Class Action

Class Action Defense Cases–In re HealthSouth: Eleventh Circuit Affirms Class Action Settlement Of Securities Fraud Class Action Including Bar Order Impacting CEO’s Indemnity Agreement With Company

By Michael J. Hassen

Class Action Settlement Calling for Bar Order, Wiping Out Corporate Officer’s Indemnification Agreement and Advancement of Attorney Fees from Company Properly Approved by District Court Eleventh Circuit Holds

Plaintiffs filed a class action against HealthSouth Corporation and others, including its former chairman and CEO Richard M. Scrushy, alleging securities fraud; the class action complaint was filed in March 2003, after “HealthSouth acknowledged that its previous financial statements had substantially overstated its income and assets.” In re HealthSouth Corp. Sec. Litig., ___ F.3d ___, 2009 WL 1675398, *1 (11th Cir. June 17, 2009). According to the several class action complaints that were filed, defendants violated the Securities Act of 1933 and the Securities Exchange Act of 1934. Id. Ultimately, the class actions were consolidated in the Northern District of Alabama, and a partial settlement was reached between HealthSouth and the lead plaintiffs whereby HealthSouth would pay $445 million in settlement. Id. Scrushy was not a party to the settlement (having been prohibited from the mediation as the alleged mastermind of the fraud), and the district court approved the settlement over his objections, id. In part, the settlement included a bar order that extinguished “[Scrushy’s] contractual claims against HealthSouth for indemnification of settlement payments he might make to the underlying plaintiffs and extinguishes his claims for advancement of legal defense costs.” Id.

The basis of the appeal is that, in 1994, “Scrushy and HealthSouth executed an agreement requiring HealthSouth to indemnify Scrushy to the fullest extent permitted by law.” In re HealthSouth, at *1. Specifically, the indemnity agreement “require[d] HealthSouth to indemnify Scrushy for any judgment or settlement in any action in which he is sued for actions taken as a director or officer of the company, if he acted in good faith and reasonably believed he was acting in the best interest of the company.” Id. The bar order, however, wiped out any indemnity obligations, id. Scrushy’s objection was premised on the fact that the bar order “extinguished valuable and enforceable rights to which Scrushy was entitled under his indemnification agreement with HealthSouth.” Id., at *2. But “[t]he Bar Order is reciprocal, extinguishing similar claims by the settling defendants.” Id., at *2 (footnote omitted). The Eleventh Circuit reviewed Scrushy’s challenges to the settlement bar order for an abuse of discretion, id., at *3.

Full post as published by Class Action Defense Blog on July 15, 2009 (boomark / email).