Scrushy v. Tucker
2011 Ala. LEXIS 18
Ala.2011Background
- shareholder-derivative suit against Richard Scrushy for HealthSouth, consolidated with related actions, culminating in a $2.876 billion judgment against Scrushy.
- Allegations include fraud to inflate HealthSouth earnings (1996–2002), with Scrushy allegedly profiting from insider stock sales and excessive compensation.
- Claims include breach of fiduciary duty, insider trading, waste of corporate assets, and disgorgement of compensation, with requests for equitable relief and damages.
- Pre-suit demand was not made; the Delaware-style demand-excused framework was litigated to determine standing and jurisdiction, with Tucker and Cook joining as plaintiffs via Rule 20(a).
- The Alabama trial court found Scrushy knew of and participated in the fraud, breached loyalty, and ordered forfeiture of compensation and disgorgement related to insider trades and other transactions (First Cambridge and Digital Hospital).
- On appeal, Scrushy challenged jurisdiction, statutes of limitations/res judicata, the basis for compensation forfeiture, the Brophy insider-trading claim, Cook’s joinder, application of the business-judgment rule, and admissibility of evidence; the Supreme Court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tucker had subject-matter jurisdiction given no pre-suit demand | Tucker's original complaint invoked jurisdiction despite demand issues. | Scrushy argued lack of demand excusal barred jurisdiction and invalidated later pleadings. | No jurisdictional defect; Tucker's complaint and later amendments valid; Delaware demand-excusal rules applied. |
| Whether statute of limitations and res judicata bar the claims | Law-of-the-case precludes reconsideration of these defenses. | Claims barred by limitations or precluded by prior final Delaware judgment. | These defenses were not reconsidered; law-of-the-case precluded their consideration in this appeal. |
| Whether compensation forfeiture for 1997–2002 bonuses and related amounts was proper | Forfeiture/restoration is proper where fiduciary breaches occurred and bonuses were tainted by fraud. | Forfeiture based on equitable rescission only; pleadings did not support that remedy. | Remedies supported compensation forfeiture; equitable rescission theory rejected as sole basis. |
| Whether Brophy-based insider trading disgorgement remains viable in this context | Brophy claims are valid state-law remedies coexisting with federal securities laws. | Brophy is duplicative or preempted by federal law. | Brophy remains valid law; not preempted by federal securities regime. |
Key Cases Cited
- Ex parte Bentley, 50 So.3d 1063 (Ala. 2010) (internal-affairs doctrine governs substantive corporate-law questions)
- Kaufman v. Albin, 447 A.2d 761 (Del.Ch. 1982) (shareholder may amend to cure deficient demand excusal)
- In re Walt Disney Co. Derivative Litig., 731 A.2d 342 (Del.Ch.1998) (dismissal and later amendment to meet Rule 23.1 standards)
- Brehm v. Eisner, 746 A.2d 244 (Del.Ch.2000) (derivative-claims pleading standards; right to amend)
- In re Citigroup Inc. Shareholder Derivative Litig., 964 A.2d 106 (Del.Ch.2009) (demand futility standard and pleading requirements)
- Aronson v. Lewis, 473 A.2d 805 (Del.1984) (demand and board-decision primacy; substantive duties of loyalty)
- Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261 (Del.1989) (control and fiduciary duties in derivative actions)
- Weinberger v. UOP, Inc., 457 A.2d 701 (Del.1983) (business-judgment rule; substantive governance protection)
- Citron v. Merritt-Chapman & Scott Corp., 407 A.2d 1040 (Del.Ch.1979) (disgorgement and remedies for fiduciary breaches)
- Pfeiffer v. Toll, 989 A.2d 683 (Del.Ch.2010) (Brophy claims and federal preemption analysis;)
- Brophy v. Cities Service Co., 70 A.2d 5 (Del.Ch.1949) (insider trading remedy rooted in fiduciary duty; Brophy rule remains valid)
- Chiarella v. United States, 445 U.S. 222 (U.S. Supreme Court 1980) (federal framework for insider trading; overview for state-law remedies)
- In re American Int'l Group, Inc., Consolidated Derivative Litig., 965 A.2d 763 (Del.Ch.2009) (deliberations on consistency of state-law remedies with federal regime)