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The Alabama Supreme Court Friday affirmed the Jefferson Circuit Court's earlier decision to require former HealthSouth CEO Richard Scrushy to repay $47.8 million in bonuses he received from 1997-2002.
In its decision issued Friday, August 25, 2006, the court stated the following:
"We conclude that, under the law of wither Delaware or Alabama, Scrushy was unjustly enriched by the payment of the bonuses, which were the result of the vast accounting fraud perpetrated upon HealthSouth and its shareholders, and that equity and good conscience require restitution in the form of repayment of those bonuses.
Even though for purposes of the judgment the parties stipulated that Scrushy did not participate in and is not responsible for any of the criminal activities that resulted in the falsification of the financial statements, the trial court noted in its judgment that Scrushy does not dispute that the financial information originally filed by HealthSouth was inaccurate and unreliable.
As between Scrushy and HealthSouth, it would be unconsionable to allow Scrushy to retain millions of dollars awarded to him in the form of bonuses at the expense of the corporation he served as chief executive officer and its shareholders."
The opinon also cited a ruling from the Supreme Court of Delaware:
"Restitution serves to 'deprive the defendant of benefits that in equity and good conscience he ought not to keep, even though he may have received those benefits honestly in the first instance, and even though the plaintiff may have suffered no demonstrable losses."
The Alabama high court said, "After HealthSouth's financial problems became public, audits were conducted. Those audits revealed that for the year 1996 HealthSouth's actual net income was far less than had originally reported and that for the years 1997-2002 HeatlhSouth had actually lost millions of dollars annually."
The court reiterated more than once the incentive compenstion disclosure on the Form 14A proxies that "No bonuses are payable unless annual net income exceeds budgeted net income," meant that Scrushy should not have been paid bonuses in the years in which the company lost money.
HS Reported Net Income
HS Actual Net Income
The court rejected arguments from Scrushy's appeal brief covering five separate areas:
1. Discovery -- Scrushy argued that the summary judgment of the trial court denied him the opportunity to conduct discovery. He states in his brief he "was not allowed to seek documents and interrogatories, or depose witnesses." Tucker, the plaintiff in the case says Scrushy "never requested discovery." The court rejected Scrushy's argument:
"This Court has reviewed the voluminous record in this case, and we find no attempt by Scrushy to propound interrogatories, to request production of documents, or to notice depositions."
The court noted Scrushy did file an "affidavit in which he stated that he requested a continuance for discovery purposes, but he provided no detail about the discovery or what evidence was not available to him..." According to the court the lack of specificity hurt Scrushy's arguments and "because Scrushy's affidavit did not meet the specificity requirements..., we cannot say that the trial court exceeded its discretion in denying Scrushy's request for a continuance before it entered the judgment on the bonus issue."
2. The Target Bonuses -- According to the court, Scrushy argued his employment contract with HealthSouth governed the payment ot him of target bonuses, notwithstanding the provision for bonuses in the annual proxy on Form 14A. "Scrushy contends that HealthSouth was contractually obligated to pay his annual and monthly target bonuses, and, he says, he is entitled to retain those funds. Scrushy also argued that the "target bonuses were separate from the annual incentive bonuses available to senior management, he also argues that the target bonuses did not relate to HealthSouth's annual income."
The trial court rejected those arguments. "This Court specifically finds these employment contracts between Scrushy and HealthSouth did not guarantee the payment of any type bonus to Defendant Scrushy. to the contrary, any bonuses payable to Mr. Scrushy would come out of the same bonus pool as was available to all other qualifying executives...."
The Alabama Supreme Court agreed with the trial courts conclusion again calling the Form 14A disclosure an "unequivocal statement:
'No bonuses are payable unless annual net income exceeds budgeted net income.' Without annual net income, Scrushy could not have had the opportunity to earn the target bonuses...that were the subject...of his employment contract. Because Scrushy's employment contract could not have obligated HealthSouth to pay bonuses when the company not only had no annual net income, but had, in fact sustained and annual net loss, the employment contract supplements and does not contradict the provision for bonuses in the annual proxy on Form 14A, and the trial court correctly did not consider the provisions in the employment contract in determining that Scrushy was not entitled to keep the funds."
3. The 1997 Annual Bonus -- Scrushy argued according to the court that an annual bonus of $10 million paid in 1997 was paid for HealthSouth's performance in 1996. Scrushy contended he generally received his bonuses in the spring of the year.
The court rejected the idea saying, "The report to the SEC makes it clear that an annual bonues in the amount of $10,000,000 was paid to Scrushy for 1997, regardless of when it was paid to him. Scrushy's affidavit meerely states that he received bonuses other than target bonuses 'in the spring' and refers to proxy filings as dispositive; yet a review of the proxy filings does not substantiate the conclusion he asks us to draw from the affidavit. He does not allege in his affidavit that he received the $10,000,000 bonuse in the spring of 1997."
4. Unjust Enrichment -- According to the court Scrushy specifically argued that Tucker "did not prove that it would be unconsionable for Scrushy to keep the bonuses he earned from 1997 through 2002 and that the trial court erred in entering the partial summary judgment."
"Scrushy contends that he relied to his detriment on the finality of the bonus compensation when he paid taxes on that income, when he mad substantial charitable contributions based on that income, and when he otherwise incurred expenses that he cannot now retrieve. In effect, he says the trial court has ordered him to forfeit those bonuses..."
The court says Scrushy offered an affidavit from 'a leading expert in executive compensation,' however; the court ruled although the expert's opinion is that 'many public corporations award bonus compensation even when the corporation's net income is negative,' "that was clearly not HealthSouth's practice."
The Alabama high court says Scrushy argues the trial court erred when it relied on a Delaware decision against Scrushy known as the "buyback decision." Scrushy argued that decision is "internally inconsistent and thus fundamentally flawed because it purports to base its conclusion on Mr. Scrushy's innocence of any wrongdoing, when in reality it is based on Mr. Scrushy's alleged breach of duties as CEO of HealthSouth concerning its reporting of financial information...Because he was under indictment when the buyback decision was rendered, Scrushy says, he could not effectively defend himself and therefore did not tender his employment contract to the court hearing that litigation."
The court as noted above rejected that argument as well.
5. Equity -- Mr. Scrushy also argued according to the court that the trial court erred by "requiring him to repay funds he never received. He argues that it was inequitable for the trial court to order him to repay the gross amount of the bonuses awarded rather than the net after-tax amoung he received. Equitable principles of unjust enrichment, he argues, can require him to repay only the amount he 'unjustly' received."
The Alabama Supremen Court says, "We find no merit with this argument...Whether Scrushy can obtain a refund of the taxes paid upon his restitution of the bonuses is a matter between Scrushy and the taxing authorities."
The opinion was unanimous. The Scrushy defense can ask the court to review its decision within 14 days.
One of Scrushy's attorneys, Art Leach, said to wsfa.com on Monday, August 28:
"Well we are in the process of trying to make the decision as to whether or not we file a motion for re-hearing with the Supreme Court. I have appeared in the lower court in front of Judge Horn. I will be talking with the other lawyers and those lawyers will be making the decision as to whether or not there's a re-hearing filed in that case. Part of what we are looking at is the way that this case implicates broader Alabama law and how it possibly hurts businesses in the state of Alabama to have a decision like that, like this in place. We will likely get to the conclusion of that at the end of this week because we only have 14 days and once we make that decision we will formulate a pleading and it will be filed.
You know the whole idea behind a re-hearing is that there might be some problems with the opinion of the court, things that they did not consider that we need to bring to their attention. You know whether or not you would go and try to attack the entire opinion is one thing as opposed to picking certain segments of the opinion. But it's just too early for us to say. We've got a lot of work to do. We're actually working on that today."