In re Healthsouth Corp.
| Decision Date | 16 March 2004 |
| Docket Number | No. CV-03-BE-1139-S.,CV-03-BE-1139-S. |
| Citation | 308 F.Supp.2d 1253 |
| Parties | In re HEALTHSOUTH CORPORATION INSURANCE LITIGATION This Document Relates to: All Actions |
| Court | U.S. District Court — Northern District of Alabama |
Eugene P. Stutts, Steve R. Burford, Spain & Gillon LLC, Zinzer Building, Birmingham, AL, Michael Keeley, Toni Scott Reed, Katherine Gibson, Strasburger & Price LLP, Dallas, TX, Philip S. Kaufman, Stephen M. Sinaiko, Kramer Levin Naftalis & Franke LLP, New York, NY, Dent Morton, Carol Stewart, Gerald Gillespy, Burr & Forman LLP, Birmingham, AL, David M. Gische, Marcus B. Holladay, Ross, Dixon & Bell LLP, Washington, DC, Terrell J. McElheny, Dominick, Fletcher, Yeilding, Wood & Lloyd, PA, Birmingham, AL, Joseph Finnerty III, John Clarke, Richard F. Hans, Stephen Davidson, Piper Rudnick LLP, New York, NY, Lynn Hare Phillips, Kori L. Clement, Hare, Clement & Duck, PC, Birmingham, AL, Thomas A. Doyle, Matthew Allison, Michael McCutcheon, Mark S. Hamill, Baker & McKenzie, Chicago, IL, John Richard Carrigan, Christopher A. Mixson, Ogletree, Deakins, Nash, Smoak Stewart, PC, Birmingham, AL, Thomas W. Hanlon, D'Amato & Lynch, New York, NY, R. Douglas Noah Jr., Cathlynn H. Cannon, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, Dallas, TX, Scott Simpson, Batchelor & Simpson, PC, Birmingham, AL, Michael R. Delhagen, Timothy R. Dudderar, Duane Morris LLP, New York, NY, Douglas L. McCoy, Rip Britton, Hand Arendall LLC, Mobile, AL, for Plaintiffs.
W. Stancil Starnes, W. Michael Atchison, Starnes & Atchison LLP, Birmingham, AL, J. Michael Rediker, Thomas L Krebs, Michael K.K. Choy, F. Lane Finch, Jr., Patricia C. Diak, Peyton D. Bibb, Haskell Slaughter Young & Rediker LLC, Birmingham, AL, Steven M. Farina, Williams & Connolly, Washington, DC, H. Lewis Gillis, Thomas Means Gillis & Seay PC, Montgomery, AL, James L. Richey, Raymond L. Johnson, Jr., Christopher K. Whitehead, Thomas, Means, Gillis & Seay, Birmingham, AL, Robert A. Schwinger, Chadbourne & Parke, New York, NY, Donald V. Watkins, Donald V. Watkins, PC, Birmingham, AL, Thomas V. Sjoblom, Chadbourne & Parke LLP, Washington, DC, N. Lee Cooper, James L. Goyer III, Patrick C. Cooper, James R. Bussian, Carl Burkhalter, Maynard Cooper & Gale PC, Champ Lyons III, Champ Lyons III LLC, Birmingham, AL, Peter A. Bassett, Alston & Bird LLP, Atlanta, GA, J. Mark Hart, J. Mark Hart, Birmingham, AL, Michael J. Chepiga, Simpson Thacher & Bartlett LLP, New York, NY, James R. Sturdivant, Harrington & Sturdivant, Mobile, AL, Don B. Long Jr., Johnston Barton Proctor & Powell LLP, Birmingham, AL, Clarence M. Small Jr., Kenneth 0. Simon, Richard E. Smith, Christian Small LLP, Birmingham, AL, for Defendants.
This consolidated action involves claims and counterclaims by ten insurance carriers1 seeking to rescind coverage or, alternatively, to receive a declaratory judgment that their policies provide no coverage to HealthSouth Corporation and various of its officers, directors, and employees who were covered by those policies. Federal Insurance Company ("Federal"), Executive Risk Indemnity, Inc. ("Executive Risk"),2 Greenwich Insurance Company ("Greenwich"), and Clarendon America Insurance Company ("Clarendon") also filed suit in the Circuit Court of Jefferson County, Alabama. See Federal Insurance Company, et al. v. HealthSouth Corporation, et al., CV-03-2420; and Greenwich Insurance Company v. HealthSouth Corporation, et al., CV-03-3522. Currently at issue before this court are the motions for partial summary judgment filed by the following parties who will be alternately referred to as the "movants" or "insureds": (1) HealthSouth Corporation (doc. # 157); (2) Richard Scrushy (doc. # 148)3; and (3) current or former HealthSouth directors officers, and employees4 (doc. # 150, # 153, # 154, # 156 & # 261). The movants seek a determination that the severability clauses in the various primary and excess directors and officers insurance policies5 and primary and excess fiduciary responsibility insurance policies6 issued to HealthSouth preclude rescission of coverage as to all insureds.
The carriers in both the state and federal court litigation essentially allege that HealthSouth used materially false and misleading financial information to procure insurance coverage, and that the policies are therefore void ab initio. In support of their allegations, they direct the court's attention to the Securities and Exchange Commission investigation of HealthSouth's financial filings, and the numerous guilty pleas entered by HealthSouth former officers and employees who admitted they participated in a scheme to alter the financial reports of the company to meet Wall Street expectations.7 Because the federal and state insurance lawsuits involve the same insureds, the same legal questions, and will ultimately involve the same factual matters for discovery, this court has coordinated efforts with Judge Allwin E. Horn of the Jefferson County Circuit Court in a joint effort to conserve resources and, to the extent possible, ensure consistent legal determinations.
Numerous lawsuits have been filed against HealthSouth, its officers and directors alleging, inter alia, securities fraud violations. The first series of securities actions was filed in 1998.8 Another series of class action securities fraud cases were filed in August of 2002, and yet another group of securities fraud cases were filed in the spring of 2003, after the SEC investigation became public. All of these cases were consolidated in this court as In Re HealthSouth Stockholders Litigation, CV-03-BE-1501 and In Re HealthSouth Bondholders Litigation, CV-03-BE-1502. Other cases were also filed against HealthSouth during the fall of 2002 and the spring of 2003, including, among others, cases alleging violations of the Employee Retirement Income Security Act, which have been consolidated in this court as In Re HealthSouth ERISA Litigation, CV-03-BE-1700-S. The above-referenced lawsuits implicate coverage under the various policies that the insurance carriers seek to rescind in this action and in the state court action.
In an effort to methodically address the complex issues involved in the HealthSouth insurance litigation, this court, along with Judge Horn, held several strategy meetings with the attorneys for the insurance companies and the insureds. Although not unanimously well-received, this court and Judge Horn determined that certain legal issues could be addressed prior to extensive and expensive discovery. The first of these threshold legal issues involves the severability clauses found in the primary insurance policies and the legal effect of these severability clauses on the carriers' rights to rescind the policies at issue in this case. Consequently, the court invited the filing of motions for partial summary judgment addressing that issue.9
This matter currently is before the court on the motions for partial summary judgment filed by the insureds seeking a determination that the severability clauses in the various primary policies preclude rescission of coverage as to all insureds under the primary policies and the excess policies that they characterize as "following form" of the primary policies.
Specifically, the individual directors and officers request a partial summary judgment that holds: (1) no basis for rescission lies unless the insurer has a written application that corresponds to the precise policy; (2) the primary and excess directors and officers liability policies and the primary and excess fiduciary liability policies, by their express terms, mandate that the question of coverage as to each insured person must be determined separately and subject only to the statements and knowledge of the individual insured; and (3) the policies contractually limit the right of rescission to intentional or knowing fraudulent misrepresentations.10 Defendant Scrushy filed a separate motion for partial summary judgment seeking a ruling that the claims for rescission are contractually limited to circumstances involving intentional knowing fraudulent representation by the respective insured.11 In its motion for partial summary judgment, HealthSouth seeks a ruling on the same three points asserted by the individual directors and officers, plus the additional determination that the "adverse interest" rule precludes imputation to HealthSouth the personal knowledge of any officer acting for his or her personal gain.12
The insurance carriers filed numerous submissions in opposition to these motions, to which the insureds have responded. The parties have fully briefed the issue. On February 10, 2004, the court conducted a joint hearing on this issue with Judge Horn, who addressed the issue as it relates to the state court action.
For the reasons stated below, the court concludes that the severability clauses preclude rescission as to all insureds regardless of their involvement in the alleged fraud. As more specifically set out in the conclusion, the motions for partial summary judgment will be granted in part and denied in part.
The history of HealthSouth Corporation is inextricably linked with the facts germane to the issue currently before this court. HealthSouth was incorporated in 1984 by Richard M. Scrushy and grew to become one of the largest providers of physical; therapy services in the world. At various times during its history, HealthSouth was viewed as a darling of Wall Street. However, the guilty pleas entered by former HealthSouth officers and employees indicate, that much of HealthSouth's unprecedented growth may have been the result of unprecedented fraud. The first inkling of troubles at HealthSouth occurred in 1998 with the filing of a series of securities fraud lawsuits alleging financial wrongdoings, including the reporting of inflated earnings and insider tradings. The extent of the alleged wrongdoings...
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