notice” before inspection but that “it does not require the corporation to produce the
records within five days.” (Doc. 27 at 20). The Shareholders, on the other hand, interpret the
statute to require a corporation to allow eligible shareholders to inspect its records at any time

“during regular business hours” provided that the shareholders give the corporation at least five
days’ notice. (Doc. 33 at 15–21); Ala. Code § 10A-2-16.02(b).
The court agrees with the Shareholders’ proposed construction of the statute. Although a
dearth of caselaw exists explaining when a corporation must produce records for a shareholder’s
inspection, the court notes that at common law, “[t]he right of inspection [was] a present
right…and an indefinite delay in according this right [was] equivalent to a denial of it.” Cobb v.
Lagarde, 129 Ala. 488, 495, 30 So. 326, 328 (1901) (emphasis added). And the Alabama
Business and Nonprofit Entities Code, Ala. Code § 10A-1-1.01 et seq., codified the “broad
common law right to inspect.” Bank of Heflin v. Miles, 318 So. 2d 697, 701 (Ala. 1975)
(emphasis added).

Additionally, the Shareholders’ construction more closely accords with the statute’s plain
meaning, which this court must follow. Cox Enters. v. Pension Benefit Guar. Corp., 666 F.3d
697, 704 (11th Cir. 2012); City of Bessemer v. McClain, 957 So. 2d 1061, 1074–75 (Ala. 2006)
(“If, giving the statutory language its plain and ordinary meaning, we conclude that the language
is unambiguous, there is no room for judicial construction”). The plain words of the statute
entitle eligible shareholders “to inspect and copy during regular business hours…all of its books,
papers, records of account, minutes and record of shareholders, if the shareholder gives the
corporation written notice of his or her demand…at least five business days before the date on
which he or she wishes to inspect or copy.” Ala. Code § 10A-2-16.02 (emphasis added).
Because the Shareholders allege that they gave LICOA and the Directors two weeks’
notice of their desired inspection date and that LICOA and the Directors did not produce the
records on that date (doc. 25 at 18), the court concludes that LICOA’s and the Directors’ refusal
to produce the records after receiving timely notice from the Shareholders plausibly constituted a

“refusal” to produce them under the plain language of Alabama’s inspection statute.
And even if LICOA’s and the Directors’ dilatory production of the records did not
constitute a “refusal” to produce them under the statute, the Shareholders have also alleged that
LICOA’s and the Directors’ eventual production contained “obvious gaps…evidencing the fact
that [LICOA and the Directors] have not discharged their duties of production.” (Doc. 25 at 20).
The Shareholders also allege that LICOA and the Directors never allowed them to inspect certain
documents. The Shareholders point out, for example, that Terry Jacobs, another LICOA
shareholder (who is not a party to this action) wrote letters to the Directors expressing similar
concerns to the ones these Shareholders have about the Directors’ management of LICOA and
requested to inspect LICOA’s books and records under Alabama law. (Doc. 25 at 19–20). These

Shareholders allege that their document requests encompassed Mr. Jacobs’s letters such that
LICOA and the Directors should have produced them to the Shareholders and that LICOA and
the Directors never produced them. (Doc. 25 at 20). Notably, LICOA and the Directors did not
respond to this contention in its motion to dismiss. (See doc. 27 at 19–21).
Because the shareholder right to inspect “is not limited to ‘relevant’ books and records
[and] is to be liberally construed,” the court concludes that, at the motion to dismiss stage, the
Shareholders have plausibly alleged a “refusal” to produce the documents that the statute entitled
them to inspect. Miles, 318 So. 2d at 701. See also Ala. Code § 10A-2-16.02(b) (“a shareholder
…is entitled to inspect and copy…[the corporation’s] books, papers…”) (emphasis added).
LICOA and the Directors argue that even if the Shareholders plausibly alleged their
“refusal” to allow inspection under the statute, they had “reasonable cause” to refuse the
Shareholders’ inspection request. (Doc. 27 at 21-22). But the court concludes that LICOA’s
12(b)(6) motion to dismiss does not present the court with the proper procedural vehicle to

determine whether it had “reasonable cause” to refuse the inspection.
As the court pointed out above, the burden of showing “reasonable cause” for a refusal
falls on the company and its directors. Smith v. Flynn, 155 So. 2d 497, 504 (Ala. 1963) (“The
burden is upon the corporate officers…to show that…they had reasonable cause for such
refusal”). And because the “reasonable cause” defense requires the company and its directors to
“raise[] matters extraneous to the plaintiff’s prima facie case,” the court concludes that the
“reasonable cause” defense constitutes an affirmative defense. In re Rawson Food Serv., Inc.,
846 F.2d 1343, 1349 (11th Cir. 1988) (quoting Ford Motor Co. v. Transp. Indem. Co., 795 F.2d
538, 546 (6th Cir. 1986)).
And a Rule 12(b)(6) motion to dismiss does not empower a court to consider affirmative

defenses, unless the affirmative defense “appears on the face of the complaint.” Hunt v. Aimco
Props., L.P., 814 F.3d 1213, 1225 n.8 (11th Cir. 2016) (quoting Bingham v. Thomas, 654 F.3d
1171, 1175 (11th Cir. 2011)). LICOA’s and the Directors’ “reasonable cause” defense does not
appear on the face of the Direct Complaint. In fact, the Shareholders do not state in the Direct
Complaint the reason for LICOA’s and the Directors’ delay and refusal to produce certain
documents; they only allege that LICOA and the Directors told them that they “need[ed] more
time” to produce the documents. (See doc. 25 at 18–20; 25-26). Because the Direct Complaint
does not state LICOA’s and the Directors’ reason for its refusal to allow the Shareholders to
inspect the documents, the court cannot determine at this time whether they had “reasonable
cause” for their refusal. See Smith v. Flynn, 155 So. 2d 497, 502 (Ala. 1963) (“reasonable cause”
means “the exercise of ordinary business care and prudence”) (quoting Sanders v. Comm’r, 225
F.2d 629, 636–37 (10th Cir. 1955)).
For these reasons, the court will DENY the Directors’ and LICOA’s motion to dismiss

Direct Count Four, the Shareholders’ claim for a penalty under Ala. Code § 10A-2-16.02.
B. Motion to Abstain (Dissolution Claim under Ala. Code § 10A-2-14.30(2))
LICOA has filed a separate motion asking this court to abstain from hearing Direct Count
Two, the Shareholders’ claim for LICOA’s dissolution under Ala. Code § 10A-2-14.30(2)). As
grounds for its abstention argument, LICOA points the court to Burford v. Sun Oil Co., 319 U.S.
315 (1943). Under Burford, a federal court sitting in diversity may abstain from exercising
jurisdiction over state-law equitable claims if the federal court’s adjudication “would disrupt
state efforts to establish a coherent policy with respect to a matter of substantial public concern.”
Siegel v. LePore, 234 F.3d 1163, 1173 (11th Cir. 2000) (citing Boyes v. Shell Oil Prods. Co., 199
F.3d 1260, 1265 (11th Cir. 2000)).

Federal court abstention in the Burford context represents an “extraordinary and narrow
exception to the duty of a District Court to adjudicate a controversy properly before it.” Siegel,
234 F.3d at 1173 (quoting Cty. of Allegheny v. Frank Mashuda Co., 360 U.S. 185, 188 (1959)).
Even still, multiple federal courts at both the trial and appellate levels have noted that
“all…federal courts abstain in corporate dissolution cases [to] avoid infringing on the state’s
important interest in overseeing the continued existence of corporations created under its laws.”
Patel v. Oakwin Lodging Inc., Nos. 3:08-cv-206-J-32MCR, 3:08-cv-207-J-32MCR, 2008 WL
3365233, at *1 (M.D. Fla. Aug. 8, 2008) (emphasis added). See also Friedman v. Revenue Mgmt.
of N.Y., 38 F.3d 668, 671 (2d Cir. 1994) (“every federal court that has addressed the issue of
dissolving state corporations has either abstained or noted that abstention would be appropriate”)
(emphasis added).
And the Supreme Court, as early as 1935, counseled federal courts against hearing claims
for the dissolution of state corporations, noting that “[i]t has long been accepted practice for the

federal courts to relinquish their jurisdiction in favor of the state courts, where its exercise would
involve control of or interference with the internal affairs of a domestic corporation of the state.”
Pennsylvania v. Williams, 294 U.S. 176, 185 (1935). Out of an abundance of caution, however,
the court will address the Shareholders’ arguments in opposition to LICOA’s abstention motion.
The Shareholders first argue that this court should hear their claim for LICOA’s
dissolution because this court has historically applied Alabama’s judicial dissolution statute.
(Doc. 34 at 3–4). See Belcher v. Birmingham Tr. Nat. Bank, 348 F. Supp. 61, 148 (N.D. Ala.
1968). This argument fails, however, because this court decided Belcher fifty-two years ago. In
that time, although Alabama corporate law may not have undergone significant change, the law
of abstention in the corporate dissolution context has. See, e.g., Caudill v. Eubanks Farms, Inc.,

301 F.3d 658 (6th Cir. 2002); Feiwus v. Genpar, Inc., 43 F. Supp. 2d 289, 294–303 (E.D.N.Y.
1999); Neary v. Miltronics Mfg. Servs., 534 F. Supp. 2d 227 (D.N.H. 2008); Friedman v.
Revenue Mgt. of N.Y., 38 F.3d 668, 671 (2d Cir. 1994). The court also notes that the court in
Belcher did not address Burford abstention in any way.
The Shareholders next argue that this court should exercise jurisdiction over their claim
for LICOA’s dissolution because this case does not satisfy the substantive test for Burford
abstention. The Shareholders characterize that test as “(1) the presence of a complex state
regulatory scheme which would be disrupted by federal court review, and (2) the existence of a
state-created forum with specialized competence in the area.” (Doc. 34 at 4) (citing Burford, 319
U.S. at 327, 332–33). The Supreme Court, however, has clarified that no “formulaic test” exists
under the Burford doctrine, but has emphasized the relevance of the factors the Shareholders
point out here. Quackenbush, 517 U.S. at 706. In any event, the court concludes that the Burford
doctrine warrants its abstention from the Shareholders’ dissolution claim.

First, the court concludes that the judicial dissolution provision in the Alabama Business
and Nonprofit Entities Code, Ala. Code § 10A-2-14.30, does constitute a “complex state
regulatory scheme which would be disrupted by federal court review.” Burford, 319 U.S. at 325–
26. The Sixth Circuit’s reasoning in Caudill v. Eubanks Farms persuades the court on this point.
301 F.3d 658 (6th Cir. 2002). The Sixth Circuit in Caudill concluded that a Kentucky district
court properly abstained from hearing a claim to dissolve a corporation under Kentucky law. The
shareholders in Caudill raised the same argument as do the Shareholders here: that “the
[Kentucky] judicial dissolution statute does not demonstrate a complex regulatory scheme.” 301
F.3d at 665. But the Sixth Circuit disagreed, noting that “[t]his argument overlooks the important
state interest implicated in a shareholder dissolution.” Caudill, 301 F.3d at 664. Notably, the

Kentucky judicial dissolution statute is virtually identical to Alabama’s, which increases the
persuasive weight Caudill has on this court. Compare Ala. Code § 10A-2-14.30 with Ky. Rev.
Stat. § 271B.14-300.
The Sixth Circuit pointed out that a claim for dissolution calls “the very existence of the
corporation—itself a creature of state law—…into question.” Caudill, 301 F.3d at 664. And in a
persuasive analogy, the Sixth Circuit noted that a claim for corporate dissolution shares many
characteristics with a claim for a divorce, over which federal courts lack subject-matter
jurisdiction. Like a marriage, a corporation “depends upon state law for its existence.” So “a
federal court’s decision to abstain in equitable actions seeking such a ‘corporate divorce’
prevents it from terminating the life of a corporation…just as a federal court’s lack of subject-
matter jurisdiction over divorce proceedings avoids interfering with state laws governing
domestic relations.” Caudill, 301 F.3d at 664 (citing Ankenbrandt v. Richards, 504 U.S. 689, 703
(1992)).

Because it implicates Alabama’s important state interest in the internal affairs of
corporations created under its laws, the court concludes that Alabama’s judicial dissolution
statute constitutes a “complex regulatory scheme” within the meaning of Burford. Accordingly,
the court will abstain from hearing the Shareholders’ claim for LICOA’s dissolution, as the state
of Alabama “should be permitted to exercise control over the internal affairs of its domestic
corporations free from interference by federal courts, particularly where the issue is whether the
corporation should be permitted to continue in existence or be dissolved.” Caudill, 301 F.3d at
665 (quoting Hunter v. SMS, Inc., 843 F.2d 1391, 1988 WL 30056, at *15 (6th Cir. Apr. 6,
1988)). See also Conklin v. U.S. Shipbuilding Co., 140 F. 219, 222 (C.C.D.N.J. 1905) (“The
corporation is the creature of the state. It derives its life from the state. It possesses the powers

conferred by the state. The period of its existence is determined solely by the will of the state.”).
The Shareholders also argue that this court should hear their corporate dissolution claim
because Alabama does not have a “state-created forum with specialized competence” to hear
claims for corporate dissolution. (Doc. 34 at 4). While the question of whether Burford is
“limited to situations involving a particularized state administrative proceeding and specialized
judicial review” appears to be one of first impression in the Eleventh Circuit, the Sixth Circuit in
Caudill addressed this argument and, after collecting cases, noted that the weight and trend of the
authority has departed from such a rigid limit on Burford abstention. 301 F.3d at 661–62.
Notably, Justice Kennedy addressed this issue in a concurrence in Quackenbush v. Allstate
Insurance Company, in which he discussed Burford and reasoned that “[t]he fact that a state
court rather than an agency was chosen to implement [the state’s] scheme provide[s] more
reason, not less, for the federal court to stay its hand.” 517 U.S. 706, 733 (Kennedy, J.,
concurring) (emphasis added). But see St. Paul Ins. Co. v. Trejo, 39 F.3d 585, 589 (5th Cir.

1994) (refusing to abstain on Burford grounds where the lawsuit “[did] not involve a state
administrative proceeding”).
And at least one other federal court to address the abstention question in the context of a
corporate dissolution claim has held that the state interest in regulating its corporations is so
strong that a federal court should abstain not only on Burford grounds, but also based on the
Supreme Court’s decision in Pennsylvania v. Williams, which the court discussed above. Neary
v. Miltronics Mfg. Servs., Inc., 534 F. Supp. 2d 227, 231 (D.N.H. 2008) (“Williams provides a
compelling—and controlling—reason, independent of the Burford doctrine, for federal courts to
abstain from hearing claims for dissolution…against state corporations”). So, the ultimate
outcome of this narrow and undecided question regarding the limits of the Burford doctrine

would not change this court’s conclusion.
In any event, the Sixth Circuit in Caudill also pointed out that the Kentucky judicial
dissolution statute—just like Alabama’s—vests jurisdiction to hear claims for corporate
dissolution in “local forums within the courts of general jurisdiction.” 301 F.3d at 662 (citing Ky.
Rev. Stat. § 271B.14-310(1)). This legislative choice, the Caudill court noted, evidenced a state
policy of “consolidat[ing] judicial review of [corporate dissolution] cases in the local forums best
suited to adjudicate the local issues and facts raised in such cases.” 301 F.3d at 662 (quoting
MacDonald v. Village of Northport, Mich., 164 F.3d 964, 968 (6th Cir. 1999)).
Here, Alabama also has chosen a state court to implement its judicial dissolution scheme.
Under Ala. Code § 10A-2-14.30, “the circuit court of the county where a corporation’s articles
of incorporation are filed…may dissolve the corporation” (emphasis added). As such, just as in
Kentucky, Alabama Circuit Courts are courts of specialized competence to hear corporate

dissolution claims. Accordingly, Alabama provides the Shareholders with “an adequate forum
for the [claim] to dissolve the corporation,” the presence of which is a necessary condition to a
Burford abstention. Feiwus v. Genpar, Inc., 43 F. Supp. 2d 289, 295, 298 (E.D.N.Y. 1999)
(citing Ala. Pub. Serv. Comm’n v. S. Ry. Co., 341 U.S. 341, 349 (1951)).
The Shareholders’ argument that the statute’s vesting of jurisdiction for dissolution
claims in the local circuit courts “appears to be a sort of venue provision” (doc. 43 at 4) ignores
the very next section of the Alabama code, which separately lays venue for judicial dissolution
proceedings in “the county where a corporation’s articles of incorporation are filed.” Ala. Code §
10A-2-14.31(a). This court must presume that “every word, sentence, or provision of a statute
was intended for some useful purpose, [and] has some force and effect.” Rochester-Mobile, LLC

v. C&S Wholesale Grocers, Inc., 239 So. 3d 1139, 1144–45 (Ala. 2017) (quoting Richardson v.
Stanford Props., Inc., 897 So. 2d 1052, 1058 (Ala. 2004)). So, the court concludes that the
dissolution statute’s vesting of jurisdiction for judicial dissolution claims in the local circuit
courts is not a venue provision, because the Code separately designates the venue for such
actions. Accordingly, Alabama law “provides a regulatory scheme to address” actions for the
judicial dissolution of corporations. Caudill, 301 F.3d at 662. And that scheme does not provide
for federal judicial dissolution of an Alabama corporation.
Because the court concludes that matters relating to the internal affairs of Alabama
corporations constitute “matter[s] of substantial public concern,” this federal court will not
“disrupt [Alabama’s] efforts to establish a coherent policy with respect to” the corporations who
receive their very existence from its laws. See Siegel v. LePore, 234 F.3d 1163, 1173 (11th Cir.
2000) (citing Boyes v. Shell Oil Prods. Co., 199 F.3d 1260, 1265 (11th Cir. 2000)).
Accordingly, this court will abstain from hearing Direct Count Two, the Shareholders’

claim for dissolution of LICOA. The court will GRANT LICOA’s motion to abstain and will
DISMISS Direct Count Two without prejudice to the Shareholders’ ability to assert that claim in
the proper court under Alabama law.
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 (1996). Federal courts, when invoking
abstention doctrines, may dismiss only those claims in which the plaintiff seeks equitable relief;
courts must stay claims seeking damages. Quackenbush, 517 U.S. at 721. See also Feiwus v.
Genpar, Inc., 43 F. Supp. 2d 289, 302 (E.D.N.Y. 1999) (staying damages claims after dismissing

on abstention grounds claim for corporate dissolution to prevent federal court interference with
the dissolution claim, which the court granted the plaintiff leave to file in state court); Neary, 534
F. Supp. 2d at 232 (following Feiwus and also staying claims seeking damages after dismissing
dissolution claim on abstention grounds, where, like here, the dissolution claim and the damages
claim had both legal and factual commonality).
Finally, the court will DENY the Shareholders’ motion to strike LICOA’s arguments in
its reply brief to the extent those arguments relate to Alabama’s interest in regulating the
insurance industry within its borders because the court did not consider those arguments in
deciding to grant LICOA’s motion to abstain.
C. Motion to Dismiss (Derivative Complaint)
Finally, the Directors have moved to dismiss the Shareholders’ Derivative Complaint on
a variety of grounds. But because the court concludes that the Shareholders needed leave of the
court to file the Derivative Complaint and because they did not seek such leave, the court need

not reach the Directors’ other arguments.
As the court explained above, the Shareholders filed the Derivative Complaint as their
“First Amended Consolidated Derivative Complaint.” (Doc. 32) (emphasis added). The
Shareholders did not seek leave of the court before they filed the Derivative Complaint; instead,
they claim that they properly filed it as an amendment as a matter of course under Fed. R. Civ. P.
15(a)(1).
Under Fed. R. Civ. P. 15(a)(1), “[a] party may amend its pleading once as a matter of
course” (emphasis added). If “the pleading is one to which a responsive pleading is required,”
such as a complaint, the amending party must serve the amended pleading 21 days after it served
the original complaint, 21 days after receiving service of a responsive pleading, or 21 days after

receiving service of a Rule 12(b) motion. Fed. R. Civ. P. 15(a)(1)(A)-(B). “In all other cases, a
party may amend its pleading only with the opposing party’s written consent or the court’s
leave.” Fed. R. Civ. P. 15(a)(2) (emphasis added).
But here, the Shareholders filed three other complaints before they filed the Derivative
Complaint, including two prior amended complaints. (Docs. 1, 14, 25, 32). Under the plain
language of Rule 15, the Shareholders had 21 days to amend their complaint as a matter of
course after the Directors responded (doc. 9) to the original complaint. And after that date
passed, Rule 15 required the Shareholders to seek either the written consent of LICOA and the
Directors or the leave of this court before they filed another amended complaint. This court
granted the Shareholders leave to file their first two amended complaints, but the Shareholders
did not seek leave to file the Derivative Complaint, which constituted their third amended
pleading. (Docs. 13, 24).
The Shareholders provide two unpersuasive justifications for their failure to follow the

proper procedure before they filed the Derivative Complaint. First, the Shareholders argue that
because several additional Shareholder plaintiffs joined the suit through intervention, those
intervening Shareholders had the right to file the Derivative Complaint as a matter of course.
(Doc. 42). But the Shareholders’ own brief shows the flaw in this argument: the intervening
Shareholders joined Trondheim and MTP’s complaint; the intervening Shareholders never filed
their own complaint. (Doc. 42 at 6–7 n.1; doc. 32 at 1). The Derivative Complaint plainly lists
Trondheim and MTP, the Shareholders who filed the original complaint, as plaintiffs; it lists the
intervening Shareholders only as “plaintiffs in intervention.” (Docs. 1, 32). As such, the
intervening Shareholders had no pleading of their own to amend. They essentially attempted to
amend Trondheim and MTP’s complaint. See McKersie v. IU Int’l, 120 F.R.D. 60, 62 (N.D. Ill.

1988). And the addition of the intervening Shareholders likewise did not “revive” Trondheim
and MTP’s ability to amend without leave of the court. See 6 Arthur R. Miller, Mary Kay Kane
& A. Benjamin Spencer, Federal Practice and Procedure § 1481 (3d ed. 2020).
The Shareholders also argue that they properly filed the Derivative Complaint without
this court’s leave because it constituted their first amendment in their “derivative capacities.”
(Doc. 42 at 7). Apart from the fact that the Shareholders cite no authority for this proposition, it
also ignores the plain language of Rule 15, which allows “a party” to amend once as a matter of
course. And, as the court pointed out above, Trondheim and MTP previously filed three other
complaints before they filed the Derivative Complaint.
This argument also ignores the fact that although the Shareholders may have brought the
Derivative Complaint in a derivative capacity on LICOA’s behalf, the court should and will still
classify the Shareholders, not LICOA, as the plaintiffs in the Derivative Complaint because
LICOA’s management opposes the derivative suit. See Duffey v. Wheeler, 820 F.2d 1161, 1163

(11th Cir. 1987) (corporations are properly aligned as party defendants when management is
“actively antagonistic” to the plaintiff, as opposed to merely deadlocked); and Liddy v. Urbanek,
707 F.2d 1222, 1224 (11th Cir. 1983) (“if the complaint in a derivative action alleges that the
controlling shareholders or dominant officials of the corporation are guilty of fraud or
malfeasance, then antagonism is clearly evident and the corporation remains a defendant”).
In light of the liberal amendment standards in Fed. R. Civ. P. 15(a)(2), and to prevent the
confusion that naturally arises from a case with two operative complaints, the court will GRANT
the Directors’ motion to dismiss the Derivative Complaint and will DISMISS that complaint
without prejudice to the Shareholders’ ability to seek leave of the court to reallege their
derivative claims when the stay in this case is lifted. The court will accordingly DENY AS

MOOT the Directors’ motion to stay discovery as to the Shareholders’ derivative claims.
IV. Conclusion
The court did its best to declutter this case, but this case may never “spark joy,” at least to
the extent a lawsuit is capable of “sparking joy” with the clarity of its claims.
For the reasons explained above, the court will GRANT the Directors’ motion to dismiss
Direct Counts One and Three and will DISMISS those counts without prejudice. The court will
DENY LICOA’s and the Directors’ motion to dismiss Direct Count Four. The court will
GRANT LICOA’s motion to abstain as to Direct Count Two; accordingly, it will DISMISS
Direct Count Two without prejudice to the Shareholders’ ability to bring that claim in state court
and will STAY this case to allow the Shareholders that opportunity. The court will GRANT the
Directors’ motion to dismiss the Derivative Complaint and will DISMISS that complaint without
prejudice. The court finally will DENY the Shareholders’ motion to strike and will DENY AS
MOOT the Directors’ motion to stay discovery as to the derivative claims.

The court will allow the Shareholders to seek leave to file one final amended complaint
containing all their causes of action—both direct and derivative—against all defendants once the
stay in this case is lifted. The court hopes such repleading will allow the Shareholders to clear up
the confusion that has plagued both the litigants and the court in this case and will aid the court
in exercising its “inherent authority to control its docket and [to] ensure the prompt resolution of
lawsuits.” Vibe Micro, Inc. v. Shabanets, 878 F.3d 1291, 1295 (11th Cir. 2018).
The court will enter an order to the above effect contemporaneously with this opinion.
DONE and ORDERED this 8th day of December, 2020.

____________________________________
KARON OWEN BOWDRE
UNITED STATES DISTRICT JUDGE

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9989998. Public record. Not legal advice.