Title: The Lloyd Noland Foundation, Inc. v. HealthSouth Corporation Appeal from Bessemer Division of Jefferson Circuit Court: CV-04-1638). Reversed And Remanded.
Citation: N/A
Docket Number: 1041121
State: Alabama
Issuer: Alabama Supreme Court
Date: August 24, 2007

rel:  08/24/2007
Notice: This opinion is subject to formal revision before publication in the advance
sheets of Southern Reporter.  Readers are requested to notify the Reporter of Decisions,
Alabama Appellate Courts, 300 Dexter Avenue, Montgomery, Alabama 36104-3741 ((334) 229-
0649), of any typographical or other errors, in order that corrections may be made before
the opinion is printed in Southern Reporter.
SUPREME COURT OF ALABAMA
 SPECIAL TERM, 2007
_________________________
1041121
_________________________
The Lloyd Noland Foundation, Inc.
v.
HealthSouth Corporation
Appeal from Jefferson Circuit Court, Bessemer Division
(CV-04-1638)
BOLIN, Justice.
The Lloyd Noland Foundation, Inc.("the Foundation"),
appeals from the Jefferson Circuit Court's order granting a
motion filed by HealthSouth Corporation to dismiss the
Foundation's complaint on the grounds of res judicata and
collateral estoppel. We reverse and remand.
1041121
2
Facts and Procedural History
In 1996, the Foundation and Tenet Health System Medical,
Inc., a subsidiary of Tenet Healthcare Corporation ("Tenet"),
entered into a stock-purchase agreement pursuant to which
Tenet acquired the stock and assets of the Lloyd Noland
Hospital. The Foundation alleges that a number of contractual
provisions 
were 
connected 
with 
this 
sale, 
including
commitments from Tenet to provide health benefits to retired
employees of the hospital, a long-term lease on the
Foundation's management offices at the hospital, an option to
repurchase 120 licensed beds at the hospital ("the option
beds") for one dollar ($1.00), a duty to cooperate in
obtaining the necessary certificates of need ("CONs") and in
licensing the option beds in the name of the Foundation, and
a separate lease agreement providing space in the hospital for
55 of the option beds in a long-term acute-care unit.  The
Foundation also required Tenet to bind any successor owner to
these same obligations.
Tenet operated the hospital for approximately three years
then sold it to the City of Fairfield Healthcare Authority
("Fairfield") in 1999.  The sale to Fairfield involved four
1041121
3
contracts: (1) an asset sale agreement executed on October 21,
1999; (2) a security agreement executed on November 15, 1999;
(3) a six-month promissory note executed by Fairfield on
November 15, 1999, in favor of Tenet; and (4) a guaranty
agreement executed on November 15, 1999.  The promissory note
was extended by an "Agreement Regarding Amendment of Secured
Promissory Note," dated May 15, 2000.  HealthSouth managed the
hospital on behalf of Fairfield from 1999 to 2003 because
Fairfield had no employees or assets; at that time, according
to HealthSouth, HealthSouth "repossessed" the hospital.
(HealthSouth's brief at p. 4.) The hospital was subsequently
closed.
On February 11, 2000, Fairfield brought a declaratory-
judgment action in the Montgomery Circuit Court, seeking a
judgment declaring that the Foundation was not entitled to
CONs to reclassify 100 existing "acute-care" beds at the
hospital to "long-term acute-care" hospital beds pursuant to
§ 22-21-265, Ala. Code 1975, and Ala. Admin. Code (SHPDA) r.
410-1-2-.19.  The Foundation filed a counterclaim against
Fairfield, alleging that Fairfield had expressly assumed the
obligations of the contracts between Tenet and the Foundation,
1041121
4
including the obligations of the lease agreement relating to
55 of the option beds and the duty to cooperate in obtaining
the necessary CONs.  The Montgomery Circuit Court entered a
summary judgment in favor of Fairfield, and the Foundation
appealed.  This Court reversed the summary judgment and
concluded that Fairfield was "contractually bound to, among
other things, 'cooperate with [the Foundation] in having the
Option Beds relicensed, recertified or relocated for long term
acute care purposes at the Hospital or at other sites,' so
that the Foundation could, following the issuance of the CONs,
purchase up to 120 beds from Fairfield."  Lloyd Noland Found.,
Inc. v. City of Fairfield Healthcare Auth., 837 So. 2d 253,
266 (Ala. 2002).
On February 16, 2001, the Foundation sued Tenet in the
United States District Court for the Northern District of
Alabama, on the basis of diversity jurisdiction. The
Foundation alleged that Tenet failed to ensure that certain
obligations arising out of Tenet's purchase of the hospital
from the Foundation were met and sought damages under a
guaranty agreement executed by Tenet and the Foundation in
1996. 
Specifically, 
the 
Foundation 
alleged 
that 
the
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5
obligations assumed by Tenet in its purchase of the hospital
and guaranteed in the guaranty agreement were:
"(a) The obligation to resell to the Foundation
for One Dollar ($1.00) 120 of the licensed acute-
care hospital beds conveyed to [Tenet] by the
Foundation pursuant to the Stock Purchase Agreement,
such resale to take place when the Foundation became
legally authorized to operate the beds for long-term
acute-care services.
"(b) The obligation to cooperate with the
Foundation 
in 
having 
the 
beds 
relicensed,
recertified or relocated for long-term acute-care
services at the Lloyd Noland Hospital or at other
locations.
"(c) The obligation to lease to the Foundation
19,000 square feet in the Lloyd Noland Hospital for
the purposes of operating the long-term acute-care
beds.
"(d) The obligation to provide certain medical
benefits to retired employees of the Foundation.
"(e) The obligation to bind any successors or
assigns 
of 
[Tenet] 
by 
the 
same 
duties 
and
obligations to the Foundation which were required of
[Tenet] under the Stock Purchase Agreement.
"(f) The obligation to obtain the prior written
consent of the Foundation before any of the assets,
rights and duties under the Stock Purchase Agreement
were delegated or assigned by [Tenet] to a third
party."
The Foundation alleged that Tenet breached the following
obligations:
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6
"(a) [Tenet] breached its obligation to obtain
written consent from the Foundation prior to the
assignment of the assets, rights and duties under
the Stock Purchase Agreement.  
"(b) [Tenet] breached its obligation to ensure
that the aforesaid terms and provisions of the Stock
Purchase Agreement were binding and enforceable on
[Fairfield] as the successor and assign of [Tenet],
in that [Fairfield] has failed and refused to honor
the 
aforesaid 
duties 
and 
obligations 
to 
the
Foundation, contending instead that it has assumed
none of those obligations.  Instead [Fairfield] has
intentionally, 
willfully, 
deliberately 
and
maliciously set about to delay and destroy the
Foundation's contractual rights under the Stock
Purchase Agreement by the following acts and
conduct:
"(1) [Fairfield] has denied, rejected
and 
repudiated 
each 
and 
all 
of 
the
foregoing obligations of [Tenet] to the
Foundation.
"(2) 
[Fairfield] 
has 
instituted
litigation and administrative proceedings
for the purpose of nullifying, delaying,
preventing and otherwise interfering with
and damaging the Foundation's contractual
rights under the Stock Purchase Agreement
with [Tenet].
"(3) [Fairfield] has entered into
contracts and agreements for the operation
of the Lloyd Noland Hospital with a
competitor of the Foundation as part of a
plan, intent and design to interfere with
and damage the Foundation's contractual
rights under the Stock Purchase Agreement
with [Tenet].
1041121
7
"(4) 
[Fairfield] 
has 
failed 
and
refused to honor the obligations of the
medical benefit program for retirees of the
Foundation." 
Subsequently, Tenet filed a third-party complaint against both
Fairfield and HealthSouth, seeking indemnity based on a
contractual provision in the agreement amending the six-month
promissory note, which was executed on May 15, 2000. The
provision stated as follows:  
"Indemnification obligation: [Fairfield] and
Guarantor [HealthSouth] shall jointly and severally
indemnify Payee [Tenet] for any loss, damage,
expenses, or costs (including attorney's fees)
incurred by Payee that are attributable to any claim
by the Lloyd Noland Foundation, an Alabama nonprofit
corporation ('LNF'), based on acts or failure to act
by [Fairfield] and/or Guarantor after the Closing
Date (as such term is defined in the Asset Sale
Agreement) with respect to 'LNF beds' as such term
is used in Schedule 1.7(f) to the Asset Sale
Agreement and/or the Lloyd Noland Retiree Medical
Discount Program, referenced in Schedule 1.7(f)."
The promissory note was paid by HealthSouth on November
15, 2000.  Both Fairfield and HealthSouth moved for a summary
judgment in the federal litigation, arguing that the agreement
amending the promissory note, which included the indemnity
provision, expired when HealthSouth paid the promissory note
in full. Additionally, Fairfield argued that it had not
authorized HealthSouth to execute an indemnity agreement on
1041121
8
its behalf. Tenet filed a motion for a partial summary
judgment, arguing that the agreement to indemnify did not end
when HealthSouth paid the promissory note.
On August 27, 2004, while the federal action was pending,
the Foundation filed a complaint in the Birmingham Division of
the Jefferson Circuit Court against HealthSouth based on
alleged conduct related to the 1999 sale of the hospital by
Tenet to Fairfield and the subsequent management of the
hospital.  The Foundation alleged that HealthSouth had
misrepresented "that [Fairfield] was the purchaser of the
Hospital" when, the Foundation alleged, Fairfield had no
finances, no credit, no employees, and was not a duly
organized entity. The Foundation also alleged fraudulent
misrepresentation based on statements made when HealthSouth
acquired the hospital from Fairfield in 2003. The Foundation
alleged that HealthSouth had intentionally interfered with its
contractual relations with Tenet when HealthSouth arranged the
purchase of the hospital by Fairfield.  The Foundation sought
$15,000,000 in actual damages and $100,000,000 in punitive
damages. In the alternative, the Foundation sought injunctive
relief and a judgment declaring (1) that Fairfield was a mere
1041121
9
instrumentality of HealthSouth; (2) that all the obligations
that were assumed by Fairfield when it purchased the hospital
in 1999 were binding on HealthSouth; (3) that this Court's
decision in Lloyd Noland Foundation, Inc. v. City of Fairfield
Healthcare 
Authority, 
supra, 
upholding 
the 
Foundation's 
rights
under the stock-purchase agreement was binding on HealthSouth;
(4) that HealthSouth was liable for damages resulting from the
closure of the hospital; and (5) that HealthSouth was barred
by the doctrine of equitable estoppel from failing to
recognize the medical-benefit program of the Foundation's
retirees. The Foundation also sought to enjoin HealthSouth
from assigning or selling the option beds provided to the
Foundation under the stock-purchase agreement.
On October 4, 2004, HealthSouth filed a motion for a
change of venue, seeking to transfer the case to the Bessemer
Division of the Jefferson Circuit Court.  HealthSouth attached
an affidavit of an employee in support of the motion. 
On November 4, 2004, the federal district court entered
a summary judgment, granting in part and denying in part
Fairfield's 
motion 
for 
a 
summary 
judgment, 
granting
HealthSouth's motion for a summary judgment, and denying
1041121
10
Tenet's motion for a partial summary judgment. Lloyd Noland
Found., Inc. v. Tenet Healthcare Corp., (No. 01-cv-0437-BE-S
and 01-cv-1904-BE-S, November 9, 2004) (N.D. Ala. 2004).
Specifically, the district court concluded that the indemnity
provision in the agreement amending the promissory note, dated
May 15, 2000, expired upon payment of the promissory note.
The court also held that the issue whether Fairfield had
authorized HealthSouth to execute an indemnity agreement on
its behalf was moot.
On November 22, 2004, HealthSouth filed its answer to the
complaint filed in the Jefferson Circuit Court. On November
25, 2004, the case was transferred to the Bessemer Division.
On January 28, 2005, HealthSouth filed a motion to dismiss the
Foundation's complaint pursuant to Rule 12(b)(6), Ala. R. Civ.
P.  On February 3, 2005, the trial court entered an order
setting the motion to dismiss for a hearing on March 7, 2005.
HealthSouth's brief in support of its motion to dismiss, filed
on February 28, 2005, asserted the following grounds for
dismissal: that the Foundation's fraud claim must fail because
the Foundation did not allege direct injury as a result of its
own 
reliance 
on 
HealthSouth's 
alleged 
misrepresentations; 
that
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11
the Foundation's intentional-interference claim must fail
because HealthSouth was not a stranger to the business
relationship at issue; that the Foundation's request for
declaratory relief does not state a justiciable controversy
but merely seeks an advisory opinion; and that the Foundation
is not entitled to injunctive relief.  HealthSouth attached to
its brief a copy of the Foundation's complaint filed against
Tenet in the federal litigation.  HealthSouth also attached a
copy of a purported amendment to the complaint filed in the
federal action, but the amendment is not signed or dated, and
it does not bear the federal court's stamp showing that the
amendment was filed.
On March 3, 2005, HealthSouth filed an amended answer
raising the defenses of res judicata, collateral estoppel,
equitable estoppel, and lack of privity between it and the
Foundation. HealthSouth asserted that "the estoppel theories"
were based on the federal litigation. On March 28, 2005, the
Foundation filed a memorandum in opposition to HealthSouth's
motion to dismiss. On March 29, 2005, HealthSouth filed a
supplemental brief in support of its motion to dismiss,
arguing that the Foundation's complaint should be dismissed on
1041121
12
the grounds of res judicata and collateral estoppel based on
the federal litigation. Attached to its supplemental brief was
a copy of the federal court's memorandum opinion entered on
November 4, 2004.  
On April 11, 2005, the Jefferson Circuit Court granted
HealthSouth's motion to dismiss.  The entry on the case-action
summary states: "HealthSouth Corporation's motion to dismiss
based on collateral estoppel and res judicata is granted.
These same issues could have been raised in Federal Court
Cases but were not."
Standard of Review
We have set forth the standard of review that must be
applied in reviewing a dismissal pursuant to Rule 12(b)(6),
Ala. R. Civ. P.:
"On appeal, a dismissal is not entitled to a
presumption of correctness. The appropriate standard
of review under Rule 12(b)(6) is whether, when the
allegations of the complaint are viewed most
strongly in the pleader's favor, it appears that the
pleader could prove any set of circumstances that
would entitle her to relief.  In making this
determination, this Court does not consider whether
the plaintiff will ultimately prevail, but only
whether she may possibly prevail.  We note that a
Rule 12(b)(6) dismissal is proper only when it
appears beyond doubt that the plaintiff can prove no
set of facts in support of the claim that would
entitle the plaintiff to relief."
1041121
13
Nance v. Matthews, 622 So. 2d 297, 299 (Ala. 1993) (citations
omitted).  
The trial court based its final order on the affirmative
defenses of res judicata and collateral estoppel.  Rule 8(c),
Ala. R. Civ. P., provides that affirmative defenses shall be
set forth in a responsive pleading.  "Res judicata" and
"estoppel" are two of the affirmative defenses listed in Rule
8(c).   An affirmative defense is "[a] defendant's assertion
of facts and arguments that, if true, will defeat the
plaintiff's 
or 
prosecution's 
claim, 
even 
if 
all 
the
allegations in the complaint are true." Black's Law Dictionary
451 (8th ed. 2004).  The party asserting the affirmative
defense bears the burden of proving it.  Stewart v. Brimley,
902 So. 2d 1 (Ala.  2004).
Generally, an affirmative defense is pleaded in a
responsive pleading, such as an answer to a complaint.  The
reason affirmative defenses must be pleaded in a responsive
pleading is to give the opposing party notice of the defense
and a chance to develop evidence and offer arguments to
controvert the defense.  Blonder-Tongue Labs., Inc. v.
University of Illinois, 402 U.S. 313, 350 (1971).  "Since the
1041121
14
facts necessary to establish an affirmative defense generally
must be shown by matters outside the complaint, the defense
technically cannot be adjudicated on a motion under Rule 12[,
Fed. R. Civ. P.]."  5 Charles Alan Wright and Arthur C.
Miller, Federal Practice and Procedure § 1277 (3d ed. 2004).
However, a party can obtain a dismissal under Rule 12(b)(6),
Ala. R. Civ. P., on the basis of an affirmative defense when
"'the affirmative defense appears clearly on the face of the
pleading.'" Jones v. Alfa Mut. Ins. Co., 875 So. 2d 1189, 1193
(Ala. 2003)(quoting Braggs v. Jim Skinner Ford, Inc., 396 So.
2d 1055, 1058 (Ala. 1981)). In Jones v. Alfa, supra, the face
of the plaintiffs' complaint did not indicate that the
statutory limitations period applicable to their bad-faith
refusal-to-pay-insurance-benefits claim had expired before
they sued; therefore, the insurer was not entitled to a
dismissal pursuant to Rule 12(b)(6), Ala. R. Civ. P., on the
affirmative defense of the statute of limitations. 
In Wilger v. State Department of Pensions & Security, 390
So. 2d 656 (Ala. Civ. App. 1980), the father filed a custody
petition for six of his children who were under the care and
custody of the Department of Pensions and Security.  The
1041121
Rule 15(a), Ala. R. Civ. P., provides: 
1
"Unless a court has ordered otherwise, a party may
amend a pleading without leave of court, but subject
to disallowance on the court's own motion or a
motion to strike of an adverse party, at any time
15
Department did not file a responsive pleading or motion but
argued at trial that to allow the father to retry the custody
issue would be contrary to the doctrine of res judicata.  The
trial court dismissed the father's petition.  The Court of
Civil Appeals reversed the judgment of the trial court because
the record did not contain the necessary pleadings and proof
to support the judgment of dismissal.  The court noted that
res judicata was an affirmative defense that should be pleaded
under Rule 8, Ala. R. Civ. P., and that the Department had the
burden of proving from the evidence the sufficiency of the
defense.  "In some instances, res judicata may be properly
raised by means of a motion to dismiss or, more commonly,
through a motion for a summary judgment." 390 So. 2d at 657.
In the present case, the Foundation's complaint does not
mention 
the 
federal 
litigation. 
In 
response 
to 
the
Foundation's complaint, HealthSouth, in compliance with Rule
8(c), Ala. R. Civ. P., pleaded res judicata and collateral
estoppel in its amended answer.   HealthSouth filed a "motion
1
1041121
more than forty-two (42) days before the first
setting of the case for trial, and such amendment
shall be freely allowed when justice so requires.
Thereafter, a party may amend a pleading only by
leave of court, and leave shall be given only upon
a showing of good cause."
16
to dismiss," and, in a supplemental brief in support of its
motion to dismiss, it addressed the doctrines res judicata and
collateral estoppel.  Additionally, HealthSouth attached
filings 
from 
the 
federal 
court 
proceeding. 
Although
HealthSouth's motion addressing its defenses of res judicata
and collateral estoppel was actually framed as a "motion to
dismiss," the motion should have been treated as one seeking
a summary judgment because the face of the complaint did not
reference the prior litigation and HealthSouth properly
pleaded res judicata and collateral estoppel in its answer.
The substance of a motion, not what a party calls it,
determines the nature of the motion.  Ex parte Lewter, 726 So.
2d 603 (Ala.  1998).  Furthermore, the trial court clearly
considered matters outside the pleadings in making its
determination, thus converting the Rule 12(b)(6) motion to
dismiss into a Rule 56, Ala. R. Civ. P., summary-judgment
motion.  Although neither party has raised the issue of the
appropriateness of converting the motion from a motion to
1041121
17
dismiss to a motion for a summary judgment, we address this
matter because it implicates our standard of review.  We find
persuasive the following text addressing affirmative defenses
under the Federal Rules of Civil Procedure: 
"Obviously, as many cases make clear, on a
motion for summary judgment district courts may
consider evidence beyond the pleadings bearing on a
defendant's challenge to a claim for relief that
falls within the scope of the Rule 8(c) affirmative
defenses.  In addition, both Rule 12(b) and Rule
12(c) provide that when affidavits or other matter
outside the pleadings is presented to the district
court on a motion to dismiss or for judgment on the
pleadings and this matter is not excluded by the
court, the motion 'shall be treated' as one for
summary judgment.  Thus, in practice, courts that
allow the adjudication of affirmative defenses on a
motion to dismiss or for judgment on the pleadings
after permitting the parties to include extra-
pleading materials are converting these motions into
summary judgment motions; this requires the court to
give all parties notice and the opportunity provided
by Rule 56 to present pertinent evidentiary material
to the district judge.  This procedure obviates the
danger that the assertion of an affirmative defense
by a motion to dismiss under Rule 12 might deprive
the plaintiff of an adequate opportunity to present
arguments rebutting the defense. However, it must be
remembered that disputes over material issues of
fact cannot be resolved on a motion to dismiss or
for summary judgment but must be reserved for
resolution at trial by the appropriate trier."
 
5 Wright and Miller, supra, § 1277 (footnotes omitted).
Our standard of review for a summary judgment is as
follows:
1041121
18
"We review the trial court's grant or denial of
a summary-judgment motion de novo, and we use the
same standard used by the trial court to determine
whether the evidence presented to the trial court
presents a genuine issue of material fact.  Bockman
v. WCH, L.L.C., 943 So. 2d 789 (Ala. 2006).  Once
the summary-judgment movant shows there is no
genuine issue of material fact, the nonmovant must
then present substantial evidence creating a genuine
issue of material fact.  Id.  'We review the
evidence 
in 
a 
light 
most 
favorable 
to 
the
nonmovant.' 943 So. 2d at 795. We review questions
of law de novo.  Davis v. Hanson Aggregates
Southeast, Inc., 952 So. 2d 330 (Ala. 2006)."
Smith v. State Farm Mut. Auto. Ins. Co., 952 So. 2d 342, 346
(Ala. 2006). 
Analysis
The trial court concluded that the Foundation's complaint
was barred by the doctrines of res judicata and collateral
estoppel based on the federal litigation.
Res Judicata 
The elements of res judicata are: "(1) a  prior judgment
on the merits, (2) rendered by a court of competent
jurisdiction, (3) with substantial identity of parties, and
(4) with the same cause of action presented in both actions."
Equity Res. Mgmt., Inc. v. Vinson, 723 So. 2d 634, 636 (Ala.
1998).  "If those four elements are present, then any claim
that was, or that could have been, adjudicated in the prior
1041121
19
action is barred from further litigation." 723 So. 2d at 636.
"Res judicata, therefore, bars a party from asserting in a
subsequent action a claim that it has already had an
opportunity to litigate in a previous action."  Lee L. Saad
Constr. Co. v. DPF Architects, P.C., 851 So. 2d 507, 517 (Ala.
2002).
The federal litigation involved claims by the Foundation
against Tenet, in which the Foundation alleged that  Tenet had
failed to ensure that certain obligations arising out of
Tenet's purchase of the hospital from the Foundation were met,
including providing health benefits to the retired employees
of the hospital, the option to repurchase 120 licensed beds,
a duty to cooperate in having the beds relicensed for long-
term acute care, and an obligation to lease space from the
Foundation to operate the long-term acute-care beds. Pursuant
to Rule 14, Fed. R. Civ. P., Tenet filed a third-party
complaint against Fairfield and HealthSouth in the federal
litigation seeking indemnity.  HealthSouth moved for a summary
judgment, which the federal district court granted because it
found that the indemnity provision in the agreement amending
the promissory note, dated May 15, 2000, expired upon payment
1041121
20
of the promissory note and that HealthSouth thus was under no
duty 
to 
indemnify 
Tenet 
in 
the 
federal 
litigation.
HealthSouth now argues that the summary-judgment order in the
federal litigation precludes the Foundation's present claims
against it because "[t]his case involves the same alleged
primary rights and duties, as well as the same damages and
requests for relief." (HealthSouth's brief at 30.)
The trial court's order dismissing the present action
indicates that HealthSouth's motion to dismiss on the basis of
the doctrine of res judicata was granted because those same
claims could have been raised in the federal litigation but
were not. The Foundation argues that the claims it now asserts
against HealthSouth are not barred by its failure to assert
them in the federal litigation because not all the elements of
res judicata are met.  The Foundation further argues that its
present action should not be barred in that it was prevented
from bringing the present claims in the federal litigation
because the federal district court did not have supplemental
jurisdiction 
over 
the 
claims 
it 
now 
asserts 
against
HealthSouth.  We do not decide whether the same parties or
their privies were involved in the federal litigation, nor do
1041121
21
we decide whether the present action arises from the same
cause of action as did the federal litigation.  We proceed
instead to consider whether the Foundation was required to
raise these issues in the federal litigation based on
supplemental jurisdiction.  
The grant of diversity jurisdiction is codified at 28
U.S.C. § 1332.  The purpose of diversity "is to provide a
federal forum for important disputes where state courts might
favor, or be perceived as favoring, home-state litigants."
Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546,
553-54 (2005).  The federal courts developed the common-law
doctrines of pendant jurisdiction (allowing state-law claims
linked to federal claims in federal court) and ancillary
jurisdiction (allowing nondiverse parties linked to diverse
parties in federal court) to avoid piecemeal litigation.  In
1990, Congress codified the doctrines of pendant and ancillary
jurisdiction 
at 
28 
U.S.C. 
§ 
1367, 
as 
"supplemental
jurisdiction."  Section 1367(a) establishes that supplemental
jurisdiction is generally applicable in diversity cases.
However, subsection (b) makes an important exception:
"(b) In any civil action of which the district
courts have original jurisdiction founded solely on
1041121
22
section 1332 of this title, the district courts
shall not have supplemental jurisdiction under
subsection (a) over claims by plaintiffs against
persons made parties under Rule 14, 19, 20, or 24 of
the Federal Rules of Civil Procedure, or over claims
by persons proposed to be joined as plaintiffs under
Rule 19 of such rules, or seeking to intervene as
plaintiffs under Rule 24 of such rules, when
exercising 
supplemental 
jurisdiction 
over 
such
claims would be inconsistent with the jurisdictional
requirements of section 1332."
 
"Although ancillary and pendent jurisdiction now are both
codified in a new statutory jurisdiction, termed supplemental
jurisdiction, that form of jurisdiction is not available in
actions premised on diversity of citizenship over 'claims by
plaintiffs against persons made parties under Rule 14, 19, 20,
or 24.'"  6 Charles Alan Wright et al., Federal Practice and
Procedure § 1444 (2d ed. 1990).  To allow otherwise would let
the "plaintiff ... defeat the statutory requirement of
complete diversity by the simple expedient of suing only those
defendants who were of diverse citizenship and waiting for
them to implead nondiverse defendants."  Owen Equip. &
Erection Co. v. Kroger, 437 U.S. 365, 374 (1978) (footnote
omitted).
For purposes of diversity, a corporation is deemed a
citizen of any state where it is incorporated and where it has
1041121
In Lee L. Saad Constr., 851 So. 2d at 520 n. 6, this
2
Court cited the Restatement (Second) of Judgments § 26 (1982),
Reporter's Note to comment c(1), which provides:
"When the plaintiff, after having lost a state
action, seeks relief with respect to the same
23
its principal place of business. 28 U.S.C. § 1332(c).  The
Foundation's complaint against Tenet in the federal litigation
was based solely on diversity of citizenship.  Tenet impleaded
HealthSouth as a third-party defendant in the federal
litigation.  Both the Foundation and HealthSouth have their
principal places of business in Alabama.  In the federal
litigation, the mandate of complete diversity would have
applied to the Foundation's claims against third-party
defendant HealthSouth.  Because § 1367(b) barred the exercise
of supplemental jurisdiction over the Foundation's state-law
claims against HealthSouth, the Foundation is correct in its
assertion that it was prohibited from asserting its state-law
claims against HealthSouth in the federal litigation. 
HealthSouth does not dispute that it and the Foundation
were both citizens of the same state.  Instead, HealthSouth
argues that the Foundation could have chosen to bring its
claims against Tenet in state court rather than in federal
court.   This Court has stated that for purposes of res
2
1041121
transaction under a federal statute enforceable only
in federal court, it may be  argued that he should
be held barred especially if he could have
instituted his original suit in federal court where
both federal and state grounds could have been
considered .... It appears sounder, however, not to
preclude the federal action by the doctrine of bar,
but rather to allow a carry-over decided issue from
the state to the federal action by way of issue
preclusion ...."
(Emphasis omitted; emphasis added.) HealthSouth presents the
flip side of this argument (barring a plaintiff from going to
federal court when he could have resolved everything in state
court).  The comment above rejects the application of res
judicata; however, collateral estoppel may be applicable.
That is, although res judicata does not bar claims over which
the first court lacked jurisdiction, the first court's
decisions on issues common to those before the second court
may have preclusive effect under the doctrine of collateral
estoppel.   
24
judicata, the prior judgment must be rendered by a court of
competent jurisdiction.  A court of competent jurisdiction is
a court with jurisdiction over the subject matter.  If a court
lacks jurisdiction over a claim, then that claim would not
qualify as one that "might have been tried" by that court.
The doctrine of res judicata does not necessarily apply
when "[t]he plaintiff was unable to rely on a certain theory
... or to seek a certain remedy or form of relief in the first
action because of the limitations on the subject matter
jurisdiction of the courts or restrictions on their authority
1041121
25
to entertain multiple theories or demands for multiple
remedies or forms of relief in a single action ...."
Restatement (Second) of Judgments § 26 (1982). In other words,
"[i]f the court rendering judgment lacked subject-matter
jurisdiction over a claim or if the procedural rules of the
court made it impossible to raise a claim, then it is not
precluded."  Browning v. Navarro, 887 F.2d 553, 558 (5th Cir.
1989).  The Foundation was not able to assert its claims
against HealthSouth in the federal litigation.  As a result,
the trial court erred in concluding that the affirmative
defense of res judicata prevented the Foundation from bringing
its claims against HealthSouth in state court. 
Collateral Estoppel
The trial court also based its judgment on the doctrine
of collateral estoppel.  Collateral estoppel applies when (1)
the issue in a prior case was identical to the issue being
litigated in the present action, (2) the issue was actually
litigated in the prior action by a court of competent
jurisdiction, (3) resolution of that issue was necessary to
the prior judgment, and (4) the same parties are involved in
the two actions.  Smith v. Union Bank & Trust, 653 So. 2d 933
1041121
26
(Ala. 1995); Reed v. Brookwood Med. Ctr., 641 So. 2d 1245
(Ala. 1994).
The doctrine of collateral estoppel is not applicable in
the present case. The order in the federal litigation granting
HealthSouth's summary-judgment motion addressed only the
indemnity clause in Tenet and HealthSouth's agreement amending
the promissory note, dated May 15, 2000.  The Foundation's
complaint in the present action involves HealthSouth's alleged
conduct related to the 1999 sale and the subsequent management
of the hospital.  The issue addressed by the holding in the
federal litigation –- whether HealthSouth had to indemnify
Tenet -- is not identical to any of the issues to be addressed
in the present litigation.  Furthermore, collateral estoppel
is not applicable where the plaintiff was unable to seek a
certain remedy or form of relief in the first action because
of the limitations on the subject-matter jurisdiction of the
courts.  See Restatement (Second) of Judgments § 26 (1982).
Collateral estoppel does not apply where it is "asserted in an
action over which the court rendering the prior judgment would
not have had subject matter jurisdiction." Restatement
(Second) of Judgments § 28(3) cmt. d (1982).  "[A]fter a court
1041121
27
has 
incidentally 
determined 
an 
issue 
that 
it 
lacks
jurisdiction to determine directly, the determination should
not be binding when a second action is brought in a court
having such jurisdiction."  Restatement (Second) of Judgments
§ 28(3) cmt. d. As discussed above, the federal court lacked
supplemental jurisdiction over the Foundation's state-law
claims against HealthSouth.  Therefore, the trial court erred
in concluding that the Foundation's claims were barred by the
doctrine of collateral estoppel.
Other Grounds
HealthSouth argues that this Court could affirm the trial
court's judgment on the other grounds raised in its original
"motion to dismiss." An appellate court may affirm the
judgment of the trial court when the trial court has reached
the right result for the wrong reason.  Bay Lines, Inc. v.
Stoughton Trailers, Inc., 838 So. 2d 1013, 1017 (Ala. 2002).
However, this rule should not apply where the "wrong reason"
prevented a party from properly presenting his case or
prejudiced his rights.  In the present case, based on the
record before us, it appears that the trial court entered its
judgment solely on the grounds of res judicata and collateral
1041121
28
estoppel.  On January 28, 2005, HealthSouth filed a motion to
dismiss.  On February 3, 2005, the trial court entered an
order setting the motion to dismiss for a hearing on March 7,
2005.  On February 28, 2005, HealthSouth filed a brief in
support of that motion, alleging: that the Foundation's fraud
claim must fail because it did not allege direct injury as a
result 
of 
its 
own 
reliance 
on 
HealthSouth's 
alleged
misrepresentations; 
that 
the 
Foundation's 
intentional-
interference claim must fail because HealthSouth was not a
stranger to the business relationship at issue; that the
Foundation's request for declaratory relief does not state a
justiciable controversy but merely seeks an advisory opinion;
and that the Foundation is not entitled to injunctive relief.
On March 3, 2005, HealthSouth filed an amended answer,
alleging the affirmative defenses of res judicata and
collateral estoppel.  Apparently, the hearing was held on
March 7, 2005, as scheduled.  On March 29, 2005, HealthSouth
filed a supplemental brief, addressing solely the issues of
res judicata and collateral estoppel and putting forward
evidence in support of those two affirmative defenses.  On
April 11, 2005, the trial court entered its order stating:
1041121
The Foundation's original brief to this Court addresses
3
only the issues of res judicata and collateral estoppel.
HealthSouth's brief addresses those issues, as well as the
four grounds asserted in its motion to dismiss.  In its reply
brief, the Foundation addresses the additional grounds argued
by 
HealthSouth. 
This 
comports 
with 
this 
Court's 
interpretation
of the rules of appellate review.  See Pavilion Dev., LLC v.
JBJ P'ship, [Ms. 1040967, August 10, 2007]     So. 2d   
(Ala.  2007)(where the trial court specifies a basis for its
ruling, the appellant does not waive additional arguments not
addressed in its principal brief).   
29
"HealthSouth 
Corporation's motion to dismiss based on
collateral estoppel and res judicata is granted.  These same
issues could have been raised in Federal Court Cases but were
not."3
This Court has held that when a Rule 12(b)(6), Ala. R.
Civ. P., motion is converted by the trial court through
consideration of matters outside the pleadings into a Rule 56,
Ala. R. Civ. P., motion for a summary judgment, the nonmoving
party must be given notice of the trial court's intentions.
Hales v. First Nat'l Bank, 380 So. 2d 797 (Ala. 1980).  A Rule
12(b)(6) motion addresses the claim itself.  The movant is
asserting that the particular pleading to which the motion is
directed does not sufficiently state a claim on which relief
can be granted.  It does not challenge the actual existence of
a meritorious claim.  In contrast, a summary judgment is based
1041121
30
on the pleadings and any affidavits, depositions, and other
forms of evidence relative to the merits of the challenged
claim or defense.  In its original motion to dismiss,
HealthSouth tested the sufficiency of the Foundation's
complaint, not the merits. In its answer and supplemental
brief, HealthSouth challenged the Foundation's complaint on
the grounds of res judicata and collateral estoppel pursuant
to a Rule 56 summary-judgment motion.  To now review the trial
court's judgment pursuant to the summary-judgment standard on
the additional grounds raised in HealthSouth's original motion
to dismiss would be unfair because neither party has had the
opportunity to present affidavits and other evidence to
support the grounds raised in the original motion to dismiss.
Accordingly, we pretermit discussion of the other grounds
raised by HealthSouth. 
Conclusion
The judgment of the trial court is reversed and the cause
is remanded for further proceedings.
REVERSED AND REMANDED.
Cobb, C.J., and See, Stuart, Smith, and Murdock, JJ.,
concur.
Lyons and Woodall, JJ., concur in part and concur in the
result.
Parker, J., recuses himself.
1041121
31
LYONS, Justice (concurring in part and concurring in the
result).
I concur in all aspects of the main opinion except for
the rationale for not reaching the additional grounds relied
upon by HealthSouth in its motion to dismiss.  As to that
issue, I concur in the result because the trial court has not
yet ruled on those grounds.  
Woodall, J., concurs.